2014 ANNUAL REPORT
2014 LETTER TO SHAREHOLDERS
Fiscal year 2014 was a success. Our strategic focus is to be the global dynamic display industry leader in providing value to our
customers through understanding their needs and expectations; we leverage our experience and technical knowledge through product
innovation to create robust and configurable product platforms that meet or exceed customer expectations in performance, ease of use,
quality and reliability. We strive to excel in customer satisfaction by being easy to do business with and to drive continuous improvement
in productivity company-wide, with the overriding goal of continuously improving our operating margin.
We improved our financial performance with operating income ending at 6.6 percent of sales as compared to 5.9 percent of sales in
fiscal 2013. Total orders grew 8.5 percent for the year which was driven in part by securing a number of multimillion dollar orders in
the Live Events business unit. Orders for Live Events included six of the seven NFL stadium bids to boost orders by 39 percent for the
year. Our International unit increased orders primarily in the sports arena and on premise advertising areas. We continue to foster the
growth and development of our global sales and services infrastructure. Our reseller and national account areas grew for the year while
spectacular and billboard orders remained relatively flat in our Commercial business unit. Schools and Theatres orders decreased for the
year due to a decrease in demand and a decrease in the size of the products, decreasing the average sales price during the year. While
Transportation business unit orders decreased for the year due to the multi-million dollar Los Angeles Airport project in fiscal 2013, the
underlying Transportation business remains healthy. As we have done for the past 10 of 11 years, we generated positive free-cash flow.
For fiscal 2014, our free-cash flow was $23.6 million.
We continue to see opportunities to profitably grow our business. Internationally, these opportunities are in sports and commercial video
projects, architectural lighting, and third party advertising display solutions. Domestically, we see modest growth potential in the
Commercial business unit, mainly in the spectacular display niche and digital billboard market. In Live Events, we expect to maintain
sales levels even after coming off a large order growth in fiscal 2014 based on estimated sport stadium renovations in the coming year.
While we currently expect Transportation and Schools business units to maintain similar sales levels in the coming year, we are
continuing to implement and evaluate ways to further penetrate the marketplace with investments in sales tools and process changes to
reach more potential customers.
We focus effort in our product design and development area to enhance product offerings and improve quality. We design through
product platforms to improve operational efficiency and reduce warranty costs. Our product development teams are also focused on
additional LED module platforms for both through hole and surface mount device products, as well as continued enhancements of our
control system software. We invest in and will continue to expand our quality systems for our product designs, reliability testing, and
manufacturing controls to continue to offer our customers high performing and reliable products. Operational areas such as sales and
administration continue to focus on efficient methods to conduct their work in ways that to lower costs as a percentage of sales over the
long-term.
To support our flexible capacity initiatives, we will finish our $4 million manufacturing expansions in fiscal 2015. We anticipate capital
expenditures to be approximately $25 million. The most significant capital additions include manufacturing equipment to support new
product production lines, quality initiatives, continued automation, and machine replacements. We continue to invest in new information
technology hardware and software to keep the systems operational, reliable, and secure.
During fiscal 2014, we returned $16.7 million or $0.39 per share to our shareholders and changed to a quarterly dividend payment.
Thank you to our shareholders for your loyal support.
I (Aelred) have decided to retire from the Board of Directors after serving as a director and chairman since our first shareholder meeting
in June, 1969. It has been great to demonstrate that a rural, technology company located in a small university community can grow to
serve a high technology niche world market. I am confident that the current board, management team and committed employee team
will continue to provide long term profitable growth for the future benefit of all our stakeholder groups.
Aelred J. Kurtenbach
Chairman of the Board
Reece A. Kurtenbach
Chief Executive Officer
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FINANCIAL HIGHLIGHTS
Daktronics is the world’s largest supplier of large screen video displays, electronic scoreboards, LED text and graphics displays, and
related control systems, services and products. We excel in the control of display systems, including those that require integration of
multiple complex displays showing real-time information, graphics, animation and video. We design, manufacture, sell and service
display systems for customers around the world through five business units: Live Events, Commercial, Schools and Theatres,
Transportation and International. Our customers value our products for their customer and fan experience, and the ability to generate
revenues and inform their audiences. Our products have been installed in venues from grade school gyms to premier sports facilities,
destination sites and in over 100 countries throughout the world. We serve our customers through a network of offices in the United
States, Canada, United Kingdom, Germany, France, United Arab Emirates, Australia, China, Hong Kong, Japan, Spain, Singapore,
Brazil, Australia, Belgium and Macau.
We employ approximately 2,600 full-time and part-time employees. As a manufacturer and technical contractor, Daktronics markets
standard display products and customized displays and sound systems. We believe our engineering capabilities are second to none in
the industry. We are committed to on-going product development to find new applications for our products and expand the markets we
serve. Daktronics stock is traded on The NASDAQ Global Select Market under the symbol DAKT.
(Dollars in thousands, except per share and share price data.)
Net sales
Gross profit
Operating expenses
Operating income (loss)
Net income (loss)
Gross profit percentage
Operating margin percentage
Weighted average shares outstanding
Earnings per share (diluted)
Cash dividend per share
Working capital
Total assets
Shareholders' equity
Backlog
Product design and development
Capital expenditures
Depreciation & Amortization
Cash flow from operations
Employees as of year-end:
Full-time
Part-time and students
Stock price during fiscal year:
High
Low
Stock price at fiscal year end
FY2010
FY2011
FY2012
FY2013
FY2014
$393,185
94,556
101,286
(6,730)
(6,989)
24.0%
(1.7%)
40,908
(0.17)
0.10
$118,625
305,851
207,053
127,000
$441,676
111,484
91,957
19,527
14,244
25.2%
4.4%
42,277
0.34
0.60
$128,160
327,847
203,102
131,000
$489,526
113,437
103,162
10,275
8,489
23.2%
2.1%
42,304
0.20
0.62
$119,833
315,967
190,805
123,000
$518,322
133,894
103,294
30,600
22,779
25.8%
5.9%
42,621
0.53
0.73
$125,456
321,586
188,246
141,000
$551,970
141,710
105,153
36,557
22,207
25.7%
6.6%
43,762
0.51
0.39
$142,386
357,451
203,119
172,000
$21,920
16,121
22,260
43,784
$18,949
9,386
19,641
41,346
$23,507
16,524
17,518
20,088
$23,131
9,674
15,607
50,749
$23,375
15,618
14,501
36,199
2,093
404
2,141
481
2,300
519
2,213
404
2,278
387
$
9.88
7.00
8.37
$
17.30
7.30
10.72
$
11.61
7.99
8.46
$
12.40
6.39
9.57
$
16.09
9.93
13.06
Page | 2
SPECIAL NOTE REGARDING FORWARD–LOOKING STATEMENTS
This Annual Report on Form 10-K (including exhibits and any information incorporated by reference herein) contains both historical and
forward-looking statements that involve risks, uncertainties and assumptions. The statements contained in this report that are not purely
historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21B
of the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, beliefs, intentions and strategies for
the future. These statements appear in a number of places in this Report and include all statements that are not historical statements of fact
regarding the intent, belief or current expectations with respect to, among other things: (i.) our competition; (ii.) our financing plans; (iii.)
trends affecting our financial condition or results of operations; (iv.) our growth strategy and operating strategy; (v.) the declaration and
payment of dividends; (vi.) the timing and magnitude of future contracts; (vii.) parts shortages and lead times; (viii.) fluctuations in margins;
and (ix.) the seasonality of our business; (x.) the introduction of new products and technology. The words “may,” “would,” “could,”
"should," “will,” “expect,” “estimate,” “anticipate,” “believe,” “intend,” “plans” and similar expressions and variations thereof are
intended to identify forward-looking statements. Investors are cautioned that any such forward-looking statements are not guarantees of
future performance and involve risk and uncertainties, many of which are beyond our ability to control, and that actual results may differ
materially from those projected in the forward-looking statements as a result of various factors discussed herein, including those discussed
in the section of this Annual Report on Form 10-K entitled “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” and those factors discussed in detail in our other filings with the Securities and Exchange
Commission.
PART I.
Item 1. BUSINESS
General Development of Business
Company Background and Overview. Daktronics, Inc. was founded by Dr. Aelred Kurtenbach and Dr. Duane Sander in 1968 while they
were professors of electrical engineering at South Dakota State University (“SDSU”) in Brookings, South Dakota. Our relationship with
SDSU and other colleges and universities is a key factor contributing to our leadership in the industry. We have been able to experience
sustained long-term growth due in part to the capability of the local universities and colleges to provide an important source of highly
educated full-time and student employees.
Over the years, our products have evolved significantly from scoreboards and matrix displays and related software applications to complex,
integrated visual display systems which include full color video, text and graphics displays located on a local or remote network and are
tied together through sophisticated control systems. In the mid-nineties, as light emitting diodes (“LEDs”) became available in red, blue
and green colors with outdoor brightness, we pioneered the development of full color LED video displays capable of replicating trillions
of colors, thereby producing large format video systems with excellent color, brightness, energy efficiency and lifetime. Due to our
foundation of developing scoring and graphics display systems, in which we were already a leader, we were able to add video capabilities
so all of our customer’s large format display needs could be met in a complete, integrated system. This has proven to be a key factor in
Daktronics becoming a leader in large electronic displays. Over the years, we have invested in product development to add complementary
products and services, such as production services, control systems, liquid crystal display (“LCD”) networks, architectural lighting
solutions, sound systems, marketing services, maintenance and support and other products and services for our customers.
Business Developments. As a result of our line of LED display systems and software applications, we gained significant market share
through designing and manufacturing quality products and providing technical expertise and services. Our products are in use throughout
the world, as we are the world’s leader in all large format LED display product categories, according to independent research.
In the sports and live events markets, our integrated video, scoring, and control systems have been installed at many professional, collegiate
and high school facilities, in North America, and at international multi-purpose sports venues around the world.
With commercial applications, our video displays can be seen in major destination sites, such as Las Vegas and Times Square, while our
digital billboards and message displays can be seen along roadsides, at retail establishments, and at many other locations.
In the transportation market, our Vanguard® displays are in use in numerous jurisdictions across North America. Our customers include
many state departments of transportation, mass transit systems and airports.
One of our core growth strategies has been to enter geographic markets by developing a regional sales and service presence providing
after-sale support to our entire product line and sales of our products. We currently have regional offices in the United States as well as
internationally that support our field sales and service people, many of whom today work out of their homes.
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We occasionally acquire other businesses in order to provide access to new markets or to complement our existing products. Although
these acquisitions have increased the scope of services and technology we are able to provide, our primary growth objective is to increase
sales and profitability through organic growth.
We manufacture most of our products in South Dakota and Minnesota in the United States. Products for the Chinese market and most
architectural lighting products are manufactured in Shanghai, China. Our Belgium location produces products for the European third-
party advertising market, and our New York location produces rigging products.
Description of Business
We are the world’s leading supplier of electronic scoreboards, large electronic display systems, digital messaging solutions, software and
services for sporting, commercial and transportation applications. We serve our customers by providing superior products, integration
and dynamic, reliable and unique visual communication solutions. We offer a complete line of products, from small indoor and outdoor
scoreboards and electronic displays to large multi-million dollar video display systems as well as related control, timing, sound and hoist
systems and related professional services. We are recognized worldwide as a technical leader with the capabilities to design, market,
manufacture, install and service complete integrated systems displaying real-time data, graphics, animation and video.
We are engaged in a full range of activities: marketing and sales, engineering and product development, manufacturing, technical
contracting, professional services and customer service and support. Each of those activities is described below.
Marketing and Sales. Our sales force is comprised of direct sales staff and resellers located throughout the world supporting all customer
types in both sales and service. We primarily use a direct sales force for large integrated display systems sales in professional sports,
colleges and universities, and commercial spectacular projects. We use our direct sales force to sell third-party advertising and
transportation applications. We utilize resellers outside North America for large integrated system sales, where we do not have a direct
sales presence. The majority of the products sold by resellers in North America are standard catalog products. We support our resellers
through direct mail advertising, trade journal advertising, product and installation training, trade show exhibitions and accessibility to
our regional sales or service teams.
We have organized our business into five business units which have a primary focus on particular markets or customer segments. There
are four domestic business units (United States and Canada) – Commercial, Live Events, Schools and Theatres and Transportation. The
fifth business unit, identified as International, is for all operations outside the United States and Canada. This structure allows us to focus
on serving the unique needs of each of these customer groups. Live Events customers usually have a large variety of products tied into
a system in a single location involving creative production services, design and event support. The Commercial business unit serves the
needs created by large and remote networks of displays connected through various modes of communication. The Transportation business
unit focuses on the unique needs of governmental contractors and ties into integrated systems managing the flow of travelers and
vehicles. Finally, the Schools and Theatre business unit focuses on providing information displays to high schools for both sports and
marquee applications, and automated rigging for theatres. The International business unit comprises all of these areas outside of North
America.
When we target a potential customer for sales opportunities, the prospect is contacted either directly or through a reseller. Frequently,
on larger sales opportunities, engineers, technicians and sales personnel jointly participate in site visits to assess site conditions, evaluate
the customer’s requirements and present proposals. Proposals to prospective customers include business and technical presentations as
well as product demonstrations and visits to existing installations. We also regularly host customers at our various manufacturing facilities
to demonstrate product quality, manufacturing and design capabilities.
Engineering and Product Development. The large format electronic display industry is characterized by ongoing product innovations
and developments in technology and complementary services. To remain competitive, we continue to anticipate and respond to changes
and developments in the industry. We have a tradition of applying engineering resources throughout our business to anticipate and respond
rapidly to the system needs in the marketplace. We employ engineers and technicians in the areas of mechanical and electrical design,
applications engineering, software design and customer and product support. We assign product managers to each product or product
family to assist our sales staff in training and implementing product improvements and to ensure each product is designed for maximum
reliability and serviceability. We also invest in new creative technologies and in companies developing new technologies.
We leverage our efforts through best practice lean product development across product lines by utilizing common technology, concepts
and platforms. This alignment has driven improved product reliability, lower costs and better functionality for our customers.
Manufacturing. As a vertically integrated manufacturer of display systems, we perform most sub-assembly and substantially all final
assembly of our products.
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Our manufacturing operations include component manufacturing and system manufacturing (metal fabrication, electronic assembly, sub-
assembly and final assembly). We flex our production capacity through varying work hours and strategic outsourcing.
We use a modular approach for manufacturing displays. Standard product modules are designed to be used in a variety of different
products. This modular approach reduces parts inventory and improves manufacturing efficiency. We inventory a limited supply of
finished standard products. Custom projects are built according to the customer’s specifications through the use of common
components. Product modules are designed so a custom product may include a significant percentage of standard components to maximize
reliability and ease of service. A key strategy of ours is to increase standardization and commonality of parts and manufacturing processes
across product lines through product platform strategies.
Our order entry, production, customer service and many other functions are also consolidated through an enterprise resource planning
system and a service operations system to facilitate the sales, design, production, and delivery process.
Our plants are loosely aligned with the five business units described above. This alignment has been critical to allow us to respond to
the different types of customers in the different business units in areas such as lead times and product consolidation. Furthermore, we
have decentralized to these plants certain functions such as materials planning and scheduling. Our goal is to generally align sales,
marketing, engineering and manufacturing into a cohesive business unit with a focus on customers while not losing the synergies of
shared resources. On the other hand, given the cyclical nature of some parts of our business, we also needed to balance and maintain our
ability to manufacture the same products across our plants so we can smooth out the peaks and valleys of customer demand of the various
business units.
Our manufacturing facilities have embraced lean manufacturing techniques throughout all areas. We have also placed significant emphasis
on lean techniques in the non-manufacturing areas. Although there are direct costs associated with implementing lean techniques, the
goal of doing so is to eliminate waste and timely deliver products to a customer while maintaining minimal inventory and eliminating
non-value added tasks.
Technical Contracting. We serve as a technical contractor for larger display system installations requiring custom designs and innovative
product solutions. The purchase of display systems typically involves competitive proposals. As part of our response to a proposal
request, we may suggest additional products or features to assist the prospective customer in analyzing the optimal type of display
system. We usually include in our proposal site preparation and installation services related to the display system. In these cases, we
serve as a contractor and may retain subcontractors. We are licensed in a number of domestic jurisdictions as a general
contractor. Typically, we outsource all related electrical, steel and installation labor to qualified subcontractors. We have developed
relationships with many subcontractors throughout the United States over time, which is advantageous for us in bidding and delivering
on these projects.
Professional Services. Our professional services are essential to continued market penetration and growth. Professional services we
provide in addition to technical contracting include event support, content creation, product maintenance, marketing assistance, training
on hardware and software, control room design, and continuing technical support for operators of complicated display systems.
Customer Service and Support. We offer limited warranties on our products against failure due to defective parts or workmanship for
periods generally ranging from one to five years after the first sale or installation, depending on the product or type of customer. In
addition, we offer service agreements of various scopes. To serve our customers we provide help-desk access, parts repair and replacement,
display monitoring and on-site support. We staff our technical help desk with experienced technicians who are on-call 24 hours a day to
support events and sites. Our field service personnel and third party service partners are trained to provide on-site support. We use third
party service partners to allow us to respond to changes in volume of service. Service volume peaks in the late summer and early fall.
Our repair centers, located in the United States, Belgium and Shanghai, are staffed with trained technicians who repair and return
components requiring service. We also offer a component exchange program for same-day shipment of replacement parts.
General Description of Our Products and Technologies
Our range of products spans from message displays, to scoreboards, to audio systems, to large complex systems. The two principal
components of our systems are the display and the controller. We produce displays varying in complexity, size and resolution. The
physical dimensions of a display depend on the size of the viewing area, the distance from the viewer to the display, and the amount and
type of information to be displayed. Generally, for longer distance viewing, the light sources, or pixels, are larger and spaced farther
apart. The type of display may also depend on the location of the viewing audience. For example, arena scoreboards may have a viewing
angle nearly as wide as 180 degrees, compared with roadside displays, which typically are viewed from a passing vehicle only within a
narrow angle from the display. We customize our products according to the design specifications of the customer and the conditions of
the environment in which our products function.
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The controller uses computer hardware and our software products to compile information provided by the operator and other integrated
sources and then processes the information, graphics or animation to be presented on the displays.
Product Families and Technologies
Our products are comprised of the following primary product families, all of which include control systems and software:
Scoring and timing systems
ITS dynamic message signs
• Video display systems
•
• Message displays
•
• Audio systems
• Digital billboards
• Digit and price displays
• Automated rigging and hoists
Each of these product families is described below.
Video Display Systems. This group consists primarily of displays comprised of a large number of full-color pixels capable of showing
various levels of video, graphics and animation plus controllers which manage the operation of the display. Video displays are comprised
of red, green and blue LEDs arranged in various combinations to form pixels (picture elements). The electronic circuitry which controls
the pixels allows for variances in the relative brightness of each LED to provide a full color spectrum, thereby displaying video images
in striking, vibrant colors.
We offer a wide range of video display systems for different applications and budgets. Variables in video displays include the spacing
of the pixels (pixel pitch), the resolution of the displays (number of pixels), the brightness of the displays (nits), the number of discrete
colors the display is able to produce (color depth), and the viewing angles. In addition, modular design allows the product to be readily
configured in custom sizes to meet each customer’s specific requirements with virtually no limit to the size of display that can be built.
We offer a wide range of pixel spacing, ranging from four millimeter to twenty-six millimeter. The four millimeter application provides
the user with the greatest pixel density and shortest viewing distance, while the twenty-six millimeter is the most cost effective for
physically large displays with longer viewing distances. In addition, the uniformity of colors across the display is important to the quality
of the video image. Our unique display control circuitry, along with our proprietary manufacturing and calibration procedures, provide
uniform colors across the display.
In addition to traditional rectangular video displays, we have adapted LED video technology into ribbon board displays and modular
display systems. Our ribbon board display systems are configured in different height-to-width ratios to give arenas and stadiums the
ability to install long, narrower bands of displays in the facility. For new construction projects, our ProRail® attachment system is
combined with ribbon board technology to provide improved sight lines for fans and reduce construction costs for the facility’s
owner. Digital ribbon boards generally serve as a revenue generation source for teams and facilities through advertising as well as another
location to display information such as scoring and statistics.
Our transportable display systems are comprised of lightweight individual LED video panels less than a square meter in size and are
assembled together to form a display in a customizable height and width. These panels are used in what we refer to as mobile and modular
applications, such as touring shows and the events market.
Our video systems may use a network of displays to deliver a pre-programmed schedule of advertisements, relevant entertainment
information and sports scores, including video, audio, graphics and live data to viewers in concourses and club areas. The network can
be integrated with the main video displays through the control system, providing complete control. Daktronics digital display networks
can incorporate flat-panel screens, LED message displays, LED video screens and even numeric scoreboards to provide an even better
game day experience.
Our GKD MediaMesh® product can turn any building facade into a dynamic communications medium while not concealing the architecture
behind it. This display can be mounted over a solid facade or in front of windows resulting in a finished solution that is free from visible
cabling, and delivers a clean, semi-transparent viewing experience for those within the building. The stainless steel, textile-like mesh
provides a modern, urban feel while the thin-profile design – less than one inch in depth – provides an elegant, refined structural appearance.
Our line of ProPixel® LED architectural lighting and display products include our freeform video elements, which are available as
individual pixels or strips of pixels, assembled and interconnected to transform structures into stunning visual landmarks. Flexible
mounting platforms allow designers to transform structures into full-motion video displays and to create various effects. These elements
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can be structured in various resolutions depending on the application. The freeform video elements are managed by our various controllers,
depending on the specific application.
The primary control components for video displays in live event applications are our Show Control Software Suite, proprietary digital
media players and proprietary video processors. These control components provide advanced capability for the display of live video and
real time content on our displays.
Our Show Control Software Suite is an integrated display control system enabling flexible, intuitive display control and event management
for large video applications. The Show Control Software Suite can operate entire networks of displays from a single, intuitive control
interface. Features such as smart buttons allow users to instantly deliver media clips, camera feeds, and streaming information to any
display in a network.
Daktronics digital media players store recorded video clips and can function as a still store and character generator. Managed through
our Show Control Software Suite, the digital media player provides instant access to any video, animation, graphic or real-time data file
on a player. It also controls the overall picture settings of any Daktronics LED display, making it the most feature-rich product of its kind
in the live events industry.
We also provide a proprietary video processing system developed specifically for LED display technology. For larger venues hosting
live events, the Show Control Software Suite, digital media player and video processor are typically part of a larger system with cameras,
switches and other components. These systems provide the ability to show instant replays, live action video, prerecorded video clips,
and overlays of scoring, timing and statistical information. We occasionally package our components with control components from
other suppliers to provide a complete video production solution.
Scoring and Timing Systems. Our line of scoring and timing products include indoor and outdoor scoreboards for many different sports,
digit displays, scoring and timing controllers, statistics software and other related products. Indoor systems range in complexity from
two-digit shot clocks and small scoreboards to large, center-hung scoreboards incorporating video displays, message centers, advertising
panels, hoist systems and control software. Outdoor scoreboards range in complexity from two-digit game timers and small scoreboards
to larger systems incorporating scoring, timing, video, message centers, advertising panels and control software.
We expect LED technology will remain the technology of choice for scoreboards and displays due to its lower power consumption, longer
life and resulting lower maintenance costs as compared to other technologies. Because most of the scoreboards and display products
within this group have significant standardization, we have been able to advance our goal of efficiently delivering high quality products.
We offer a variety of internally developed controllers complementing our scoreboards and displays. These controllers vary in price and
complexity from the All Sport® 100, a handheld controller for portable scoreboards, to the All Sport® 5000 series, designed for more
sophisticated scoring systems and allowing for more user-defined options. These controllers communicate with scoreboards through
radio frequencies, fiber optic connections or other means.
We also offer timing systems for sports events, primarily aquatics and track competitions. A primary component of these systems is our
OmniSport® 2000 timing console. The system has the capability to not only time and rank the competitors but also to interface with
event management software created by third parties to facilitate the administration of the sporting event. Other timing system components
include swimming touchpads, race start systems, and relay take-off platforms.
As a key component of an integrated system, we market sports statistics and results software under the DakStats® trademark. The software
allows entry and display of sports statistics and other information. It is one of the leading applications of its type in collegiate and high
school sports.
Message Displays. The key product lines in this group are marketed under the names Galaxy® and GalaxyPro® and are generally controlled
with our Venus® 1500 display controller.
Galaxy® full-matrix displays, available in both indoor and outdoor models, are our leading product line for commercial applications and
are expected to be a key product line for growth in the future. Galaxy® displays are full color, monochrome, or tri-color, with pixel
spacing ranging from six millimeter to forty-six millimeter depending on color, size and viewing distance. They are used primarily as
message centers to convey information and advertising to consumers. The modular design of the product allows us to configure a display
to readily meet the size requirements of each customer. We offer various price points for displays within the Galaxy® line.
GalaxyPro® displays are full-matrix outdoor displays capable of displaying text, graphics and animation, as well as prerecorded video
clips. The product was developed to meet the video needs of the commercial market, primarily large retail market applications such as
auto dealerships and shopping centers. GalaxyPro® displays are offered in full color with pixel spacing ranging from sixteen to twenty-
six millimeters. GalaxyPro® displays are capable of producing 68 billion colors, have excellent color uniformity across the display and
Page | 7
are fully compatible with our Venus® 1500 display control software. The modular design of the product allows us to configure a display
to readily meet the size requirements of each customer.
Galaxy® and GalaxyPro® series displays utilize our proprietary Venus® 1500 display control software to control the creation of messages
and graphic sequences for downloading to the display. This software is designed to be usable without any special training, and it is
applicable to all general advertising or message presentation applications. We also provide software allowing system integrators to write
their own software using the Venus® 1500 software developer’s kit to communicate to displays supplied by us. Several system integrators
have implemented the Venus® 1500 protocol into their specific applications, resulting in additional display sales.
ITS Dynamic Message Signs (DMS). DMS products include a wide range of LED-based displays for road management, parking, mass
transit and aviation applications. The Vanguard® family of dynamic message displays is typically used to direct traffic and inform
motorists. These displays are used over freeways, on arterial roads, near bridges, at toll booths and in other locations. We have also
developed a control system for these displays to help transportation agencies manage large networks of displays.
Our digit and directional displays are primarily marketed and sold for use in parking facilities. They include multi-line displays delivered
in vertical cabinets or drop-in digit panels designed to be mounted in existing structures or signs.
Most of the transportation products are designed and tested to rigorous transportation industry standards. Our personnel routinely work
with standard development organizations to assist in writing standards to benefit the public and take advantage of the latest display
technologies.
Audio Systems. Our audio system offerings include both standard and custom options. Standard audio systems are designed to meet the
needs of a wide variety of outdoor sports venues based on the size and configuration of the facility. Each of the standard outdoor systems
includes control systems featuring digital signal processing for improved sound quality reproduction. Custom indoor and outdoor systems
are also offered for larger venues and venues with unique seating configurations. Our sound systems are often integrated into an overall
venue solution for scoring, timing, message display and/or video capability.
Digital Billboards. Our line of digital billboards offers a unique digital display solution for the outdoor advertising industry. The products,
developed based on our experience with other full-color LED display technologies, are used primarily to display static images which
change at regular intervals. Digital billboard systems include many features unique to the outdoor advertising market, such as our patented
mounting system, self-adjusting brightness, improved energy consumption and enhanced network security.
The Visiconn® system is the primary software application for controlling content and playback loops for digital billboard applications. The
Visiconn® display management solution can transform any Internet-ready computer into a secure, global control center for multiple LED
displays, flat panel monitors (such as LCDs) and other display technologies. A rights-based control environment allows users to grant
advertisers access to powerful content management tools while also providing detailed ad tracking and proof-of-play reports. These
features, combined with instant content deployment and the ability to sync with trusted real-time data providers, allow for incorporation
of live information into any presentation.
Digit and Price Displays. Other product lines marketed primarily to Commercial customers include our DataTime® and Fuelight™ display
systems. The DataTime® product line consists of outdoor time and temperature displays which use a remote sensor for temperature data
and are available in red or amber in various character sizes. Fuelight™ digit displays are specifically designed for the petroleum industry,
offering high visibility and quick fuel price updates using the Fuelink™ control software. The product easily retrofits into existing structures
and is also available in single-face or double-face (on certain models) configurations.
Automated Rigging and Hoist Products. The automated rigging and hoist product family includes our Vortek® automated hoists which
complement our arena center-hung scoreboard/display systems for both small and large sporting facilities. The hoist is an important part
of an integrated solution for indoor venues having center-hung, suspended displays. Many of these hoist systems are customized based
on the weight and design of the equipment being suspended, along with the load capacity of the building structure and attachment points
within the facility.
Additionally, we provide automated rigging for theatre applications, primarily in high schools and similar venues. The strengths of our
automated rigging systems include safety and ease of operation. The theatre rigging control system includes intuitive touch screens and
menus to control the integrated hoist systems. These features enhance safety and operation of a theatre production, which allows for
timed and easy to control changes in scenery, lighting and sound.
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Financial Information about Segments and Geographic Areas
Sales outside the U.S. during fiscal years 2014, 2013 and 2012 were approximately 18 percent, 17 percent and 17 percent of our net sales,
respectively. Since 2000, we have acquired or opened international offices in Canada, China, France, the United Arab Emirates, Germany,
Australia, Japan, Brazil, Spain, Singapore, Macau, Hong Kong, Belgium and the United Kingdom.
Our operations in countries outside the U.S. are accompanied by various risks, including financial risks. Relationships with customers
and terms of sale vary by country, often with longer-term receivables than are typical in the U.S. However, we typically secure the
receivables from outside the U.S. with a letter of credit, bank guarantee or partial payment in advance. Currency exchange rate fluctuations
can affect net sales from, and the profitability of, operations outside the U.S. We attempt to hedge these exposures to reduce the effects
of foreign currency fluctuations on net earnings. In addition, although we do not have the intention to do so, the repatriation of certain
earnings of our foreign subsidiaries may result in substantial U.S. tax cost.
See Note 2 of the Consolidated Financial Statements for financial information pertaining to our business segments and geographic
operations.
Sources of Raw Materials
Materials used in the production of our video display system are sourced from around the world. We source some of our materials, such
as LEDs and power supplies, from a limited number of suppliers, primarily due to the proprietary nature of the material. The loss of one
of these key suppliers or a flaw in the supplied material could have an adverse impact on our business and operations. However, our
sourcing group works to implement strategies to mitigate the associated risks. From time to time, we enter into pricing agreements or
purchasing contracts under which we agree to purchase a minimum amount of product in exchange for guaranteed price terms over the
length of the contract, which generally does not exceed one year.
Intellectual Property
As new products are developed, we may apply for patents to document our rights to the technology so other parties cannot later claim
ownership (a defensive strategy) and to also allow us to pursue infringement claims against competitors for protection due to patent
violations (an offensive strategy).
We rely on trademarks, in addition to patents, to help establish and preserve proprietary protection for our products. Our trademarks are
registered in the United States and other countries. These trademarks are used to establish brand recognition and distinction in our various
markets.
Product drawings, software, training and product manuals and other works of authorship are also subject to applicable copyright law
protections. We provide software to our customers in object code to help preserve our intellectual property rights. We also rely on
nondisclosure and license agreements with our employees to protect our intellectual property. Despite these intellectual property
protections, there can be no assurance a competitor will not copy the functions or features of our products.
Seasonal Nature of the Business
Our sales and profitability historically have fluctuated due to the seasonality of our business and variability due to the impact of large
product orders, such as large commercial display systems and display systems for facilities where professional, major college, or
international sports events take place. As a result of the seasonality of the business, primarily due to the sports market, net sales and
net income tend to be lower in the third quarter of a fiscal year.
The seasonality of the sports business is caused by sales related to facilities for football, basketball and hockey in the summer and fall
and for baseball in the early to late spring, leaving a slower time in the winter. This seasonal effect can be compounded by large product
orders in the sports markets and by the effects of holidays during our third fiscal quarter. The effects of seasonality are generally not as
great in our Commercial, International and Transportation business units, although the impact of large orders in those markets and the
implications of weather during the winter months of the northern hemisphere can cause fluctuations in net sales and profits.
Gross margins on large orders tend to fluctuate more than the gross margins on smaller orders. Large product orders with competitive
bidding and substantial subcontract work for product installation generally have lower gross margins with greater variability in
margins. Although we follow the percentage-of-completion method of recognizing revenues on the majority of these larger orders, we
nevertheless have experienced fluctuations in operating results and expect our future results of operations will be subject to similar
fluctuations.
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Working Capital Items
Overall, changes in operating assets and liabilities impact the timing and levels of working capital. Generally, we contractually require
down payments or progress payments on orders from our customers. Some of the inventory components have long-lead times and
therefore, we stock inventory in preparation for anticipated projects. Large projects can cause significant fluctuations in the short term
in inventory, accounts receivables, accounts payable, customer deposits, costs and earnings in excess of billings and various other operating
assets and liabilities. Working capital balances are also impacted by the seasonality of the sports business.
On large product orders, the time between order acceptance and project completion may extend up to and exceed 18 months depending
on the amount of custom work and the customer’s delivery needs. We often receive down payments or progress payments on these
orders. To the extent these payments are not sufficient to fund the inventory and other costs associated with these orders, we use working
capital and bank borrowings to finance these cash requirements.
Customers
The primary markets we serve, along with primary types of customers, are as follows:
Markets
Live Events
Schools and Theatres
Commercial
Transportation
Types of Customers
Large colleges and universities, professional sports teams and facilities, national and international
sports games and federations, civic arenas and convention centers, live entertainment venues, staging
and rental, and motor racing.
Elementary and secondary schools, small colleges and universities, local recreation centers and
theatres.
Retailers and outdoor advertisers, auto dealers, gaming facilities, petroleum retailers, restaurants
and quick-serve restaurants, shopping centers, worship venues, and spectaculars.
State and local departments of transportation, airlines, airports and related industries, parking
facilities and transit authorities.
We have a large and diverse worldwide customer base and generally are not economically dependent on any single customer, however,
there are important customers within each of our business units and the loss of one or more customers could have an adverse effect on
us. Within our Commercial business unit, two major customers account for more than 50 percent of our digital billboard sales niche.
Backlog
Our backlog consists of contractually obligating sales agreements or purchase orders we expect to fill within the next 24 months. Backlog
was approximately $171.6 million as of April 26, 2014 and $141.3 million as of April 27, 2013. Because sales agreements and purchase
orders may be subject to extended delivery schedules and have variable estimated profitability, our backlog is not necessarily indicative
of future net sales or net income. Although orders for many of our products may be shipped within 90 days, other orders may take longer
depending on the customer’s project schedule or other factors. Contracts related to new construction projects generally tend to have the
longest lead times from contract signing to product delivery.
Government and Other Regulation
In the United States and other countries, various laws and regulations, including zoning ordinances, restrict the installation of outdoor
signs and displays, particularly in the commercial market. These laws and regulations impose greater restrictions on electronic displays
versus non-electronic displays such as traditional billboards due to alleged concerns over aesthetics or driver safety if a display is located
near a road or highway. These factors may prevent or inhibit us from selling products to some prospective customers.
Some of our products are tested to safety standards developed by Underwriters Laboratories in the United States, as well as similar
standards in other countries. We design and produce our products in accordance with these standards.
Our manufacturing operations use certain chemical products and chemical processes subject to various environmental rules and
regulations. Our manufacturing operations must also meet numerous safety related rules and regulations. We believe we are in material
compliance with these applicable governmental laws and regulations.
Our supply chain and sales distribution channels subject us to various trade compliance regulations. We believe we are in material
compliance with these applicable governmental law and regulations.
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In the United States and other countries, various laws and regulations require us to evaluate our supply chain for the origins of certain
material. We are currently evaluating our supply chain for those materials.
In some countries in which we operate, such as China, there are various laws and regulations which may affect our operations. These
include restrictions or limitations on our ability to withdraw our capital investment, underdeveloped legal frameworks to enforce our
rights, including payment collections, and different levels of enforcement and consistency of laws.
Competition
The electronic display industry is highly fragmented. Intense competition in the industry comes from a variety of sources. Our video
systems, especially those systems comprised of many displays networked together, are highly complex and visible and thus require a
high standard of performance difficult for other industry participants to achieve and maintain over the long-term.
Each of our business units tends to have a different set of competitors. Some competitors compete only in our transportation business
and some primarily compete in the high school market, for example. Video display competitors compete for our live events, international,
and commercial video business. Asian-based competitors continue to expand their presence beyond Asia to compete more directly with
us in all product areas. These competitors generally offer products and solutions at a lower price.
Because a large screen electronic display is often part of our customer's advertising budget, we may also compete with other forms of
advertising, such as on-line advertising, television, print media or static display signs.
There are generally more competitors in product categories and applications requiring less complicated display systems, such as the high
school scoreboard market, the text and graphics display market and the market for less customized video displays. As the needs of
customers increase and the display systems become more complex, there are generally fewer competitors. However, due to the high
profile nature of larger complex display systems, the competition is intense on those projects.
Overall, we generally compete based on our broad range of high-quality products and features, prompt and reliable delivery, our technical
contracting expertise, our local presence, and our depth of complementary services. We also strive to provide cost-effective products
and solutions for our customers. Contrary to our focus on technologically advanced products and customer support, some of our
competitors compete in some markets by providing lower-cost display systems, which are of a lesser quality with lower product
performance or less customer support. If a customer focuses principally on price, we are less likely to obtain the sale. To remain
competitive, we must continue to enhance our existing products, introduce new products and product features, and provide customers
with cost-effective solutions to their display needs.
Research and Development
We believe our engineering and product development capability and experience are a very important factor to continue to develop the
most up-to-date digital displays and control system solutions desired by the market. Product development expenses for fiscal years 2014,
2013 and 2012 were $23.4 million, $23.1 million and $23.5 million, respectively.
Environmental Concerns
Our products and production processes require the storage, use and disposal of a variety of chemicals considered hazardous under
applicable federal and state laws. Accordingly, we are subject to a variety of regulatory requirements for the handling and disposal of
such materials. We do not anticipate any material effect on our capital expenditures, earnings or competitive position due to compliance
with government regulations involving environmental matters.
Employees
As of April 26, 2014, we employed approximately 2,280 full-time employees and approximately 390 part-time and temporary
employees. Of these employees, approximately 980 were in manufacturing, 560 were in sales and marketing, 510 were in customer
service, 380 were in engineering and 240 were in general and administrative. None of our employees are represented by a collective
bargaining agreement. We believe employee relations are good.
Available Information
We make available, free of charge, on or through our website (http://investor.daktronics.com), our annual, quarterly and current reports
and any amendments to those reports as soon as reasonably practicable after we electronically file such reports with the Securities and
Exchange Commission (“SEC”). The reports are also available through a link to the SEC website at http://www.sec.gov. Information
contained on our website or linked through it is not part of this Report.
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Item 1A. RISK FACTORS
A number of risks and uncertainties exist which could impact our future operating results. These uncertainties include, but are not limited
to, general economic conditions, competition, our success in developing new products and technologies, market acceptance of new
products and other factors, including those set forth below.
We engage in a highly competitive business. If we are unable to compete effectively, we could lose market share, and our results of
operations could be negatively impacted. We operate in highly competitive markets, some of which are highly fragmented. We also
compete against products produced in Asia and other parts of the world, including the U.S., which in some cases are of lower quality or
performance and lower cost. In addition, because a customer’s budget for the purchase of an electronic display is often part of their
advertising budget, our products often compete with other forms of advertising, such as television, print media or fixed display
signs. Competition could result in not only a reduction in net sales but also in the prices charged by us for our products. To remain
competitive, we must be able to not only anticipate and respond quickly to our customers’ needs and enhance our existing products and
services to meet those needs, but also continue to price our products competitively. Our competitors may develop cheaper, more efficient
products, or they may be willing to charge lower prices for strategic marketing or to increase market share. Some competitors have more
capital and other resources and may be better able to take advantage of acquisition opportunities or adapt more quickly to changes in
customer requirements, which could negatively affect our ability to compete effectively.
Our results of operations can be substantially affected by whether we are awarded large contracts and the size and timing of large
contracts. The amounts of our orders and net sales and our financial results will be substantially affected by whether we are awarded
large contracts, primarily in the professional and major college sports facilities market, the outdoor advertising niche and for large
spectaculars around the world and the amounts and timing of these contracts. When awarded large contracts, the timing and amount
could cause material fluctuations in our net sales and earnings. Awards of large contracts and their timing and amount are difficult to
predict and are outside of our control.
Our products are covered by warranties, and fulfilling these warranties could adversely affect our financial results. Unanticipated
warranty and other costs for defective products could adversely affect our financial condition and results of operations and reputation. We
provide warranties on our products generally for terms of five years or less. In addition, in response to customer needs, we regularly
offer extended warranties. These warranties require us to repair or replace faulty products and meet certain performance standards, among
other customary warranty provisions. Although we continually monitor our warranty claims and provide a reserve for estimated warranty
issues on an on-going basis, an unanticipated claim could have a material adverse impact on our financial results. In some cases, we may
be able to subrogate a claim back to a subcontractor or supplier if the subcontractor or supplier supplied the defective product or performed
the service, but this may not always be possible. The need to repair or replace products with design or manufacturing defects could
temporarily delay the sale of new products, reduce profits and adversely affect our reputation.
Our quarterly operating results may vary significantly, which could have a material effect on the price of our common stock. Our quarterly
revenues and earnings have varied in the past and are likely to vary in the future. Contracts we enter into generally stipulate customer-
specific delivery terms and may have contract cycles of a year or more, which subjects the timing of revenue recognition to many factors
beyond our control. In addition, the timing and size of large contract orders and delivery may not be predictable or repeatable.
Furthermore, because significant portions of our operating costs are fixed, an unanticipated delay or cancellation of orders in backlog
may have a significant negative impact on our quarterly operating results. Factors causing our operating results to vary may include new
product introductions, variations in product and project mix and delivery due date changes. Therefore, quarterly operating results may
be subject to significant variations, and operating results in one quarter may not be indicative of future operating results.
We enter into fixed-priced contracts on a regular basis, which could reduce our profits. The majority of contracts we enter into are to
sell our products are on a fixed-price basis. If our actual costs exceed original estimates on fixed-price contracts, our profits will be
reduced. Although we benefit from cost savings, we have a limited ability to recover cost overruns. Because of the large scale and long
duration of some contracts, unanticipated cost increases may occur as a result of several factors including, but not limited to, increases
in the cost or shortages of components; materials or labor; unanticipated technical problems; required project modifications not initiated
by the customer; and suppliers’ or subcontractors’ failure to perform or delay in performing their obligations. These factors could delay
delivery of products, and contracts may provide for liquidated damages for late delivery. Unanticipated costs unable to be passed on to
customers or the payment of liquidated damages under fixed contracts would negatively impact our profits.
Backlog may not be indicative of future revenue or profitability. Customers may cancel or delay projects for reasons beyond our
control. Orders normally contain cancellation provisions to permit our recovery of costs expended and a portion of the anticipated profit
if a customer cancels an order. If a customer elects to cancel, we may not realize the full amount of revenues included in our backlog. If
projects are delayed, the timing of revenues could be affected, and projects may remain in the backlog for extended periods of time. In
addition, as a result of delays, revenue recognition occurs over longer periods of time and is subject to unanticipated delays and cost
changes. If we receive relatively large orders in any given quarter, fluctuations in the levels of the quarterly backlog can result because
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the backlog may reach levels which may not be sustained in subsequent quarters. For these reasons, backlog may not be indicative of
future revenues.
Large contracts with significant customers represent a significant portion of our accounts receivable and costs and estimated earnings
in excess of billings. We closely monitor the credit worthiness of our customers and have not, to date, experienced significant credit
losses. Significant portions of our sales are to customers who place large orders for custom products. We mitigate our exposure to credit
risk, to some extent, by requiring deposits, payments prior to shipment, progress payments and letters of credit. However, because some
of the exposure is outside of our control, unanticipated events resulting in credit losses could have a material adverse impact on our
operating results.
Price fluctuations in and shortage of raw materials and components could adversely affect our operating margin. We purchase large
quantities of raw materials and components including, but not limited to, aluminum, LEDs, power supplies, circuit boards and various
other electronic components. Materials comprise the largest component of our cost of goods sold. Any interruption in the supply of or
increase in the cost of the raw materials or components could have a material adverse effect on our business, operating results and financial
condition. Although we are sometimes able to pass such price increases to our customers, our success in offsetting higher raw material
and component costs with price increases is largely influenced by competitive and economic conditions and could vary significantly
depending on the market served. As of the date of this Report, there were no material parts shortages in the marketplace impacting our
business.
We depend on single-source suppliers for some of the raw materials used in the manufacture of our products. We obtain some of our
raw materials, including, but not limited to, LEDs, power supplies, circuit boards and plastics, from one or a limited number of suppliers. If
we cannot obtain key raw materials from our suppliers, the raw materials may not be readily available from other suppliers, other suppliers
may not agree to supply the materials to us on terms as favorable as the terms we currently receive, or the raw materials from any other
suppliers may not be of adequate and consistent quality. Although we believe our supply of raw materials currently is adequate for the
needs of our business, we cannot assure that new sources of supply will be available when needed. Any interruption in our supply of
raw materials could have a material adverse effect on our ability to manufacture our products until a new source of supply is located and,
therefore, could have a material adverse effect on our business, financial condition or results of operations.
is characterized by ongoing product
Our business may suffer if we are not successful in our efforts to keep up with a rapidly changing product market. The electronic display
industry
in display and controller
technology. Competitors could develop new or superior products to increase their share of our markets. Our future success in addressing
the needs of our customers will depend in part on our ability to continue to understand their needs and to make timely and cost-effective
product improvements, innovations and developments.
innovations and developments
improvement,
Our international operations are exposed to additional risk and uncertainties, including unfavorable political developments, weak foreign
economies, and compliance with foreign governmental requirements, which may impact our results of operations. For fiscal years 2014,
2013 and 2012, revenue outside the United States represented approximately 18 percent, 17 percent and 17 percent of our consolidated
net sales, respectively. Our operations and earnings throughout the world have been and may in the future be adversely affected by
changes in trade, monetary and fiscal policies, laws and regulations, or other activities of U.S. and non-U.S. governments, agencies, and
similar organizations. These conditions include, but are not limited to, changes in a country's or region's economic or political conditions;
trade regulations affecting production, pricing and marketing of products; local labor conditions and regulations; reduced protection of
intellectual property rights in some countries; changes in the regulatory or legal environment; restrictions on currency exchange activities;
and burdensome taxes and tariffs and other trade barriers. International risks and uncertainties also include changing social and economic
conditions, terrorism, political hostilities and war, difficultly in enforcing agreements or collecting receivables and increased transportation
and other shipping costs. The likelihood of such occurrences and their overall effect on us vary greatly from country to country and are
not predictable. These factors may result in a decline in net sales or profitability and could adversely affect our ability to expand our
business outside of the United States.
We may fail to continue to attract, develop and retain key management and other key employees, which could negatively impact our
operating results. We depend on the performance of our senior management team and other key employees, including experienced and
skilled technical personnel. The loss of certain members of our senior management, including our Chief Executive Officer, could
negatively impact our operating results and ability to execute our business strategy. Our future success will also depend in part upon our
ability to attract, train, motivate and retain qualified personnel.
We may not be able to utilize our capacity efficiently or accurately plan our capacity requirements, which may negatively affect our
business and operating results. We increase our production capacity and the overhead supporting production based on anticipated market
demand. Market demand, however, has not always developed as expected or remained at a consistent level. The potential underutilization
risk can decrease our profitability.
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The following factors are among those that could complicate accurate capacity planning for market demand:
• Changes in the demand for and mix of products our customers buy.
• Our ability to add and train our manufacturing staff in advance of demand.
• The market’s pace of technological change.
• Variability in our manufacturing productivity.
• Long lead times for our plant and equipment expenditures, requiring major financial commitments well in advance of actual
production requirements.
Any future deterioration of our business could result in the underutilization of our manufacturing capacity, resulting in an impairment of
certain assets. Our inability to plan our capacity requirements accurately and efficiently utilize our production capacity, or our failure to
put in place the technologies and capacity necessary to meet market demand, could adversely affect our business, financial condition or
results of operations.
Regulations related to the use of conflict-free minerals may increase our costs and cause us to incur additional expenses. The Dodd-
Frank Wall Street Reform and Consumer Protection Act contains provisions to improve the transparency and accountability of the use
by public companies in their products of minerals originating from the conflict zones of the Democratic Republic of Congo (DRC) and
adjoining countries and to prevent the sourcing of such “conflict” minerals. As a result, the SEC enacted annual disclosure and reporting
requirements for public companies that use these minerals in their products, which apply to us. Under the final rules, which first apply
to public companies for the 2013 calendar year, we are required to conduct due diligence to determine the source of any conflict minerals
used in our products. Because our supply chain is broad-based and complex, we may not be able to verify the origins for all minerals
used in our products. We may face reputational challenges with our customers and other stakeholders if we are unable to sufficiently
verify the origins of all minerals used in our products through the due diligence procedures we are implementing. In addition, the rules
could reduce the number of suppliers who provide components and products containing conflict-free minerals and thus could increase
the cost of the components used in manufacturing our products and the costs of our products to us. Any increased costs and expenses
could have a material adverse impact on our financial condition and results of operations.
Our actual results could differ from the estimates and assumptions used to prepare our financial statements. In preparing our financial
statements, our management is required under U.S. generally accepted accounting principles ("GAAP") to make estimates and assumptions
as of the dates of the financial statements. These estimates and assumptions affect the reported values of assets, liabilities, revenue, and
expenses and disclosure of contingent assets and liabilities. Areas requiring significant estimates by our management include the
recognition of contract revenue, costs, profit or losses in applying the principles of percentage of completion; estimated amounts for
warranty costs, collectability of billed and unbilled accounts receivable and the amount of any allowance for doubtful accounts; the
amount of estimated liabilities; the valuation of assets acquired plus liabilities, goodwill, and intangible assets assumed in acquisitions;
and the valuation of stock-based compensation. Our actual results could differ from our estimates of such results, which could have a
material negative impact on our financial condition and results of operation.
If our internal control over financial reporting is found to be inadequate, our financial results may not be accurate, raising concerns for
investors and potentially adversely affecting our stock price. Under Section 404 of the Sarbanes-Oxley Act of 2002, we are required to
evaluate and determine the effectiveness of our internal controls over financial reporting. We have dedicated a significant amount of
time and resources to ensure compliance with this legislation for the fiscal years ended April 26, 2014, April 27, 2013 and April 28, 2012
and will continue to do so for future periods. We may encounter problems or delays in completing the review and evaluation, implementing
improvements, or receiving a positive attestation from our independent registered public accounting firm. In addition, our assessment
of internal controls may identify deficiencies in our internal controls over financial reporting or other matters which may raise concerns
for investors and therefore adversely affect our stock price.
Our future results may be affected by legal compliance risks related to the U.S. Foreign Corrupt Practices Act and other anti-bribery
and anti-corruption laws for the countries in which we operate. We are required to comply with the United States Foreign Corrupt
Practices Act, which prohibits United States companies from engaging in bribery or making other prohibited payments to foreign officials
for the purpose of obtaining or retaining business. It also requires us to maintain specific record-keeping standards and adequate internal
accounting controls. Foreign companies, including some of our competitors, are not subject to these prohibitions and
requirements. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time to time in many jurisdictions,
including the Middle East and the People's Republic of China ("China"). If our competitors engage in these practices, they may receive
preferential treatment from companies or governmental agencies, resulting in a competitive advantage for securing business from these
companies or government officials who might give them priority in obtaining new licenses or permits, which would put us at a
disadvantage. In addition, although we inform our personnel through training sessions, policies and other means that such practices are
illegal, we cannot assure our employees or agents will not engage in such conduct for which we may be held responsible even if we are
not aware of such conduct. If our employees or agents are found to have engaged in such practices, we could suffer severe fines and
penalties.
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Product liability claims not covered by insurance could adversely affect our financial condition and results of operations. We may be
subject to product liability claims involving claims of personal injury or property damage. Although we maintain product liability
insurance coverage to protect us in the event of such a claim, our coverage may be inadequate to cover litigation and/or the potential
award. Also, a well-publicized actual or perceived problem could adversely affect our reputation and reduce the demand for our products.
Our operations in China subject us to risks and uncertainties relating to China's laws and regulations. We have offices and manufacturing
facilities and make sales to customers in China which encompass many different activities. Under its current leadership, the government
of China has been pursuing economic reform policies, including encouraging foreign trade and investment and greater economic
decentralization. However, the government of China may not continue to pursue such policies or may reverse or otherwise change such
policies. Despite progress in developing its legal system, China does not have a comprehensive and highly developed system of laws,
particularly with respect to foreign investment activities and foreign trade. Enforcement of existing and future laws and contracts is
uncertain, and the implementation and interpretation of them may be inconsistent. As the Chinese legal system develops, the promulgation
of new laws, changes to existing laws and the preemption of local regulations by national laws may adversely affect foreign investors
and foreign companies with operations in China, such as ours. In addition, some government policies and rules are not published or
communicated in local districts in a timely manner, if at all. If they are published, they may not be followed consistently by local
districts. As a result, we may inadvertently operate our business in violation of new rules and policies without having any knowledge of
their existence. These uncertainties could limit the legal protections available to us. Any litigation or other proceeding in China may be
protracted and result in substantial costs and diversion of resources and management attention. Furthermore, a significant portion of our
business in China involves contracts with government bodies, which can significantly inhibit our ability to enforce a contract through
litigation or similar means.
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 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, resulting 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 could also 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.
The terms and conditions of our credit facility impose restrictions on our operations, and if we default on our credit facility, it could have
a material adverse effect on our results of operations and financial condition. The terms and conditions of our credit facilities impose
restrictions limiting, among other things, our ability to incur debt, merge, sell assets, make distributions (including cash dividends) and
create or incur liens. The availability of credit facilities is also subject to certain covenants as explained in “Item 7 – Management’s
Discussion and Analysis of Financial Condition and Results of Operations.” Our ability to comply with the covenants may be affected
by events beyond our control, and we cannot assure we will achieve operating results and maintain a financial position meeting the
requirements of the credit facility. A breach of any of these covenants could result in a default under the facilities. In the event of a
default, the bank could elect to declare any outstanding principal amount of the credit facilities and term debt, any and all accrued interest
thereon and any or all other amounts payable under the credit facilities to be immediately due and payable, which would have an adverse
effect on our results of operations and financial condition. As of April 26, 2014, we were in compliance with all financial and other
covenants of our credit facilities.
Maintaining adequate bonding and letter of credit capacity is necessary for us to successfully bid on and win some contracts. In line
with industry practice, we are often required to provide performance or payment bonds to our customers. These bonds indemnify the
customer should we fail to perform our obligations under the contract. If a bond is required for a particular project, and we are unable
to obtain an appropriate bond, we cannot pursue that project. Historically, we have had adequate bonding and letter of credit capacity;
however, as is typically the case, the issuance of a bond is at the surety's sole discretion and the issuance of the letter of credit is based
on the company's credit worthiness. Our failure to provide bonds at all or on a timely basis could negatively affect our ability to procure
projects and our business, financial condition and results of operations.
Prevailing economic, financial and business conditions and other factors could impair our ability to operate our business, satisfy our
debt obligations, and impact our customers' and vendors' business. It is anticipated that borrowings from our existing credit facilities
and cash provided by operating activities should provide sufficient funds to finance our capital expenditures, working capital and otherwise
meet operating expenses and debt service requirements as they become due. However, if additional capital is required, there can be no
assurance we will be able to obtain such capital when needed or on satisfactory terms, if at all. In addition, market conditions can
Page | 15
negatively impact our clients' ability to fund their projects and can impact our vendors, suppliers, and subcontractors and may not allow
them to perform their obligations to us, potentially adversely impacting our business, financial condition, and results of operations.
We may make future acquisitions, which may be difficult to integrate, divert management resources, result in unanticipated costs or dilute
our shareholders. Part of our business strategy is to acquire or invest in companies, businesses, products or technologies complementing
our current products, enhancing our market coverage or technical capabilities, or offering growth opportunities. Additional risks
potentially associated with acquisitions include the following:
• Difficulty integrating the purchased company, products, businesses or technologies into our own business
•
• Difficult, time-consuming and costly to integrate management information and accounting systems of an acquired business into
Incurring substantial unanticipated integration costs
our current systems
• Assimilating the acquired businesses may divert management attention and financial resources from our other operations,
disrupting our ongoing business
• Entering markets in which we have limited prior experience
• Loss of key employees, particularly those of the acquired entity
• Retaining or developing the acquired businesses’ customers
• Adversely affect our existing business relationships with suppliers
•
•
Failure to effectively analyze our return on investment
Inability to indemnify assumed liabilities for infringement of intellectual property rights or other claims
In connection with these acquisitions or investments, we could incur debt, recognize amortization expenses related to intangible assets,
recognize large and immediate write-offs, assume liabilities or issue stock diluting our current shareholders’ percentage of ownership. We
may not be able to complete acquisitions or integrate the operations, products or personnel gained through any such acquisition without
a material adverse effect on our business, financial condition or results of operations.
We maintain inventory subject to obsolescence and write downs to the extent it is replaced through product enhancements or advances
in technology. As a result of our products being subject to continuous enhancements and design changes, inventory held by us is subject
to the risk of obsolescence, and excess levels may not be salable. Losses incurred as a result could have an adverse impact on our future
profits.
We may be unable to protect our intellectual property rights effectively, or may infringe upon the intellectual property of others. We rely
on a variety of intellectual property rights we use in our products and services. We may not be able to successfully preserve our intellectual
property rights in the future, and these rights could be invalidated, circumvented or challenged. In addition, the laws of some foreign
countries in which our products and services have been or may be sold do not protect intellectual property rights to the same extent as
the laws of the United States.
In addition, intellectual property of others also has an impact on our ability to offer some of our products and services for specific uses
or at competitive prices. Competitor's patents or other intellectual property may limit our ability to offer products or services to our
customers. Any infringement or claimed infringement of the intellectual property rights of others could result in litigation and adversely
affect our ability to continue to provide, or could increase the cost of providing, products and services.
Intellectual property litigation is very costly and could result in substantial expense and diversions of our resources, whether or not we
prevail, both of which could adversely affect our business, financial condition or results of operations. In addition, there may be no
effective legal recourse against infringement of our intellectual property by third parties, whether due to limitations on enforcement of
rights in foreign jurisdictions or as a result of other factors.
The outcome of pending and future claims and litigation can have a material adverse impact on our business, financial condition, and
results of operations. We can be a party to litigation in the normal course of business. Litigation and regulatory proceedings are subject
to inherent uncertainties, and unfavorable rulings can and do occur. Pending or future claims against us could result in professional
liability, product liability, criminal liability, warranty obligations or other liabilities to the extent we are not insured against a loss or our
insurance fails to provide adequate coverage and could have a material adverse impact on our business, financial condition, and results
of operations.
Our manufacturing would be interrupted if we were unable to use our manufacturing facilities. We manufacture most of our products
in two locations in South Dakota and one in Minnesota. In addition, we manufacture certain products in our China and Belgium facilities. If
any of these facilities, or a part thereof, were to be destroyed, shut down or unable to be used for its intended purposes, we would be
limited in our capacity to meet customer demands until a replacement facility and equipment, if necessary, was found. The replacement
of the manufacturing facility could take an extended amount of time before manufacturing operations could restart. The delay engendered
Page | 16
by, and the potential cost incurred in these steps could have a material adverse effect on our business, financial condition or results of
operations.
Our data systems could fail or their security could be compromised. Our business operations depend on the reliability of sophisticated
data systems. Any failure of these systems, or any breach of our systems’ security measures, could adversely affect our operations, at
least until our data can be restored and/or the breaches remediated.
Our common stock has at times been thinly traded, which may result in low liquidity and price volatility. The daily trading volume of
our common stock has at times been relatively low. If this were to occur in the future, the liquidity and appreciation of our common
stock may not meet our shareholders’ expectations, and the prices at which our stock trades may be volatile. The market price of our
common stock could be adversely impacted as a result of sales by existing shareholders of a large number of shares of common stock in
the market or by the perception such sales could occur.
The protections we have adopted and to which we are subject may discourage takeover offers favored by our shareholders. We have
adopted and are subject to several provisions of the South Dakota Business Corporation Act (SD Act) that could have the effect of
discouraging takeover offers. Of the 120,000,000 shares of capital stock authorized in our articles of incorporation, 5,000,000 shares are
undesignated. Our Board of Directors may issue the undesignated shares on terms and with the rights, preferences and designations
determined by the Board without shareholder action, which could be used to discourage takeover attempts. Our articles of incorporation
provide for a classified board consisting of three classes of directors. Our classified board generally makes it more difficult to replace
directors and to acquire our company. We have adopted a shareholder rights plan providing for the exercise of common stock purchase
rights when a person becomes the beneficial owner of 15 percent or more of our outstanding common stock (subject to certain
exceptions). In addition, we are governed by the anti-takeover provisions of the SD Act, which may deny shareholders the receipt of a
premium on their common stock, which in turn may have a depressive effect on the market price of our common stock. In general, shares
of a corporation acquired in a “control share acquisition,” as defined in the SD Act, have no voting rights unless voting rights are approved
in a prescribed manner. There are also provisions prohibiting a public South Dakota corporation from engaging in a “business combination”
with an “interested shareholder,” both as defined in the SD Act, for a period of four years after the date of the transaction in which the
person became an interested shareholder unless the business combination is approved in a prescribed manner. The SD Act also limits
the voting rights of shares acquired in specified types of acquisitions and restricts specified types of business combinations. The existence
or issuance of "blank check" stock, the classified Board, the existence of our shareholder rights plan and the effect of the anti-takeover
provisions of the SD Act, individually or in the aggregate, may discourage potential takeover attempts and delay, deter or prevent a change
in control. They also may make the removal of management more difficult, which could deprive our shareholders of opportunities to
sell their shares at prices higher than prevailing market prices.
Significant changes in the market price of our common stock could result in securities litigation claims against us. Significant price and
value fluctuations historically have occurred with respect to the publicly-traded securities of technology companies generally. The price
of our common stock has changed significantly in the past and is likely to continue to experience significant changes in the future. In
the past, securities litigation claims have been filed against certain companies following a period of decline in the market price of their
publicly-traded securities. We may be the target of similar securities litigation claims in the future. Risks associated with litigation often
are difficult to assess or quantify, and their existence and magnitude can remain unknown for significant periods of time. Although we
maintain directors’ and officers’ insurance, the amount of insurance coverage may not be sufficient to cover a claim, and the continued
availability of this insurance cannot be assured. Future litigation, if any, may result in substantial costs and divert management’s attention
and resources, which could materially adversely affect our results of operations, financial condition and the liquidity of our common
stock.
Our directors and executive officers have substantial influence over us and could limit the ability of our other shareholders to affect the
outcome of key transactions, including changes of control. Dr. Aelred Kurtenbach serves as our Chairman of the Board. Mr. Reece
Kurtenbach, Dr. Aelred Kurtenbach's son, serves as our Chief Executive Officer. In addition, Dr. Aelred Kurtenbach has two other children
who serve as our Vice President of Human Resources and as our Vice President of Manufacturing. Together, these individuals, in the
aggregate, beneficially owned 8.65 percent of our outstanding common stock as of June 03, 2014, assuming the exercise by them of all
of their options that were currently exercisable or that vest within 60 days of June 03, 2014. In addition, our other executive officers and
directors, in the aggregate, beneficially owned an additional 5.05 percent of our outstanding common stock as of June 03, 2014, assuming
the exercise by them of all of their options currently exercisable or that vest within 60 days of June 03, 2014. These Kurtenbach family
members and our other executive officers and directors and their affiliated entities, if acting together, are able to influence significantly
all matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other significant
corporate transactions. These shareholders may have interests differing from other shareholders and they may vote in a way with which
other shareholders disagree, unfavorably affecting other shareholders’ interests. The concentration of ownership of our common stock
may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our shareholders of an
opportunity to receive a premium for their common stock as part of a sale of our company, and may adversely affect the market price of
our common stock. This concentration of ownership of our common stock may also have the effect of influencing the completion of a
change in control not necessarily in the best interests of all of our shareholders.
Page | 17
Our business is partially subject to risks of terrorist acts and, to a lesser degree, acts of war. Terrorist acts and, to a lesser degree, acts
of war, may disrupt our operations as well as the operations of our customers. Such acts have created an interruption of orders and delays
in orders already booked, primarily in sports facilities and destination sites. Any future terrorist activities and, to a lesser degree, acts of
war, could create additional uncertainties, forcing customers to further reduce or delay their spending or cancel or delay already planned
projects, which could have a material adverse impact on our business, operating results or financial condition.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
Our principal real estate properties are located in areas we deem necessary to meet sales, service and operating requirements. We consider
all of the properties to be both suitable and adequate to meet our requirements for the foreseeable future.
We own various buildings used for manufacturing, sales and service space in Brookings, South Dakota, totaling approximately
773,000 square feet; a building in Redwood Falls, Minnesota, totaling approximately 120,000 square feet; and a building in Rupelmonde,
Belgium, totaling approximately 40,000 square feet. We lease a facility in Sioux Falls, South Dakota, comprising approximately 145,000
square feet. The lease contains an option to purchase the building from January 1, 2015 through December 31, 2016. We lease
approximately 90,500 square feet in a building in Shanghai, China for sales, service and manufacturing.
The remaining sales and service offices located throughout the United States, Canada, Europe, South America, and the Asia-Pacific
regions are small offices, generally consisting of less than 10,000 square feet leased under operating leases. These lease obligations
expire on various dates, with the longest commitment extending to fiscal 2019. We believe all of our leases will be renewable at market
terms, at our discretion as they become due or that suitable alternative space will be available to lease under similar terms and conditions.
Item 3. LEGAL PROCEEDINGS
We are involved in a variety of legal actions relating to various matters during the normal course of business. Although we are unable
to predict the ultimate outcome of these legal actions, it is the opinion of management that the disposition of these matters, taken as a
whole, will not have a material adverse effect on our financial condition or results of operations.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
Page | 18
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our common stock is quoted on The NASDAQ Global Select Market under the symbol “DAKT.” As of June 03, 2014, we had 1,217
shareholders of record. Following are the high and low sales prices for our common stock for each quarter within the last two fiscal
years.
Fiscal Year 2014
Fiscal Year 2013
Sales Price
High
Low
Cash
Dividends
Declared
Sales Price
High
Low
Cash
Dividends
Declared
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
$
$
11.49
12.35
15.80
14.63
$
9.63
10.45
11.73
13.06
$
0.120
0.090
0.090
0.090
$
8.39
9.91
11.73
12.40
$
6.39
7.36
8.03
9.57
0.115
—
0.615
—
On May 22, 2014, our Board of Directors declared a quarterly dividend payment of $0.10 per share payable on June 13, 2014 to holders
of record of our common stock on June 2, 2014.
Although we expect to continue to pay dividends for the foreseeable future, any and all subsequent dividends will be reviewed regularly
and declared by the Board at its discretion. In addition, our credit facility imposes limitations on our ability to pay dividends as further
described in “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital
Resources.”
Performance Graph
The following graph shows changes during the period from May 2, 2009 to April 26, 2014 in the value of $100 invested in: (1) our
common stock; (2) The NASDAQ Composite; and (3) the Standard and Poor's 600 Index for Electronic Equipment Manufacturers. The
values of each investment as of the dates indicated are based on share prices plus any cash dividends, with the dividends reinvested on
the date they were paid. The calculations exclude trading commissions and taxes.
Page | 19
Item 6. SELECTED FINANCIAL DATA (in thousands, except per share data)
The table below provides selected historical financial data, which should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and the Notes to the Consolidated
Financial Statements, which are included in Items 7 and 8 of this Annual Report on Form 10-K. The statement of operations data for the
fiscal years ended April 26, 2014, April 27, 2013 and April 28, 2012 and the balance sheet data at April 26, 2014 and April 27, 2013 are
derived from, and are qualified by reference to, the audited Consolidated Financial Statements included elsewhere in this report. The
statement of operations data for the fiscal years ended April 30, 2011 and May 1, 2010 and the balance sheet data at April 28, 2012,
April 30, 2011 and May 1, 2010 are derived from audited financial statements that are not included in this Report.
Statement of Operations Data:
Net sales
Gross profit
Gross profit margin
Operating income (loss)
Operating margin
Net income (loss)
Diluted earnings (loss) per share
Weighted average diluted shares outstanding
Balance Sheet Data:
Working capital
Total assets
Total long-term liabilities
Total shareholders' equity
Cash dividends per share
2014
2013
2012
2011
2010
$ 551,970
141,710
$ 518,322
133,894
$ 489,526
113,437
$ 441,676
111,484
$ 393,185
94,556
25.7%
36,557
6.6%
22,206
0.51
43,762
25.8%
30,600
5.9%
22,779
0.53
42,621
23.2%
10,275
2.1%
8,489
0.20
42,304
25.2%
19,527
4.4%
14,244
0.34
42,277
24.0 %
(6,730)
(1.7)%
(6,989)
(0.17)
40,908
$ 140,532
357,451
20,624
203,119
0.39
$ 125,456
319,418
16,480
188,246
0.73
$ 119,833
315,967
15,989
190,805
0.62
$ 128,160
327,847
15,083
203,102
0.60
$ 118,625
305,851
14,358
207,053
0.10
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion highlights the principal factors affecting changes in our 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 included in this Report.
OVERVIEW
We design, manufacture and sell a wide range of display systems to customers throughout the world. We focus our sales and marketing
efforts on markets, geographical regions and products. Our five business segments consist of four domestic business units and an
International business unit. The four domestic business units consist of Commercial, Live Events, Schools and Theatres, and
Transportation, all of which include the geographic territories of the United States and Canada.
Our net sales and profitability historically have fluctuated due to the impact of large project orders, such as display systems for professional
sports facilities and colleges and universities or spectacular projects in the commercial area, as well as the seasonality of the sports market.
Large project orders can include a number of displays, controllers, and subcontracted structure builds, each of which can occur on varied
schedules according to the customer's needs. Net sales and gross profit percentages also have fluctuated due to other seasonal factors,
including the impact of holidays, which primarily affects our third quarter. Our gross margins on large custom and standard orders tend
to fluctuate more than on small standard orders. Large product orders involving competitive bidding and substantial subcontract work
for product installation generally have lower gross margins. Although we follow the percentage of completion method of recognizing
revenues for large custom orders, we nevertheless have experienced fluctuations in operating results and expect our future results of
operations will be subject to similar fluctuations.
Orders are booked and included in backlog only upon receipt of an executed contract and any required deposits. As a result, certain
orders for which we have received binding letters of intent or contracts will not be booked until all required contractual documents and
deposits are received. In addition, order bookings can vary significantly on a quarterly basis as a result of the timing of large orders.
Page | 20
GENERAL
Our business, especially the large video display business in all of our business units, is very competitive, and generally our margins on
these large video display contracts are similar across the business units over the long-term. There are, however, differences in the short
term among the business units, which are discussed in the following analysis.
Overall, our business growth is driven by the market demand for large format electronic displays with the depth and quality of our
products, including related control systems, the depth of our service offerings and our technology, serving these market demands. This
growth, however, is partially offset by declines in product prices caused by increasing competition. Each business unit also has unique
key growth drivers and challenges.
Commercial Business Unit: Over the long-term, we believe growth in the Commercial business unit will result from a number of factors,
including:
• The growing interest in our standard display products used in many different retail-type establishments and other types of
commercial establishments. The demand in this area is driven by these establishments' desire to attract the attention of motorists
and others into their storefronts. It is also driven by the need to communicate messages to the public. National accounts may
replace their displays reaching end of life, which could lead to increased sales. Furthermore, we believe in the future there will
be increased demand from national accounts, including retailers, quick serve restaurants and other types of nationwide
organizations, which could lead to increased sales.
Increasing interest in spectaculars, which include very large and sometimes highly customized displays as part of entertainment
venues such as casinos, amusement parks and Times Square type locations.
•
• The introduction of architectural lighting products for commercial buildings, which real estate owners use to add accents or
effects to an entire side or circumference of a building to communicate messages or to decorate the building.
• The continued deployment of digital billboards as billboard companies continue developing new sites and start to replace digital
billboards which are reaching end of life. This is dependent on there being no adverse changes in the digital billboard regulatory
environment, which could restrict future deployments of billboards, as well as maintaining our current market share of the
business concentrated in a few large billboard companies.
Live Events Business Unit: Over the long-term, we believe growth in the Live Events business unit will result from a number of factors,
including:
Facilities spending more on larger display systems to enhance the game-day and event experience for attendees.
•
• Lower product costs, driving an expansion of the marketplace.
• Our product and service offerings, which remain the most integrated and comprehensive offerings in the industry.
• The competitive nature of sports teams, which strive to out-perform their competitors with display systems.
• The desire for high-definition video displays, which typically drives larger displays or higher resolution displays, both of which
increase the average transaction size.
Schools and Theatres Business Unit: Over the long-term, we believe growth in the Schools and Theatres business unit will result from
a number of factors, including:
•
•
Increased demand for video systems in high schools as school districts realize the revenue-generating potential of these displays
versus traditional scoreboards.
Increased demand for different types of displays, such as message centers at schools to communicate to students, parents and
the broader community.
• The use of more sophisticated displays in athletic facilities, such as aquatic venues in schools.
Transportation Business Unit: Over the long-term, we believe growth in the Transportation business unit will result from increasing
applications and acceptance of electronic displays to manage transportation systems, including roadway, airport, parking, transit and
other applications. This growth is highly dependent on government spending, primarily by the federal government, along with the
continuing acceptance of public private partnerships as an alternative funding source.
International Business Unit: Over the long-term, we believe growth in the International business unit will result from achieving greater
penetration in various geographies, building products more suited to individual markets, third-party advertising market opportunities,
and the reasons listed in each of the other business units to the extent they apply outside the United States and Canada.
Each of our business units is impacted by adverse economic conditions in different ways and to different degrees. The effects of an
adverse economy are generally less severe on our sports related business as compared to our other businesses, although in severe economic
Page | 21
downturns, the sports business also can be severely impacted. Our Commercial and International business units are highly dependent
on economic conditions in general.
The cost and selling prices of our products have decreased over time and are expected to continue to decrease in the future. As a result,
each year we must sell more products to generate the same or greater level of net sales as in previous fiscal years. This price decline has
been significant as a result of increased competition across all business units.
Business Combinations
During the first quarter of the fiscal year ended April 26, 2014, we completed the acquisition of OPEN Out-of Home Solutions ("OPEN"),
a Belgian company, for an undisclosed amount. OPEN is a European manufacturer of cabinets and street furniture for the third-party
advertising market. Revenue and expenses from this acquisition are reflected in the International business unit segment.
For further discussion related to this acquisition, See Note 4 of our Notes to the Consolidated Financial Statements included in this
Report.
Page | 22
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The following discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation
of these financial statements requires us to make estimates and judgments which affect the reported amounts of assets, liabilities, revenues
and expenses and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate our estimates, including those
related to total costs on long-term construction-type contracts, costs to be incurred for product warranties and extended maintenance
contracts, bad debts, excess and obsolete inventory, income taxes, share-based compensation and contingencies. Our estimates are based
on historical experience and on various other assumptions believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other sources. Actual results
may differ from these estimates.
We believe the following critical accounting policies require significant judgments and estimates in the preparation of our consolidated
financial statements:
Revenue recognition on long-term construction-type contracts. Earnings on construction-type contracts are recognized on the percentage-
of-completion method, measured by the percentage of costs incurred to date to estimated total costs for each contract. Contract costs
include all direct material and labor costs and those indirect costs related to contract performance. Indirect costs include charges for such
items as facilities, engineering and project management. Provisions for estimated losses on uncompleted contracts are made in the period
such losses are capable of being estimated. Generally, construction-type contracts we enter into have fixed prices established, and to the
extent the actual costs to complete construction-type contracts are higher than the amounts estimated as of the date of the financial
statements, the resulting gross margin would be negatively affected in future quarters when we revise our estimates. Our practice is to
revise estimates as soon as such changes in estimates are known. We do not believe there is a reasonable likelihood there will be a material
change in future estimates or assumptions we use to determine these estimates. We combine contracts for accounting purposes when
they are negotiated as a package with an overall profit margin objective, essentially represent an agreement to do a single project for a
customer, involve interrelated construction activities, and are performed concurrently or sequentially. When a group of contracts is
combined, revenue and profit are recognized uniformly over the performance of the combined projects. We segment revenues in
accordance with the contract segmenting criteria in Accounting Standards Codification (“ASC”) 650-35, Construction-Type and
Production-Type Contracts.
Allowance for doubtful accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of
our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required. To identify impairment in customers’ ability to pay, we review
aging reports, contact customers in connection with collection efforts and review other available information. Although we consider our
allowance for doubtful accounts adequate, if the financial condition of our customers were to deteriorate and impair their ability to make
payments to us, additional allowances may be required in future periods. We do not believe there is a reasonable likelihood there will
be a material change in the future estimates or assumptions we use to determine the allowance for doubtful accounts. As of April 26,
2014 and April 27, 2013, we had an allowance for doubtful accounts balance of approximately $2.5 million and $2.7 million, respectively.
Warranties. We have recognized a reserve for warranties on our products equal to our estimate of the actual costs to be incurred in
connection with our performance under the warranties. Generally, estimates are based on historical experience taking into account known
or expected changes. If we would become aware of an increase in our estimated warranty costs, additional reserves may become necessary,
resulting in an increase in costs of goods sold. We do not believe there is a reasonable likelihood there will be a material change in the
future estimates or assumptions we use to determine our reserve for warranties. As of April 26, 2014 and April 27, 2013, we had
approximately $27.3 million and $25.1 million reserved for these costs, respectively.
Extended warranty and product maintenance. We recognize deferred revenue related to separately priced extended warranty and product
maintenance agreements. The deferred revenue is recognized ratably over the contractual term. If we would become aware of an increase
in our estimated costs under these agreements in excess of our deferred revenue, additional reserves may be necessary, resulting in an
increase in costs of goods sold. In determining if additional reserves are necessary, we examine cost trends on the contracts and other
information and compare them to the deferred revenue. We do not believe there is a reasonable likelihood there will be a material change
in the future estimates or assumptions we use to determine estimated costs under these agreements. As of April 26, 2014 and April 27,
2013, we had $13.8 million and $13.0 million of deferred revenue related to separately priced extended warranty and product maintenance
agreements, respectively.
Inventory. Inventories are stated at the lower of cost or market. Market refers to the current replacement cost, except market may not
exceed the net realizable value (that is, the estimated selling price in the ordinary course of business less reasonably predictable costs of
completion and disposal), and market is not less than the net realizable value reduced by an allowance for normal profit margins. In
valuing inventory, we estimate market value where it is believed to be the lower of cost or market, and any necessary changes are charged
to costs of goods sold in the period in which they occur. In determining market value, we review various factors such as current inventory
Page | 23
levels, forecasted demand and technological obsolescence. We do not believe there is a reasonable likelihood there will be a material
change in the future estimates or assumptions we use to calculate the estimated market value of inventory. However, if market conditions
change, including changes in technology, product components used in our products or expected sales, we may be exposed to unforeseen
losses which could be material.
Income taxes. 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 our deferred tax assets
will be recovered from future taxable income in each jurisdiction, and to the extent we believe recovery is not likely, a valuation allowance
must be established. We review deferred tax assets, including net operating losses, and to the extent we believe the asset may not be
realized, we recognize a valuation allowance. If our estimates of future taxable income are not met in future periods, a valuation allowance
for some of the remaining deferred tax assets may be required. We believe we will generate taxable income in future years which will
allow for realization of deferred tax assets. Realization of the deferred tax assets would require approximately $34 million of taxable
income, which we believe is achievable through future earnings.
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 any current examinations and our understanding of how the tax authorities view certain relevant industry and commercial
matters. In evaluating the exposure 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 apply judgment to estimate the exposure associated with our various filing positions. We believe any potential
tax assessments from various tax authorities 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.
ASC 740 requires disclosure of the gross amount of temporary differences for which no deferred tax liability has been recognized related
to our investment in foreign subsidiaries when the earnings of the foreign subsidiaries are indefinitely reinvested. The amount of cash
and short-term investments held by foreign subsidiaries that would not be available to fund domestic operations unless the funds are
repatriated is $2.7 million. If circumstances change and it becomes apparent that some or all of the undistributed earnings of a subsidiary
will be remitted in the foreseeable future but we have not recognized income, we will accrue as an expense in the current period income
taxes attributable to that remittance. Currently we have not recorded a deferred tax liability related to these investments as we do not
intend to repatriate these funds.
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 were
retracted for past periods (which in some cases could occur if we do not 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. Our tax holiday
with respect to our Chinese operations expired as of December 31, 2011 and, after fiscal 2012, we were not benefiting from any tax
incentives in foreign jurisdictions which would have a material impact on our effective tax rate. In addition, any acquisitions may cause
our effective tax rate to increase, depending on the jurisdictions in which the acquired operations are located.
Asset Impairment. Carrying values of goodwill and other intangible assets with indefinite lives are reviewed at least annually for possible
impairment in accordance with ASC 350, Intangibles - Goodwill and Other. Our impairment review involves estimating the fair value
of goodwill and indefinite-lived intangible assets using a combination of a market approach and an income (discounted cash flow)
approach at the reporting unit level, requiring significant management judgment with respect to revenue and expense growth rates, changes
in working capital, and the selection and use of an appropriate discount rate. The estimates of fair value of reporting units are based on
the best information available as of the date of the assessment. The use of different assumptions would increase or decrease estimated
discounted future operating cash flows and could increase or decrease an impairment charge. We use our judgment in assessing whether
assets may have become impaired between annual impairment tests. Indicators such as adverse business conditions, economic factors
and technological change or competitive activities may signal an asset has become impaired.
Carrying values for long-lived tangible assets and definite-lived intangible assets, excluding goodwill and indefinite-lived intangible
assets, are reviewed for possible impairment as circumstances warrant in connection with ASC 360-10-05-4, Impairment or Disposal of
Long-Lived Assets. Impairment reviews are conducted when we believe a change in circumstances in the business or external factors
Page | 24
warrants a review. Circumstances such as the discontinuation of a product or product line, a sudden or consistent decline in the forecast
for a product, changes in technology or in the way an asset is being used, a history of negative operating cash flow, or an adverse change
in legal factors or in the business climate, among others, may be indicators to trigger an impairment review. Our initial impairment review
to determine if a potential impairment charge is required is based on an undiscounted cash flow analysis at the lowest level for which
identifiable cash flows exist. The analysis requires judgment with respect to changes in technology, the continued success of product
lines, future volume, revenue and expense growth rates, and discount rates.
Share-based compensation. We use the Black-Scholes standard option pricing model (“Black-Scholes model”) to determine the fair
value of stock options and stock purchase rights. The determination of the fair value of the awards on the date of grant using the Black-
Scholes model is affected by our stock price as well as by assumptions regarding other variables, including projected employee stock
option exercise behaviors, risk-free interest rate, expected volatility of our stock price in future periods, and expected dividend yield.
We analyze historical employee exercise and termination data to estimate the expected life assumption of a new employee option. We
believe historical data currently represents the best estimate of the expected life of a new employee option. The risk-free interest rate we
use is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected life of the options. We
estimate the expected volatility of our stock price in future periods by using the implied volatility in market traded options. Our decision
to use expected volatility was based on the availability of actively traded options for our common stock, and our assessment of expected
volatility is more representative of future stock price trends than the historical volatility of our common stock. We use an expected
dividend yield consistent with our dividend yield over the period of time we have paid dividends in the Black-Scholes option valuation
model. The amount of share-based compensation expense we recognize during a period is based on the portion of the awards ultimately
expected to vest. We estimate pre-vesting option forfeitures at the time of grant by analyzing historical data, and we revise those estimates
in subsequent periods if actual forfeitures differ from those estimates.
If factors change and we employ different assumptions for estimating share-based compensation expense in future periods or if we decide
to use a different valuation model, the expense in future periods may differ significantly from what we have recorded in the current period
and could materially affect our net earnings and net earnings per share in a future period.
Page | 25
RECENT ACCOUNTING PRONOUNCEMENTS
For a summary of recently issued accounting pronouncements and the effects those pronouncements would have on our financial results,
see Note 1 of the Notes to our Consolidated Financial Statements included in this Report.
RESULTS OF OPERATIONS
Net Sales
(in thousands)
Net Sales:
Commercial
Live Events
Schools & Theatres
Transportation
International
Orders:
Commercial
Live Events
Schools & Theatres
Transportation
International
Year Ended
April 26, 2014
April 27, 2013
April 28, 2012
Amount
Percent
Change
Amount
Percent
Change
Amount
$
$
$
$
154,754
197,246
59,531
54,861
85,578
551,970
155,840
225,331
59,812
49,057
87,094
577,134
7.0% $
24.4
(10.0)
(25.1)
13.0
6.5% $
2.5% $
39.4
(7.7)
(33.2)
8.7
8.5% $
144,596
158,562
66,128
73,270
75,766
518,322
152,028
161,602
64,796
73,426
80,158
532,010
(2.7)% $
(1.5)
10.8
51.7
5.1
5.9 % $
(0.8)% $
2.5
10.7
33.4
44.7
10.8 % $
148,585
160,933
59,662
48,284
72,062
489,526
153,268
157,695
58,534
55,060
55,396
479,953
Fiscal Year 2014 as compared to Fiscal Year 2013
Commercial: The increase in net sales for fiscal 2014 compared to fiscal 2013 was the net result of:
• An increase of $6.0 million in sales of large custom video contracts. The level of large custom contract orders and sales in this
niche is subject to volatility.
• An increase of $4.7 million in sales in our reseller niche resulting from increased contract orders in the shopping centers and
malls; and civic and nonprofit niches.
• Relatively flat sales in our billboard niche.
A number of custom video project opportunities are available in the marketplace; however, due to a number of factors, such as the
discretionary nature of customers committing to a system, it is difficult to precisely predict orders and sales for fiscal 2015 in the
Commercial business unit. However, we believe sales for fiscal 2015 will be slightly higher due to increases in the shipment of digital
billboard orders and increases in large video projects as compared to fiscal 2014. We expect growth in this business unit over the long-
term, assuming the economy continues to improve.
Live Events: The increase in net sales for fiscal 2014 compared to fiscal 2013 was the net result of:
• An increase of $40.0 million in sales in our large sports venue segment, resulting from $26.5 million in sales to National Football
League ("NFL") stadiums, $18.4 million in sales to multi-sport arenas, and $4.3 million in sales to Major League Baseball
("MLB") stadiums. This was offset by decrease in sales to minor league stadiums, National Hockey League ("NHL") stadiums,
and other various niches.
• A $1.3 million decrease in sales to mobile and modular customers due to reduced demand from these customers.
We continue to see ongoing interest from venues at all levels to increase the size and capability of their display system, which offers
continued growth opportunity for this market in fiscal 2015. A number of factors, such as the discretionary nature of customers committing
to upgrade systems, versus the non-discretionary purchases associated with new construction, the current aggressive competitive
environment and various other factors, make forecasting fiscal 2015 orders and net sales difficult. However, we expect sales to be similar
to fiscal 2014. We expect growth in this business unit over the long-term, assuming the economy continues to improve and we are
successful at counteracting competitive pressures.
Page | 26
Schools and Theatres: The decrease in net sales for fiscal 2014 compared to fiscal 2013 was the result of:
• Lower volume of sales from large video systems as a result of a decrease in the size and corresponding selling price of the video
displays ordered during fiscal 2014. The opportunities to book large video system orders vary from year to year and it is hard
to predict. A number of factors, such as the discretionary nature of customers committing to upgrade products, impact order
volumes.
• The timing of purchase decisions that are impacted by economic factors.
We continue to see opportunities to sell larger video systems in fiscal 2015, primarily in high school facilities which benefit from our
sports marketing services that generate advertising revenue to fund the display systems. For the long term, we believe this business unit
presents growth opportunities as the economy continues to improve and larger video systems are adopted.
Transportation: The decrease in net sales for fiscal 2014 compared to fiscal 2013 was the result of:
• Recognized sales in the amount of $30.5 million during fiscal 2013 for two significant projects with no sales from recurring
projects of a similar size recognized during fiscal 2014.
• A slight increase in sales related to traditional transportation business in fiscal 2014.
For fiscal 2015, we believe the transportation market sales will be generally flat. A number of factors, such as transportation funding, a
current aggressive competitive environment and various other factors, make forecasting orders and net sales difficult. However, highways
and public transit show growth in capital improvement projects that include dynamic message signs. The Obama administration has
recently proposed a four-year plan that would spend $302 billion on highways and transit. Without this continuation and potential increase
in funding, payments to states could be reduced and have a negative impact on our sales and financial results in the Transportation business
unit.
International: The increase in net sales for the fiscal 2014 compared to fiscal 2013 was the net result of a higher beginning backlog for
fiscal 2014 compared to fiscal 2013 and an increase of orders booked during fiscal 2014 converting into sales and progress on large
projects. We have been successful in sports application systems and commercial applications internationally.
We completed the acquisition of OPEN during the first quarter of fiscal 2014. OPEN's sales were included in the International business
unit results and contributed $4.2 million of net sales during fiscal 2014.
For fiscal 2015, we believe the International business unit has potential for sales growth as we penetrate markets with our established
sales networks and the pipeline of projects increases. In addition, the third-party advertising business continues to be strong worldwide,
and we see a definite shift to digital as prices for displays have come down. We continue to see an increase in our pipeline for large video
projects in sports and commercial applications and an increase in the projects using architectural lighting solutions. As with our other
business units, large video system projects cause difficulty in projecting fiscal 2015 results.
Fiscal Year 2013 as compared to Fiscal Year 2012
Commercial: The decrease in net sales for fiscal 2013 compared to fiscal 2012 was the net result of:
• A decrease of $3.5 million in sales for large video display projects due to delayed orders for custom video projects.
• A decrease of $3.7 million in sales to outdoor advertising companies due to lower demand from our billboard customers.
• An increase of $2.2 million in sales of on premise advertising displays, which was primarily due to an increase in orders for a
national account customer replacement program, as previously disclosed, and an improved economy.
• An increase of $1.0 million of service related sales.
Live Events: The decrease in net sales for fiscal 2013 compared to fiscal 2012 was the net result of:
• A $2.4 million decrease in sales to mobile and modular customers due to reduced demand from these customers.
• General volatility of this business unit because of the nature of the business in large custom display systems. During fiscal 2013,
sales increased for multi-purpose live event arena venues and NFL stadiums which were offset by a decrease in sales to MLB
stadiums and NHL and National Basketball Association arenas.
Schools and Theatres: The increase in net sales for fiscal 2013 compared to fiscal 2012 was the result of:
•
Schools demonstrating more willingness in fiscal 2013 than in fiscal 2012 to move forward with projects including smaller video
systems, scoring and timing equipment and message centers.
• An increased demand in video projects for high schools.
Page | 27
Transportation: The increase in net sales for fiscal 2013 compared to fiscal 2012 was the result of:
•
•
Sales recorded from a large procurement contract in fiscal 2013 compared to fiscal 2012.
Sales recorded in relation to a $21 million order for video displays at the LAX Bradley International Terminal in Los Angeles
during fiscal 2013. This type of order in the transportation market is unusual and infrequent in nature.
International: The increase in net sales for fiscal 2013 compared to fiscal 2012 was the net result of general volatility in this business
unit because of the nature of the business in large custom display systems and timing differences in the production and installation schedule
of orders booked.
Advertising Revenues
We occasionally sell products in exchange for the advertising revenues generated from the use of our display products. These sales
represented less than one percent of net sales for fiscal 2014, 2013, and 2012. 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 are typically higher.
Backlog
The product order backlog as of April 26, 2014 was $172 million as compared to $141 million as of April 27, 2013. Historically, our
backlog varies due to the seasonality of our business, the timing of large projects, and customer delivery schedules for these orders. The
backlog decreased from one year ago in our Transportation business unit and increased in our other business units.
Backlog is not a measure defined by U.S. generally accepted accounting principles, and our methodology for determining backlog may
vary from the methodology used by other companies in determining their backlog amounts. Our backlog is equal to the amount of net
sales expected to be recognized in future periods on standard product and contract sales that are evidenced by an arrangement with fixed
and determinable prices and with collectability reasonably assured. Backlog may not be indicative of future operating results, and
arrangements in our backlog may be canceled, modified or otherwise altered; therefore, it is not necessarily indicative of future sales or
net income.
Gross Profit
(in thousands)
Commercial
Live Events
Schools & Theatres
Transportation
International
April 26, 2014
Year Ended
April 27, 2013
April 28, 2012
Amount
As a Percent
of Net Sales
Amount
As a Percent
of Net Sales
Amount
$
$
44,974
43,019
16,202
16,126
21,389
141,710
29.1% $
21.8
27.2
29.4
25.0
25.7% $
38,123
31,718
18,601
24,552
20,900
133,894
26.4% $
20.0
28.1
33.5
27.6
25.8% $
38,123
26,477
15,532
14,445
18,860
113,437
As a Percent
of Net Sales
25.7%
16.5
26.0
29.9
26.2
23.2%
Fiscal Year 2014 as compared to Fiscal Year 2013
The gross profit percentage remained flat for fiscal 2014 compared to fiscal 2013.
It is difficult to project gross profit levels for fiscal 2015 because of the uncertainty regarding the level of sales, uncertainty regarding
the sales mix and timing, and the competitive factors in our business. We are focused on improving our gross profit margins as we execute
our strategies for improved profitability which include quality initiatives in our supply chain and manufacturing processes. We are focused
on product reliability in designs to improve warranty costs as a percent of net sales. We continue to focus on improved process flow in
our services organization to improve gross profit margin.
Commercial: The gross profit percent increase in the Commercial business unit for fiscal 2014 compared to fiscal 2013 was the result
of overall gross margin improvement on product sales mix and manufacturing utilization, which were offset by increased warranty costs.
Live Events: The gross profit percent increase in the Live Events business unit for fiscal 2014 compared to fiscal 2013 was the result of
improved manufacturing utilization from increased sales, offset by slightly higher warranty costs. Large live events video projects are
competitively bid and generally result in lower overall margins from a sales mix perspective.
Page | 28
Schools and Theatres: The gross profit percent decrease in the Schools and Theatres business unit for fiscal 2014 compared to fiscal
2013 primarily was the result of lower volume of sales from video projects and increased warranty and manufacturing costs.
Transportation: The gross profit percent decrease in the Transportation business unit for fiscal 2014 compared to fiscal 2013 was primarily
the result of a lower volume of large custom projects and increased manufacturing costs, which were partially offset by lower warranty
costs.
International: The gross profit percent decrease in the International business unit for fiscal 2014 compared to fiscal 2013 was the net
result of a decrease in the gross margin on product sales and an increase in manufacturing costs related to our new manufacturing plant
in Belgium for third-party advertising displays, which were partially offset by lower warranty costs.
Fiscal Year 2013 as compared to Fiscal Year 2012
The increase in our gross profit percentage for fiscal 2013 compared to fiscal 2012 is the net result of the following:
• An increase of approximately 3.4 percentage points because of improved cost and resource management in the manufacturing
and services infrastructure and improved sales mix.
• A decrease of approximately 0.8 percentage points because of unexpected warranty costs and costs incurred for services not
covered under warranty to cover primarily supplier component issues. For fiscal 2013, warranty costs were approximately 3.4
percent of net sales compared to 2.7 percent in fiscal 2012.
Commercial: The gross profit percent increase for fiscal 2013 compared to fiscal 2012 was primarily the result of sales mix and improved
manufacturing utilization, which were offset by unexpected warranty costs due to a supplier component failure.
Live Events: The gross profit percent increase for fiscal 2013 compared to fiscal 2012 was the result of lowered manufacturing
infrastructure costs primarily due to the overall higher sales volumes. Large live events video projects are competitively bid and generally
result in lower overall margins from a sales mix perspective.
Schools and Theatres: The gross profit percent increase for fiscal 2013 compared to fiscal 2012 primarily was the result of sales mix
and improved manufacturing utilization from the overall higher sales volumes and cost reduction initiatives.
Transportation: The gross profit percent increase for fiscal 2013 compared to fiscal 2012 was primarily the result of improved
manufacturing utilization from the overall higher sales volumes and cost reduction initiatives and improved sales mix offset by unexpected
warranty costs due to a supplier component failure.
International: The gross profit percent increase for fiscal 2013 compared to fiscal 2012 was the net result of an increase in the gross
margin on product sales, which increased the overall gross profit by approximately six percentage points, offset by an increase in warranty
costs and an increase in services infrastructure costs.
Selling Expenses
(in thousands)
Commercial
Live Events
Schools & Theatres
Transportation
International
April 26, 2014
Year Ended
April 27, 2013
April 28, 2012
As a
Percent of
Net Sales
Percent
Change
As a
Percent of
Net Sales
Percent
Change
As a
Percent of
Net Sales
Amount
Amount
9.5%
6.3
18.0
6.0
14.7
9.7%
5.6% $
(1.0)
2.6
2.9
0.1
2.0% $
13,882
12,647
10,451
3,222
12,557
52,759
9.6%
8.0
15.8
4.4
16.6
10.2%
(1.6)% $
(1.9)
(3.4)
(6.2)
14.5
1.0 % $
14,112
12,898
10,816
3,436
10,971
52,233
9.5%
8.0
18.1
7.1
15.2
10.7%
Amount
$
$
14,662
12,515
10,727
3,316
12,574
53,794
Fiscal Year 2014 as compared to Fiscal Year 2013
Selling expenses consist primarily of salaries, other employee-related costs, travel and entertainment expenses, facilities-related costs
for sales and service offices, bad debt expenses, third-party commissions and expenditures for marketing efforts, including the costs of
collateral materials, conventions and trade shows, product demos, and supplies. The increase in selling expenses for fiscal 2014 compared
to fiscal 2013 was the net result of the following factors:
Page | 29
• A $1.3 million increase in personnel costs, including taxes and benefits.
• A $0.7 million decrease in bad debt expense for potentially uncollectable accounts receivable primarily from sales derived from
our International business unit not recurring in fiscal 2014.
• A $0.6 million increase in travel and entertainment for sales activities.
We expect selling expenses will increase slightly in dollars in fiscal 2015 as compared to fiscal 2014 but remain flat as a percentage of
net sales.
Commercial: The increase in selling expenses for fiscal 2014 compared to fiscal 2013 was the result of $0.8 million increases in travel
and entertainment, third-party commission expenses, and various changes in other selling expenses.
Live Events: The decrease in selling expenses for fiscal 2014 compared to fiscal 2013 was the result of reductions in depreciation and
various changes in other selling expenses from normal business changes and cost containment initiatives.
Schools & Theatres: The increase in selling expenses for fiscal 2014 compared to fiscal 2013 was the result of an increase of $0.3 million
in travel and entertainment and marketing, conventions, and advertising expenses.
Transportation: The increase in selling expenses for fiscal 2014 compared to the same period in fiscal 2013 was the result of an increase
in travel and entertainment expense and various changes in other selling expenses.
International: Selling expenses were flat for fiscal 2014 compared to fiscal 2013, although there were increases in payroll costs, net of
taxes and benefits, primarily due to the acquisition in fiscal 2014, these costs were offset by decreases in bad debt expense and various
other selling expenses.
Fiscal Year 2013 as compared to Fiscal Year 2012
Commercial: The decrease in selling expense for fiscal 2013 compared to fiscal 2012 was due to a $0.3 million decrease in travel and
entertainment expenses and various changes in other selling expenses as a result of our initiatives to contain costs.
Live Events: The decrease of $0.2 million in selling expenses for fiscal 2013 compared to fiscal 2012 was the result of our initiative to
contain costs in travel and entertainment and convention expenses.
Schools & Theatres: The decrease in selling expenses for fiscal 2013 compared to fiscal 2012 was the result of reductions in bad debts
and various changes in other selling expenses from normal business changes and cost containment initiatives.
Transportation: Selling expenses for fiscal 2013 compared to fiscal 2012 decreased as a result of cost containment efforts offsetting
increases in other variable expenses.
International: The increase in selling expenses for fiscal 2013 compared to fiscal 2012 was the net result of:
• An increase of $1.2 million in bad debt expense for potentially uncollectable accounts receivable due to the continued softness
of the worldwide economy.
• A $0.7 million increase in third-party commissions on significant contracts. Third-party sales agents are contracted from time-
to-time to penetrate geographic locations where we have limited presence.
• A net decrease of $0.2 million in various other selling expenses.
Other Operating Expenses
Year Ended
Amount
(in thousands)
General and administrative
$ 27,984
Product design and development $ 23,375
April 26, 2014
As a
Percent of
Net Sales
April 27, 2013
As a
Percent of
Net Sales
Percent
Change Amount
2.1% $ 27,404
1.1% $ 23,131
5.1%
4.2%
Percent
Change Amount
(0.1)% $ 27,422
(1.6)% $ 23,507
5.3%
4.5%
April 28, 2012
As a
Percent of
Net Sales
5.6%
4.8%
Fiscal Year 2014 as compared to Fiscal Year 2013
General and administrative expenses consist primarily of salaries, other employee-related costs, professional fees, shareholder relations
costs, facilities and equipment related costs for administrative departments, training costs, amortization of intangibles and the costs of
supplies. The increase in general and administrative expense in fiscal 2014 as compared to fiscal 2013 was the result of an increase of
Page | 30
$0.8 million in professional fees, travel and entertainment, IT maintenance, advertising, and other expense, which was offset by decreases
in various other general and administrative expenses.
We expect general and administrative expenses to increase slightly in dollars for fiscal 2015 as compared to fiscal 2014 but remain flat
as a percentage of net sales.
Product design and development expenses consist primarily of salaries, other employee-related costs, facilities and equipment-related
costs and supplies. Product design and development expenses in fiscal 2014 as compared to fiscal 2013 were flat.
Our costs for product development represent an allocated amount of costs based on time charges, materials costs and overhead of our
engineering departments. Generally, a significant portion of our engineering time is spent on product development, while the rest is
allocated to large contract work and included in cost of goods sold.
We expect product design and development expenses will increase slightly in dollars in fiscal 2015 as compared to fiscal 2014 but remain
flat as a percentage of sales.
Fiscal Year 2013 as compared to Fiscal Year 2012
General and administrative expenses in fiscal 2013 as compared to fiscal 2012 remained relatively flat due to our continued focus on
controlling spending as a part of our strategic goals to improve operating income. During fiscal 2013, increases in salaries and other
employee-related costs of $0.5 million were offset by decreases of $0.3 million in professional fees and $0.2 million of other costs.
The decline in product design and development expenses in fiscal 2013 as compared to fiscal 2012 was the net result of an increase in
personnel costs, including taxes and benefits, of $0.5 million, a decrease in material costs related to product development of $1.0 million
as a result of the timing of projects for prototyping new products and the stage of product development, and an increase of $0.1 million
in various other expenses.
Other Income and Expenses
(in thousands)
Interest income, net
Other (expense) income, net
April 26, 2014
As a
Percent of
Net Sales
Year Ended
April 27, 2013
As a
Percent of
Net Sales
Amount
1,039
$
(355)
$
Percent
Change Amount
1,168
(839)
0.2 % (11.0)% $
(0.1)% (57.7)% $
Percent
Change Amount
1,412
(110)
0.2 % (17.3)% $
(0.2)% 662.7 % $
April 28, 2012
As a
Percent of
Net Sales
0.3 %
— %
Fiscal Year 2014 as compared to Fiscal Year 2013
Interest income, net: We generate interest income through short-term cash investments, marketable securities, 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. Interest expense is comprised primarily of interest costs on long-term marketing obligations. Interest
income declined slightly for fiscal 2014 as compared to fiscal 2013 due to a lower level of income on investments due to lower yields
available in the market when reinvesting available cash. As a result of the volatility of working capital needs and changes in investing
and financing activities, along with changes in the interest rate environment, it is difficult to project changes in interest income. We
expect our cash balances will be increasing during fiscal 2015; however, we are unable to project how that will compare to fiscal 2014.
Other (expense) income, net: The decrease of $0.5 million in other expenses for fiscal 2014 as compared to fiscal 2013 was due to the
recognition in fiscal 2013 of a $0.5 million settlement of a dispute relating to a past acquisition; no similar transaction was recorded in
fiscal 2014
Fiscal Year 2013 as compared to Fiscal Year 2012
Interest income, net: Interest income declined slightly for fiscal 2013 as compared to fiscal 2012 due to a reduction in long-term receivable
balances. As a result of the volatility of working capital needs and changes in investing and financing activities, along with changes in
the interest rate environment, it is difficult to project changes in interest income.
Other (expense) income, net: The decrease of $0.7 million in other expenses for fiscal 2013 as compared to fiscal 2012 was due to the
settlement in fiscal 2013 of the dispute described above and approximately $0.1 million of higher currency losses on U.S. dollar advances
to foreign subsidiaries in fiscal 2013 compared to fiscal 2012.
Page | 31
Income Taxes
Fiscal Year 2014 as compared to Fiscal Year 2013
The effective tax rate was approximately 40.4 percent for fiscal 2014 as compared to 26.4 percent for fiscal 2013. To understand the
overall effective tax rate for each year, it is important to recognize the effect of specific items as they compare to the level of income
before taxes in each year. Income tax expense increased to $15.0 million in fiscal 2014 as compared to $8.2 million in fiscal 2013. The
increase was attributable primarily to the increase in income before income taxes and the recording of a $2.3 million valuation allowance
against our deferred tax asset for our equity in investments. In comparing fiscal 2014 to fiscal 2013, the changes in the effective tax rate
were primarily due to the net impact of the following items:
• The federal research and development tax credit decreased the effective tax rate by approximately 2.0 percent in fiscal 2014 as
compared to 5.8 percent in fiscal year 2013. However, the effect of the tax credit on the tax rate in fiscal 2014 was limited as
the credit pertained to only a portion of the year. The credit made a lesser impact on the effective tax rate because income before
taxes was higher with a lower tax credit in fiscal 2014 than in fiscal 2013.
• A decrease in the effective tax rate of approximately 2.7 percentage points due to the Domestic Production Activities Deduction
compared to 3.2 percentage points in fiscal 2013 as a result of a higher actual book income and a more precise calculation.
• A decrease in the effective tax rate of approximately 0.9 percentage points as a result of the dividends paid into our 401(k) plan
compared to 2.0 percentage points in fiscal 2013.
• A decrease in the effective tax rate of approximately 1.1 percentage points in fiscal 2013 due to an international tax change
which did not occur in fiscal 2014.
• An increase in the effective tax rate of 6.2 percentage points due to a recorded valuation allowance against our equity in investments
which did not occur in fiscal 2013.
• Various other items which have a greater impact on the effective rate due to higher income before taxes but are not material to
the results.
We operate within multiple taxing jurisdictions, both domestic and international, and we 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 because different
taxing jurisdictions have different statutes of limitations.
Fiscal Year 2013 as compared to Fiscal Year 2012
The effective tax rate was approximately 26.4 percent for fiscal 2013 as compared to 26.7 percent in fiscal 2012. Income tax expense
increased to $8.2 million in fiscal 2013 as compared to $3.1 million in fiscal 2012. The increase was attributable primarily to the increase
in income before income taxes. In comparing fiscal 2013 to fiscal 2012, the changes in the effective tax rate were primarily due to the
net impact of the following items:
• The reinstatement of the federal research and development tax credit which decreased the effective rate by approximately 5.8
percent in fiscal 2013 as compared to 8.7 percent in fiscal year 2012. However, the effect of the tax credit on the tax rate in
fiscal 2012 was limited as the credit pertained to only a portion of the year, but that amount made a greater impact on the effective
tax rate because income before taxes were lower in fiscal 2012 than in fiscal 2013.
• An increase in the annual estimated effective tax rate of approximately 2.5 percentage points in fiscal 2013 compared to 10.5
percentage points in fiscal 2012 as a result of the impact of non-deductible meals and entertainment costs and stock compensation
expense on a higher projected income compared to similar level expenses on a lower projected income in fiscal 2012.
• A decrease in the effective tax rate of approximately 1.1 percentage points in fiscal 2013 due to an international tax change
which did not occur in fiscal 2012.
• An increase in the effective tax rate related to a reversal of valuation allowances in fiscal 2012, as it related to some foreign
jurisdictions which did not occur in fiscal 2013.
• Various other items which have a greater impact on the effective rate due to lower income before taxes but which are not material
to our financial results.
Fiscal Year 2014 Fourth Quarter Summary
During the fourth quarter of fiscal 2014, net sales increased approximately nine percent to $136.2 million as compared to $124.5 million
in the fourth quarter of fiscal 2013. Net sales increased in the Commercial, Live Events, and International business units and decreased
in the Schools and Theatres and Transportation business units. Commercial business unit net sales increased due to increases in the net
sales for billboard, reseller, and national account niches, offset by a decrease in sales realization on large video projects. Live Events
business unit net sales increased due an increase in orders related to video displays for NFL stadiums.
Page | 32
Gross margin percentage increased to approximately 25 percent in the fourth quarter of fiscal 2014 from approximately 23 percent in the
fourth quarter of fiscal 2013. The increase in gross profit percentage was the net result of lower warranty costs and improved manufacturing
utilization.
Selling expenses increased to $13.7 million from $13.2 million in the fourth quarter of fiscal 2014 compared to the fourth quarter of fiscal
2013. The increase was the result of a $0.7 million increase in payroll costs, including taxes and benefits, travel and entertainment
expenses, and commissions and consultants. This increase was offset by a decrease of $0.2 million in bad debt and marketing, conventions,
and advertising expenses. We use third parties to expand market opportunities, and these types of expenses occur only if the third party
is successful in procuring sales.
General and administrative costs declined by approximately one percent in the fourth quarter of fiscal 2014 to $7.2 million as compared
to $7.3 million in the fourth quarter of fiscal 2013. The decrease was the net result of a decrease of approximately $0.2 million in payroll
costs, including taxes and benefits, and information technology, including software and hardware expenses, and an increase of $0.1 million
in travel and entertainment and other expenses.
Product development costs increased by approximately seven percent in the fourth quarter of fiscal 2014 to $6.0 million as compared to
$5.7 million in the fourth quarter of fiscal 2013. The increase was the result of an increase of $0.3 million in engineering costs and small
changes in non-engineering costs, materials to produce prototypes or test materials, and legal fees related to patent work.
The effective tax rate was 74.3 percent in the fourth quarter of fiscal 2014 compared to an effective tax benefit of 22.9 percent in the
fourth quarter of fiscal 2013. The increase was primarily related to a one-time $2.3 valuation allowance against our equity in investments
booked in the fourth quarter of fiscal 2014, which did not occur during the fourth quarter of fiscal 2013. The effective tax benefit for the
fourth quarter of fiscal 2013 was the result of an increase in the domestic production activities deduction estimate and other one-time
adjustments in fiscal 2013.
LIQUIDITY AND CAPITAL RESOURCES
(in thousands)
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash
Net increase in cash and cash equivalents
April 26,
2014
Year Ended
April 27,
2013
Percent
Change
$
$
36,199
(16,358)
(15,321)
(94)
4,426
$
$
50,749
(8,531)
(31,002)
(11)
11,205
(28.7)%
91.7
(50.6)
754.5
60.5 %
Cash flows from operating activities: The decrease in cash from operating activities for fiscal 2014 as compared to fiscal 2013 was the
net result of a decrease in changes in net operating assets and liabilities of $17.9 million plus an increase of $5.9 million in our deferred
income taxes, adjusted by an $1.1 million decrease in depreciation and amortization and a $0.6 million decrease in net income.
The most significant drivers of cash generated from operating activities in fiscal 2014 were the net result of the following:
• Net income of $22.2 million.
• Depreciation, amortization, share-based compensation, and other various non-cash activities of $18.9 million.
• Cash generated of $37.3 million because of changes in balances of $30.7 million from construction-type contracts due to the
timing of billing and production schedules; $5.4 million of customer deposits; $0.7 million of net collections of long-term
receivables during this period; and $0.5 million of various other operating account changes.
• Cash consumed of $53.6 million because of a $21.6 million increase in accounts receivable due to an increase in sales; a $19.4
million increase in inventory for future deliveries; a $9.9 million increase in income taxes; a $0.9 million decrease in accounts
payable; a $0.8 million decrease in warranty obligations; and $1.0 million decrease in various other operating account changes.
Overall, changes in operating assets and liabilities can be impacted by the timing of cash flows on large projects, which can cause
significant fluctuations in the short term in inventory, accounts receivables, accounts payable, customer deposits, costs and earnings in
excess of billings and various other operating assets and liabilities. Variability in costs and earnings in excess of billings and billings in
excess of costs relates to the timing of billings on construction-type contracts and revenue recognition, which can vary significantly
depending on contractual payment terms and build installation schedules. Balances are also impacted by the seasonality of the sports
business.
Page | 33
Cash flows from investing activities: The increase in cash used in investing activities for fiscal 2014 as compared to fiscal 2013 was the
net result of the following:
• An increase in purchases of property and equipment of $3.8 million. During fiscal 2014, we invested $5.4 million in manufacturing
equipment, $3.4 million in product demonstration equipment, $3.1 million in information systems infrastructure, including
software, and $1.6 million in other assets. Capital expenditures are expected to be $25 million for all of fiscal 2015.
$1.5 million used for acquisitions during fiscal 2014.
•
• An increase in the net cash invested in marketable securities, net of sales and maturities of $2.5 million.
Cash flows from financing activities: The decrease in cash used in financing activities for fiscal 2014 as compared to fiscal 2013 was
the result of a $14.2 million decrease in dividends paid to shareholders. Dividends of $16.7 million, or $0.39 per share, were paid during
fiscal 2014 compared to $30.9 million, or $0.73 per share, in the prior year. During fiscal 2014, we paid $3.7 million related to debt
assumed in our recent acquisition, which was offset by $3.6 million increase in proceeds from stock options exercised, which was partially
offset by a non-recurring payment in fiscal 2013 to pay off notes payable of $1.5 million.
Other Liquidity and Capital Resources Discussion: Included in receivables and costs in excess of billings as of April 26, 2014 was
approximately $7.6 million of retainage on long-term contracts, all of which is expected to be collected within one year.
Working capital was $140.5 million at April 26, 2014 and $125.5 million at April 27, 2013. The increase in working capital was primarily
the result of higher sales and increases in cash, accounts receivable, and inventories, and decreases in accrued expenses and deferred
revenue, which were partially offset by decreases in costs and estimated earnings in excess of billings and increases among customer
deposits, accounts payable, warranty obligations, and billings in excess of cost and estimated earnings. We have historically financed
working capital needs through a combination of cash flow from operations and borrowings under bank credit agreements.
We have used and expect to continue to use cash reserves and, to a lesser extent, bank borrowings to meet our short-term working capital
requirements. On large product orders, the time between order acceptance and project completion may extend up to and exceed 24 months
depending on the amount of custom work and a customer’s delivery needs. We often receive down payments or progress payments on
these product orders. To the extent these payments are not sufficient to fund the costs and other expenses associated with these orders,
we use working capital and bank borrowings to finance these cash requirements.
We have a credit agreement with a U.S. bank for a $35.0 million line of credit, which includes up to $15.0 million for standby letters of
credit. The line of credit, which was amended on November 15, 2013, is due on November 15, 2016. The interest rate ranges from LIBOR
plus 145 basis points to LIBOR plus 195 basis points depending on the ratio of our interest-bearing debt to EBITDA. EBITDA is defined
as net income before income taxes, interest expense, depreciation and amortization, all as determined in accordance with GAAP. The
effective interest rate was 1.6 percent at April 26, 2014. We are assessed a loan fee equal to 0.125 percent per annum of any non-used
portion of the loan. As of April 26, 2014, there were no advances to us under the line of credit and the balance of letters of credit,
outstanding was approximately $6.7 million.
The credit agreement is unsecured and requires us to be in compliance with the following financial ratios:
• A minimum fixed charge coverage ratio of at least 2 to 1 at the end of any fiscal year. The ratio is equal to (a) EBITDA less
dividends or other distributions, a capital expenditure reserve of $6 million, and income tax expenses, over (b) all principal and
interest payments with respect to debt, excluding principal payments on the line of credit; and
• 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 have an additional credit agreement with another U.S. bank which supports our credit needs outside of the United States. It was also
amended in November 15, 2013 and becomes due on November 15, 2016. The facility provides for a $40.0 million line of credit and
includes facilities for letters of credit and bank guarantees and to secure foreign loans for our international subsidiaries. This credit
agreement is unsecured. It contains the same covenants as the credit agreement on the line of credit and contains an inter creditor agreement
whereby the debt has a cross default provision with the primary credit agreement described above. The total credit allowed between the
two credit agreements is limited to $40.0 million. As of April 26, 2014, there were no advances outstanding and approximately $4.6
million in bank guarantees under this line of credit.
We were in compliance with all applicable covenants as of April 26, 2014 and April 27, 2013. The minimum fixed charge coverage ratio
as of April 26, 2014 was 56-to-1, and the ratio of interest-bearing debt to EBITDA as of April 26, 2014 was 0.06-to-1.
On May 23, 2013, our Board of Directors declared a semi-annual dividend of $0.12 per share on our common stock for the fiscal year
ended April 27, 2013, which was paid on June 14, 2013.
Page | 34
On August 22, 2013, the Board declared a quarterly dividend payment of $0.09 per share on our common stock for the first quarter ended
July 27, 2013, which was paid on September 20, 2013.
On November 21, 2013, the Board declared a quarterly dividend payment of $0.09 per share on our common stock for the second quarter
ended October 26, 2013, which was paid on December 20, 2013.
On February 27, 2014, the Board declared a quarterly dividend payment of $0.09 per share on our common stock for the third quarter
ended on January 25, 2014, which was paid on March 21, 2014.
On May 22, 2014, our Board of Directors declared a semi-annual dividend of $0.10 per share on our common stock for the fiscal year
ended April 26, 2014, payable on June 13, 2014 to shareholders of record of our common stock on June 2, 2014.
Although we expect to continue to pay dividends for the foreseeable future, any and all subsequent dividends will be reviewed regularly
and declared by the Board at its discretion.
We are sometimes required to obtain performance bonds for display installations, and we have a bonding line available through a surety
company for an aggregate of $150.0 million in bonded work outstanding. At April 26, 2014, we had $16.0 million of bonded work
outstanding against this line.
We believe if our growth extends beyond current expectations, or if we make any strategic investments, we may need to increase our
credit facilities or seek other means of financing. We anticipate we will be able to obtain any needed funds under commercially reasonable
terms from our current lenders or other sources. We believe our working capital available from all sources will be adequate to meet the
cash requirements of our operations in the foreseeable future.
OFF-BALANCE-SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
We enter into various lease, purchase and marketing obligations that require payments in future periods. Operating lease obligations
relate primarily to leased manufacturing space, office space, furniture, and vehicles. Long-term marketing obligations relate to amounts
due in future periods for payments on net sales where we sold and installed our equipment in exchange for future advertising revenue. When
certain advertising revenue thresholds are met, all or a portion of excess cash is owed back to the customer. Conditional and unconditional
purchase obligations represent future payments for inventory, advertising rights and various other products and services purchase
commitments.
We have entered into standby letters of credit and surety bonds with financial institutions relating to the guarantee of future performance
on contracts, primarily construction type contracts. Performance guarantees are issued to certain customers to guarantee the operation
and installation of the equipment and our ability to complete a contract. These performance guarantees have various terms, which are
generally less than one year.
Guarantees include transactions in connection with the sale of equipment to various customers. Under these transactions, we have entered
into contractual arrangements whereby we agreed to repurchase equipment at the end of the lease term at a fixed price. Our total obligations
under these fixed price arrangements were $1.1 million and $1.3 million as of April 26, 2014 and April 27, 2013, respectively. In
accordance with the provisions of ASC 460, Guarantees, there is no guarantee liability in accrued expenses that must be recognized, in
connection with these arrangements.
Page | 35
As of April 26, 2014, our contractual obligations were as follows (in thousands):
Contractual Obligations
Cash commitments:
Long-term obligations and accrued interest
Operating leases
Unconditional purchase obligations
Conditional purchase obligations
Unrecognized tax benefits(1)
Total
Other commercial commitments:
Standby letters of credit
Lines of credit interest
Surety bonds
Guarantees
Total
Less than
1 year
1-3 Years
4-5 Years
After 5
Years
$
$
$
$
$
$
2,995
5,865
1,898
900
494
12,152
9,944
35
16,048
1,100
$
$
$
$
$
$
728
2,658
917
200
—
4,503
$
$
4,855
35
14,662
$
$
$
— $
1,170
2,999
931
400
—
5,500
$
$
3,639
$
— $
$
$
1,386
1,100
1,097
208
50
300
—
1,655
$
$
1,450
$
— $
— $
— $
—
—
—
—
—
—
—
—
—
—
(1) Unrecognized tax benefits relate to uncertain tax positions. As we are not able to reasonably estimate the timing of the payments
or the amount by which the liability will increase or decrease over time, the related balances have not been reflected in any of
the columns other than the total column.
INFLATION
We believe inflation has not had a material effect on our operations or our financial condition, although it could in the future.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Rates
Through April 26, 2014, 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. For the fiscal year 2014, net sales originating outside the United States were 18 percent
of total net sales, of which a portion was denominated in Canadian dollars, Euros, Chinese renminbi, British pounds, Australian dollars,
Brazilian reais or other currencies. We manufacture our products in the United States, China, and Belgium. Our results of operations
could be affected by factors such as changes in foreign currency rates or weak economic conditions in foreign markets. If we believed
currency risk in any foreign location is significant, we would utilize foreign exchange hedging contracts to manage our exposure to the
currency fluctuations.
Over the long term, net sales to international markets are expected to increase as a percentage of net sales and, consequently, a greater
portion of this business could be denominated in foreign currencies. In addition, we may fund our foreign subsidiaries’ operating cash
needs in the form of loans denominated in U.S. dollars. As a result, operating results may become subject to fluctuations based upon
changes in the exchange rates of certain currencies in relation to the United States dollar. To the extent we engage in international sales
denominated in U.S. dollars, an increase in the value of the U.S. dollar relative to foreign currencies could make our products less
competitive in international markets. This effect is also impacted by the sources of raw materials from international sources. We estimate
that a 10 percent change in all foreign exchange rates would impact our reported income before taxes by approximately $1.6 million.
This sensitivity analysis disregards the possibilities that rates can move in opposite directions and that losses from one geographic area
may be offset by gains from another geographic area. We will continue to monitor and minimize our exposure to currency fluctuations
and, when appropriate, use financial hedging techniques, including foreign currency forward contracts and options, to minimize the effect
of these fluctuations. However, exchange rate fluctuations as well as differing economic conditions, changes in political climates, differing
tax structures and other rules and regulations could adversely affect our ability to effectively hedge exchange rate fluctuations in the
future.
We have foreign currency forward agreements in place to offset changes in the value of inter-company receivables from certain foreign
subsidiaries due to changes in foreign exchange rates. The notional amount of these derivatives is $5.3 million, and all contracts mature
within fourteen months. These contracts are marked to market each balance sheet date and are not designated as hedges. See Note 15 of
the Notes to our Consolidated Financial Statements included in this Report for further details on our derivatives.
Interest Rate Risks
Our exposure to market rate risk for changes in interest rates relates primarily to our marketing obligations and long-term accounts
receivable. As of April 26, 2014, our outstanding marketing obligations were $0.7 million, all of which were in fixed rate obligations.
Page | 36
In connection with the sale of certain display systems, we have entered into various types of financing with customers. The aggregate
amounts due from customers include an imputed interest element. The majority of these financings carry fixed rates of interest. As of
April 26, 2014, our outstanding long-term receivables were $13.1 million. Each 25 basis point increase in interest rates would have an
associated annual opportunity cost of $48 thousand.
The following table provides maturities and weighted average interest rates on our financial instruments sensitive to changes in interest
rates.
2015
2016
2017
2018
2019
Thereafter
Fiscal Years (in thousands)
Assets:
Long-term receivables, including current
maturities:
Fixed-rate
Average interest rate
Liabilities:
Long- and short-term debt:
Variable-rate
Average interest rate
Long-term marketing obligations,
including current portion:
Fixed-rate
Average interest rate
$
5,311
$
3,149
$
1,862
$
1,371
$
7.6%
7.8%
8.5%
8.4%
$
$
$
$
616
4.5%
379
8.8%
$
$
749
4.5%
184
8.8%
$
$
484
4.5%
38
8.5%
$
$
506
4.5%
35
8.8%
$
$
$
760
8.2%
529
4.5%
27
9.0%
659
8.9%
—
—%
—
—%
Of our $45.1 million in cash balances at April 26, 2014, $37.7 million were denominated in United States dollars. Cash balances in
foreign currencies are operating balances maintained in accounts of our foreign subsidiaries. A portion of the cash held in foreign accounts
is used to collateralize outstanding bank guarantees issued by the foreign subsidiaries.
Page | 37
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Daktronics, Inc.
We have audited the accompanying consolidated balance sheets of Daktronics, Inc. and subsidiaries (the Company) as of April 26, 2014
and April 27, 2013, and the related consolidated statements of operations, comprehensive income, shareholders' equity and cash flows
for each of the three years in the period ended April 26, 2014. Our audits also included the financial statement schedule listed in the Index
at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
Daktronics, Inc. and subsidiaries at April 26, 2014 and April 27, 2013, and the consolidated results of its operations and its cash flows
for each of the three years in the period ended April 26, 2014, in conformity with U.S. generally accepted accounting principles. Also
in our opinion, the related financial statement schedule referred to above, when considered in relation to the consolidated financial
statements taken as a whole, presents fairly in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Daktronics
Inc.’s internal control over financial reporting as of April 26, 2014, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated June 12,
2014, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
June 12, 2014
Page | 38
DAKTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Restricted cash
Marketable securities
Accounts receivable, net
Inventories, net
Costs and estimated earnings in excess of billings
Current maturities of long-term receivables
Prepaid expenses and other assets
Deferred income taxes
Income tax receivables
Total current assets
Property and equipment, net
Long-term receivables, less current maturities
Goodwill
Intangibles, net
Advertising rights, net and other assets
Deferred income taxes
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable
Accrued expenses
Warranty obligations
Billings in excess of costs and estimated earnings
Customer deposits (billed or collected)
Deferred revenue (billed or collected)
Current portion of other long-term obligations
Income taxes payable
Deferred income taxes
Total current liabilities
Long-term warranty obligations
Long-term deferred revenue (billed or collected)
Other long-term obligations, less current maturities
Deferred income taxes
Total long-term liabilities
SHAREHOLDERS' EQUITY:
Common stock, no par value, authorized 120,000,000 shares; 43,166,731 and
42,393,456 shares issued at April 26, 2014 and April 27, 2013, respectively
Additional paid-in capital
Retained earnings
Treasury stock, at cost, 19,680 shares
Accumulated other comprehensive income (loss)
TOTAL SHAREHOLDERS' EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
See notes to consolidated financial statements.
Page | 39
April 26,
2014
April 27,
2013
$
$
$
$
$
$
$
45,054
514
25,398
82,500
62,228
33,400
5,235
6,758
10,694
2,459
274,240
65,270
7,877
4,558
2,680
826
2,000
357,451
45,913
23,462
14,476
22,483
17,654
7,722
809
1,162
27
133,708
12,774
4,978
2,871
1
20,624
40,628
48
24,052
63,227
49,045
39,355
4,807
6,185
12,755
46
240,148
61,625
11,325
3,306
1,181
772
1,061
319,418
38,651
24,331
13,933
14,245
12,375
9,112
356
1,689
—
114,692
11,213
4,424
843
—
16,480
43,935
29,923
129,266
(9)
4
203,119
357,451
$
37,429
27,194
123,750
(9)
(118)
188,246
319,418
DAKTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Net sales
Cost of goods sold
Gross profit
Operating expenses:
Selling expense
General and administrative
Product design and development
Operating income
Nonoperating income (expense):
Interest income
Interest expense
Other (expense) income, net
Income before income taxes
Income tax expense
Net income
Weighted average shares outstanding:
Basic
Diluted
Earnings per share:
Basic
Diluted
Cash dividend declared per share
See notes to consolidated financial statements.
$
April 26,
2014
551,970
410,260
141,710
Year Ended
April 27,
2013
518,322
384,428
133,894
$
$
April 28,
2012
489,526
376,089
113,437
53,794
27,984
23,375
105,153
36,557
52,759
27,404
23,131
103,294
30,600
52,233
27,422
23,507
103,162
10,275
1,294
(255)
(355)
37,241
15,035
22,206
42,886
43,762
0.52
0.51
0.39
$
$
$
$
1,523
(355)
(839)
30,929
8,150
22,779
42,280
42,621
0.54
0.53
0.73
$
$
$
$
1,747
(335)
(110)
11,577
3,088
8,489
41,869
42,304
0.20
0.20
0.62
$
$
$
$
Page | 40
DAKTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
April 26,
2014
Year Ended
April 27,
2013
April 28,
2012
Net income
$
22,206
$
22,779
$
8,489
Other comprehensive income (loss):
Cumulative translation adjustments
Unrealized (loss) gain on available-for-sale securities,
net of tax
Total other comprehensive income (loss), net of tax
Comprehensive income
See notes to consolidated financial statements.
147
(25)
122
22,328
$
(102)
(49)
(151)
22,628
$
$
(20)
52
32
8,521
Page | 41
DAKTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
Common
Stock
Additional
Paid-In
Capital
Balance as of April 30, 2011:
$
Net income
Other comprehensive income
Net tax benefit (deduction) related to
share-based compensation
Share-based compensation
Exercise of stock options
Employee savings plan activity
Dividends paid
Balance as of April 28, 2012:
Net income
Other comprehensive income
Net tax benefit (deduction) related to
share-based compensation
Share-based compensation
Exercise of stock options
Employee savings plan activity
Dividends paid
Balance as of April 27, 2013:
Net income
Other comprehensive income
Net tax benefit (deduction) related to
share-based compensation
Share-based compensation
Exercise of stock options
Employee savings plan activity
Dividends paid
Balance as of April 26, 2014:
$
See notes to consolidated financial statements
32,670
—
—
—
—
547
1,414
—
34,631
—
—
—
—
1,316
1,482
—
37,429
—
—
—
—
4,954
1,552
—
43,935
$
$
21,149
—
—
(2)
3,262
(89)
—
—
24,320
—
—
—
3,037
(163)
—
—
27,194
—
—
119
2,897
(287)
—
—
29,923
Retained
Earnings
$ 149,291
8,489
—
$
—
—
—
—
(25,950)
131,830
22,779
—
—
—
—
—
(30,859)
123,750
22,206
—
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
(9) $
—
—
—
—
—
—
—
(9)
—
—
—
—
—
—
—
(9)
—
—
1
—
32
—
—
—
—
—
33
—
(151)
—
—
—
—
—
(118)
—
122
Total
$ 203,102
8,489
32
(2)
3,262
458
1,414
(25,950)
190,805
22,779
(151)
—
3,037
1,153
1,482
(30,859)
188,246
22,206
122
—
—
—
—
(16,690)
$ 129,266
$
—
—
—
—
—
(9) $
—
—
—
—
—
4
119
2,897
4,667
1,552
(16,690)
$ 203,119
Page | 42
DAKTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation
Amortization
Amortization of premium/discount on marketable securities
(Gain) Loss on sale of property and equipment
Share-based compensation
Excess tax benefits from share-based compensation
Provision for doubtful accounts
Deferred income taxes, net
Change in operating assets and liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment
Proceeds from sales of property and equipment
Purchases of marketable securities
Proceeds from sales or maturities of marketable securities
Acquisition, net of cash acquired
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable
Payments on notes payable
Proceeds from exercise of stock options
Excess tax benefits from share-based compensation
Principal payments on long-term obligations
Dividends paid
Net cash used in financing activities
EFFECT OF EXCHANGE RATE CHANGES ON CASH
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS:
Beginning of period
End of period
See notes to consolidated financial statements.
April 26,
2014
Year Ended
April 27,
2013
April 28,
2012
$
22,206
$
22,779
$
8,489
14,137
364
221
(72)
2,897
(119)
(190)
1,543
(4,788)
36,199
(13,519)
238
(15,550)
13,953
(1,480)
(16,358)
—
—
4,954
119
(3,704)
(16,690)
(15,321)
(94)
4,426
15,379
228
190
42
3,037
—
331
(4,340)
13,103
50,749
(9,674)
198
(16,506)
17,451
—
(8,531)
—
(1,459)
1,316
—
—
(30,859)
(31,002)
(11)
11,205
17,273
245
183
(16)
3,262
(48)
(150)
(68)
(9,132)
20,038
(16,524)
231
(18,870)
16,410
—
(18,753)
782
(1,711)
547
48
—
(25,950)
(26,284)
114
(24,885)
40,628
45,054
$
29,423
40,628
$
54,308
29,423
$
Page | 43
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 1. Nature of Business and Summary of Significant Accounting Policies
Nature of business: Daktronics, Inc. and its subsidiaries are engaged principally in the design, manufacture and sale of a wide range of
electronic display systems and related products which are sold in a variety of markets throughout the world and the rendering of related
maintenance and professional services. Our products are designed primarily to inform and entertain people through the communication
of content.
Fiscal year: 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. When
April 30 falls on a Wednesday, the fiscal year ends on the preceding Saturday. The fiscal years ended April 26, 2014, April 27, 2013 and
April 28, 2012 each consisted of 52 weeks. 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. Fiscal 2015 will be a 53-week year.
Principles of consolidation: The consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries
– Daktronics France SARL; Daktronics Shanghai, Ltd.; Daktronics GmbH; Daktronics UK, Ltd.; Daktronics HK Limited; Daktronics
International Limited; Daktronics Canada, Inc.; Daktronics Beijing, Ltd.; Daktronics Australia Pty Ltd.; Daktronics Installation;
Daktronics Japan, Inc.; Daktronics Brazil, Ltda.; Daktronics Singapore Pte. Ltd.; Daktronics Belgium N.V.; and Daktronics Spain
S.L. 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. As of April 26, 2014 and April 27, 2013, we did not have any investments
accounted for by the equity method.
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 the 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 construction-type contracts, estimated costs to be
incurred for product warranties, excess and obsolete inventory, the reserve for doubtful accounts, share-based compensation, goodwill
impairment and income taxes. Changes in estimates are reflected in the periods in which they become known.
Cash and cash equivalents: All highly liquid investments with maturities of three months or less at the date of purchase are considered
to be cash equivalents and consist primarily of government repurchase agreements, savings accounts and money market accounts that
are carried at cost, which approximates fair value. We maintain our cash in bank deposit accounts, the balances of which at times may
exceed federally insured limits. We have not experienced any losses in such accounts.
Restricted cash: Restricted cash consists of cash and cash equivalents held in bank deposit accounts to secure issuances of foreign bank
guarantees.
Inventories: Inventories are stated at the lower of cost (first-in, first-out method) or market. Market is determined on the basis of estimated
net realizable values.
Revenue recognition: Net sales are reported net of estimated sales returns and exclude sales taxes. We estimate our sales returns reserve
based on historical return rates and analysis of specific accounts. Our sales returns reserve was $14 and $73 at April 26, 2014 and April 27,
2013, respectively.
Long-term construction-type contracts: Earnings on construction-type contracts are recognized on the percentage-of-completion method,
measured by the percentage of costs incurred to date to estimated total costs for each contract. Contract costs include all direct material
and labor costs and those indirect costs related to contract performance. Indirect costs include charges for such items as facilities,
engineering, and project management. Provisions for estimated losses on uncompleted contracts are made in the period in which such
losses are probable and capable of being estimated. We combine contracts for accounting purposes when they are negotiated as a package
with an overall profit margin objective, essentially represent an agreement to do a single project for a customer, involve interrelated
construction activities, and are performed concurrently or sequentially. When a group of contracts is combined, revenue and profit are
recognized uniformly over the performance of the combined projects. We segment revenues in accordance with contract segmenting
criteria in Accounting Standards Codification (“ASC”) 650-35, Construction-Type and Production-Type Contracts.
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.
Page | 44
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 deferred revenue (billed or collected) in the liability section
of the balance sheet.
Services: Revenues generated by us for services, such as event support, control room design, on-site training, equipment service and
technical support of our equipment, are recognized as net sales when the services are performed. Net sales from services and product
maintenance approximated 8.4 percent, 9.0 percent and 9.0 percent of net sales for the fiscal years ended April 26, 2014, April 27, 2013
and April 28, 2012, respectively.
Multiple-element arrangements: We generate revenue from the sale of equipment and related services, including customization, installation
and maintenance services. In these limited cases, 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 they 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 605-25, Revenue Arrangements with Multiple Deliverables and ASC 605-35, Accounting for Performance of Construction-Type
and Certain Production-Type Contracts, 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. We first consider the separation criteria of ASC
605-35. Deliverables not within the scope of ASC 605-35 are evaluated for separation under ASC 605-25. For those elements falling
under the guidance of ASC 605-25, we generally account for a deliverable (or a group of deliverables) separately if the delivered item
(s) has standalone value to the customer and if we have given the customer a general right of return relative to the delivered item(s) and
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, we allocate the arrangement consideration
to the individual items based on their relative fair values. The amount of arrangement consideration allocated to the delivered item(s) is
limited to the amount 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 to determine when and
by which method 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 neither VSOE nor third party evidence is available, we use our best estimate of the
selling price for that deliverable.
Software: We typically sell our proprietary software bundled with our 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.
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. We recognize imputed interest as earned.
Page | 45
Property and equipment: Property and equipment is stated at cost and depreciated principally on the straight-line method over the following
estimated useful lives:
Buildings
Machinery and equipment
Office furniture and equipment
Computer software and hardware
Equipment held for rental
Demonstration equipment
Transportation equipment
Years
7 - 40
5 - 7
3 - 5
3 - 5
2 - 7
3 - 5
5 - 7
Leasehold improvements are depreciated over the lesser of the useful life of the asset or the term of the lease. Our depreciation expense
was $14,137, $15,379 and $17,273 for the fiscal years ended April 26, 2014, April 27, 2013 and April 28, 2012, respectively.
Long-Lived Assets: Long-lived assets other than goodwill and indefinite-lived intangible assets, as described in Note 5, which are
separately tested for impairment, are evaluated for impairment whenever events or changes in circumstances indicate 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. 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.
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 when incurred.
Insurance: We are self-insured for certain losses related to health and liability claims and workers’ compensation, although we obtain
third-party insurance to limit our exposure to these claims. We estimate our self-insured liabilities using a number of factors, including
historical claims experience. Our self-insurance liability was $1,656 and $1,843 at April 26, 2014 and April 27, 2013, respectively, and
is included in accrued expenses 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 in accumulated other comprehensive income (loss).
Income taxes: We account for income taxes under ASC 740, Income Taxes, which requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events included in our financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities
using enacted tax rates in effect for the year in which the differences are expected to reverse. ASC 740 requires the consideration of a
valuation allowance for deferred tax assets if it is “more likely than not” some component or all of the benefits of deferred tax assets will
not be realized. Tax rate changes are reflected in income during the period such changes are enacted. We have benefited from a tax
holiday in China that expired in fiscal 2012.
Our income tax returns, like those of most companies, are periodically audited by U.S. federal, state and local and foreign tax authorities.
These audits include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of
income among various tax jurisdictions. At any one time, multiple tax years are subject to audit by the various tax authorities. In evaluating
the tax benefits associated with our various tax filing positions, we record a tax benefit for uncertain tax positions using the highest
cumulative tax benefit that is more likely than not to be realized. A number of years may elapse before a particular matter for which we
have established a liability is audited and effectively settled. We adjust our liability for unrecognized tax benefits in the period in which
Page | 46
we determine the issue is effectively settled with the tax authorities, the statute of limitations expires for the relevant taxing authority to
examine the tax position, or when more information becomes available. We include our liability for unrecognized tax benefits, including
accrued penalties and interest, in income taxes payable on our consolidated balance sheets and in income tax expense in our consolidated
statements of operations.
Comprehensive income (loss): We follow the provisions of ASC 220, Reporting Comprehensive Income, which establishes standards
for reporting and displaying comprehensive income and its components. Comprehensive income (loss) 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 (loss) represents net income (loss) adjusted for foreign currency translation adjustments and unrealized gains and losses on
available-for-sale securities. The foreign currency translation adjustment included in comprehensive (loss) income has not been tax
affected, as the investments in foreign affiliates are deemed to be permanent. In accordance with ASC 220 and Accounting Standards
Update ("ASU") 2011-05, we disclose comprehensive income (loss) on a separate consolidated statement of comprehensive income.
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.
Advertising costs: We expense advertising costs as incurred. Advertising expenses were $1,694, $1,584 and $1,843 for fiscal years 2014,
2013 and 2012, respectively.
Shipping and handling costs: Shipping and handling costs 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.
Earnings per share (“EPS”): Basic EPS is computed by dividing income attributable to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the potential dilution which may occur if securities or other
obligations to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock which
share in our earnings.
The following is a reconciliation of the income and common stock share amounts used in the calculation of basic and diluted EPS for
the fiscal years ended April 26, 2014, April 27, 2013 and April 28, 2012:
For the year ended April 26, 2014:
Basic earnings per share
Dilution associated with stock compensation plans
Diluted earnings per share
For the year ended April 27, 2013:
Basic earnings per share
Dilution associated with stock compensation plans
Diluted earnings per share
For the year ended April 28, 2012:
Basic earnings per share
Dilution associated with stock compensation plans
Diluted earnings per share
Net income
Shares
Per share
income (loss)
$
$
$
$
$
$
22,206
—
22,206
22,779
—
22,779
8,489
—
8,489
42,886
876
43,762
42,280
341
42,621
41,869
435
42,304
$
$
$
$
$
$
0.52
(0.01)
0.51
0.54
(0.01)
0.53
0.20
—
0.20
Options outstanding to purchase 1,564, 2,672 and 1,611 shares of common stock with a weighted average exercise price of $18.64, $15.09
and $19.17 per share during the fiscal years ended April 26, 2014, April 27, 2013 and April 28, 2012, respectively, 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.
Share-based compensation: We account for share-based compensation in accordance with ASC 718, Compensation-Stock
Compensation. Under the fair value recognition provisions of ASC 718, we measure share-based compensation cost at the grant date
based on the fair value of the award and recognize the compensation expense over the requisite service period, which is the vesting
period. See Note 10 for additional information and the assumptions we use to calculate the fair value of share-based employee
compensation.
Page | 47
Recent Accounting Pronouncements
In July 2012, the FASB issued ASU 2012-02, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets
for Impairment. The amended guidance gives entities the option to perform a qualitative impairment assessment to determine whether it
is more-likely-than-not an indefinite-lived intangible asset is impaired. An entity must identify and evaluate changes in economic, industry
and entity-specific events and circumstances affecting the significant inputs used to determine the fair value of an indefinite-lived intangible
asset and whether it is more-likely-than-not the fair value exceeds its carrying amount. ASU 2012-02 is effective for annual and interim
impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The adoption of this
amended guidance did not have an impact on our consolidated results of operations or financial condition, as the ASU impacts only the
analysis to be performed.
In February 2013, the Financial Accounting Standards Board ("FASB") issued ASU 2013-02: Reporting of Amounts Reclassified Out of
Accumulated Other Comprehensive Income , an update to Comprehensive Income (Topic 220). ASU 2013-02 requires an entity to present
either on the face of the statement where net income is presented or in the notes to the financial statements any significant amounts
reclassified out of accumulated other comprehensive income by the respective line items in the statement presenting net income.
Additionally, disclosures about the changes in each component of accumulated other comprehensive income are also required. ASU
2013-02 requires prospective application and is effective for fiscal years, and interim periods within those years, beginning after December
15, 2012. We adopted ASU 2013-02 in the first quarter of fiscal 2014, and there was no impact on our financial statements as related to
disclosure only.
In May 2014,the FASB issued ASU 2014-09, Revenue from Contracts with Customers, issued as a new topic, ASC 606. The new revenue
recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle
of the guidance is that a Company should recognize revenue to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard
will also result in enhanced disclosures about revenue, providing guidance for transactions that were not previously addressed
comprehensively, and improve guidance for multiple-element arrangements. This ASU is effective for us beginning in fiscal 2018 and
can be adopted by the Company either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently
evaluating the effect that adopting this new accounting guidance will have on our consolidated results of operations, cash flows, and
financial position.
Note 2. Segment Reporting
We have organized our business into five segments which meet the definition of reportable segments under ASC 280-10, Segment
Reporting: Commercial, Live Events, Schools and Theatres, Transportation, and International business units. These segments are based
on the type of customer and geography.
Our Commercial business unit primarily consists of sales of our video display systems, digital billboards, Galaxy® and Fuelight™ product
lines to resellers (primarily sign companies), outdoor advertisers, national retailers, quick-serve restaurants, casinos and petroleum
retailers. Our Live Events business unit primarily consists of sales of integrated scoring and video display systems to college and
professional sports facilities and convention centers and sales of our mobile display technology to video rental organizations and other
live events type venues. Our Schools and Theatres business unit primarily consists of sales of scoring systems, Galaxy® displays and
video display systems to primary and secondary education facilities and sales of our Vortek® automated rigging systems for theatre
applications. Our Transportation business unit primarily consists of sales of our Vanguard® and Galaxy® product lines to governmental
transportation departments, airlines and other transportation related customers. Our International business unit consists of sales of all
product lines outside the United States and Canada.
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 the portion related to non-allocated costs,
are allocated to each segment based on various financial measures. In general, our segments follow the same accounting policies as those
described in Note 1. Unabsorbed costs of domestic field sales and services infrastructure, including most field administrative staff, are
allocated to the Commercial, Live Events, Transportation, and Schools and Theatres business units based on cost of sales. Shared
manufacturing, building and utilities, and procurement costs are allocated based on payroll dollars, square footage and various other
financial measures.
We do not maintain information on sales by products; therefore, disclosure of such information is not practical.
Page | 48
The following table sets forth certain financial information for each of our five operating segments for the periods indicated:
Net sales:
Commercial
Live Events
Schools & Theatres
Transportation
International
Contribution margin:
Commercial
Live Events
Schools & Theatres
Transportation
International
Non-allocated operating expenses:
General and administrative
Product design and development
Operating income
Nonoperating income (expense):
Interest income
Interest expense
Other (expense) income, net
Income before income taxes
Income tax expense
Net income
Depreciation and amortization:
Commercial
Live Events
Schools & Theatres
Transportation
International
Unallocated corporate depreciation
April 26,
2014
Year Ended
April 27,
2013
April 28,
2012
$
154,754
197,246
59,531
54,861
85,578
551,970
$
144,596
158,562
66,128
73,270
75,766
518,322
148,585
160,933
59,662
48,284
72,062
489,526
30,313
30,503
5,474
12,810
8,816
87,916
27,984
23,375
36,557
1,294
(255)
(355)
37,241
15,035
22,206
4,243
4,461
2,053
1,132
873
1,739
14,501
$
$
$
24,241
19,071
8,150
21,330
8,343
81,135
27,404
23,131
30,600
1,523
(355)
(839)
30,929
8,150
22,779
4,940
4,473
2,233
1,375
717
1,869
15,607
$
$
$
24,011
13,579
4,716
11,009
7,889
61,204
27,422
23,507
10,275
1,747
(335)
(110)
11,577
3,088
8,489
6,103
5,055
2,361
1,386
650
1,963
17,518
$
$
$
$
No single geographic area comprises a material amount of net sales or long-lived assets net of accumulated depreciation other than the
United States. The following table presents information about net sales and long-lived assets in the United States and elsewhere:
Net sales:
United States
Outside U.S.
Long-lived assets:
United States
Outside U.S.
Page | 49
April 26,
2014
Year Ended
April 27,
2013
April 28,
2012
$
$
$
$
453,468
98,502
551,970
60,846
4,424
65,270
$
$
$
$
430,242
88,080
518,322
60,060
1,565
61,625
$
$
$
$
405,479
84,047
489,526
66,350
2,046
68,396
The increase in long-lived assets is due to a business combination as described in Note 4. We have numerous customers worldwide for
sales of our products and services; therefore, we are not economically dependent on a limited number of customers for the sale of our
products and services except with respect to our dependence on a few large digital billboard customers in our Commercial business unit.
Note 3. Marketable Securities
We have a cash management program which provides for the investment of cash balances not used in current operations. We classify
our investments in marketable securities as available-for-sale in accordance with the provisions of ASU 320, Investments – Debt and
Equity Securities. Marketable securities classified as available-for-sale are reported at fair value with unrealized gains or losses, net of
tax, reported in accumulated other comprehensive income (loss). As it relates to fixed income marketable securities, we do not intend
to sell any of these investments, and it is not more-likely-than-not we will be required to sell any of these investments before recovery
of the entire amortized cost basis. In addition, as of April 26, 2014, we anticipate we will recover the entire amortized cost basis of such
fixed income securities, and we have determined no other-than-temporary impairments associated with credit losses were required to be
recognized. The cost of securities sold is based on the specific identification method. Where quoted market prices are not available, we
use the market price of similar types of securities traded in the market to estimate fair value.
As of April 26, 2014 and April 27, 2013, our available-for-sale securities consisted of the following:
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
Balance as of April 26, 2014:
Certificates of deposit
U.S. Government securities
U.S. Government sponsored entities
Municipal obligations
Balance as of April 27, 2013:
Certificates of deposit
U.S. Government securities
U.S. Government sponsored entities
Municipal obligations
$
$
$
$
7,734
2,000
8,349
7,309
25,392
4,677
4,999
4,752
9,596
24,024
$
$
$
$
— $
2
—
12
14
$
— $
19
—
9
28
$
— $
—
(8)
—
(8)
$
— $
—
—
—
— $
7,734
2,002
8,341
7,321
25,398
4,677
5,018
4,752
9,605
24,052
Realized gains or losses on investments are recorded in our consolidated statements of operations as other income (expense), net. Upon
the sale of a security classified as available-for-sale, the security’s specific unrealized gain (loss) is reclassified out of "accumulated other
comprehensive income (loss)” into earnings based on the specific identification method. In the fiscal years ended April 26, 2014 and
April 27, 2013, the reclassifications from accumulated other comprehensive income (loss) to net assets were immaterial. Realized gains
and losses on sales and maturities of investments were immaterial in the fiscal years ended April 26, 2014 and April 27, 2013.
All available-for-sale securities are classified as current assets, as they are readily available to support our current operating needs. The
contractual maturities of available-for-sale debt securities as of April 26, 2014 were as follows:
Certificates of deposit
U.S. Government securities
U.S. Government sponsored entities
Municipal obligations
Note 4. Business Combination
Less than 12
months
1-5 Years
Total
$
$
4,198
1,001
—
2,357
7,556
$
$
3,536
1,001
8,341
4,964
17,842
$
$
7,734
2,002
8,341
7,321
25,398
We acquired 100 percent ownership in OPEN Out-of Home Solutions ("OPEN"), a Belgian company, on May 8, 2013 for an undisclosed
amount. The results of its operations have been included in our consolidated financial statements since the date of acquisition. We have
not made pro forma disclosures as the results of its operations are not material to our consolidated financial statements.
OPEN is a European manufacturer of cabinets and street furniture for the third-party advertising market. This acquisition expanded our
product offerings to third-party advertisers as they increasingly adopt digital technology and included a manufacturing plant in Belgium
Page | 50
to manufacture digital advertising displays. This acquisition was funded with cash on hand and a five-year promissory note that matures
in May 2018.
During the third quarter of fiscal 2014, the purchase price allocation for the OPEN acquisition was completed. The excess of the purchase
price over the net tangible and intangible assets was recorded as goodwill of $1,250 which primarily related to the value of an assembled
workforce and is not deductible for tax purposes. Included in the purchase price allocation were acquired identifiable intangibles valued
at $1,160 representing trade names with a useful life of 20 years and a customer list valued at $582 with a useful life of nine years. Also
included in the purchase was $2,658 of property and equipment, $2,038 of inventory, $833 of other current assets offset by current
operating liabilities of $1,230 and long and short term debt of $4,155. There were no material adjustments to the original purchase price
allocation.
The purchase price includes deferred payments of $2.3 million to be made over five years unless certain conditions in the business are
not met. We have included the payment obligation in other long-term obligations in the balance sheet.
OPEN's sales were included in the International business unit results and contributed $4.2 million of net sales during fiscal 2014. General
and administrative expenses included $44 and $146 for the years ending April 26, 2014, and April 27, 2013, respectively, for professional
fees relating to the acquisition.
Note 5. Long-Lived Assets
Goodwill and other intangible assets: 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 an impairment or a decline in value may have
occurred. Such circumstances could include, but are not limited to, a worsening trend of orders and sales without a corresponding way
to preserve future cash flows or a significant decline in our stock price. 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 utilize an income approach to estimate the fair value of each reporting unit. We selected this method because we believe 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 rates which 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 occurring 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. Although there are inherent uncertainties related to the assumptions used
and to our application of these assumptions to this analysis, we believe 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 our future investments for capital expenditures as a percent of revenue will remain similar to the historical rates
as a percentage of sales in future years, with investments related to equipment replacements and new product line manufacturing equipment
needs, and to keep our information technology infrastructure robust, and we believe long-term receivables will decrease as we grow. We
also have assumed through the recent economic downturn that 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.
We perform an analysis of goodwill on an annual basis. We complete this annual analysis during our third quarter of each fiscal year,
based on the goodwill amount as of the first business day of our third quarter in fiscal 2014, 2013, and 2012. The result of our analysis
indicated no goodwill impairment existed for each fiscal year.
The changes in the carrying amount of goodwill related to each reportable segment for the fiscal year ended April 26, 2014 were as
follows:
Balance as of April 27, 2013:
Acquisition, net of cash acquired
Foreign currency translation
Balance as of April 26, 2014:
Live Events
2,417
$
—
(36)
2,381
$
Commercial
725
$
—
(2)
723
$
Transportation
164
$
—
(35)
129
$
International
$
— $
1,250
75
1,325
$
$
Total
3,306
1,250
2
4,558
Page | 51
As required by ASC 350, intangibles with finite lives are amortized. We evaluate indefinite lived assets for impairment annually and
whenever events or changes in circumstances indicate their carrying value may not be recoverable. The net value of intangible assets is
shown on our consolidated balance sheets. Estimated amortization expense based on intangibles as of April 26, 2014 is $361 for each
of the fiscal years 2015 through 2016, $228 for fiscal 2017, $133 for each of the fiscal years 2018 through 2019, and $1,062 for fiscal
years after 2019.
The following table sets forth the gross carrying amount and accumulated amortization of intangible assets by major intangible class as
of April 26, 2014 and April 27, 2013:
April 26, 2014
April 27, 2013
Weighted
Average Life
(in years)
Gross
Carrying
Amount
Accumulated
Amortization Net Value
Gross
Carrying
Amount
Accumulated
Amortization Net Value
Definite-lived:
Patents
Registered Trademarks
Other
Indefinite-lived:
Registered trademarks
10
20
9
13
$
$
$
2,282
1,216
648
4,146
$
1,730
59
78
1,867
$
552
1,157
570
2,279
$
2,282
—
—
2,282
$
1,502
—
—
1,502
780
—
—
780
401
4,547
$
—
1,867
$
401
2,680
$
401
2,683
$
—
1,502
$
401
1,181
Impairment of long-lived assets: We recorded a pretax asset impairment charge of $109, $64 and $538 for the fiscal years ended April 26,
2014, April 27, 2013 and April 28, 2012, respectively for other long-lived assets, including property and equipment. The impairment
charges related to technology or equipment obsoleted due to technology improvements or to custom demo equipment with no resale
value. Impairment charges during fiscal 2014, 2013, and 2012 were included primarily in product development and selling expense,
respectively.
Note 6. Selected Financial Statement Data
Inventories consisted of the following:
Raw materials
Work-in-process
Finished goods
April 26,
2014
April 27,
2013
$
$
27,660
11,835
22,733
62,228
$
$
20,979
8,523
19,543
49,045
Inventories are reported net of the allowance for excess and obsolete inventory of $2,692 and $3,286 as of April 26, 2014 and April 27,
2013, respectively.
Property and equipment consisted of the following:
Land
Buildings
Machinery and equipment
Office furniture and equipment
Computer software and hardware
Equipment held for rental
Demonstration equipment
Transportation equipment
Less accumulated depreciation
April 26,
2014
April 27,
2013
2,539
59,363
72,787
15,754
45,329
868
7,532
4,823
208,995
143,725
65,270
$
$
1,497
57,012
65,600
16,118
41,745
868
8,400
4,026
195,266
133,641
61,625
$
$
Page | 52
April 26,
2014
April 27,
2013
14,189
2,977
6,296
23,462
$
$
12,940
2,534
8,857
24,331
Accrued expenses consisted of the following:
Compensation
Taxes, other than income taxes
Short term and other
Other (expense) income, net consisted of the following:
Foreign currency transaction (losses)
Other
Note 7. Uncompleted Contracts
Uncompleted contracts consisted of the following:
Costs incurred
Estimated earnings
Less billings to date
$
$
$
$
$
$
April 26,
2014
(292)
(63)
(355)
April 26,
2014
486,430
166,250
652,680
641,763
10,917
Uncompleted contracts are included in the accompanying consolidated balance sheets as follows:
Costs and estimated earnings in excess of billings
Billings in excess of costs and estimated earnings
Note 8. Receivables
April 26,
2014
$
$
33,400
(22,483)
10,917
Year Ended
April 27,
2013
April 28,
2012
$
$
$
$
$
$
(319)
(520)
(839)
$
$
(206)
96
(110)
April 27,
2013
393,287
146,378
539,665
514,555
25,110
April 27,
2013
39,355
(14,245)
25,110
We sell our products throughout the United States and in certain foreign countries on credit terms we establish for each customer. On
the sale of certain products, we have the ability to file a contractor’s lien against the product installed as collateral and to file claims
against surety bonds to protect our interest in receivables. Foreign sales are at times secured by irrevocable letters of credit or bank
guarantees.
Accounts receivable are reported net of an allowance for doubtful accounts of $2,539 and $2,729 at April 26, 2014 and April 27, 2013,
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
were 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 collection will not occur. Charge-offs of receivables and our allowance for doubtful accounts
related to financing receivables are not material to our financial results.
In connection with certain sales transactions, we have entered into sales contracts with installment payments exceeding six months and
sales-type leases. The present value of these contracts and leases is recorded as a receivable as the revenue is recognized in accordance
with generally accepted accounting principles, and profit is recognized to the extent the present value is in excess of cost. We generally
Page | 53
retain a security interest in the equipment or in the cash flow generated by the equipment until the contract is paid. The present value of
long-term contracts and lease receivables, including accrued interest and current maturities, was $13,112 and $16,132 as of April 26,
2014 and April 27, 2013, respectively. Contract and lease receivables bearing annual interest rates of 5.0 to 10.0 percent are due in varying
annual installments through July 2022. The face amount of long-term receivables was $14,892 as of April 26, 2014 and $18,731 as of
April 27, 2013. Included in accounts receivable as of April 26, 2014 and April 27, 2013 was $2,098 and $803, respectively, of retainage
on construction-type contracts, all of which are expected to be collected within one year.
Note 9. Financing Agreements
We have a credit agreement with a U.S. bank for a $35.0 million line of credit, which includes up to $15.0 million for standby letters of
credit. The line of credit, which was amended on November 15, 2013, is due on November 15, 2016. The interest rate ranges from LIBOR
plus 145 basis points to LIBOR plus 195 basis points depending on the ratio of our interest-bearing debt to EBITDA. EBITDA is defined
as net income before deductions for income taxes, interest expense, depreciation and amortization, all as determined in accordance with
GAAP. The effective interest rate was 1.6 percent at April 26, 2014. We are assessed a loan fee equal to 0.125 percent per annum of any
non-used portion of the loan. As of April 26, 2014, there were no advances to us under the line of credit, and the balance of letters of
credit outstanding was approximately $6.7 million.
The credit agreement is unsecured and requires us to be in compliance with the following financial ratios:
• A minimum fixed charge coverage ratio of at least 2 to 1 at the end of any fiscal year. The ratio is equal to (a) EBITDA less
dividends or other distributions, a capital expenditure reserve of $6 million, and income tax expenses, over (b) all principal and
interest payments with respect to debt, excluding principal payments on the line of credit; and
• 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 have an additional credit agreement with another U.S. bank which supports our credit needs outside of the United States. It was also
amended on November 15, 2013 and becomes due on November 15, 2016. The facility provides for a $40.0 million line of credit and
includes facilities for letters of credit and bank guarantees and to secure foreign loans for our international subsidiaries. This credit
agreement is unsecured. It contains the same covenants as the credit agreement on the line of credit and contains an inter creditor agreement
whereby the debt has a cross default provision with the primary credit agreement described above. The total credit allowed between the
two credit agreements is limited to $40 million. As of April 26, 2014, there were no advances outstanding and approximately $4.6 million
in bank guarantees under this line of credit.
We were in compliance with all applicable covenants as of April 26, 2014 and April 27, 2013. The minimum fixed charge coverage ratio
as of April 26, 2014 was 56-to-1, and the ratio of interest-bearing debt to EBITDA as of April 26, 2014 was 0.06-to-1.
Note 10. Shareholders’ Equity and Share-Based Compensation
Common stock: Our authorized shares of 120,000,000 consist of 115,000,000 shares of common stock and 5,000,000 shares of
“undesignated stock.” Our Board of Directors has the power to issue any or all of the shares of undesignated stock without shareholder
approval, including the authority to establish the rights and preferences of the undesignated stock.
Each outstanding share of our common stock includes one common share purchase right. Each right entitles the registered holder to
purchase from us one one-tenth of one share of common stock at a price of $100 per common share, subject to adjustment and the terms
of the shareholder rights agreement under which the dividend was declared and paid. The rights become exercisable immediately after
the earlier of (i) 10 business days following a public announcement where a person or group has acquired beneficial ownership of 15
percent or more of our outstanding common shares (subject to certain exclusions) or (ii) 10 business days following the commencement
or announcement of an intention to make a tender offer or exchange offer for our common shares, the consummation of which would
result in the beneficial ownership by a person or group of 15 percent or more of our outstanding common shares. The rights expire on
November 19, 2018, which date may be extended by our Board subject to certain additional conditions.
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 and the 2001 Outside Directors Option Plan (“2001 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 10-year life, an exercise price equal to the fair market
value on the grant date and a five-year annual vesting period. Stock options granted to independent directors under these plans have a
seven-year life and an exercise price equal to the fair market value on the date of grant. Stock options granted to independent directors
prior to fiscal 2010 vested annually over three years, and options granted in or after fiscal 2010 vest in one year. The restricted stock
granted to independent directors vests in one year, provided that they remain on the Board. Restricted stock units are granted to employees
Page | 54
and have a five-year annual vesting period. As with stock options, restricted stock and restricted stock unit ownership cannot be transferred
during the vesting period.
At April 26, 2014, the aggregate number of shares available for future grant under the 2007 Plan for stock options and restricted stock
awards was 439 shares. Full value awards such as restricted stock and restricted stock unit awards reduce the number of shares available
for issuance by a factor of two, and if such an award were forfeited or terminated without delivery of the shares, the number of shares
again become eligible for issuance would be multiplied by a factor of two. Although the 2001 Plans remain in effect for options outstanding,
no new options can be granted under these plans.
Restricted stock and restricted stock units: We issue restricted stock to our non-employee directors and restricted stock units to employees.
The fair value of restricted stock and our restricted stock unit awards are measured on the grant date based on the market value of our
common stock. The related compensation expense as calculated under ASC 718, net of estimated forfeitures, is recognized over the
applicable vesting period. Unrecognized compensation expense related to the restricted stock and restrict stock unit awards was
approximately $2,333 at April 26, 2014, which is expected to be recognized over a weighted-average period of 3.1 years. The total fair
value of restricted stock vested was $804, $666, and $511 for fiscal years 2014, 2013, and 2012, respectively.
A summary of nonvested restricted stock and restricted stock units for the years ended April 26, 2014, April 27, 2013 and April 28, 2012
is as follows:
April 26, 2014
Number of
Nonvested
Shares
Weighted
Average
Grant Date
Fair Value
Per Share
$
279
147
(85)
(23)
318
9.74
10.03
9.47
9.37
9.59
Year Ended
April 27, 2013
Number of
Nonvested
Shares
Weighted
Average
Grant Date
Fair Value
Per Share
$
242
119
(69)
(13)
279
9.81
8.50
12.05
9.63
9.74
April 28, 2012
Number of
Nonvested
Shares
Weighted
Average
Grant Date
Fair Value
Per Share
$
181
118
(49)
(8)
242
11.07
8.24
10.51
10.85
9.81
Outstanding at beginning of year
Granted
Vested
Forfeited
Outstanding at end of year
Stock Options: We issue incentive stock options to our employees and non-qualified stock options to our independent directors. A
summary of stock option activity under all stock option plans during the fiscal year ended April 26, 2014 is as follows:
Outstanding at April 27, 2013
Granted
Canceled or forfeited
Exercised
Outstanding at April 26, 2014
Shares vested and expected to vest
Exercisable at April 26, 2014
Weighted
Average
Exercise
Price Per
Share
Stock
Options
3,421
226
(205)
(507)
2,935
2,903
2,077
$
$
$
$
13.59
11.04
17.56
9.77
13.77
13.81
15.23
Weighted
Average
Remaining
Contractual
Life (Years)
5.09
—
—
—
5.00
4.96
3.79
Aggregate
Intrinsic
Value
$
$
$
$
1,176
—
—
1,534
6,333
6,241
3,808
The aggregate intrinsic value of stock options represents the difference between the exercise price of stock options and the fair market
value of the underlying common stock at day's end for all in-the-money options. We define in-the-money options at April 26, 2014 as
options having exercise prices lower than the $13.06 per share market price of our common stock. There were in-the-money options to
purchase 1,091 shares exercisable at April 26, 2014. The total intrinsic value of options exercised during fiscal years 2014, 2013, and
2012 was $1,534, $562, and $624, respectively. The total fair value of stock options vested was $1,541, $1,898, and $2,497 for fiscal
years 2014, 2013, and 2012, respectively.
We estimate the fair value of stock options granted using the Black-Scholes option valuation model. We recognize the fair value of the
stock options on a straight-line basis as compensation expense. All options are recognized over the requisite service periods of the awards,
which are generally the vesting periods.
Page | 55
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including
the expected stock price volatility. ASC 718 requires us to estimate forfeitures at the time of grant and revise those estimates in subsequent
periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record share-
based compensation expense only for those awards expected to vest. The following factors are the significant assumptions used in the
computation of fair value of options:
Expected life. The expected life of options granted represents the period of time they are expected to be outstanding. We estimate
the expected life of options granted based on historical exercise patterns, which we believe are representative of future behavior. We
have examined our historical pattern of option exercises in an effort to determine if there were any discernible patterns of activity
based on certain demographic characteristics. Demographic characteristics tested included age, salary level, job level and
geographic location. We have determined there were no meaningful differences in option exercise activity based on the
demographic characteristics tested.
Expected volatility. We estimate the volatility of our common stock at the date of grant based on historical volatility consistent
with ASC 718 and SEC Staff Accounting Bulletin No. 107, Share Based Payments. Our decision to use historical volatility instead
of implied volatility was based upon analyzing historical data along with the lack of availability of history of actively traded options
on our common stock.
Risk-free interest rate. The rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a term similar to the
expected life of the options.
Dividend yield. We use an expected dividend yield consistent with our dividend yield over the period of time we have paid
dividends.
The following table provides the weighted-average fair value of options granted and the related assumptions used in the Black-Scholes
model:
Fair value of options granted
Risk-free interest rate
Expected dividend rate
Expected volatility
Expected life of option
April 26,
2014
$
4.96
$
2.03 - 2.34%
2.32%
54.09 - 54.37%
5.9 - 6.9 years
Year Ended
April 27,
2013
3.43
0.71 - 1.13%
2.43%
45.60 - 46.15%
5.9 - 6.8 years
$
April 28,
2012
3.46
1.10 - 1.50%
0.71 - 2.15%
44.59 - 46.85%
5.9 - 6.8 years
Employee stock purchase plan: We have an employee stock purchase plan (“ESPP”), which enables employees after six months of
continuous employment to elect, in advance and semi-annually, to contribute up to 15 percent of their compensation, subject to certain
limitations, toward the purchase of our common stock at a purchase price equal to 85 percent of the lower of the fair market value of the
common stock on the first or last day of the participation period. The ESPP plan requires participants to hold any shares purchased under
the ESPP for a minimum period of one year after the date of purchase. Compensation expense recognized on shares issued under our
ESPP is based on the value of a traded option to purchase shares of our stock at a 15 percent discount to the stock price. The total number
of shares reserved under the ESPP is 2,500. The number of shares of common stock issued under the ESPP totaled 195, 214, and 160
shares in fiscal 2014, 2013, and 2012, respectively. The number of shares of common stock reserved for future employee purchases
under the ESPP totaled 990 shares at April 26, 2014. The ESPP is intended to qualify under Section 423 of the Internal Revenue Code
of 1986.
Total share-based compensation expense: As of April 26, 2014, there was $5,034 of total unrecognized compensation cost related to
nonvested share-based compensation arrangements granted under all equity compensation plans. Total unrecognized compensation cost
will be adjusted for future changes in estimated forfeitures. We expect to recognize the cost over a weighted-average period of 2.9 years.
Page | 56
The following table presents a summary of the share-based compensation expense by equity type as follows:
Stock options
Restricted stock and stock units
Employee stock purchase plan
April 26,
2014
Year Ended
April 27,
2013
April 28,
2012
$
$
1,451
1,000
446
2,897
$
$
1,812
765
460
3,037
$
$
2,565
256
441
3,262
A summary of the share-based compensation expenses for stock options, restricted stock, restricted stock units and shares issued under
the ESPP for the fiscal years ended April 26, 2014, April 27, 2013 and April 28, 2012 is as follows:
Cost of goods sold
Selling
General and administrative
Product design and development
April 26,
2014
Year Ended
April 27,
2013
April 28,
2012
$
$
657
810
859
571
2,897
$
$
633
856
980
568
3,037
$
$
610
982
1,059
611
3,262
We received $4,954 in cash from option exercises under all share-based payment arrangements for the fiscal year ended April 26, 2014.
The tax (expense) benefit related to non-qualified options and restricted stock units under all share-based payment arrangements totaled
$(126), $346, and $325 for fiscal years 2014, 2013, and 2012, respectively.
Note 11. Employee Benefit Plans
We sponsor a 401(k) savings plan under which eligible U.S. employees may choose to make voluntary contributions of such employee's
compensation on a pretax basis, subject to certain Internal Revenue Service (IRS) limits. We make matching contributions equal to 50
percent (25 percent from August 1, 2010 to January 29, 2011) of the employee's qualifying contribution up to six percent of such employee's
compensation plus other discretionary contributions as authorized by our Board of Directors. Employees are eligible to participate upon
completion of one year of service if they have attained the age of 21 and have worked more than 1000 hours during such plan year. We
contributed $1,859, $1,713 and $1,618 to the plan for fiscal years 2014, 2013, and 2012, respectively.
We have unfunded deferred compensation agreements with certain officers and a former director under which interest is credited each
year to each participant’s account in an amount equal to the five-year Treasury note rate as of January 1 of each plan year. Total amounts
accrued for these plans as of April 26, 2014 and April 27, 2013 was $522 and $629, respectively. Contributions for each of the fiscal
years 2014, 2013, and 2012 were $23, $23 and $23, respectively. The amounts accrued under the plans are not funded and are subject
to the claims of the participants’ creditors. Participants may elect various forms of withdrawals upon retirement, including a lump sum
distribution or annual payments over five or 10 years.
Note 12. Income Taxes
We are subject to U.S. Federal income tax as well as the income taxes of multiple state jurisdictions. As a result of the completion of
examinations by the IRS on prior years and the expiration of statutes of limitations, fiscal years 2011, 2012 and 2013 are the remaining
years open under statutes of limitations. Certain subsidiaries are also subject to income tax in several foreign jurisdictions which have
open tax years varying by jurisdiction beginning in fiscal 2005.
On January 2, 2013, the President signed into law The American Taxpayer Relief Act of 2012 reinstating the federal research and
development credit for the 2012 and 2013 calendar years. As a result of the retroactive extension, we recognized approximately $1,804
in tax benefits during fiscal year 2013.
Page | 57
Income tax expense consisted of the following:
Current:
Federal
State
Foreign
Deferred taxes
April 26,
2014
Year Ended
April 27,
2013
April 28,
2012
$
$
11,342
1,454
696
1,543
15,035
$
$
9,517
2,219
754
(4,340)
8,150
$
$
2,266
577
313
(68)
3,088
A reconciliation of the provision for income taxes and the amount computed by applying the federal statutory rate to income before
income taxes is as follows:
Computed income tax expense at federal
statutory rate
State taxes, net of federal benefit
Research and development tax credit
Meals and entertainment
Stock compensation
Dividends paid to retirement plan
Domestic production activities deduction
Change in foreign deferred rates
Change in valuation allowances
Other, net
April 26,
2014
Year Ended
April 27,
2013
April 28,
2012
$
$
13,035
1,433
(750)
344
586
(328)
(1,012)
—
2,301
(574)
15,035
$
$
10,825
684
(1,804)
308
466
(616)
(976)
—
—
(737)
8,150
$
$
4,052
497
(1,004)
375
842
(522)
(270)
(249)
(364)
(269)
3,088
We operated under a tax holiday in China which expired in fiscal 2012. As noted above, the expiration of this tax holiday caused a $249
decrease in our income tax expense in fiscal 2012.
The pretax income attributable to domestic and foreign operations was as follows:
Domestic
Foreign
Income before income taxes
April 26,
2014
Year Ended
April 27,
2013
April 28,
2012
$
$
35,699
1,542
37,241
$
$
27,667
3,262
30,929
$
$
10,052
1,525
11,577
Page | 58
The components of the net deferred tax asset were as follows:
Deferred tax assets:
Warranty reserves
Vacation accrual
Net losses on equity investments
Deferred maintenance revenue
Reserves for excess and obsolete inventory
Equity compensation
Allowance for doubtful accounts
Inventory capitalization
Accrued compensation and benefits
Intangible assets
Net operating loss carry forwards
Other
Valuation allowance on equity investments
Deferred tax liabilities:
Property and equipment
Prepaid expenses
Other
April 26,
2014
April 27,
2013
$
$
10,432
1,510
2,870
1,332
981
899
797
306
1,397
56
766
585
21,931
(2,297)
19,634
(6,232)
(574)
(162)
(6,968)
12,666
$
$
9,847
1,788
3,066
2,439
1,246
1,049
599
600
1,077
37
—
440
22,188
—
22,188
(7,542)
(662)
(168)
(8,372)
13,816
We review deferred tax assets, including net operating losses, and to the extent we believe the asset may not be realized, we recognize a
valuation allowance. As of April 26, 2014 and April 27, 2013, we had recorded $2.3 million and $0 in valuation allowances, respectively.
We believe our net deferred tax assets, with the exception of the deferred tax asset related to the valuation allowance noted above, will
be fully realized based upon our estimates of the future taxable income. If our estimates of future taxable income are not met in future
periods, an additional valuation allowance for some of these deferred tax assets may be required.
We have not recorded U.S. deferred income taxes on certain of our non-U.S. subsidiaries’ undistributed earnings, as such amounts are
intended to be reinvested outside the United States indefinitely. However, should we change our business and tax strategies in the future
and decide to repatriate a portion of these earnings to one of our U.S. subsidiaries, including cash maintained by these non-U.S. subsidiaries,
additional U.S. tax liabilities would be incurred. It is not practical at this time to estimate the amount of additional U.S. tax liabilities
we would incur.
We have income tax net operating loss carryforwards related to our international operations of approximately $2.3 million which all have
an indefinite life.
The Company has recorded a deferred tax asset of $0.8 million reflecting the benefit of $2.3 million in loss carryforwards. As stated,
such deferred tax assets have an indefinite life and do not expire. They are as follows by jurisdiction:
Germany
Hong Kong
Belgium
April 26,
2014
April 27,
2013
$
$
75
8
683
766
$
$
—
—
—
—
Realization is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is
not assured, management believes it is more likely than not that all of the deferred tax asset will be realized. The amount of the deferred
Page | 59
tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward
period are reduced.
The following table presents the classification of the net deferred tax assets on the accompanying consolidated balance sheets:
Current assets
Current liabilities
Non-current assets
Non-current liabilities
April 26,
2014
April 27,
2013
$
$
10,694
(27)
2,000
(1)
12,666
$
$
12,755
—
1,061
—
13,816
We account for uncertainties in tax positions under the provisions of ASC 740-10, Accounting for Uncertainty in Income Taxes, an
Interpretation of SFAS No. 109. ASC 740-10 creates a single model to address uncertainty in tax positions and clarifies the accounting
for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in
the financial statements. ASC 740-10 also provides guidance on derecognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The following table provides a reconciliation of changes in unrecognized tax
benefits for fiscal years 2014, 2013 and 2012:
Balance as of April 30, 2011:
Gross increases related to prior period tax positions
Gross decreases related to prior period tax positions
Gross increases related to current period tax positions
Balance as of April 28, 2012:
Gross decreases related to prior period tax positions
Gross increases related to current period tax positions
Lapse of statute of limitations
Balance as of April 27, 2013:
Gross increases related to prior period tax positions
Gross increases related to current period tax positions
Balance as of April 26, 2014:
Amount
527
14
(178)
86
449
(11)
129
(188)
379
16
99
494
$
$
$
$
All of our unrecognized tax benefits would have an impact on the effective tax rate if recognized. We recognized an expense (benefit)
of $20, $10 and $(1) in net interest and penalties during the years ended April 26, 2014, April 27, 2013 and April 28, 2012, respectively.
Interest and penalties recognized are recorded in income taxes in our consolidated statements of operations. We had accrued $15 and
$11 in net interest or penalties as of April 26, 2014 and April 27, 2013, respectively.
Page | 60
Note 13. Cash Flow Information
The changes in operating assets and liabilities consisted of the following:
April 26,
2014
Year Ended
April 27,
2013
April 28,
2012
(Increase) decrease:
Restricted cash
Accounts receivable
Long-term receivables
Inventories
Costs and estimated earnings in excess of billings
Prepaid expenses and other current assets
Income taxes receivable
Advertising rights and other assets
Increase (decrease):
Accounts payable and accrued expenses
Customer deposits
Billings in excess of costs and estimated earnings
Long-term warranty obligations
Income taxes payable
Long-term deferred revenue
Other long-term obligations
$
$
(466)
(18,293)
3,027
(12,771)
5,955
(536)
(2,414)
64
6,867
4,930
8,238
2,103
(527)
(835)
(130)
(4,788)
$
$
1,120
3,364
2,348
6,656
(16,335)
(658)
5,944
386
7,658
(450)
(140)
2,932
1,023
(576)
(169)
13,103
Supplemental disclosures of cash flow information consisted of the following:
Cash payments for:
Interest
Income taxes, net of refunds
April 26,
2014
Year Ended
April 27,
2013
$
198
16,521
$
420
5,422
$
$
$
377
(4,995)
462
(7,539)
1,173
784
(1,120)
226
6,975
1,538
(5,899)
(767)
(215)
783
(915)
(9,132)
April 28,
2012
306
4,292
Supplemental schedule of non-cash investing and financing activities consisted of the following:
Demonstration equipment transferred to inventory
$
255
$
612
$
409
April 26,
2014
Year Ended
April 27,
2013
April 28,
2012
Purchases of property and equipment included in
accounts payable
Contributions of common stock under the employee
stock purchase plan
Note 14. Fair Value Measurement
2,099
1,552
1,207
1,482
1,475
1,413
ASC 820, Fair Value Measurement, defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an
exit price) in an orderly transaction between market participants at the measurement date. It also establishes a fair value hierarchy which
requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The
fair value hierarchy within ASC 820 distinguishes between the following three levels of inputs which may be utilized when measuring
fair value.
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than quoted prices included within Level 1 for the assets or liabilities, either directly or indirectly (for
example, quoted market prices for similar assets and liabilities in active markets or quoted market prices for identical assets or
Page | 61
liabilities in markets not considered to be active, inputs other than quoted prices that are observable for the asset or liability, or
market-corroborated input.)
Level 3 - Unobservable inputs supported by little or no market activity based on our own assumptions used to measure assets and liabilities.
The fair values for fixed-rate contracts receivable are estimated using a discounted cash flow analysis based on interest rates currently
being offered for contracts with similar terms to customers with similar credit quality. The carrying amounts reported on our consolidated
balance sheets for contracts receivable approximate fair value and have been categorized as a Level 2 fair value measurement. Fair values
for fixed-rate long-term marketing obligations are estimated using a discounted cash flow calculation applying interest rates currently
being offered for debt with similar terms and underlying collateral. The total carrying value of long-term marketing obligations as reported
on our consolidated balance sheets within other long-term obligations approximates fair value and has been categorized as a Level 2 fair
value measurement.
The following table sets forth by Level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair
value on a recurring basis at April 26, 2014 and April 27, 2013 according to the valuation techniques we used to determine their fair
values. There have been no transfers of assets or liabilities among the fair value hierarchies presented.
Balance as of April 26, 2014:
Cash and cash equivalents
Restricted cash
Available-for-sale securities:
Certificates of deposit
U.S. Government securities
U.S. Government sponsored entities
Municipal obligations
Derivatives - currency forward contracts
Balance as of April 27, 2013:
Cash and cash equivalents
Restricted cash
Available-for-sale securities:
Certificates of deposit
U.S. Government securities
U.S. Government sponsored entities
Municipal obligations
Derivatives - currency forward contracts
Fair Value Measurements
Level 2
Total
Level 1
$
$
$
$
45,054
514
—
2,002
—
—
—
47,570
40,628
48
—
5,018
—
—
—
45,694
$
$
$
$
— $
—
7,734
—
8,341
7,321
(85)
23,311
$
— $
—
4,677
—
4,752
9,605
7
19,041
$
45,054
514
7,734
2,002
8,341
7,321
(85)
70,881
40,628
48
4,677
5,018
4,752
9,605
7
64,735
The following methods and assumptions were used to estimate the fair value of each class of financial instrument. There have been no
changes in the valuation techniques used by us to value our financial instruments.
Cash and cash equivalents: Consists of cash on hand in bank deposits and highly liquid investments, primarily money market
accounts. The fair value was measured using quoted market prices in active markets. The carrying amount approximates fair value.
Restricted cash: Consists of cash and cash equivalents held in bank deposit accounts to secure issuances of foreign bank guarantees. The
fair value of restricted cash was measured using quoted market prices in active markets. The carrying amount approximates fair value.
Certificates of deposit: Consists of time deposit accounts with original maturities of less than three years and various yields. The fair
value of these securities was measured based on valuations observed in less active markets than Level 1 investments from a third-party
financial institution. The carrying amount approximates fair value.
U.S. Government securities: Consists of U.S. Government treasury bills, notes, and bonds with original maturities of less than three years
and various yields. The fair value of these securities was measured using quoted market prices in active markets.
U.S. Government sponsored entities: Consist of Fannie Mae and Federal Home Loan Bank investment grade debt securities trading with
sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis. The fair value of these securities was
Page | 62
measured based on valuations observed in less active markets than Level 1 investments. The contractual maturities of these investments
vary from one month to three years.
Municipal obligations: Consist of investment grade municipal bonds trading with sufficient frequency and volume to enable us to obtain
pricing information on an ongoing basis. The contractual maturities of these investments vary from two to three years. The fair value
of these bonds was measured based on valuations observed in less active markets than Level 1 investments.
Derivatives – currency forward contracts: Consists of currency forward contracts trading with sufficient frequency and volume to enable
us to obtain pricing information on an ongoing basis. The fair value of these securities was measured based on a valuation from a third-
party bank. See Note 15 for more information regarding our derivatives.
The fair value measurement standard also applies to certain non-financial assets and liabilities measured at fair value on a nonrecurring
basis. For example, certain long-lived assets such as goodwill, intangible assets and property, plant and equipment are measured at fair
value in connection with business combinations or when an impairment is recognized and the related assets are written down to fair
value. We utilized the fair value measurement standard primarily level 3 inputs, to value the assets and liabilities for the business
combination involving OPEN, which occurred during the first three months of fiscal 2014. See Note 4 for more information on the
business combination. We did not make any material business combinations or recognize significant impairment losses during fiscal
2014 or fiscal 2013.
Note 15. Derivative Financial Instruments
We utilize derivative financial instruments to manage the economic impact of fluctuations in currency exchange rates on those transactions
denominated in currencies other than our functional currency, which is the U.S. dollar. We enter into currency forward contracts to
manage these economic risks. We account for all derivatives on the balance sheet within other assets or accounts payable measured at
fair value, and changes in fair values are recognized in earnings unless specific hedge accounting criteria are met for cash flow or net
investment hedges. As of April 26, 2014 and April 27, 2013, we had not designated any of our derivative instruments as accounting
hedges, and thus we recorded the changes in fair value in other (expense) income, net.
The foreign currency exchange contracts in aggregated notional amounts in place to exchange United States Dollars at April 26,
2014 and April 27, 2013 were as follows:
Foreign Currency Exchange Forward Contracts:
U.S. Dollars/Australian Dollars
U.S. Dollars/Canadian Dollars
U.S. Dollars/British Pounds
U.S. Dollars/Euros
U.S. Dollars/Singapore Dollars
U.S. Dollars/Brazilian Reais
April 26, 2014
April 27, 2013
U.S.
Dollars
Foreign
Currency
U.S.
Dollars
Foreign
Currency
455
—
2,484
1,314
1,035
—
512
—
1,500
973
1,300
—
2,944
492
1,554
1,155
—
—
2,873
492
1,005
866
—
—
As of April 26, 2014 and April 27, 2013, there was a net liability and asset of $85 and $7, respectively, representing the fair value of
foreign currency exchange forward contracts, which was determined using Level 2 inputs from a third-party bank.
Note 16. Commitments and Contingencies
Litigation: We are a party to legal proceedings and claims which arise during the ordinary course of business. We review our legal
proceedings and claims, regulatory reviews and inspections and other legal matters on an ongoing basis and follow appropriate accounting
guidance when making accrual and disclosure decisions. We establish accruals for those contingencies when the incurrence of a loss is
probable and can be reasonably estimated, and we disclose the amount accrued and the amount of a reasonably possible loss in excess
of the amount accrued, if such disclosure is necessary for our financial statements to not be misleading. We do not record an accrual
when the likelihood of loss has been incurred is probable, but the amount cannot be reasonably estimated, or when the loss is believed
to be only reasonably possible or remote, although disclosures will be made for material matters as required by ASC 450-20, Loss
Contingencies. Our assessment of whether a loss is reasonably possible or probable is based on our assessment and consultation with
legal counsel regarding the ultimate outcome of the matter following all appeals.
Page | 63
As of April 26, 2014, we did not believe there was a reasonable possibility that any material loss for these various claims or legal actions,
including reviews, inspections or other legal proceedings, if any, would be incurred. Accordingly, no accrual or disclosure of a potential
range of loss has been made related to these matters. In the opinion of management, the ultimate liability of all unresolved legal proceedings
is not expected to have a material effect on our financial position, liquidity or capital resources.
Guarantees: In connection with the sale of equipment to various customers, we have entered into contractual arrangements whereby we
agreed to repurchase equipment at the end of the lease term at a fixed price. Our total obligations under these fixed price arrangements
were $1,100 and $1,285 as of April 26, 2014 and April 27, 2013, respectively. In accordance with the provisions of ASC 460, Guarantees,
there was no guarantee liability in accrued expenses that needed to be recognized in connection with these arrangements.
Warranties: We offer a standard parts coverage warranty for periods varying from one to five years for most of our products. We also
offer additional types of warranties to include on-site labor, routine maintenance and event support. In addition, the terms of warranties
on some installations can vary from one to 10 years and sometimes more. The specific terms and conditions of these warranties vary
primarily depending on the type of the product sold. We estimate the costs which may be incurred under the warranty obligations and
record a liability in the amount of such estimated costs at the time the revenue is recognized. Factors affecting our estimate of the cost
of our warranty obligations include historical experience and expectations of future conditions. We continually assess the adequacy of
our recorded warranty reserves and, to the extent we experience any changes in warranty claim activity or costs associated with servicing
those claims, our warranty obligation is adjusted accordingly.
Changes in our warranty liability for the fiscal years ended April 26, 2014 and April 27, 2013 consisted of the following:
Beginning accrued warranty costs
Warranties issued during the period
Settlements made during the period
Changes in accrued warranty costs for pre-existing
warranties during the period, including expirations
Ending accrued warranty costs
April 26,
2014
April 27,
2013
$
$
25,146
13,008
(13,796)
2,892
27,250
$
$
22,215
11,140
(13,875)
5,666
25,146
Performance guarantees: We have entered into standby letters of credit and surety bonds with financial institutions relating to the
guarantee of future performance on contracts, primarily construction type contracts. As of April 26, 2014, we had outstanding letters of
credit and surety bonds in the amount of $11,350 and $16,048, respectively. Performance guarantees are issued to certain customers to
guarantee the operation and installation of the equipment and our ability to complete a contract. These performance guarantees have
various terms, which are generally less than one year.
Leases: We lease vehicles, office space and various equipment for various sales and service locations throughout the world, including
manufacturing space in the United States and China. Some of these leases, including the lease for manufacturing facilities in Sioux Falls,
South Dakota, include provisions for extensions or purchase. The lease for the facilities in Sioux Falls, South Dakota can be extended
for an additional three years past its current term, which ends December 31, 2016, and it contains an option to purchase the property
subject to the lease from January 1, 2015 to December 31, 2016 for $8,400, which approximates fair value. If the lease is extended, the
purchase option increases to $8,600 for the year ending December 31, 2017 and $8,800 for the year ending December 31, 2018. Rental
expense for operating leases was $2,742, $2,749 and $3,159 for the fiscal years ended April 26, 2014, April 27, 2013 and April 28, 2012,
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 April 26, 2014:
Fiscal years ending
2015
2016
2017
2018
2019
Thereafter
Amount
2,658
1,987
1,012
192
16
—
5,865
$
$
Page | 64
Purchase commitments: From time to time, we commit to purchase inventory, advertising, information technology maintenance and
support services, and various other products and services over periods that extend beyond one year. As of April 26, 2014, we were
obligated under the following conditional and unconditional purchase commitments, which included $900 in conditional purchase
commitments.
Fiscal years ending
2015
2016
2017
2018
2019
Thereafter
Amount
1,117
1,081
250
250
100
—
2,798
$
$
Other long-term obligations: We are obligated to pay the following payments for an acquisition and for other various obligations.
Advertising
Deferred purchase price
Total Outstanding
Less: current price
Other long-term obligations
Note 17. Subsequent Events
April 26, 2014
April 27, 2013
620
2,375
2,995
728
2,267
701
—
701
356
345
On May 22, 2014, our Board of Directors declared a semi-annual dividend of $0.10 per share on our common stock for the fiscal year
ended April 26, 2014, payable on June 13, 2014 to holders of record of our common stock on June 2, 2014.
Note 18. Quarterly Financial Data (Unaudited)
The following table presents summarized quarterly financial data:
$
$
July 27,
2013
138,722
35,502
5,719
0.13
0.13
July 28,
2012
132,919
36,390
6,678
0.16
0.16
Net sales
Gross profit
Net income
Basic earnings per share
Diluted earnings per share
Net sales
Gross profit
Net income (loss)
Basic earnings (loss) per share
Diluted earnings (loss) per share
Page | 65
$
Fiscal 2014 Quarter Ended
January 25,
October 26,
2014
2013
115,369
161,639
29,089
43,365
2,871
11,790
0.07
0.28
0.07
0.27
$
$
Fiscal 2013 Quarter Ended
January 26,
October 27,
2013
2012
111,050
149,871
27,049
42,352
2,710
11,547
0.06
0.27
0.06
0.27
$
$
$
April 26,
2014
136,240
33,754
1,826
0.04
0.04
April 27,
2013
124,482
28,103
1,844
0.04
0.04
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management of our company is responsible for establishing and maintaining effective disclosure controls and procedures as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. As of April 26, 2014, an evaluation was performed, under
the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded as of April 26, 2014, our disclosure controls and procedures were effective at the reasonable
assurance level to ensure information required to be disclosed in this Annual Report on Form 10-K was recorded, processed, summarized
and reported within the time period required by the SEC’s rules and forms and accumulated and communicated to management, including
our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
During the quarter ended April 26, 2014 and thereafter, there have been no changes in our internal control over financial reporting that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined
in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control system was designed to provide reasonable assurance
to our management and board of directors regarding the preparation and fair presentation of published financial statements. All internal
control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control
—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework). Based
on our evaluation under the framework in Internal Control—Integrated Framework, our management concluded our internal control over
financial reporting was effective as of April 26, 2014.
Our internal control over financial reporting as of April 26, 2014 has been audited by Ernst & Young LLP, our independent registered
public accounting firm, as stated in their report that follows.
By /s/ Reece A. Kurtenbach
Reece A. Kurtenbach
Chief Executive Officer
June 12, 2014
By /s/ Sheila M. Anderson
Sheila M. Anderson
Chief Financial Officer
June 12, 2014
Page | 66
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Daktronics, Inc.
We have audited Daktronics, Inc. and subsidiaries’ internal control over financial reporting as of April 26, 2014, based on criteria established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992
framework) (the COSO criteria). Daktronics, Inc’s management is responsible for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Daktronics, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting
as of April 26, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Daktronics, Inc. and subsidiaries as of April 26, 2014 and April 27, 2013, and the related consolidated
statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended April
26, 2014 of Daktronics, Inc. and subsidiaries and our report dated June 12, 2014 expressed “an unqualified opinion thereon”.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
June 12, 2014
Page | 67
Item 9B. OTHER INFORMATION
None
PART III.
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item 10 will be included under the captions “Proposal One - Election of Directors” and “Corporate
Governance” in our Proxy Statement for our 2014 annual meeting of shareholders (“Proxy Statement”) to be filed within 120 days after
our most recent fiscal year-end. Information concerning the compliance of our officers, directors and 10 percent shareholders with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the information to be contained in the Proxy Statement
under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.” The information regarding Audit Committee members
and “Audit Committee Financial Experts” is incorporated by reference to the information to be contained in the Proxy Statement under
the caption “Corporate Governance–Committees of the Board of Directors.” The information regarding our Code of Conduct is
incorporated by reference to the information to be contained in the Proxy Statement under the heading “Corporate Governance – Code
of Conduct.”
Item 11. EXECUTIVE COMPENSATION
Information regarding the compensation of our directors and officers for the fiscal year ended April 26, 2014 will be in the Proxy Statement
under the heading “Proposal One - Election of Directors” and “Executive Compensation” and is incorporated herein by reference.
We maintain a Code of Conduct which applies to all of our employees, officers and Directors. Included in the Code of Conduct are ethics
provisions that apply to our Chief Executive Officer, Chief Financial Officer and all other financial and accounting management
employees. A copy of our Code of Conduct can be obtained from our Internet website at www.daktronics.com on the Investor Relations
page and will be made available free of charge to any shareholder upon request. Information on or available through our website is not
part of this Report. We intend to disclose any waivers from, or amendments to, the Code of Conduct by posting a description of such
waiver or amendment on our Internet website. However, to date, we have not granted a waiver from the Code of Conduct.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The security ownership of certain beneficial owners and management will be contained in the Proxy Statement under the heading “Security
Ownership of Certain Beneficial Owners and Management” and “Executive Compensation - Securities Authorized for Issuance Under
Equity Compensation Plans” and is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Information required by this item is incorporated by reference from the sections entitled “Proposal One – Election of Directors –
Independent Directors” and “Corporate Governance - Compensation Committee Interlocks and Insider Participation” contained in our
Proxy Statement. There were no related party transactions in fiscal 2014.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding our principal accountant will be contained in the Proxy Statement under the heading “Proposal Three - Ratification
of Appointment of Independent Registered Public Accounting Firm” and is incorporated herein by reference.
Page | 68
PART IV.
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
Our financial statements, a description of which follows, are contained in Part II, Item 8:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of April 26, 2014 and April 27, 2013
Consolidated Statements of Operations for each of the three fiscal years ended April 26, 2014, April 27, 2013 and April 28, 2012
Consolidated Statements of Comprehensive Income for each of the three fiscal years ended April 26, 2014, April 27, 2013 and
April 28, 2012
Consolidated Statements of Shareholders’ Equity for each of the three fiscal years ended April 26, 2012, April 27, 2013 and April 28,
2012
Consolidated Statements of Cash Flows for each of the three fiscal years ended April 26, 2014, April 27, 2013 and April 28, 2012
Notes to the Consolidated Financial Statements
(2)
Schedules
The following financial statement schedule is submitted herewith:
Schedule II – Valuation and Qualifying Accounts
Other schedules are omitted because they are not required or are not applicable or because the required information is included in
the financial statements listed above.
(3)
Exhibits
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; the reports described below are filed as Commission File No. 0-23246 unless otherwise
indicated.
3.1
3.2
4.1
4.2
4.3
4.4
4.5
10.1
10.2
10.3
10.4
10.5
Amended and Restated Articles of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 filed with
our Quarterly Report on Form 10-Q on August 13, 2013 ).
Amended and Restated Bylaws of the Company (Incorporated by reference to Exhibit 3.4 filed with our Annual Report
on Form 10-K on June 12, 2013).
Form of Stock Certificate evidencing Common Stock, without par value, of the Company (Incorporated by reference to
Exhibit 4.1 filed with our Amendment No. 1 to the Registration Statement on Form S-1 on January 12, 1994 as Commission
File No. 33-72466).
Rights Agreement (Incorporated by reference to Exhibit 4.1 filed with our Form 8-A on August 29, 2008).
2001 Incentive Stock Option Plan (Incorporated by reference to Exhibit 4.1 to our Registration Statement on Form S-8
filed on November 8, 2001 as Commission File No. 333-72990).*
2001 Outside Directors Stock Option Plan (Incorporated by reference to Exhibit 4.2 to our Registration Statement on
Form S-8 filed on November 8, 2001 as Commission File No. 333-72990).*
Daktronics, Inc. 2007 Incentive Stock Plan (Incorporated by reference to Exhibit 10.1 filed with our Quarterly Report
on Form 10-Q on August 20, 2007).*
Amended and Restated Deferred Compensation Agreement Between the Company and Aelred Kurtenbach (Incorporated
by reference to Exhibit 10.1 filed with our Annual Report on Form 10-K on June 28, 2004).*
Loan Agreement dated October 14, 1998 between U.S. Bank National Association and the Company (Incorporated by
reference to Exhibit 10.6 filed with our Quarterly Report on Form 10-Q filed on December 11, 1998).
Eighth Amendment to Loan Agreement dated November 12, 2009 by and between the Company and U.S. Bank National
Association (Incorporated by reference to Exhibit 10.1 filed with our Current Report on Form 8-K filed on November
12, 2009).
Tenth Amendment to Loan Agreement dated November 15, 2011 by and between the Company and U.S. Bank National
Association (Incorporated by reference to Exhibit 10.1 filed with our Current Report on Form 8-K filed on November
17, 2011).
Eleventh Amendment to Loan Agreement dated November 9, 2012 by and between the Company and U.S. Bank National
Association (Incorporated by reference to Exhibit 10.1 filed with our Current Report on Form 8-K filed on November
9, 2012).
Page | 69
10.6
10.7
10.8
10.9
Renewal Revolving Note dated November 15, 2013 issued by the Company to the U.S. Bank National Association.
(Incorporated by reference to Exhibit 10.2 filed with our Current Report on Form 8-K filed on November 18, 2013).
Loan Agreement dated December 23, 2010 between the Company and Bank of America, N.A. (Incorporated by reference
to Exhibit 10.3 filed with our Current Report on Form 8-K filed on November 17, 2011).
Second Amendment to Loan Agreement dated November 15, 2011 by and between the Company and Bank of America,
N.A. (Incorporated by reference to Exhibit 10.5 filed with our Current Report on Form 8-K filed on November 17, 2011).
Third Amendment to Loan Agreement dated July 2, 2012 by and between the Company and Bank of America, N.A.
(Incorporated by reference to Exhibit 10.1 filed with our Current Report on Form 8-K filed on July 3, 2012).
10.10 Fourth Amendment to Loan Agreement dated November 9, 2012 by and between the Company and Bank of America,
N.A. (Incorporated by reference to Exhibit 10.3 filed with our Current Report on Form 8-K filed on November 9, 2012).
10.11 Reaffirmation and Second Amendment to Unlimited Guaranty Agreement dated November 9, 2012 by and between the
Company and Bank of America, N.A. (Incorporated by reference to Exhibit 10.4 filed with our Current Report on Form
8-K filed on November 9, 2012).
10.12 Amended and Restated Revolving Note dated November 15, 2013 issued by the Company to Bank of America, N.A.
(Incorporated by reference to Exhibit 10.5 filed with our Current Report on Form 8-K filed on November 18, 2013.
10.13 Twelfth Amendment to Loan Agreement dated November 15, 2013 by and between the Company and U.S. Bank National
Association (Incorporated by reference to Exhibit 10.1 filed with our Current Report on Form 8-K filed on November
18, 2013).
10.14 Fifth Amendment to Loan Agreement dated November 15, 2013 by and between the Company and Bank of America,
N.A. (Incorporated by reference to Exhibit 10.3 filed with our Current Report on Form 8-K filed on November 18, 2013).
10.15 Reaffirmation of and Third Amendment to Unlimited Guaranty Agreement dated November 15, 2013 by and between
the Company and Bank of America, N.A. (Incorporated by reference to Exhibit 10.4 filed with our Current Report on
Form 8-K filed on November 18, 2013).
Subsidiaries of the Company. (1)
21.1
23.1
Consent of Ernst & Young LLP. (1)
24
31.1
31.2
32.1
32.2
101
Power of Attorney. (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. (1)
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. (1)
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
1350). (1)
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
1350). (1)
The following financial information from our Annual Report on Form 10-K for the fiscal year ended April 26, 2014,
formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated
Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements
of Shareholders' Equity, (v) the Consolidated Statements of Cash Flows, (vi) Notes to Consolidated Financial Statements,
and (vii) document and entity information. (1) (2)
(1) Filed herewith electronically.
(2) Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on
Form 10-K shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the
“Exchange Act”), or otherwise subject to the liability of that section, and shall not be deemed part of a registration
statement, prospectus or other document filed under the Securities Act of 1933 or the Exchange Act, except as shall
be expressly set forth by specific reference in such filings.
*
Indicates a management contract or compensatory plan or arrangement.
All Sport®, Daktronics®, DakStats®, DataTime®, Fuelight™, Fuelink™, Galaxy®, GalaxyPro™, OmniSport®, ProAd®, ProPixel®,
ProRail®, ProStar®, ProTour®, Sportsound®, Valo®, Vanguard®, Venus®, V-Net®, Visiconn®, V-Tour®, V-Link®, and Vortek® are
trademarks of Daktronics, Inc. All other trademarks referenced are the intellectual property of their respective companies.
Page | 70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual
Report to be signed on its behalf by the undersigned, thereunto duly authorized, on June 12, 2014.
DAKTRONICS, INC.
By: /s/ Reece A. Kurtenbach
Chief Executive Officer and President
(Principal Executive Officer)
By: /s/ Sheila M. Anderson
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Title
Director
Date
June 12, 2014
Director
June 12, 2014
Director
June 12, 2014
Director
June 12, 2014
Director
June 12, 2014
Director
June 12, 2014
Director
June 12, 2014
Director
June 12, 2014
Director
June 12, 2014
Signature
By /s/ Byron J. Anderson
Byron J. Anderson
By /s/ Robert G. Dutcher
Robert G. Dutcher
By /s/ Nancy D. Frame
Nancy D. Frame
By /s/ Aelred J. Kurtenbach
Aelred J. Kurtenbach
By /s/ Reece A. Kurtenbach
Reece A. Kurtenbach
By /s/ James B. Morgan
James B. Morgan
By /s/ John L. Mulligan
John L. Mulligan
By /s/ Bruce W. Tobin
Bruce W. Tobin
By /s/ James A. Vellenga
James A. Vellenga
Page | 71
DAKTRONICS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended April 26, 2014, April 27, 2013 and April 28, 2012
(in thousands)
Description
For the year ended April 26, 2014:
Deducted from asset accounts:
Additions
Balance at
Beginning
of Year
Charged to
Costs and
Expenses
Charged to
Other
Accounts
Deductions
Balance
at End
of Year
Allowance for doubtful accounts
$
2,718
$
860
$
Allowance for excess and obsolete inventories
3,286
1,219
$
—
(1) (1)
(1,039) (2) $
(1,812) (3)
2,539
2,692
For the year ended April 27, 2013:
Deducted from asset accounts:
Allowance for doubtful accounts
Allowance for excess and obsolete inventories
For the year ended April 28, 2012:
Deducted from asset accounts:
Allowance for doubtful accounts
Allowance for excess and obsolete inventories
2,398
2,851
2,548
2,139
782
3,094
110
2,537
—
1 (1)
(462) (2)
(2,660) (3)
—
11 (1)
(260) (2)
(1,836) (3)
2,718
3,286
2,398
2,851
(1)
(2)
(3)
Translation adjustment on foreign subsidiary balances.
Write-off of uncollected accounts, net of collections.
Obsolete and excess inventory disposals
Page | 72
DAKTRONICS, INC.
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the Annual Report on Form 10-K of Daktronics, Inc. (the “Company”) for the annual period ended April 26,
2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Reece A. Kurtenbach, Chief
Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by
the Company and furnished to the Securities and Exchange Commission or its staff upon request.
/s/ Reece A. Kurtenbach
Reece A. Kurtenbach
Chief Executive Officer
Date: June 12, 2014
EXHIBIT 32.2
DAKTRONICS, INC.
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Daktronics, Inc. (the “Company”) for the annual period ended April 26,
2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Sheila M. Anderson, Chief
Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by
the Company and furnished to the Securities and Exchange Commission or its staff upon request.
/s/ Sheila M. Anderson
Sheila M. Anderson
Chief Financial Officer
Date: June 12, 2014
Page | 73
DIRECTORS & COMPANY MANAGERS
INDEPENDENT DIRECTORS
Robert G. Dutcher2
Former Strategic Advisor Lead Member
of MEDRAD, Inc.
Nancy D. Frame2, 3
Former Deputy Director
U.S. Trade and Development Agency
Bruce W. Tobin1
Former Vice President of Finance for
International & Corporate Staff Services
3M
James A. Vellenga1, 3
Former President and CEO
BSFX Corporation
Byron J. Anderson2, 3
Former Senior Vice President
Agilent Technologies, Inc.
John L. Mulligan1
Investment Associate
UBS Financial Services, Inc.
1 Member of Audit Committee
2 Member of Compensation Committee
3 Member of Nominating and Governance Committee
NON-INDEPENDENT DIRECTORS
Dr. Aelred J. Kurtenbach(1)
Co-Founder, Chairman of the Board
Reece A. Kurtenbach(1)
Director, President and CEO
James B. Morgan
Former President and CEO
Daktronics, Inc.
Sheila M. Anderson(1)
Chief Financial Officer and Treasurer
COMPANY OFFICERS
Bradley T. Wiemann(1)
Executive Vice President Commerical,
Schools & Theatres, and Transportation
Business Units
Carla S. Gatzke
Vice President Human Resources,
Secretary
Matthew J. Kurtenbach(1)
Vice President Manufacturing
Jay W. Parker
Vice President Live Events Sales
Daniel J. Chase
Vice President Asia-Pacific Sales
Pete F. Egart
Vice President EMELA Sales
Brett D. Wendler
Vice President Engineering
Seth T. Hansen
Vice President Project Management
Rich E. Hinz
Vice President Information Technology
(1) Named executive officer
Page | 74
INVESTOR RELATIONS
You can contact Daktronics Investor Relations at any time to
order financial documents such as our Annual Report or Form
10-K free of charge.
You may contact us about any investment related questions, via
phone, fax, email, or through our web site. Our contact
information is:
Daktronics, Inc.
Investor Relations
201 Daktronics Drive
Brookings, SD 57006
Website: www.daktronics.com
Email: investor@daktronics.com
Phone: 605-692-0200
Fax: 605-697-4700
TRANSFER AGENT
Wells Fargo Bank Minnesota, N.A.
Shareowner Services
1110 Centre Pointe Curve, Suite 101
Mendota Heights, MN 55120
Inquiries related to stock transfers or lost certificates should be
directed to Wells Fargo Shareowner Services by calling 800-
468-9716 or 651-450-4064.
INDEPENDENT AUDITORS
EY, Minneapolis, Minnesota
LEGAL COUNSEL
Winthrop & Weinstine, P.A., Minneapolis, Minnesota
ANNUAL MEETING
The annual meeting of shareholders will be held September 3,
2014 at Daktronics headquarters in Brookings, South Dakota,
at 7:00 pm Central Daylight Time. Shareholders of record on
June 30, 2014 will be eligible to vote at the meeting.
FORM 10-K AND OTHER REPORTS
Copies of the Company’s Annual Report on Form 10-K for the
year ended April 26, 2014, filed with the Securities and
Exchange Commission, are available without charge upon
written request to the Investor Relations Dept., Daktronics, Inc.,
201 Daktronics Drive, Brookings, South Dakota, 57006-5128;
by calling 800-605-DAKT (3258); or by accessing the
Company’s website at www.daktronics.com
STOCK PRICE HISTORY
Our common stock trades on The NASDAQ Global Select
Market under the symbol DAKT. High and low sales prices of
our common stock for fiscal years 2014 and 2013 are presented
below.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
FISCAL 2013
Low
High
$ 8.39 $ 6.39
$ 9.91 $ 7.36
$ 11.73 $ 8.03
$ 12.40 $ 9.57
FISCAL 2014
Low
High
$ 9.63
$ 11.49
$10.45
12.35
11.73
15.80
13.06
14.63
ADDITIONAL INFORMATION
Visit us at www.daktronics.com for additional information on
upcoming and future projects, product offerings, and other
items of interest.
Cautionary Notice Regarding Forward-Looking Statements:
This annual report, including information incorporated by reference and the Annual Report on Form 10-K, contains both historical and forward-looking
statements that involve risks, uncertainties and assumptions. The statements contained in this report that (including exhibits and any information incorporated
by reference) are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21B of the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, beliefs, intentions and strategies for the future. These
statements appear in a number of places in this report and include all statements that are not historical statements of fact regarding the intent, belief or current
expectations with respect to, among other things: our financing plans; trends affecting our financial condition or results of operations; our growth strategy and
operating strategy; our competition; our business outside of the United States; our large contracts with significant customers; our ability to protect our intellectual
property rights; excess production capacity or capacity needs; our involvement in litigation; difficult conditions of the economy; and the declaration and payment
of dividends. The words “may,” “would,” “could,” “will,” “expect,” “estimate,” “anticipate,” “believe,” “intend,” “plans” and similar expressions and variations
thereof are intended to identify forward-looking statements. Investors are cautioned that any such forward-looking statements are not guarantees of future
performance and involve risk and uncertainties, many of which are beyond our ability to control, and that actual results may differ materially from those
projected in the forward-looking statements as a result of various factors discussed herein, including those discussed in the section of the Annual Report on
Form 10-K entitled “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and those
factors discussed in detail in our other filings with the Securities and Exchange Commission.
Copyright © 2014 Daktronics, Inc. DD2808021 Rev. 00 063014