DAKT_2013.10.26_Q2_10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 26, 2013
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From to .
Commission File Number: 0-23246
DAKTRONICS, INC.
(Exact name of Registrant as specified in its charter)
|
| | |
South Dakota (State or other jurisdiction of incorporation or organization) | | 46-0306862 (I.R.S. Employer Identification Number) |
|
| | |
201 Daktronics Drive Brookings SD | | 57006 |
(Address of principal executive offices) | | (Zip Code) |
(605) 692-0200
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
| | | |
Large accelerated filer | o | Accelerated filer | x |
Non-accelerated filer | o (Do not check if a smaller reporting company.) | Smaller reporting company | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
The number of shares of the registrant’s common stock outstanding as of November 25, 2013 was 42,936,181.
DAKTRONICS, INC. AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended October 26, 2013
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
DAKTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
|
| | | | | | | | |
| | October 26, 2013 | | April 27, 2013 |
| | (unaudited) | | |
ASSETS | | | | |
CURRENT ASSETS: | | | | |
Cash and cash equivalents | | $ | 52,236 |
| | $ | 40,628 |
|
Restricted cash | | 29 |
| | 48 |
|
Marketable securities | | 25,367 |
| | 24,052 |
|
Accounts receivable, net | | 66,913 |
| | 63,227 |
|
Inventories, net | | 51,308 |
| | 49,045 |
|
Costs and estimated earnings in excess of billings | | 41,847 |
| | 39,355 |
|
Current maturities of long-term receivables | | 5,839 |
| | 4,807 |
|
Prepaid expenses and other assets | | 5,290 |
| | 6,185 |
|
Deferred income taxes | | 12,355 |
| | 12,755 |
|
Income tax receivables | | 2,012 |
| | 46 |
|
Property and equipment and other assets available for sale | | 3,050 |
| | — |
|
Total current assets | | 266,246 |
| | 240,148 |
|
| | | | |
Long-term receivables, less current maturities | | 9,912 |
| | 11,325 |
|
Goodwill | | 4,682 |
| | 3,306 |
|
Intangibles, net | | 1,799 |
| | 1,181 |
|
Advertising rights, net and other assets | | 702 |
| | 772 |
|
Deferred income taxes | | 1,276 |
| | 1,061 |
|
| | 18,371 |
| | 17,645 |
|
PROPERTY AND EQUIPMENT: | | |
| | |
|
Land | | 2,363 |
| | 1,497 |
|
Buildings | | 59,343 |
| | 57,012 |
|
Machinery and equipment | | 68,003 |
| | 65,600 |
|
Office furniture and equipment | | 16,112 |
| | 16,118 |
|
Computer software and hardware | | 42,870 |
| | 41,745 |
|
Equipment held for rental | | 868 |
| | 868 |
|
Demonstration equipment | | 8,238 |
| | 8,400 |
|
Transportation equipment | | 4,378 |
| | 4,026 |
|
| | 202,175 |
| | 195,266 |
|
Less accumulated depreciation | | 139,159 |
| | 133,641 |
|
| | 63,016 |
| | 61,625 |
|
TOTAL ASSETS | | $ | 347,633 |
| | $ | 319,418 |
|
| | | | |
See notes to consolidated financial statements. | | |
| | |
|
DAKTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued) (in thousands, except share data)
|
| | | | | | | | |
| | October 26, 2013 | | April 27, 2013 |
| | (unaudited) | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | |
CURRENT LIABILITIES: | | | | |
|
Accounts payable | | 40,883 |
| | 38,651 |
|
Accrued expenses | | 26,464 |
| | 24,331 |
|
Warranty obligations | | 14,699 |
| | 13,933 |
|
Billings in excess of costs and estimated earnings | | 15,855 |
| | 14,245 |
|
Customer deposits (billed or collected) | | 16,533 |
| | 12,375 |
|
Deferred revenue (billed or collected) | | 8,509 |
| | 9,112 |
|
Current portion of other long-term obligations | | 940 |
| | 356 |
|
Income taxes payable | | 1,297 |
| | 1,689 |
|
Total current liabilities | | 125,180 |
| | 114,692 |
|
| | | | |
Long-term warranty obligations | | 12,048 |
| | 11,213 |
|
Long-term deferred revenue (billed or collected) | | 5,787 |
| | 4,424 |
|
Other long-term obligations, less current maturities | | 3,170 |
| | 843 |
|
Total long-term liabilities | | 21,005 |
| | 16,480 |
|
TOTAL LIABILITIES | | 146,185 |
| | 131,172 |
|
| | | | |
SHAREHOLDERS' EQUITY: | | |
| | |
|
Common stock, no par value, authorized 120,000,000 shares; 42,773,846 and 42,393,456 shares issued at October 26, 2013 and April 27, 2013, respectively | | 40,341 |
| | 37,429 |
|
Additional paid-in capital | | 28,606 |
| | 27,194 |
|
Retained earnings | | 132,325 |
| | 123,750 |
|
Treasury stock, at cost, 19,680 shares | | (9 | ) | | (9 | ) |
Accumulated other comprehensive income (loss) | | 185 |
| | (118 | ) |
TOTAL SHAREHOLDERS' EQUITY | | 201,448 |
| | 188,246 |
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | | $ | 347,633 |
| | $ | 319,418 |
|
| | | | |
See notes to consolidated financial statements. | | |
| | |
|
DAKTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| October 26, 2013 | | October 27, 2012 | | October 26, 2013 | | October 27, 2012 |
Net sales | $ | 161,639 |
| | $ | 149,871 |
| | $ | 300,361 |
| | $ | 282,790 |
|
Cost of goods sold | 118,274 |
| | 107,519 |
| | 221,494 |
| | 204,048 |
|
Gross profit | 43,365 |
| | 42,352 |
| | 78,867 |
| | 78,742 |
|
| | | | | | | |
Operating expenses: | |
| | |
| | |
| | |
|
Selling expense | 13,304 |
| | 12,796 |
| | 26,922 |
| | 25,876 |
|
General and administrative | 6,804 |
| | 6,850 |
| | 14,103 |
| | 13,431 |
|
Product design and development | 5,692 |
| | 5,845 |
| | 11,681 |
| | 11,866 |
|
| 25,800 |
| | 25,491 |
| | 52,706 |
| | 51,173 |
|
Operating income | 17,565 |
| | 16,861 |
| | 26,161 |
| | 27,569 |
|
| | | | | | | |
Nonoperating income (expense): | |
| | |
| | |
| | |
|
Interest income | 312 |
| | 348 |
| | 655 |
| | 779 |
|
Interest expense | (12 | ) | | (36 | ) | | (127 | ) | | (123 | ) |
Other income (expense), net | 278 |
| | 150 |
| | (114 | ) | | (30 | ) |
| | | | | | | |
Income before income taxes | 18,143 |
| | 17,323 |
| | 26,575 |
| | 28,195 |
|
Income tax expense | 6,353 |
| | 5,776 |
| | 9,066 |
| | 9,970 |
|
Net income | $ | 11,790 |
| | $ | 11,547 |
| | $ | 17,509 |
| | $ | 18,225 |
|
| | | | | | | |
Weighted average shares outstanding: | |
| | |
| | |
| | |
|
Basic | 42,709 |
| | 42,163 |
| | 42,639 |
| | 42,138 |
|
Diluted | 43,002 |
| | 42,316 |
| | 43,023 |
| | 42,287 |
|
| | | | | | | |
Earnings per share: | |
| | |
| | |
| | |
|
Basic | $ | 0.28 |
| | $ | 0.27 |
| | $ | 0.41 |
| | $ | 0.43 |
|
Diluted | $ | 0.27 |
| | $ | 0.27 |
| | $ | 0.41 |
| | $ | 0.43 |
|
| | | | | | | |
Cash dividend declared per share | $ | 0.090 |
| | $ | — |
| | $ | 0.210 |
| | $ | 0.115 |
|
| | | | | | | |
See notes to consolidated financial statements. | | | |
| | |
| | |
|
DAKTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) (unaudited)
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | October 26, 2013 | | October 27, 2012 | | October 26, 2013 | | October 27, 2012 |
| | | | | | | | |
Net income | | $ | 11,790 |
| | $ | 11,547 |
| | $ | 17,509 |
| | $ | 18,225 |
|
| | | | | | | | |
Other comprehensive income (loss): | | | | | | | | |
Cumulative translation adjustments | | 290 |
| | 219 |
| | 323 |
| | (8 | ) |
Unrealized gain (loss) on available-for-sale securities, net of tax | | 11 |
| | (12 | ) | | (20 | ) | | (38 | ) |
Total other comprehensive income (loss), net of tax | | 301 |
| | 207 |
| | 303 |
| | (46 | ) |
Comprehensive income | | $ | 12,091 |
| | $ | 11,754 |
| | $ | 17,812 |
| | $ | 18,179 |
|
| | | | | | | | |
See notes to consolidated financial statements. | | | | | | | | |
DAKTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
|
| | | | | | | |
| Six Months Ended |
| October 26, 2013 | | October 27, 2012 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net income | $ | 17,509 |
| | $ | 18,225 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
|
Depreciation | 7,190 |
| | 7,717 |
|
Amortization | 181 |
| | 114 |
|
Amortization of premium/discount on marketable securities | 116 |
| | 93 |
|
Gain on sale of property and equipment | (76 | ) | | (11 | ) |
Share-based compensation | 1,456 |
| | 1,654 |
|
Excess tax benefits from share-based compensation | (19 | ) | | (13 | ) |
Provision for doubtful accounts | 364 |
| | (187 | ) |
Deferred income taxes, net | 186 |
| | (258 | ) |
Change in operating assets and liabilities | 3,719 |
| | 6,708 |
|
Net cash provided by operating activities | 30,626 |
| | 34,042 |
|
| | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | |
|
Purchases of property and equipment | (6,285 | ) | | (4,331 | ) |
Proceeds from sale of property and equipment | 133 |
| | 119 |
|
Purchases of marketable securities | (4,422 | ) | | (6,828 | ) |
Proceeds from sales or maturities of marketable securities | 2,958 |
| | 5,992 |
|
Acquisition, net of cash acquired | (1,298 | ) | | — |
|
Net cash used in investing activities | (8,914 | ) | | (5,048 | ) |
| | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | |
|
Payments on notes payable | — |
| | (982 | ) |
Proceeds from exercise of stock options | 2,145 |
| | 439 |
|
Excess tax benefits from share-based compensation | 19 |
| | 13 |
|
Principal payments on long-term obligations | (3,640 | ) | | — |
|
Dividends paid | (8,934 | ) | | (4,832 | ) |
Net cash used in financing activities | (10,410 | ) | | (5,362 | ) |
| | | |
EFFECT OF EXCHANGE RATE CHANGES ON CASH | 306 |
| | 39 |
|
NET INCREASE IN CASH AND CASH EQUIVALENTS | 11,608 |
| | 23,671 |
|
| | | |
CASH AND CASH EQUIVALENTS: | |
| | |
|
Beginning of period | 40,628 |
| | 29,423 |
|
End of period | $ | 52,236 |
| | $ | 53,094 |
|
| | | |
Supplemental disclosures of cash flow information: | | | |
Cash payments for: | |
| | |
|
Interest | $ | 47 |
| | $ | 149 |
|
Income taxes, net of refunds | 10,832 |
| | 1,783 |
|
| | | |
Supplemental schedule of non-cash investing and financing activities: | |
| | |
|
Demonstration equipment transferred to inventory | 259 |
| | 367 |
|
Purchases of property and equipment included in accounts payable | 699 |
| | 706 |
|
Contributions of common stock under the employee stock purchase plan | 766 |
| | 732 |
|
| | | |
See notes to consolidated financial statements. | |
| | |
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
Note 1. Basis of Presentation and Summary of Critical Accounting Policies
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to fairly present our financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions affecting the reported amounts therein. Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from those estimates.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The balance sheet at April 27, 2013 has been derived from the audited financial statements at that date, but it does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with our financial statements and notes thereto for the year ended April 27, 2013, which are contained in our Annual Report on Form 10-K previously filed with the Securities and Exchange Commission. The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-02: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"), 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 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. The Company adopted ASU 2013-02 in the first quarter of fiscal 2014, and there was no impact to the Company's financial statements.
Note 2. Earnings Per Share ("EPS")
Basic EPS is computed by dividing income attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution if securities or other obligations to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock sharing in our earnings.
The following is a reconciliation of the income and common share amounts used in the calculation of basic and diluted EPS for the three and six months ended October 26, 2013 and October 27, 2012:
|
| | | | | | | | | | |
| Net income | | Shares | | Per share income |
For the three months ended October 26, 2013: | | | | | |
Basic earnings per share | $ | 11,790 |
| | 42,709 |
| | $ | 0.28 |
|
Dilution associated with stock compensation plans | — |
| | 293 |
| | (0.01 | ) |
Diluted earnings per share | $ | 11,790 |
| | 43,002 |
| | $ | 0.27 |
|
For the three months ended October 27, 2012: | | | | | |
Basic earnings per share | $ | 11,547 |
| | 42,163 |
| | $ | 0.27 |
|
Dilution associated with stock compensation plans | — |
| | 153 |
| | — |
|
Diluted earnings per share | $ | 11,547 |
| | 42,316 |
| | $ | 0.27 |
|
For the six months ended October 26, 2013: | | | | | |
Basic earnings per share | $ | 17,509 |
| | 42,639 |
| | $ | 0.41 |
|
Dilution associated with stock compensation plans | — |
| | 384 |
| | — |
|
Diluted earnings per share | $ | 17,509 |
| | 43,023 |
| | $ | 0.41 |
|
For the six months ended October 27, 2012: | | | | | |
Basic earnings per share | $ | 18,225 |
| | 42,138 |
| | $ | 0.43 |
|
Dilution associated with stock compensation plans | — |
| | 149 |
| | — |
|
Diluted earnings per share | $ | 18,225 |
| | 42,287 |
| | $ | 0.43 |
|
Options outstanding to purchase 2,356 shares of common stock with a weighted average exercise price of $15.66 for the three months ended October 26, 2013 and 2,467 shares of common stock with a weighted average exercise price of $15.16 for the three months ended October 27, 2012 were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.
Options outstanding to purchase 2,312 shares of common stock with a weighted average exercise price of $15.85 for the six months ended October 26, 2013 and 3,554 shares of common stock with a weighted average exercise price of $13.15 for the six months ended October 27, 2012 were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.
Note 3. Segment Disclosure
We have organized our business into five segments which meet the definition of reportable segments under Accounting Standards Codification ("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 of our Annual Report on Form 10-K. 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.
The following table sets forth certain financial information for each of our five operating segments for the periods indicated:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| October 26, 2013 | | October 27, 2012 | | October 26, 2013 | | October 27, 2012 |
Net sales: | | | | | | | |
Commercial | $ | 44,973 |
| | $ | 39,773 |
| | $ | 78,674 |
| | $ | 78,130 |
|
Live Events | 58,175 |
| | 50,604 |
| | 113,252 |
| | 95,113 |
|
Schools & Theatres | 18,823 |
| | 21,688 |
| | 36,740 |
| | 39,861 |
|
Transportation | 15,238 |
| | 17,571 |
| | 28,280 |
| | 34,167 |
|
International | 24,430 |
| | 20,235 |
| | 43,415 |
| | 35,519 |
|
| 161,639 |
| | 149,871 |
| | 300,361 |
| | 282,790 |
|
| | | | | | | |
Contribution margin: | | | | | | | |
Commercial | 10,179 |
| | 8,566 |
| | 16,123 |
| | 14,768 |
|
Live Events | 10,287 |
| | 8,073 |
| | 18,629 |
| | 15,149 |
|
Schools & Theatres | 2,355 |
| | 3,434 |
| | 5,503 |
| | 6,011 |
|
Transportation | 4,760 |
| | 6,025 |
| | 6,905 |
| | 12,004 |
|
International | 2,480 |
| | 3,458 |
| | 4,785 |
| | 4,934 |
|
| 30,061 |
| | 29,556 |
| | 51,945 |
| | 52,866 |
|
| | | | | | | |
Non-allocated operating expenses: | | | | | | | |
General and administrative | 6,804 |
| | 6,850 |
| | 14,103 |
| | 13,431 |
|
Product design and development | 5,692 |
| | 5,845 |
| | 11,681 |
| | 11,866 |
|
Operating income | 17,565 |
| | 16,861 |
| | 26,161 |
| | 27,569 |
|
| | | | | | | |
Nonoperating income (expense): | | | | | | | |
Interest income | 312 |
| | 348 |
| | 655 |
| | 779 |
|
Interest expense | (12 | ) | | (36 | ) | | (127 | ) | | (123 | ) |
Other income (expense), net | 278 |
| | 150 |
| | (114 | ) | | (30 | ) |
| | | | | | | |
Income before income taxes | 18,143 |
| | 17,323 |
| | 26,575 |
| | 28,195 |
|
Income tax expense | 6,353 |
| | 5,776 |
| | 9,066 |
| | 9,970 |
|
Net income | $ | 11,790 |
| | $ | 11,547 |
| | $ | 17,509 |
| | $ | 18,225 |
|
| | | | | | | |
Depreciation and amortization: | | | | | | | |
Commercial | $ | 1,065 |
| | $ | 1,213 |
| | $ | 2,117 |
| | $ | 2,493 |
|
Live Events | 1,115 |
| | 1,161 |
| | 2,262 |
| | 2,265 |
|
Schools & Theatres | 529 |
| | 562 |
| | 1,075 |
| | 1,138 |
|
Transportation | 278 |
| | 345 |
| | 564 |
| | 669 |
|
International | 183 |
| | 222 |
| | 419 |
| | 359 |
|
Unallocated corporate depreciation | 379 |
| | 452 |
| | 934 |
| | 907 |
|
| $ | 3,549 |
| | $ | 3,955 |
| | $ | 7,371 |
| | $ | 7,831 |
|
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:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| October 26, 2013 | | October 27, 2012 | | October 26, 2013 | | October 27, 2012 |
Net sales: | | | | | | | |
United States | $ | 132,950 |
| | $ | 125,835 |
| | $ | 248,402 |
| | $ | 241,494 |
|
Outside U.S. | 28,689 |
| | 24,036 |
| | 51,959 |
| | 41,296 |
|
| $ | 161,639 |
| | $ | 149,871 |
| | $ | 300,361 |
| | $ | 282,790 |
|
| | | | | | | |
| | | | | | | |
| October 26, 2013 | | April 27, 2013 | | | | |
Long-lived assets: | | | | | | |
|
|
United States | $ | 58,730 |
| | $ | 60,060 |
| | | |
|
|
Outside U.S. | 4,286 |
| | 1,565 |
| | | | |
| $ | 63,016 |
| | $ | 61,625 |
| | | |
|
|
The increase in long-lived assets is due to a business combination as described in Note 5. 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 4. Marketable Securities
We have a cash management program which provides for the investment of cash balances not used in current operations. We classify our investments in marketable securities as available-for-sale in accordance with the provisions of ASC 320, Investments – Debt and Equity Securities. Marketable securities classified as available-for-sale are reported at fair value with unrealized gains or losses, net of tax, reported in accumulated other comprehensive 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 October 26, 2013, 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 October 26, 2013 and April 27, 2013, our available-for-sale securities consisted of the following:
|
| | | | | | | | | | | | | | | |
| Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
Balance as of October 26, 2013: | | | | | | | |
Certificates of deposit | $ | 5,667 |
| | $ | — |
| | $ | — |
| | $ | 5,667 |
|
U.S. Government securities | 5,000 |
| | 5 |
| | — |
| | 5,005 |
|
U.S. Government sponsored entities | 5,051 |
| | — |
| | — |
| | 5,051 |
|
Municipal obligations | 9,640 |
| | 4 |
| | — |
| | 9,644 |
|
| $ | 25,358 |
| | $ | 9 |
| | $ | — |
| | $ | 25,367 |
|
Balance as of April 27, 2013: | |
| | |
| | |
| | |
|
Certificates of deposit | $ | 4,677 |
| | $ | — |
| | $ | — |
| | $ | 4,677 |
|
U.S. Government securities | 4,999 |
| | 19 |
| | — |
| | 5,018 |
|
U.S. Government sponsored entities | 4,752 |
| | — |
| | — |
| | 4,752 |
|
Municipal obligations | 9,596 |
| | 9 |
| | — |
| | 9,605 |
|
| $ | 24,024 |
| | $ | 28 |
| | $ | — |
| | $ | 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)” and into earnings based on the specific identification method. In the six months ended October 26, 2013 and October 27, 2012, the reclassifications from accumulated other comprehensive income (loss) to net assets were immaterial. Realized gains and losses on sales or maturities of investments were immaterial in the six months ended October 26, 2013 and October 27, 2012.
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 October 26, 2013 were as follows:
|
| | | | | | | | | | | |
| Less than 12 months | | Greater than 12 months | | Total |
Certificates of deposit | $ | 3,696 |
| | $ | 1,971 |
| | $ | 5,667 |
|
U.S. Government securities | 3,505 |
| | 1,500 |
| | 5,005 |
|
U.S. Government sponsored entities | — |
| | 5,051 |
| | 5,051 |
|
Municipal obligations | 4,598 |
| | 5,046 |
| | 9,644 |
|
| $ | 11,799 |
| | $ | 13,568 |
| | $ | 25,367 |
|
Note 5. Business Combination
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 adopt digital technology and another plant to manufacture digital advertising displays. This acquisition was funded with cash on hand and a note payable over five years.
During the first quarter of fiscal 2014, the preliminary fair value measurements of assets acquired and liabilities assumed, as of the acquisition date, were completed. The excess of the purchase price over the net tangible and intangible assets was recorded as goodwill of $1,321. Included in the purchase price allocation was acquired identifiable intangibles valued at $1,151 representing trade names with a useful life of 20 years and a customer list valued at $615 with a useful life of nine years. The purchase price allocation will be completed during fiscal 2014.
Note 6. Goodwill
The changes in the carrying amount of goodwill related to each reportable segment for the six months ended October 26, 2013 were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Live Events | | Commercial | | Transportation | | International | | Total |
Balance as of April 27, 2013: | $ | 2,417 |
| | $ | 725 |
| | $ | 164 |
| | $ | — |
| | $ | 3,306 |
|
Acquisition, net of cash acquired | — |
| | — |
| | — |
| | 1,321 |
| | 1,321 |
|
Foreign currency translation | (8 | ) | | — |
| | (8 | ) | | 71 |
| | 55 |
|
Balance as of October 26, 2013: | $ | 2,409 |
| | $ | 725 |
| | $ | 156 |
| | $ | 1,392 |
| | $ | 4,682 |
|
We perform an analysis of goodwill on an annual basis. We last performed our annual analysis based on the goodwill amount as of the first business day of our third quarter in fiscal 2013, which was October 28, 2012. The result of the analysis indicated no goodwill impairment existed as of that date. We are presently in the process of completing this annual analysis based on the goodwill amount as of the first business day of our third quarter.
Note 7. Inventories
Inventories consisted of the following:
|
| | | | | | | |
| October 26, 2013 | | April 27, 2013 |
Raw materials | $ | 22,840 |
| | $ | 20,979 |
|
Work-in-process | 7,049 |
| | 8,523 |
|
Finished goods | 21,419 |
| | 19,543 |
|
| $ | 51,308 |
| | $ | 49,045 |
|
Note 8. Receivables
Accounts receivable are reported net of an allowance for doubtful accounts of $3,181 and $2,729 at October 26, 2013 and April 27, 2013, respectively.
In connection with certain sales transactions, we have entered into sales contracts with installment payments exceeding six months and sales-type leases. The present value of these contracts and leases is recorded as a receivable as the revenue is recognized in accordance with generally accepted accounting principles, and profit is recognized to the extent the present value is in excess of cost. We generally retain a security interest in the equipment or in the cash flow generated by the equipment until the contract is paid. The present value of long-term contracts and lease receivables, including accrued interest and current maturities, was $15,751 and $16,132 as of October 26, 2013 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 $17,971 as of October 26, 2013 and $18,731 as of April 27, 2013. Included in accounts receivable as of October 26, 2013 and April 27, 2013 was $2,149 and $803, respectively, of retainage on construction-type contracts, all of which is expected to be collected within one year.
Note 9. 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 that 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.
As of October 26, 2013, we did not believe there was a reasonable possibility any material loss for these various claims or legal actions, including reviews, inspections or other legal proceedings, if any, had been 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 $1,285 as of October 26, 2013 and April 27, 2013. We have recognized a guarantee liability in accrued expenses for the amount of $185 in accordance with the provisions of ASC 460, Guarantees, 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. 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 six months ended October 26, 2013 consisted of the following:
|
| | | | | |
| | | Amount |
Beginning accrued warranty costs | | | $ | 25,146 |
|
Warranties issued during the period | | | 5,644 |
|
Settlements made during the period | | | (8,137 | ) |
Changes in accrued warranty costs for pre-existing warranties during the period, including expirations | | | 4,094 |
|
Ending accrued warranty costs | | | $ | 26,747 |
|
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 October 26, 2013, we had outstanding letters of credit and surety bonds in the amount of $5,293 and $11,462, 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 $1,388 and $1,450 for the six months ended October 26, 2013 and October 27, 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 October 26, 2013:
|
| | | | |
Fiscal years ending | | Amount |
2014 | | $ | 2,169 |
|
2015 | | 2,266 |
|
2016 | | 1,911 |
|
2017 | | 987 |
|
2018 | | 187 |
|
Thereafter | | 27 |
|
| | $ | 7,547 |
|
Purchase commitments: From time to time, we commit to purchase inventory, advertising, and various other products and services over periods extending beyond one year. As of October 26, 2013, we were obligated under the following conditional and unconditional purchase commitments, which included $1,000 in conditional purchase commitments.
|
| | | | |
Fiscal years ending | | Amount |
2014 | | $ | 1,056 |
|
2015 | | 514 |
|
2016 | | 377 |
|
2017 | | 250 |
|
2018 | | 250 |
|
Thereafter | | — |
|
| | $ | 2,447 |
|
Note 10. 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 Internal Revenue Service on prior years and the expiration of statutes of limitations, fiscal years 2010, 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.
As of October 26, 2013, we had $492 of unrecognized tax benefits which would affect our effective tax rate if recognized.
Note 11. Fair Value Measurement
ASC 820, Fair Value Measurements and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer the liability (an exit price) in an orderly transaction between market participants 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 that may be utilized when measuring fair value.
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than quoted prices included within Level 1 for the assets or liabilities, either directly or indirectly (for example, quoted market prices for similar assets and liabilities in active markets or quoted market prices for identical assets or liabilities in markets not considered to be active, inputs other than quoted prices that are observable for the asset or liability, or market-corroborated input.)
Level 3 - Unobservable inputs supported by little or no market activity based on our own assumptions used to measure assets and liabilities.
The fair values for fixed-rate contracts receivable are estimated using a discounted cash flow analysis based on interest rates currently being offered for contracts with similar terms to customers with similar credit quality. The carrying amounts reported on our consolidated balance sheets for contracts receivable approximate fair value and have been categorized as a Level 2 fair value measurement. Fair values for fixed-rate long-term marketing obligations are estimated using a discounted cash flow calculation applying interest rates currently being offered for debt with similar terms and underlying collateral. The total carrying value of long-term marketing obligations as reported on our consolidated balance sheets within other long-term obligations approximates fair value and has been categorized as a Level 2 fair value measurement.
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 October 26, 2013 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.
|
| | | | | | | | | | | |
| Fair Value Measurements |
| Level 1 | | Level 2 | | Total |
Balance as of October 26, 2013: | | | | | |
Cash and cash equivalents | $ | 52,236 |
| | $ | — |
| | $ | 52,236 |
|
Restricted cash | 29 |
| | — |
| | 29 |
|
Available-for-sale securities: | |
| | |
| | |
Certificates of deposit | — |
| | 5,667 |
| | 5,667 |
|
U.S. Government securities | 5,005 |
| | — |
| | 5,005 |
|
U.S. Government sponsored entities | — |
| | 5,051 |
| | 5,051 |
|
Municipal obligations | — |
| | 9,644 |
| | 9,644 |
|
Derivatives - currency forward contracts | — |
| | (243 | ) | | (243 | ) |
| $ | 57,270 |
| | $ | 20,119 |
| | $ | 77,389 |
|
Balance as of April 27, 2013: | |
| | |
| | |
|
Cash and cash equivalents | $ | 40,628 |
| | $ | — |
| | $ | 40,628 |
|
Restricted cash | 48 |
| | — |
| | 48 |
|
Available-for-sale securities: | |
| | |
| | |
Certificates of deposit | — |
| | 4,677 |
| | 4,677 |
|
U.S. Government securities | 5,018 |
| | — |
| | 5,018 |
|
U.S. Government sponsored entities | — |
| | 4,752 |
| | 4,752 |
|
Municipal obligations | — |
| | 9,605 |
| | 9,605 |
|
Derivatives - currency forward contracts | — |
| | 7 |
| | 7 |
|
| $ | 45,694 |
| | $ | 19,041 |
| | $ | 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: Consists of Fannie Mae and Federal Home Loan Bank investment grade debt securities trading with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis. The fair value of these securities was measured based on valuations observed in less active markets than Level 1 investments. The contractual maturities of these investments vary from one month to three years.
Municipal obligations: Consists 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 one month 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 valuation from a third-party bank. See Note 12 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 to value the assets and liabilities for the business combination involving OPEN, which occurred during the first three months of fiscal 2014. See Note 5 for more information on the business combination. We did not make any material business combinations or recognize any significant impairment losses during fiscal 2013.
Note 12. 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 October 26, 2013 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 income (expense), net.
The foreign currency exchange contracts in aggregated notional amounts in place to exchange United States Dollars at October 26, 2013 and April 27, 2013 were as follows:
|
| | | | | | | | | | | |
| October 26, 2013 | | April 27, 2013 |
| U.S. Dollars | | Foreign Currency | | U.S. Dollars | | Foreign Currency |
Foreign Currency Exchange Forward Contracts: | | | | | | | |
U.S. Dollars/Australian Dollars | 5,339 |
| | 5,751 |
| | 2,944 |
| | 2,873 |
|
U.S. Dollars/Canadian Dollars | 960 |
| | 1,012 |
| | 492 |
| | 492 |
|
U.S. Dollars/British Pounds | 1,644 |
| | 1,056 |
| | 1,554 |
| | 1,005 |
|
U.S. Dollars/Euros | 837 |
| | 633 |
| | 153 |
| | 114 |
|
As of October 26, 2013 and April 27, 2013, there was a net liability and asset of $243 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 13. Subsequent Events
On November 21, 2013, our Board of Directors declared a dividend of $0.09 per share payable on December 20, 2013 to shareholders of record of our common stock on December 6, 2013.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (including exhibits and any information incorporated by reference herein) contains both historical and forward-looking statements that involve risks, uncertainties and assumptions. The statements contained in this Report that are not purely historical are forward-looking statements that are subject to the safe harbors created under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, beliefs, intentions and strategies for the future. These statements appear in a number of places in this Report and include all statements that are not historical statements of fact regarding our intent, belief or current expectations with respect to, among other things: (i) our financing plans; (ii) trends affecting our financial condition or results of operations; (iii) our growth strategy and operating strategy; (iv) the declaration and payment of dividends; (v) the timing and magnitude of future contracts; (vi) parts shortages and longer lead times; (vii) fluctuations in margins; and (viii) 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 risks and uncertainties, many of which are beyond our ability to control, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors discussed herein, including those discussed in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended April 27, 2013 in the section entitled “Item 1A. Risk Factors.”
The following discussion highlights the principal factors affecting changes in financial condition and results of operations. This discussion should be read in conjunction with the accompanying Consolidated Financial Statements and Notes to the Consolidated Financial Statements.
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 affecting the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate our estimates, including those related to estimated total costs on long-term construction-type contracts, estimated costs to be incurred for product warranties and extended maintenance contracts, bad debts, excess and obsolete inventory, income taxes, stock-based compensation and contingencies. Our estimates are based on historical experience and on various other assumptions we believe 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 under different assumptions or conditions.
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, 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 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.
For a summary of recently issued accounting pronouncements and the effects of those pronouncements on our financial results, refer to Note 1 of the Notes to the Consolidated Financial Statements, included elsewhere in this Report.
GENERAL
Our business, especially the large video display business in all of our business units, is very competitive, and generally our margins on these large video display contracts are similar across the business units over the long-term. There are, however, differences in the short term among the business units, which are discussed in the following analysis.
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, among other types of applications. The demand in this area is driven by retailers' and other types of commercial 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 increasing 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 for these 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. |
| |
• | 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 more athletic venues, 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 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.
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 downturns, the sports business also can be severely impacted. Our Commercial and International business units are highly dependent on economic conditions in general.
The cost and selling prices of our products have decreased over time and are expected to continue to decrease in the future. As a result, each year we must sell more product to generate the same or greater level of net sales as in previous fiscal years. This price decline has been significant as a result of increased competition across all business units.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED OCTOBER 26, 2013 AND OCTOBER 27, 2012
Net Sales
|
| | | | | | | | | | |
| Three Months Ended |
(in thousands) | October 26, 2013 | | October 27, 2012 | | Percent Change |
Net Sales: | | | | | |
Commercial | $ | 44,973 |
| | $ | 39,773 |
| | 13.1 | % |
Live Events | 58,175 |
| | 50,604 |
| | 15.0 |
|
Schools & Theatres | 18,823 |
| | 21,688 |
| | (13.2 | ) |
Transportation | 15,238 |
| | 17,571 |
| | (13.3 | ) |
International | 24,430 |
| | 20,235 |
| | 20.7 |
|
| $ | 161,639 |
| | $ | 149,871 |
| | 7.9 | % |
Orders: | |
| | |
| | |
|
Commercial | $ | 38,147 |
| | $ | 32,035 |
| | 19.1 | % |
Live Events | 36,160 |
| | 34,195 |
| | 5.7 |
|
Schools & Theatres | 14,142 |
| | 14,465 |
| | (2.2 | ) |
Transportation | 11,708 |
| | 7,496 |
| | 56.2 |
|
International | 26,797 |
| | 22,141 |
| | 21.0 |
|
| $ | 126,954 |
| | $ | 110,332 |
| | 15.1 | % |
Commercial: The increase in net sales for the three months ended October 26, 2013 compared to the same period one year ago was the net result of:
| |
• | An increase of $7.5 million in sales of large custom video contracts due to three large orders for projects totaling over $10.0 million booked during the first and second quarters of fiscal 2014. The level of large custom contract orders and sales in this niche is subject to volatility. |
| |
• | A decrease of $2.6 million in our billboard niche due to the $9.5 million decline in order volume in the first quarter of fiscal 2014. Lower order levels were primarily the result of the volatility in the timing of orders. Orders of $11.4 million this quarter were a slight increase over the second quarter of fiscal 2013. |
The increase in orders for the three months ended October 26, 2013 compared to the same period one year ago was the result of:
| |
• | An increase of $4.1 million in orders for large custom video projects during the three months ended October 26, 2013 compared to the same period in fiscal 2013. During the second quarter of fiscal 2014, we booked three video system orders for a combined total of $4.0 million. |
| |
• | An increase of $1.1 million in orders related to extended service agreements, which is mainly due to our national accounts customers and the timing of renewals for extended service agreements, which accounted for $0.9 million of increase compared to the second quarter of fiscal 2013. |
| |
• | An increase of $0.7 million in orders for billboard customers due to the volatility in the timing of orders. |
Live Events: The increase in net sales for the three months ended October 26, 2013 compared to the same period one year ago was primarily the net result of:
| |
• | A net increase of $4.0 million in sales related to video displays for multi-sport facilities and NBA arenas for orders booked in previous quarters. |
| |
• | An increase of $4.5 million in sales related to NFL stadiums for significant orders booked during the first quarter of fiscal 2014. |
Orders increased for the three months ended October 26, 2013 compared to the same period one year ago as the current period included five contracts for upgrade projects totaling approximately $9.5 million.
Schools and Theatres: The decrease in net sales for the three months ended October 26, 2013 compared to the same period one year ago was primarily the result of lower order volume and selling prices during the first quarter of fiscal 2014. This was primarily the result of the level of orders being impacted by the timing of purchasing decisions influenced by economic factors and the size of displays or the average selling price of the displays being lower than in the previous year.
Orders for the three months ended October 26, 2013 compared to the same period one year ago remained flat as the increase in standard orders was offset by a decrease in orders for large projects. This decrease is mainly due to a reduction in display size or a reduction in average selling price than in the same quarter in the previous year.
Transportation: The decrease in net sales for the three months ended October 26, 2013 compared to the same period one year ago was primarily the result of a net reduction of $5.0 million in sales recognized during the second quarter of fiscal 2014 compared to same period one year ago for two significant transit projects. The reduction was partially offset by two new transit projects with $3.4 million in sales recognized during the second quarter of fiscal 2014.
Orders for the three months ended October 26, 2013 compared to the same period one year ago increased primarily due to a $2.5 million order for our new full color Vanguard products introduced at the beginning of this fiscal year. We also saw an increase in the volume of orders compared to the second quarter of fiscal 2013, as the prior year had an unusually low level of orders booked due to some significant orders that were pushed back until the third quarter of fiscal 2013.
International: The increase in net sales in our International business unit for the three months ended October 26, 2013 compared to the same period one year ago is the net result of a higher beginning backlog by $7.9 million for the second quarter of fiscal 2014 compared to the same period of fiscal 2013, the timing of orders, and progress on large projects.
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 $1.0 million of net sales for the quarter.
The increase in orders for the three months ended October 26, 2013 compared to the same period one year ago was mainly due to the timing of orders, continued growth in the Asia Pacific region, and the increasing acceptance of new products in certain international markets.
Backlog
The product order backlog as of October 26, 2013 was $132 million as compared to $128 million as of October 27, 2012 and $167 million at the end of the first quarter of fiscal 2014. Historically, our backlog varies due to the seasonality of our business, the timing of large orders, and customer delivery schedules for these orders. The backlog increased from one year ago in our Commercial, Live Events and International business units and decreased in our Schools and Theatres and Transportation 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 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
|
| | | | | | | | | | | | | | | |
| Three Months Ended |
| October 26, 2013 | | | | October 27, 2012 |
| Amount | | As a Percent of Net Sales | | | | Amount | | As a Percent of Net Sales |
(in thousands) |
Commercial | $ | 13,992 |
| | 31.1 | % | |
| | $ | 12,038 |
| | 30.3 | % |
Live Events | 13,277 |
| | 22.8 |
| |
| | 11,421 |
| | 22.6 |
|
Schools & Theatres | 4,927 |
| | 26.2 |
| |
| | 6,022 |
| | 27.8 |
|
Transportation | 5,616 |
| | 36.9 |
| |
| | 6,881 |
| | 39.2 |
|
International | 5,553 |
| | 22.7 |
| |
| | 5,990 |
| | 29.6 |
|
| $ | 43,365 |
| | 26.8 | % | |
| | $ | 42,352 |
| | 28.3 | % |
The decrease in our gross profit percentage for the three months ended October 26, 2013 compared to the same period one year ago was the net result of the following:
Commercial: The gross profit percent increase for the three months ended October 26, 2013 compared to the same period one year ago was the result of overall gross margin improvement on product sales mix, which was partially offset by higher warranty costs as a percentage of net sales.
Live Events: The gross profit percent increased slightly for the three months ended October 26, 2013 compared to the same period one year ago, which was the net result of improved margins related to better manufacturing utilization with a higher level of sales along with a decrease in margins related to changes in product sales mix, as larger contracts normally have lower margins due to increased competition.
Schools and Theatres: The gross profit percent decrease for the three months ended October 26, 2013 compared to the same period one year ago was the result of the sales mix and lower manufacturing utilization due to lower sales volumes.
Transportation: The gross profit percent decrease for the three months ended October 26, 2013 compared to the same period one year ago was primarily due to lower margins in large custom projects and lower manufacturing utilization, which were offset by decreased expenses in warranty and services.
International: The gross profit percent decrease for the three months ended October 26, 2013 compared to the same period one year ago was primarily the result of decreased margins on large video display projects and a higher level of manufacturing costs related to our new manufacturing plant in Belgium.
Selling Expense
|
| | | | | | | | | | | | | | | | |
| Three Months Ended |
| October 26, 2013 | | | | October 27, 2012 |
| Amount | | As a Percent of Net Sales | | Percent Change | | Amount | | As a Percent of Net Sales |
(in thousands) | | | | |
Commercial | $ | 3,812 |
| | 8.5 | % | | 9.8 | % | | $ | 3,472 |
| | 8.7 | % |
Live Events | 2,990 |
| | 5.1 |
| | (10.7 | ) | | 3,348 |
| | 6.6 |
|
Schools & Theatres | 2,572 |
| | 13.7 |
| | (0.7 | ) | | 2,589 |
| | 11.9 |
|
Transportation | 856 |
| | 5.6 |
| | 0.1 |
| | 855 |
| | 4.9 |
|
International | 3,074 |
| | 12.6 |
| | 21.4 |
| | 2,532 |
| | 12.5 |
|
| $ | 13,304 |
| | 8.2 | % | | 4.0 | % | | $ | 12,796 |
| | 8.5 | % |
Selling expenses consist primarily of salaries, other employee-related costs, travel and entertainment expenses, facilities-related costs for sales and service offices, bad debt expenses, third-party commissions and expenditures for marketing efforts, including the costs of collateral materials, conventions and trade shows, product demos, and supplies.
Selling expenses in our Schools and Theatres and Transportation business units remained relatively flat in the three months ended October 26, 2013 compared to the same period one year ago due to overall cost management initiatives to increase profitability.
Selling expense in our Commercial and International business units increased $0.4 million and $0.5 million, respectively, in the second quarter of fiscal 2014 compared to the same quarter a year ago which mainly related to changes in payroll, travel and entertainment, and third-party commissions expenses. Increases in payroll and travel and entertainment primarily relate to international expansion. We use third parties in various locations around the world to expand market opportunities, and third-party commission expenses will occur only if the third party is successful in procuring sales. These increases in expenses were partially offset by a decrease in selling expense in our Live Events business unit of $0.4 million primarily due to reductions in convention expenses.
Other Operating Expenses
|
| | | | | | | | | | | | | | | | |
| Three Months Ended |
| October 26, 2013 | | | | October 27, 2012 |
| Amount | | As a Percent of Net Sales | | Percent Change | | Amount | | As a Percent of Net Sales |
(in thousands) |
General and administrative | $ | 6,804 |
| | 4.2 | % | | (0.7 | )% | | $ | 6,850 |
| | 4.6 | % |
Product design and development | $ | 5,692 |
| | 3.5 | % | | (2.6 | )% | | $ | 5,845 |
| | 3.9 | % |
General and administrative expenses consist primarily of salaries, other employee-related costs, professional fees, shareholder relations costs, facilities and equipment-related costs for administrative departments, training costs, amortization of intangibles and the costs of supplies. General and administrative expenses in the second quarter of fiscal 2014 as compared to the same period one year ago remained relatively flat.
Product design and development expenses consist primarily of salaries, other employee-related costs, facilities cost and equipment-related costs and supplies. Product development investments in the near term are focused on video technology with a range of pixel pitches for outdoor applications using LED surface mount technology, which offers improved performance at a lower cost point over our current offerings. In addition, we continue to focus on various other products to standardize display components and control systems for both single site displays and networked displays.
Our costs for product development represent an allocated amount of costs based on time charges, materials costs and the overhead of our engineering departments. Generally, a significant portion of our engineering time is spent on product development, while the rest is allocated to large contract work and included in cost of goods sold. Product development expenses in the second quarter of fiscal 2014 as compared to the same period one year ago decreased slightly due to a $0.1 million reduction in personnel costs, including taxes and benefits, as a result of a decrease in personnel.
Other Income and Expenses
|
| | | | | | | | | | | | | | | | |
| Three Months Ended |
| October 26, 2013 | | | | October 27, 2012 |
| Amount | | As a Percent of Net Sales | | Percent Change | | Amount | | As a Percent of Net Sales |
(in thousands) |
Interest income (expense), net | $ | 300 |
| | 0.2 | % | | (3.8 | )% | | $ | 312 |
| | 0.2 | % |
Other income (expense), net | $ | 278 |
| | 0.2 | % | | 85.3 | % | | $ | 150 |
| | 0.1 | % |
Interest income (expense), net: We generate interest income through short-term cash investments, marketable securities, product sales on an installment basis, or in exchange for the rights to sell and retain advertising revenues from displays, which result in long-term receivables. Interest expense is comprised primarily of interest costs on long-term marketing obligations.
Interest income, net was flat in the second quarter of fiscal 2014 compared to the same period one year ago due to no significant change in investments or financing activities.
Other income (expense), net: We realized an increase of $0.1 million in income from the net result of other income and expenses for the second quarter of fiscal 2014 as compared to the same period one year ago. This change was the net effect of an increase in foreign currency gains for changes in foreign currency rates as it relates to the remeasurement of inter-company loans into U.S. dollars and an increase in losses on changes in the fair value of currency hedges and various other non-operating gains.
Income Taxes
Our effective tax rate was 35.0 percent for the second quarter of fiscal 2014 as compared to an effective tax rate of 33.3 percent for the second quarter of fiscal 2013. In comparing the second quarter of fiscal 2014 to the second quarter of fiscal 2013, changes in our effective tax rate was the net effect of the following:
| |
• | Our actual book income was lower while our actual domestic production activities deduction, giving us a benefit of $3.0 million, which in turn had a benefit of 0.1 percentage points on our effective tax rate. |
| |
• | The research and development tax credit was not in effect during the second quarter of fiscal 2013; thus the accrual of an eight-month credit due to legislation extending the credit until December 31, 2013 created a benefit to our effective tax rate of 1.9 percent in the second quarter of fiscal 2014. |
| |
• | An increase in the effective tax rate of approximately 0.9 percentage points due to a one-time adjustment that resulted in a refund in the second quarter of fiscal 2013 related to a foreign entity tax return which did not reoccur in the current period. |
| |
• | Various other items had a greater impact on the effective rate in the second quarter of fiscal 2014 due to lower income before taxes but are not material to financial results. |
COMPARISON OF THE SIX MONTHS ENDED OCTOBER 26, 2013 AND OCTOBER 27, 2012
Net Sales
|
| | | | | | | | | | |
| Six Months Ended |
(in thousands) | October 26, 2013 | | October 27, 2012 | | Percent Change |
Net Sales: | | | | | |
Commercial | $ | 78,674 |
| | $ | 78,130 |
| | 0.7 | % |
Live Events | 113,252 |
| | 95,113 |
| | 19.1 |
|
Schools & Theatres | 36,740 |
| | 39,861 |
| | (7.8 | ) |
Transportation | 28,280 |
| | 34,167 |
| | (17.2 | ) |
International | 43,415 |
| | 35,519 |
| | 22.2 |
|
| $ | 300,361 |
| | $ | 282,790 |
| | 6.2 | % |
Orders: | |
| | |
| | |
|
Commercial | $ | 75,122 |
| | $ | 76,634 |
| | (2.0 | )% |
Live Events | 103,560 |
| | 84,894 |
| | 22.0 |
|
Schools & Theatres | 33,693 |
| | 37,923 |
| | (11.2 | ) |
Transportation | 25,677 |
| | 39,532 |
| | (35.0 | ) |
International | 48,185 |
| | 44,891 |
| | 7.3 |
|
| $ | 286,237 |
| | $ | 283,874 |
| | 0.8 | % |
Commercial: Net sales for the six months ended October 26, 2013 remained flat compared to the same period one year ago, which was the net result of an increase in sales of our large video display projects partially offset by a decline in our national account customer replacement program and lower billboard shipments.
The decrease in orders for the six months ended October 26, 2013 compared to the same period one year ago was the result of a decrease in orders in the outdoor advertising and national accounts niches offset by an increase in orders of large video projects.
Over the near-term in fiscal 2014, we believe the Commercial business unit sales for fiscal 2014 will be generally flat to slightly higher due to expected lower national account replacement business and the volatility in the shipment of billboard orders compared to fiscal 2013. 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 2014 in the Commercial business unit.
Live Events: The increase in net sales for the six months ended October 26, 2013 compared to the same period one year ago was the net result of an increase in orders during the first quarter of fiscal 2014 resulting in $10.3 million in sales from professional sport arenas and $5.4 million in sales from university arena displays.
Orders for the six months ended October 26, 2013 compared to the same period one year ago increased $18.7 million, which was attributed to increases in orders for NFL stadiums, universities, and arena systems.
We continue to see ongoing interest from venues at all levels to increase the size and capability of their display systems, which should offer continued growth opportunity for this market in fiscal 2014. 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 2014 orders and net sales difficult. However, for the reasons cited previously, 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.
Schools and Theatres: The decrease in net sales for the six months ended October 26, 2013 compared to the same period one year ago was primarily the result of a lower volume of sales from video projects as a result of a decrease in the size of video displays, causing the average selling price of the displays to be lower than in the previous year. The decline has also been caused by the timing in purchasing decisions that are impacted by economic factors.
Orders for the six months ended October 26, 2013 decreased compared to the same period one year ago primarily as the result of the level of orders remaining the same, but the size of displays or average selling price of the displays being lower than in the previous year.
We continue to see opportunities to sell larger video systems for the remainder of fiscal 2014, primarily in high school facilities which benefit from our sports marketing services in generating advertising revenue to fund the display systems; however, orders may not increase
over fiscal 2013. A number of factors, such as the discretionary nature of customers committing to upgrade products and economic factors which impact non-discretionary purchases associated with new construction, impact order volumes. 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 the six months ended October 26, 2013 compared to the same period one year ago was primarily the result of $12.0 million in sales recognized during the first six months of fiscal 2013 for a significant transit project with no recurring projects in similar size during fiscal 2014.
The decrease in orders for the six months ended October 26, 2013 compared to the same period one year ago was primarily due to an order for $20.0 million booked during the first quarter of fiscal 2013 for a major airport with no recurring order in similar size during fiscal 2014. Excluding this project, orders were up $6.1 million year over year.
Currently, for fiscal 2014 we do not expect another large project similar to the major airport project booked in the first quarter of 2013, but with the introduction of our 20mm high resolution full-color products in fiscal 2013, we are anticipating sales to adjust back to a more normal growth curve for the remainder of fiscal 2014 with an increase over fiscal 2012 sales levels.
International: The increase in net sales for the six months ended October 26, 2013 compared to the same period one year ago is the net result of a higher beginning backlog for fiscal 2014 compared to fiscal 2013, a higher level of orders booked during the first six months of fiscal 2014 and progress on large projects.
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 $2.1 million of net sales through October 26, 2013.
The increase in orders for the six months ended October 26, 2013 compared to the same period one year ago was mainly due to the continued growth in the Asia Pacific region and the increasing acceptance of new products in certain international markets.
For fiscal 2014, 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 and the availability of projects using architectural lighting solutions. These factors could increase sales for the remainder of fiscal 2014.
Gross Profit
|
| | | | | | | | | | | | | | | |
| Six Months Ended |
| October 26, 2013 | | | | October 27, 2012 |
| Amount | | As a Percent of Net Sales | | | | Amount | | As a Percent of Net Sales |
(in thousands) |
Commercial | $ | 23,424 |
| | 29.8 | % | | | | $ | 21,887 |
| | 28.0 | % |
Live Events | 24,624 |
| | 21.7 |
| | | | 21,658 |
| | 22.8 |
|
Schools & Theatres | 10,787 |
| | 29.4 |
| | | | 11,210 |
| | 28.1 |
|
Transportation | 8,588 |
| | 30.4 |
| | | | 13,612 |
| | 39.8 |
|
International | 11,444 |
| | 26.4 |
| | | | 10,375 |
| | 29.2 |
|
| $ | 78,867 |
| | 26.3 | % | | | | $ | 78,742 |
| | 27.8 | % |
The decrease in our gross profit percentage for the six months ended October 26, 2013 compared to the same period one year ago was the net result of the changes described below:
Commercial: The gross profit percent increase in the Commercial business unit for the six months ended October 26, 2013 compared to the same period one year ago was the result of overall gross margin improvement on product sales mix, which was partially offset by increased warranty and manufacturing costs.
Live Events: The gross profit percent decrease in the Live Events business unit for the six months ended October 26, 2013 compared to the same period one year ago was the result of lowered margins due to the product sales mix being impacted by large custom display projects and higher warranty costs, which was partially offset by improved manufacturing utilization from increased sales.
Schools and Theatres: The gross profit percent decrease in the Schools and Theatres business unit for the six months ended October 26, 2013 compared to the same period one year ago primarily was the result of decreased manufacturing utilization from the overall lower sales volume.
Transportation: The gross profit percent decrease in the Transportation business unit for the six months ended October 26, 2013 compared to the same period one year ago was the net result of:
| |
• | Lower margins on large custom projects contributing an eleven percentage point decrease. |
| |
• | A decrease of two percentage points due to lower manufacturing utilization. |
| |
• | An increase of approximately three percentage points due to decreased expenses in warranty and services. |
| |
• | An increase of approximately one percentage point due to various other items impacting gross margins. |
International: The gross profit percent decrease in the International business unit for the six months ended October 26, 2013 compared to the same period one year ago was the net result of:
| |
• | A decrease in the gross margin on product sales, which decreased the overall gross profit by approximately five percentage points. |
| |
• | A decrease of approximately two percentage points due to a higher level of manufacturing costs related to our new manufacturing plant in Belgium for third-party advertising displays. |
| |
• | An increase of approximately three percentage points as a result of improved margins on standard orders. |
It is difficult to project gross profit levels for fiscal 2014 because of the uncertainty regarding the level of sales and the competitive factors in our business. We are focused on improving our gross profit margins as we execute on our strategies for improved profitability. We are focusing efforts on the quality of the supply chain, on the quality of manufacturing process by adding additional quality testing in our manufacturing areas, on the continued focus on product reliability in designs to improve warranty costs as a percent of net sales, and continuing our focus on improved process flow in our services organization to improve gross profit margin. An increase in gross profit assumes competitive pressures remain consistent with the levels of fiscal 2013.
Selling Expense
|
| | | | | | | | | | | | | | | | |
| Six Months Ended |
| October 26, 2013 | | | | October 27, 2012 |
| Amount | | As a Percent of Net Sales | | Percent Change | | Amount | | As a Percent of Net Sales |
(in thousands) | | | | |
Commercial | $ | 7,301 |
| | 9.3 | % | | 2.6 | % | | $ | 7,118 |
| | 9.1 | % |
Live Events | 5,995 |
| | 5.3 |
| | (7.9 | ) | | 6,510 |
| | 6.8 |
|
Schools & Theatres | 5,283 |
| | 14.4 |
| | 1.6 |
| | 5,199 |
| | 13.0 |
|
Transportation | 1,683 |
| | 6.0 |
| | 4.7 |
| | 1,608 |
| | 4.7 |
|
International | 6,660 |
| | 15.3 |
| | 22.4 |
| | 5,441 |
| | 15.3 |
|
| $ | 26,922 |
| | 9.0 | % | | 4.0 | % | | $ | 25,876 |
| | 9.2 | % |
The increase in selling expenses in the first six months of fiscal 2014 compared to the same period one year ago was the net result of the following:
Commercial: Selling expenses increased for the first six months of fiscal 2014 compared to the same period in fiscal 2013 due to a $0.3 million increase in travel and entertainment and third-party commission expenses, which was partially offset by a $0.1 million decrease in various other expenses.
Live Events: The decrease in selling expenses for the first six months of fiscal 2014 compared to the same period in fiscal 2013 was the result of a decrease of $0.4 million in payroll benefits, convention and depreciation expenses.
Schools & Theatres: Selling expenses remained flat for the first six