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 reportReport 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 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 our filings with the Securities and Exchange Commission, including in our Annual Report on Form 10-K for the fiscal year ended April 30, 2011 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 statementsConsolidated Financial Statements and notesNotes to the consolidated financial statements.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 that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate our estimates, including those related to estimated total costs on long-term construction-type contracts, estimated costs to be incurred for product warranties and extended maintenance contracts, bad debts, excess and obsolete inventory, income taxes, stock-based compensation and contingencies. Our estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We 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 primary five segments consist of four domestic segments and one International segment. The four domestic segments consist of Live Events, Commercial, Schools and Theatres, and Transportation.
Our net sales and profitability historically have fluctuated due to the impact of large product orders, such as display systems for professional sports facilities and colleges and universities, as well as the seasonality of the sports market. Net sales and gross profit percentages also have fluctuated due to other seasonality factors, including the impact of holidays, which primarily affects our third quarter. Our gross margins on large product orders tend to fluctuate more than those for smaller standard orders. Large product orders that involve competitive bidding and substantial subcontract work for product installation generally have lower gross margins. Although we follow the percentage of completion method of recognizing revenues for large custom orders, we nevertheless have experienced fluctuations in operating results and expect that our future results of operations will be subject to similar fluctuations.
Orders are booked and included in backlog only upon receipt of a firm contract and after receipt of any required deposits. As a result, certain orders for which we have received binding letters of intent or contracts will not be booked until all required contractual documents and deposits are received. In addition, order bookings can vary significantly as a result of the timing of large orders.
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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. Fiscal 2012 and fiscal 2011 each contains 52 weeks. Within each 52 week fiscal year, each quarter is comprised of a 13 week periodsperiod 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.
For a summary of recently issued accounting pronouncements and the effects of those pronouncements on our financial results, refer to Note 21 of the notesNotes to our consolidated financial statements,Consolidated Financial Statements, which are included elsewhere in this report.Report.
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales represented by items included in our Consolidated Statements of Operations for the periods indicated:
| | | Three Months Ended | | | Six Months Ended | |
| | | October 29, | | | October 30, | | | October 29, | | | October 30, | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| | | | | | | | | | | | | |
| Net sales | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| Cost of goods sold | | | 76.8 | % | | | 74.1 | % | | | 76.1 | % | | | 73.9 | % |
| Gross profit | | | 23.2 | % | | | 25.9 | % | | | 23.9 | % | | | 26.1 | % |
| Total operating expenses | | | 18.8 | % | | | 18.0 | % | | | 19.6 | % | | | 19.9 | % |
| Operating income | | | 4.4 | % | | | 7.9 | % | | | 4.3 | % | | | 6.2 | % |
| Interest income (expense), net | | | 0.3 | % | | | 0.3 | % | | | 0.3 | % | | | 0.4 | % |
| Other income (expense), net | | | 0.0 | % | | | 0.1 | % | | | (0.1 | ) % | | | 0.1 | % |
| Income before income taxes | | | 4.7 | % | | | 8.3 | % | | | 4.5 | % | | | 6.7 | % |
| Income tax expense | | | 1.7 | % | | | 2.8 | % | | | 1.7 | % | | | 2.5 | % |
| Net income | | | 3.0 | % | | | 5.5 | % | | | 2.8 | % | | | 4.2 | % |
NET SALES
The following table sets forth net sales and orders by business unit for the periods indicated (dollars in thousands):
| | | Three Months Ended | | | Six Months Ended | |
| | | October 29, | | | October 30, | | | October 29, | | | October 30, | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Net Sales: | | Amount | | | Percent Change | | | Amount | | | Amount | | | Percent Change | | | Amount | |
| Commercial | | $ | 43,704 | | | | 37.1 | % | | $ | 31,879 | | | $ | 76,407 | | | | 38.9 | % | | $ | 55,010 | |
| Live Events | | | 46,664 | | | | 6.0 | | | | 44,025 | | | | 85,181 | | | | 0.6 | | | | 84,708 | |
| Schools & Theatres | | | 17,239 | | | | (19.3 | ) | | | 21,351 | | | | 35,721 | | | | (6.0 | ) | | | 37,999 | |
| Transportation | | | 12,439 | | | | 8.3 | | | | 11,482 | | | | 23,939 | | | | 25.8 | | | | 19,028 | |
| International | | | 15,864 | | | | (12.7 | ) | | | 18,182 | | | | 33,359 | | | | 8.7 | | | | 30,676 | |
| | | $ | 135,910 | | | | 7.1 | % | | $ | 126,919 | | | $ | 254,607 | | | | 12.0 | % | | $ | 227,421 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Orders: | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial | | $ | 33,358 | | | | 30.0 | % | | $ | 25,666 | | | $ | 80,599 | | | | 37.3 | % | | $ | 58,712 | |
| Live Events | | | 44,488 | | | | 65.6 | | | | 26,864 | | | | 83,823 | | | | 31.0 | | | | 64,000 | |
| Schools & Theatres | | | 13,475 | | | | (4.0 | ) | | | 14,030 | | | | 31,648 | | | | (11.1 | ) | | | 35,602 | |
| Transportation | | | 12,342 | | | | 31.2 | | | | 9,408 | | | | 28,016 | | | | 33.2 | | | | 21,036 | |
| International | | | 14,132 | | | | (46.1 | ) | | | 26,211 | | | | 33,899 | | | | (14.6 | ) | | | 39,691 | |
| | | $ | 117,795 | | | | 15.3 | % | | $ | 102,179 | | | $ | 257,985 | | | | 17.8 | % | | $ | 219,041 | |
Commercial Business Unit. The Commercial business unit is comprised of the reseller and key accounts business, which includes primarily our Galaxy®, Fuelight™ and GalaxyPro® displays and large custom contracts for commercial facilities, and the outdoor advertising business, which is primarily sales of our digital billboard technology to outdoor advertising companies.
For the second quarter of fiscal 2012 and for the first half of fiscal 2012, net sales in the outdoor advertising business were up 201% and 170%, respectively, when compared to the same period one year ago. Net sales and orders for the first six months of fiscal 2012 were $28.1 million and $28.0 million, respectively. Orders in the outdoor advertising business were up approximately 104% and 80% for the second quarter and year to date in fiscal 2012 as compared to the same period one year ago. During the second half of fiscal 2011, two of the large outdoor advertising companies in the United States announced their plans for digital billboard deployments for calendar 2011, calling for an increase in digital billboard deployments beginning in the first calendar quarter of 2011. These plans, in addition to the improving economy benefitting other outdoor advertising companies, have caused both orders and sales to rise. We believe that our ability to maintain our market share with these customers and others has been driven, in part, by the industry’s acceptance of our Series 4000 digital billboard product. Over the past few fiscal years, the average selling price of digital billboards has declined significantly. As a result, although the unit sales may approximate the unit sales prior to the economic downturn, the total sales dollars will be significantly less. It is important to note that the outdoor advertising business has a number of constraints in addition to the adverse economic conditions over the past few years, primarily the challenges of achieving adequate returns on investments on digital displays, which limit locations suitable for digital displays, and regulatory constraints, which limit where displays can be installed. Furthermore, a large part of our business in this area is obtained from two customers, and therefore a loss of one of those customers could have an adverse impact on this portion of our business, although each customer is less that 5% of net sales in the first six months of fiscal 2011 and 2012.
For the second quarter of fiscal 2012 and for the first half of fiscal 2012, net sales in the reseller portion of the Commercial business unit were up 9% and 13%, respectively, when compared to the same periods one year ago. Orders in the reseller portion of the Commercial business unit were up approximately 6% and 20% for the second quarter and year to date in fiscal 2012 as compared to the same periods one year ago. Net sales and orders for the first six months of fiscal 2012 were $36.3 million and $39.8 million, respectively. These increases in orders and net sales have resulted from increases in sales of both large video displays and our standard Galaxy® displays, which we attribute to better economic conditions as well as increasing interest in our new product technologies, including our GalaxyPro® and DVX video platforms. This area of the business has also been helped by the introduction of our architectural lighting products, which we expect to help drive further sales. The level of large custom contract orders and sales in this niche is subject to volatility as described in prior filings, and therefore orders could decline in future periods, although we continue to see a growing number of opportunities. Furthermore, this business unit is sensitive to economic conditions, and the future performance of this business unit will vary based on these conditions.GENERAL
As a result of much of our business being comprised of large contracts, our results on a quarterly basis may fluctuate due to the worsening economictiming of these contract order dates and credit environments in early fiscal 2009,delivery schedules. As a result, our management discussion and analysis, which describes the competitive pressureschanges quarter over quarter and year to date over year to date, places more of the information concerning trends and other information in the Commercialyear to date results.
Our business, especially the large video display business in all of our business units, is very competitive, and generally our margins on these large contracts are similar across the business units over the long-term. There are, however, differences that arise in the short term among the business units, which are discussed more fully in the following analysis.
Overall, our business growth is driven by the market demand for large format electronic displays and the depth and quality of our products, including related control systems, the depth of our service offerings and our technology that serve these market demands. This growth, however, is partially offset by declines in product prices caused by increasing competition as well as declines in the costs of the raw materials and improved product designs and manufacturing methods which decreases the per unit selling prices of displays. Within each business unit, increased as competitors went after fewer opportunities. This competitive pressure put considerable pricing pressure on all aspects of thisthere are also key growth drivers that apply uniquely to that business unit. The competitive pressures continue and are expected to continue in future quarters. This has had an adverse impact on our gross margins and net sales.
SubjectCommercial Business Unit: Over the long-term, we believe that the following factors are important growth drivers to the foregoing, our Commercial business unit generally benefits from increasing product acceptance, lower cost of displays, our distribution network and a stronger advertising market.unit:
| · | The continued deployment of digital billboards, which we believe can expand as billboard companies continue developing new sites for digital billboards and start to replace digital billboards which are reaching end of life, which we expect could start happening in fiscal 2015. This growth 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 that is concentrated in a few large billboard companies. |
There is seasonality in the outdoor advertising niche because the deployment of displays slows in the winter months in the northern United States, which results in the fluctuation of our net sales over the course of a fiscal year.| · | The growing interest in our standard display products that are 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 attracting the attention of motorists and others into their establishment. It is also driven by the need to communicate messages to the general public. Furthermore, we believe that 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, intricate displays seen at 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. |
Live Events Business Unit. Unit:The increase in net sales for Over the Live Events business unit for both the second quarter and first six months of fiscal 2012 as compared to the same period in fiscal 2011 was primarily the result of the increase in orders booked in the second quarter of fiscal 2012 as compared to the second quarter of fiscal 2011. The increase in orders resulted from the increasing level of opportunities that have evolved in the business as a result of the lowering cost of video systems and our sense that the market is expanding as a result. We believe that this can drive growth in this business unit in the future.
In fiscal 2011, as explained in prior filings, orders and net sales were adversely impacted by economic conditions. Although it appears that those economic conditions improved during the first six months of fiscal 2012 as compared to the same period of fiscal 2011,long-term, we believe that the labor situations in the National Football League (“NFL”) and the National Basketball Association (“NBA”) adversely impacted net sales and orders in the first six months of fiscal 2012. Net sales for existing facilities in these two areas declined 87% in fiscal 2012 as compared to the first quarter of fiscal 2011. The NFL labor situation has been resolved. However, we expect that until labor issues are resolved in the NBA, net sales and orders could continue be adversely impacted. In addition, the current labor agreement in the National Hockey League expires in calendar 2012 and the failure to reach agreement on a new agreement could adversely impact net sales in fiscal 2013.
Beginning in the fourth quarter of fiscal 2009, we began to see more significant competitive pressure in the Live Events marketplace. We believe that this pressure continues to hurt gross profit margins. We also believe that there are still some economic pressures that are adversely impacting orders and net sales. These competitive factors and general economic conditions also make it difficult to forecast orders and net salesgrowth in the Live Events business unit for the rest of fiscal 2012. Furthermore, although on a year to date basis orders have increased significantly, we believe that the volume of orders in the rest of the fiscal year related to professional baseball facilities will decline compared to fiscal 2011 and, as a result we believe that the current percentage increase in orders on a fiscal year to date basis will decline in the second half of the fiscal year.
Although our Live Events business is typically resistant to economic conditions, the severity of the current economic environment has negatively impacted this business. There have been transactions which have been delayed due to economic conditions or labor issues, as described herein or in prior filings, has also had a significant negative impact on this business. However, we expect to see sales growth in Live Events over the long term, assuming that the economy improves and we are successful at counteracting competitive pressures.
Our expectations regarding additional growth over the long term in large sports venues is due tofrom a number of factors, including facilities tending to spend more on larger display systems; lowerincluding:
| · | Facilities spending more on larger display systems. |
| · | Lower product costs, which are driving an expansion of the marketplace. |
| · | Our product and services 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: Over the long-term, we believe that growth in the Schools and Theatres business unit will result from a number of factors, including:
| · | Increasing demand for video systems in high schools, as school districts realize the revenue generating potential of these displays versus traditional scoreboards. |
| · | Increasing 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 to more athletic venues, such as aquatics in schools. |
Transportation: Over the long-term, we believe that growth in the Transportation business unit will result from increasing applications of electronic displays in locations to manage commuters, including roadway, airport, parking, transit and other applications. This growth is highly dependent on government spending, primarily federal government spending.
International: Over the long-term, we believe that growth in the International business unit will result from achieving greater penetration in various geographies, building products more suited to individual markets, and the reasons listed in each of the marketplace;other business units to the extent they apply outside the United States.
Each of our productbusiness units is impacted by adverse economic conditions in different ways and services offerings, which remain the most integrated and comprehensive offerings in the industry; and our field sales and service network, which is important to support our customers. In addition, we benefit from the competitive nature of sports teams, which strive to out-perform their competitors with display systems. This impact has been and is expected to continue to be a driving force in increasing transaction sizes in new construction and major renovations. Growth in the large sports venues is also driven by the desire for high-definition video displays, which typically drives larger displays or higher resolution displays, both of which increase the average transaction size. These increases, however, have been partially offset by the decline in product selling prices. We also believe that thedifferent degrees. The effects of an adverse economy are generally less severe on our sports related business as compared to our other businesses, as evidenced by periods of pooralthough in severe economic downturns, that occurred priorthe sports business can be severely impacted. Our Commercial and International business units are highly dependent on economic conditions in general. Beginning in fiscal 2009, we began to calendar year 2008. We believe thatsee the impacts of the economy negatively impact our Commercial business unit and, to a lesser degree, our International business unit. As we entered into fiscal 2010, we began to see the adverse economic conditions that have existed over the last couple of years were deep enough to adversely impact our sports business, at all levels. Beginning in the second half of fiscal 2011, we saw our Commercial business unit start to rebound, led by improvements in orders for digital billboards, followed by other business units. We are uncertain as to how much the current economic conditions are still impacting our business, but we believe that there are still adverse implications of the current economic conditions in all of our business units.
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 a greater level of net sales as in previous fiscal years. This price decline has been significant way. Netas a result of increased competition across all business units.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JANUARY 28, 2012 TO THREE MONTHS ENDED JANUARY 29, 2011
NET SALES
| | | Three Months Ended | |
| | | January 28, | | | January 29, | | | Dollar Change | | | Percent Change | |
| (in thousands) | | 2012 | | | 2011 | |
| Net Sales: | | | | | | | | | | | | |
| Commercial | | $ | 38,833 | | | $ | 28,750 | | | $ | 10,083 | | | | 35.1 | % |
| Live Events | | | 38,496 | | | | 36,138 | | | | 2,358 | | | | 6.5 | |
| Schools & Theatres | | | 10,696 | | | | 11,672 | | | | (976 | ) | | | (8.4 | ) |
| Transportation | | | 10,261 | | | | 11,063 | | | | (802 | ) | | | (7.2 | ) |
| International | | | 24,639 | | | | 12,245 | | | | 12,394 | | | | 101.2 | |
| | | $ | 122,925 | | | $ | 99,868 | | | $ | 23,057 | | | | 23.1 | % |
| | | | | | | | | | | | | | | | | |
| Orders: | | | | | | | | | | | | | | | | |
| Commercial | | $ | 30,720 | | | $ | 25,772 | | | $ | 4,948 | | | | 19.2 | % |
| Live Events | | | 38,684 | | | | 46,797 | | | | (8,113 | ) | | | (17.3 | ) |
| Schools & Theatres | | | 9,941 | | | | 12,171 | | | | (2,230 | ) | | | (18.3 | ) |
| Transportation | | | 15,443 | | | | 11,416 | | | | 4,027 | | | | 35.3 | |
| International | | | 12,218 | | | | 8,993 | | | | 3,225 | | | | 35.9 | |
| | | $ | 107,006 | | | $ | 105,149 | | | $ | 1,857 | | | | 1.8 | % |
Commercial: The increase in net sales in our sports marketing and mobile and modular portion of this market were approximately 1% of totalCommercial business unit for the three months ended January 28, 2012 compared to the same period one year ago is the net result of:
| · | An increase in orders in the second quarter of fiscal 2012 over the same period one year ago in our billboard segment, which resulted in a larger backlog of billboard products as we entered the third quarter of fiscal 2012 that converted to actual sales during the quarter. Orders were approximately $6 million higher in the second quarter of fiscal 2012 as compared to the second quarter of fiscal 2011. We attribute this growth to the increase in orders primarily from two of the large billboard companies, which increased their deployment plans at the beginning of calendar year 2011. |
| · | An increase in sales of large video display systems, primarily spectaculars, which increased to approximately $4.8 million compared to $0.7 million is the same period one year ago, which we attribute to improvements in the economy and improving pipeline. |
| · | An 8% increase in sales for our standard product displays, which appears to be a reflection of improvements in the economy as well as our expanded product offerings, including our GalaxyPro line of displays. |
Orders in our Commercial business unit increased for the three months ended January 28, 2012, compared to the same period one year ago is the net result of:
| · | An increase of approximately $4 million in orders for large video display systems due to the same factors described above in net sales. |
| · | An increase of approximately $1 million in orders of our standard products for the same reasons described above in net sales. |
Live Events: The increase in net sales in our Live Events business unit for the three months ended January 28, 2012 compared to the same period one year ago is primarily the result of the higher than expected order volume in the second quarter and first six months of fiscal 2012 andwhich drove a higher backlog at the beginning of the third quarter of fiscal 2012. Orders in our Live Events business unit declined for the three months ended January 28, 2012 compared to the same period one year ago primarily as the result of the decline in orders for major league baseball projects. In the third quarter of fiscal 2011, and thus were not material.we booked approximately $18 million in orders for major league baseball facilities versus approximately $7 million in the third quarter of fiscal 2012.
Schools and Theatres Business Unit.Theatres: The decrease in net sales in our Schools and Theatres business unit for the three months ended January 28, 2012 compared to the same period one year ago is primarily the result of economic pressures on schools, which in some cases inhibits spending in spite of the revenue generation abilities of these display systems for schools.
The decrease in orders for the Schools and Theatres business unit for the three months ended January 28, 2012 compared to the same period one year ago was the result of a decline in orders for large video systems in high schools totaling approximately $2.6 million. The amount of orders in the third quarter of fiscal 2011 was unusually high, as orders of this type are typically concentrated in our fourth and first quarters of each fiscal year.
Transportation: The decrease in net sales in our Transportation business unit for the three months ended January 28, 2012 compared to the same period one year ago is the result of normal volatility in the business resulting from the fluctuations of construction type contracts.
The increase in orders in our Transportation business unit for the three months ended January 28, 2012 compared to the same period one year ago is the result of orders totaling more than $6 million from a large customer under a multi-year procurement contract that we negotiated in the fourth quarter of fiscal 2011.
International: The increase in net sales in our International business unit for the three months ended January 28, 2012 compared to the same period one year ago is the result a large order that was booked in the second quarter of fiscal 2011 that contributed over $6 million to net sales during the quarter. This order was included in backlog at the beginning of fiscal 2012.
The increase in orders in the International business unit for the three months ended January 28, 2012 compared to the same period one year ago is the result of the increasing level of opportunities outside of the United States as we expand our reach and penetration into more parts of the world where our products are in demand.
GROSS PROFIT
| | Three Months Ended |
| | January 28, 2012 | | | | | January 29, 2011 |
| | | | | As a Percent of Net Sales | | Percent Change | | | | | As a Percent of Net Sales |
| (in thousands) | Amount | | | Amount | |
| Commercial | $ | 10,355 | | | | 26.7 | % | | | 59.1 | % | | $ | 6,509 | | | | 22.6 | % |
| Live Events | | 6,218 | | | | 16.2 | | | | (0.9 | ) | | | 6,272 | | | | 17.4 | |
| Schools & Theatres | | 1,917 | | | | 17.9 | | | | (34.2 | ) | | | 2,912 | | | | 25.0 | |
| Transportation | | 2,892 | | | | 28.2 | | | | (5.3 | ) | | | 3,055 | | | | 27.6 | |
| International | | 6,473 | | | | 26.3 | | | | 32.3 | | | | 4,894 | | | | 40.0 | |
| | $ | 27,855 | | | | 22.7 | % | | | 17.8 | % | | $ | 23,642 | | | | 23.7 | % |
The decrease in our gross profit percentange for the three months ended January 28, 2012 compared to the same period one year ago is the net result of:
| · | An increase of approximately 1 percentage point in our services infrastructure and lower utilization in services. |
| · | An additional 1 percentage point decrease due to less absorption of manufacturing costs. |
| · | An increase of approximately 1 percentage point in margin on product sales. |
Commercial: The gross profit percent increase in the Commercial business unit for the three months ended January 28, 2012 compared to the same period one year ago principally is a result of an improvement in gross profit on large video display contracts resulting from the lower cost of the product coupled with better pricing on the contracts, which added approximately 3 percentage points.
Live Event:. The gross profit percent decrease in the Live Events business unit for the three months ended January 28, 2012 compared to the same period one year ago is the net result of:
| · | An increase of approximately 4 percentage points due to improvement in gross profit percentages on large contracts. |
| · | A decrease of approximately 5 percentage points for higher costs of services infrastructure and lower manufacturing absorption. |
Schools and Theatres: The gross profit percent decrease in the Schools and Theatres business unit for the three months ended January 28, 2012 compared to the same period one year ago as a result of:
| · | Lower gross profit margins on product sales, which reduced gross profit percent by approximately 4 percentage points. |
| · | Lower manufacturing absorption and higher services costs, which further reduced gross profit percent by approximately 4 percentage points. |
Transportation: The gross profit margin increase in the secondTransportation business unit for the three months ended January 28, 2012 compared to the same period one year ago is a result of an increase of approximately 4 percentage points in gross profit percent on product sales, which was partially offset by a lower manufacturing absorption and higher services infrastructure costs.
International: The gross profit percent decreased in the International business unit for the three months ended January 28, 2012 compared to the same period one year ago as a result of a decrease in the gross profit percent on large contracts.
SELLING EXPENSE
| | Three Months Ended |
| | January 28, 2012 | | | | | January 29, 2011 |
| | | | As a Percent of Net Sales | | Percent Change | | | | As a Percent of Net Sales |
| (in thousands) | Amount | | | Amount | |
| Commercial | $ | 3,522 | | | 9.1 | % | | | 14.1 | % | | $ | 3,087 | | | 10.7 | % |
| Live Events | | 3,574 | | | 9.3 | | | | 4.0 | | | | 3,435 | | | 9.5 | |
| Schools & Theatres | | 2,747 | | | 25.7 | | | | 26.1 | | | | 2,178 | | | 18.7 | |
| Transportation | | 813 | | | 7.9 | | | | (4.9 | ) | | | 855 | | | 7.7 | |
| International | | 2,685 | | | 10.9 | | | | 3.5 | | | | 2,593 | | | 21.2 | |
| | $ | 13,341 | | | 10.9 | % | | | 9.8 | % | | $ | 12,148 | | | 12.2 | % |
Commercial: Commercial selling expenses increased approximately 14.1 percent in the third quarter and first six months of fiscal 2012 compared to the same periodsperiod one year ago. The increase was the result of a $0.2 million increase in personnel costs, including taxes and benefits, and a $0.1 million increase in travel and entertainment costs. These increases are a result of the increase in orders, as explained previously.
Live Events: Selling expenses increased by 4.0 percent in the third quarter of fiscal 2012 compared to the same period in fiscal 2011. The increase was the result of a $0.2 million increase in personnel costs, including taxes and benefits, which was offset by net decreases in various other expenses.
Schools and Theatres: Selling expenses increased by $0.6 million compared to the same period in fiscal 2011. The increase for the quarter was due to an increase in bad debt expense and personnel costs, including taxes and benefits.
Transportation: Selling expenses declined 4.9 percent for the third quarter of fiscal 2012 compared to the same period one year ago. The decline for the third quarter was due to a decrease in bad debt expense, and marketing costs, partially offset by higher travel and entertainment costs.
International: Selling expenses were flat although there were increases in payroll costs, net of taxes and benefits, and various other expenses, which were offset by decreases in commissions and fees to third parties.
OTHER OPERATING EXPENSES
| | Three Months Ended |
| | January 28, 2012 | | | | | January 29, 2011 |
| | | | As a Percent of Net Sales | | Percent Change | | | | As a Percent of Net Sales |
| (in thousands) | Amount | | | Amount | |
| General and administrative | $ | 6,974 | | | 5.7 | % | | | 15.3 | % | | $ | 6,047 | | | 6.1 | % |
| Product design and development | $ | 5,696 | | | 4.6 | % | | | 21.9 | % | | $ | 4,673 | | | 4.7 | % |
The increase in general and administrative expense in the third quarter of fiscal 2012 as compared to the same period one year ago is the net result of the following:
| · | An increase in professional fees of $0.4 million as a result of an approximately $0.3 million increase in information technology costs as we outsourced more projects to speed up development where we believed we could achieve a faster payback in efficiencies and higher costs to support the expansion of our international business, including opening offices in Brazil, Singapore and Spain. |
| · | Increases in personnel costs, including taxes and benefits, of approximately $0.3 million due to an increase in employee count, primarily related to personnel to support hiring in other areas of the company, and in accounting and legal to support international development. |
| · | Increases in various other expenses of approximately $0.2 million. |
The increase in product development expense in the third quarter of fiscal 2012 as compared to the same period one year ago is due to the net result of the following:
| · | An increase in personnel costs, including taxes and benefits, of approximately $0.7 million, as we increased our staff to support the continued rollout of our display and control system platforms. |
| · | An increase in material costs related to product development of $0.3 million as a result of increasing importance placed on prototyping new products and the increase in new product introductions. |
| · | A decrease of $0.4 million in various other expenses. |
OTHER EXPENSES
| | Three Months Ended |
| | January 28, 2012 | | | | | January 29, 2011 |
| | | | As a Percent of Net Sales | | Percent Change | | | | As a Percent of Net Sales |
| (in thousands) | Amount | | | Amount | |
| Interest income, net | $ | 373 | | | 0.3 | % | | | (25.8 | ) % | | $ | 503 | | | 0.5 | % |
| Other (expense) income, net | $ | (29 | ) | | (0.0 | ) % | | | (105.2 | ) % | | $ | 557 | | | 0.6 | % |
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 in the third quarter of fiscal 2012 as compared to the same period in 2011 due to a reduction in our cash and short term investment balances that was mainly the result of the dividend payments during the third quarter of fiscal 2012. Interest expense was relatively flat compared to the same period one year ago.
Other (expense) income, net: Yhe decrease of $0.6 million in the third quarter of fiscal 2012 as compared to the same period one year ago is due to the net result of a $0.6 million gain on the settlement of amounts owed by Outcast Media International, Inc. ("Outcast") in the third quarter of fiscal 2011, as described in previous filings, a increase of $0.1 in foreign currency losses, and by various other non-operating gains.
In addition, as a result of the decrease in the value of the U.S. dollar, we experienced higher levels of currency losses on U.S. dollar advances to foreign subsidiaries in the third quarter of fiscal 2012 compared to the same period in fiscal 2011.
INCOME TAXES
The effective tax rate was 23.9% for the third quarter of fiscal 2012 as compared to 0.2% for the third quarter of fiscal 2011. Our effective tax rate can vary significantly due to the mix of pre-tax income in different countries and the estimate of the annual effective rate in each country.
In comparing the third quarter of fiscal 2012 to the same period in fiscal 2011, the change in the effective tax rate is due to the net impact of the following items:
| · | An increase in the effective tax rate of approximately 12 percentage points as a result of the reinstatement of the research and development tax credit in the third quarter of fiscal 2011, which included a credit for the ten months prior to the third quarter. |
| · | A increase in the liability for foreign income taxable in the United States under subpart F of the US Tax Code, which increased the effective tax rate by 14 percentage points. |
| · | A decrease in the effective tax rate of approximately 8 percentage points as a result of the effect of the change in tax rates on deferred assets in foreign jurisdictions resulting from the termination of the tax holiday. |
| · | A change in estimate of prior year tax liabilities related to state income tax items, which increased the effective tax rate by approximately 6 percentage points |
COMPARISON OF THE NINE MONTHS ENDED JANUARY 28, 2012 TO NINE MONTHS ENDED JANUARY 29, 2011
NET SALES
| | Nine Months Ended | |
| | January 28, | | January 29, | | Dollar Change | | Percent Change | |
| (in thousands) | 2012 | | 2011 |
| Net Sales: | | | | | | | | |
| Commercial | $ | 115,239 | | $ | 83,760 | | $ | 31,479 | | | 37.6 | % |
| Live Events | | 123,676 | | | 120,846 | | | 2,830 | | | 2.3 | |
| Schools & Theatres | | 46,418 | | | 49,671 | | | (3,253 | ) | | (6.5 | ) |
| Transportation | | 34,201 | | | 30,091 | | | 4,110 | | | 13.7 | |
| International | | 57,998 | | | 42,921 | | | 15,077 | | | 35.1 | |
| | $ | 377,532 | | $ | 327,289 | | $ | 50,243 | | | 15.4 | % |
| | | | | | | | | | | | | |
| Orders: | | | | | | | | | | | | |
| Commercial | $ | 111,319 | | $ | 84,484 | | $ | 26,835 | | | 31.8 | % |
| Live Events | | 122,507 | | | 110,798 | | | 11,709 | | | 10.6 | |
| Schools & Theatres | | 41,589 | | | 47,773 | | | (6,184 | ) | | (12.9 | ) |
| Transportation | | 43,459 | | | 32,452 | | | 11,007 | | | 33.9 | |
| International | | 46,117 | | | 48,683 | | | (2,566 | ) | | (5.3 | ) |
| | $ | 364,991 | | $ | 324,190 | | $ | 40,801 | | | 12.6 | % |
Commercial: The increase in net sales in our Commercial business unit for the nine months ended January 28, 2012 compared to the same period one year ago is the net result of:
· | An increase in orders in fiscal 2012 over the same period one year ago in our billboard business, which increased approximately 56%. This growth was the result of the large outdoor advertising companies increasing their rollout of digital billboards beginning in calendar 2011 and our ability to gain back a portion of the business with one large outdoor advertising company. |
· | A 60% increase in orders for large video display systems, primarily spectaculars, which increased to approximately $21 million compared to $13 million in the same period one year ago, which we attribute to improvements in the economy and a growing market. |
| · | A 13% increase in orders for our standard product displays which appears to be a reflection of improvement in the economy as well as our expanded product offerings, including our GalaxyPro line of displays. |
Live Events: The increase in net sales in our Live Events business unit for the nine months ended January 28, 2012 compared to the same period one year ago is the net result of:
| · | Higher level of orders booked in the second quarter of fiscal 2012 as compared to the second quarter of fiscal 2011, as previously described. |
| · | The decrease in orders for certain professional facilities in the first nine months of fiscal 2011 was due to a decline in professional sports facilities. We booked approximately $22.2 million in orders for professional baseball projects in the first three quarters of fiscal 2011 compared to approximately $10.1 million in the first three quarters of fiscal 2012. In addition, orders for the first nine months of fiscal 2012 for National Football League and National Basketball Association facilities were down in part as a result of the labor issues in both sports in the spring and summer of calendar year 2011. Net sales to National Football League facilities declined from $12.7 in the first nine months of fiscal 2011 to $2.8 for the first nine months of fiscal 2012. |
As a result of the lower orders booked in the third quarter of fiscal 2012 compared to the same period one year ago, we expect that net sales for fiscal 2012 will be generally flat as compared to fiscal 2011. We believe that for fiscal 2012, orders have increased as a result of lowering the overall costs of the product as previously described and partially offset by the decrease in lower orders for professional sports facilities.
Schools and Theatres: The decrease in net sales in our Schools and Theatres business unit for the nine months ended January 28, 2012 compared to the same period one year ago is the result of economic pressures on schools, which we believe inhibits spending in spite of the revenue generation abilities of these display systems for schools. We believe that this couldwill lead to lower overall net sales in the Schools and Theatres business unit for all of fiscal 2012 as compared to fiscal 2011.
A positive aspect that could drive different results in the Schools and Theatres business unit is the increase in opportunities for larger video systems, primarily in high school facilities whichthat benefit from our sports marketing services that generate the advertising revenue to fund the display systems. Net sales for the hoist portion of this business unit decreased in the second quarter and first six months of fiscal 2012 as compared to the same period one year ago.slightly. For the long term, we believe that this business unit presents growth opportunities onceas the economy improves.
Transportation Business UnitTransportation: . The increase in net sales in theour Transportation business unit for both the second quarter and first sixnine months of fiscalended January 28, 2012 as compared to the same periods one year ago was generally due to greater throughput in manufacturing, allowing us to work down the backlog at a faster rate than we were able to in the prior fiscal year and due to the increase in orders. The increase in orders over the same periods is generally due to the inherent volatility of order bookings when looking at it over a short time horizon. The Transportation business unit is dependent on government spending, primarily federal government spending. Furthermore, to the extent that the federal government commits to the spending, it takes an extended period of time for that spending to be allocated to projects for electronic displays. Therefore, changes in government spending levels impact our business well after the spending levels change. The U.S. Congress is expected to pass legislation to address future transportation spending; however, the outcome of any legislation is unknown at this time but could impact orders and net sales in the future. We believe that overall growth in this business unit in the past was the result of federal government stimulus money and prior federal legislation that provided for increased spending on transportation projects and to us gaining market share. Based on the uncertainty of federal spending levels, it is difficult to estimate how orders and net sales will turn out for fiscal 2012.
Similar to other business units, it appears that the competitive environment has become more intense in the Transportation business unit as a limited number of competitors have become more aggressive in pricing. Although we expect that this pricing pressure is not sustainable, it is likely to have an adverse impact on our net sales and gross profit margins until it eases.
International Business Unit. Net sales in the International business unit are impacted generally by the timing and magnitude of orders booked and the expected delivery expectations. During the second quarter of fiscal 2011, we had booked a large order in excess of $10 million for a new arena in Mexico. This had a significant impact on orders for both the second quarter of fiscal 2011 and the first half of fiscal 2011 as compared to the same periods in fiscal 2012. Since orders in the International business unit generally involved complex contract negotiating, contain more complicated issues compared to a U.S. order perspective, and are generally larger orders, there is more volatility in International order bookings on a quarter to quarter basis.
Overall, we have made considerable investments in growing our business internationally, where we do not have the same market share as we do domestically. This investment has allowed us to leverage our internationally known brand and capture business we were not previously effective at winning since we were not local to the customer. We also believe that improvements in the economy have improved order volumes. We expect that we will continue to see growth in the International business unit over the long-term as a result.
As stated in prior filings, in the second half of fiscal 2009, we began to see more competitive pressures in this area similar to the competitive pressures described above in the Live Events market because the competitors tend to overlap. We expect this challenging competitive environment to continue.
-19-
Advertising Revenues. We occasionally sell products in exchange for the advertising revenues generated from use of the products. These sales represented less than 1% for the first six months and for the second quarter of fiscal 2012 and fiscal 2011. 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 October 29, 2011 was approximately $136 million as compared to $121 million as of October 30, 2010 and $154 million at the end of the first quarter of fiscal 2012. Historically, our backlog varies due to the timing of large orders. The backlog increased from one year ago in all of our business units, with the exception of Schools and Theaters, which declined. Backlog varies significantly quarter-to-quarter due to the effects of large orders, and significant variations can be expected, as explained previously. Backlog also varies significantly due to customer delivery expectations. In addition, our backlog is not necessarily indicative of future sales or net income.
GROSS PROFIT
The following table sets forth gross profit for each of our five business units for the periods indicated (dollars in thousands):
| | Three Months Ended |
| | October 29, | | October 30, |
| | 2011 | | 2010 |
| | Gross Profit | | Percent Change | | As a Percent of Net Sales | | Gross Profit | | As a Percent of Net Sales |
| Commercial | $ | 10,964 | | 35.8 | % | | 25.1 | % | | $ | 8,075 | | 25.3 | % |
| Live Events | | 9,200 | | (5.4) | | | 19.7 | | | | 9,728 | | 22.1 | |
| Schools & Theatres | 4,191 | | (30.9) | | | 24.3 | | | | 6,065 | | 28.4 | |
| Transportation | | 3,717 | | (1.0) | | | 29.9 | | | | 3,755 | | 32.7 | |
| International | | 3,398 | | (34.6) | | | 21.4 | | | | 5,194 | | 28.6 | |
| | $ | 31,470 | | (4.1) | % | | 23.2 | % | | $ | 32,817 | | 25.9 | % |
| | | | | | | | | | | | | | | |
| | Six Months Ended |
| | October 29, | | October 30, |
| | 2011 | | 2010 |
| | Gross Profit | | Percent Change | | As a Percent of Net Sales | | Gross Profit | | As a Percent of Net Sales |
| Commercial | $ | 18,944 | | 43.8 | % | | 24.8 | % | | $ | 13,177 | | 24.0 | % |
| Live Events | | 15,691 | | (13.9) | | | 18.4 | | | | 18,219 | | 21.5 | |
| Schools & Theatres | 10,067 | | (13.2) | | | 28.2 | | | | 11,604 | | 30.5 | |
| Transportation | | 7,828 | | 26.8 | | | 32.7 | | | | 6,172 | | 32.4 | |
| International | | 8,446 | | (17.5) | | | 25.3 | | | | 10,232 | | 33.4 | |
| | $ | 60,976 | | 2.6 | % | | 23.9 | % | | $ | 59,404 | | 26.1 | % |
For the second quarter of fiscal 2012 as compared to the second quarter of fiscal 2011, the decrease in gross profit as a percent of sales is the result of a 1.8 percentage point decrease in gross profit on product sales, primarily large contract sales, and a reduction of approximately two percentage points in our services related business. These decreases were offset by a reduction in warranty expense which added 1.2 percentage points. Included in gross profit on product sales is approximately $0.6 million related to the settlement of a claim from a customer, approximately $0.3 million in inventory write-downs, and approximately $0.3 million related to a contract which incurred significantly higher costs in order to conform to regulatory requirements in the country of installation, which was unforeseen at the time of sale.
For the first six months of fiscal 2012 as compared to the same period one year ago the decline in gross profit is the result of the increase in orders booked during this period, which was driven by orders from the New Jersey Turnpike under a 1.5 percentage point decrease due$25 million, three year procurement contract. Orders from this customer have exceeded $12.4 million for the fiscal year to a lower gross profit on productdate compared to $1.6 million for all of fiscal 2011.
International: The increase in net sales primarily large contract sales, and a reduction of approximately two percentage points due to higher costs in our services related business. These decreases were offset by a reduction in warranty expense which increased gross profit percentage by approximately 1.0%.
For the changes in both the quarter and the first six months, the decline in large contract gross profit percentage was primarily due to the competitive factors described above and the items previously mentioned. For the second quarters of fiscal 2012 and fiscal 2011, large contracts were approximately 64% and 62%, respectively, of net sales. Warranty costsInternational business unit for the second quarter and the first sixnine months of fiscalended January 28, 2012 were approximately 3.3% and 2.8%, respectively, of net sales, compared to 4.9% and 3.8% for the same periods in fiscal 2011. Partially offsetting these costs were lower manufacturing conversion costs which represents total labor and overhead cost of manufacturing, as a percentage of net sales, which declined by 0.3 and 0.9 percentage points for the second quarter and first six months of fiscal 2012 as compared to the same periodsperiod one year ago.ago is the result of the higher backlog of business we had at the beginning of fiscal 2012, primarily as a result of a large contract for a new arena being built in Mexico. At the end of fiscal 2011, the backlog of this contract was approximately $8.9 million compared to $0.6 at the end of the third quarter of fiscal 2012. We believe that although orders for this business unit can vary significantly from quarter to quarter as a result of the small number of orders actually booked, over the long-term, this business unit represents a significant area of growth as we penetrate markets we have not focused on previously.
-20-GROSS PROFIT
| | Nine Months Ended |
| | January 28, 2012 | | | | | January 29, 2011 |
| | | | As a Percent of Net Sales | | Percent Change | | | | As a Percent of Net Sales |
| (in thousands) | Amount | | | Amount | |
| Commercial | $ | 29,299 | | | 25.4 | % | | | 48.8 | % | | $ | 19,687 | | | 23.5 | % |
| Live Events | | 21,908 | | | 17.7 | | | | (10.5 | ) | | | 24,491 | | | 20.3 | |
| Schools & Theatres | | 11,984 | | | 25.8 | | | | (17.4 | ) | | | 14,516 | | | 29.2 | |
| Transportation | | 10,720 | | | 31.3 | | | | 16.2 | | | | 9,227 | | | 30.7 | |
| International | | 14,919 | | | 25.7 | | | | (1.4 | ) | | | 15,126 | | | 35.2 | |
| | $ | 88,830 | | | 23.5 | % | | | 7.0 | % | | $ | 83,047 | | | 25.4 | % |
The decrease in our gross profit percentage for the nine months ended January 28, 2012 compared to the same period one year ago is the net result of the following:
| · | A decrease of less than a percentage point in margin on product sales. |
| · | A decrease of approximately 2.5 percentage points as a result of higher overhead costs associated with our services business. |
| · | An increase of approximately 0.7 percentage points as a result of lower warranty expenses as a percentage of net sales. For the first nine months of fiscal 2012, warranty costs were approximately 3% of net sales compared to 3.5% in fiscal 2011. |
We have been challenged with higher than expected warranty costs, by competitive factors, as noted above, and by added costs of our services infrastructure as we deploy and reengineer systems and processes. During fiscal 2009, inIn order to reduce warranty costs and to address competitive factors, we began expending significant effort on developing our new outdoor DVX technology in fiscal 2009 and then, in fiscal 2011, on our new indoor DVN technology, which are common module platforms that over time will replacehave replaced many of the different and unique modules for each of our display resolutions and types. Part of this development also involves the markets’ increasing interest in higher resolution outdoor displays, which require surface mount technology as opposed to the traditional through-hole technology.
The DVX and DVN technologies decrease the cost of displays significantly and supply the market with higher resolution products. We have also invested significant resources in quality initiatives and reliability equipment to test new designs. We believe that this technology and investment in quality initiatives will drive down warranty costs over the long term and make our products more competitive, both of which are intended to increase gross profit percentages and drive higher sales.
One of the challenges that occurred with the downturn of our business during fiscal 2009 was the higher percentage of fixed costs in manufacturing relative to net sales. Since the downturn, we have been lowering that percentage through cost reduction,reductions, lean initiatives and higher sales, and we expect to continue lowering it, adding to the gross profit percentages. Total manufacturing conversion costs for the secondthird quarter of fiscal 2012 and fiscal 2011 were approximately $17.0$18.0 million and $16.3$15.6 million, respectively. For the first sixnine months of fiscal 2012, total manufacturing conversion costs were approximately $33.8$51.8 million as compared to $32.3$47.9 million for the same period last year.
Within the Commercial business unit, the gross profit percent increased in the second quarter and first six months of fiscal 2012 as compared to the same periods one year ago as a result of lower margin percents in the large contract portion of the business, which was more than offset by better warranty performance. The improvement in warranty expense in the second quarter and the first six months of fiscal 2012 as compared to the same periods one year ago resulted in an improvement of 4.3 and 2.4 percentage points respectively. This decrease resulted from some unusually higher costs in fiscal 2011, as explained in prior filings. Furthermore, we have benefitted from the increase in production, primarily in our billboard plant, which has added approximately 3 percentage points to our gross profit. Offsetting this improvement is a decrease in gross profit percentages, primarily on large video system contracts and increased costs of our services area.
Gross profit percentages decreased in the Live Events business unit for the second quarter and first six months of fiscal 2012 as compared to the same periods one year ago due to higher services costs, which lowered the gross profit percentage by approximately two percentage points for both periods. The gross profit on large contracts, which accounts for approximately 60% of net sales in the Live Events business unit, improved slightly in both comparable periods of fiscal 2012 as compared to fiscal 2011, although the percentage improvement was minor. Based on our current backlog and competitive factors, we do not expect to see any increase in gross profit percentages on a sequential basis; however, gross margins in the large contract business vary to a large degree and are difficult to forecast.
The decrease in gross profit percents in the Schools and Theatres business unit for the second quarter and first six months of fiscal 2012 as compared to the same periods one year ago was due primarily to the higher costs of services which caused gross profit percentages to decrease by 2.5 and 2.0 percentage points over the prior year’s periods. For the second quarter of fiscal 2012 as compared to the same period one year ago, the gross profit percentage on equipment orders also declined in the high school segment. For the first six month the gross profit percentage increased on equipment orders.
The change in the gross profit percentages in our Transportation business unit increased for the second quarter and first six months of fiscal 2012 compared to the same periods one year ago as a result of the inherent volatility of gross profit percents that arise in the course of our business.
Historically, the gross profit percentages in the International business unit should approximate the gross profit percentages that we experience in our domestic large video contract business, subject to some differences in local markets. Historically, our gross profit percentages in the International business have generally been higher as a result of the focus on more profitable contracts as we had limited penetration. The declines in gross profit percentage in the International business unit is reflecting our deeper penetration, but also our success with larger international customers where the gross margins are typically lower due to the customers deeper knowledge and the more intense competition. In prior quarters we have stated that the gross margin levels were not sustainable as a result of these factors, and we are starting to see some of this as our sales and penetration increases.
It is difficult to project gross profit levels for the rest of fiscal 2012 because of the uncertainty regarding the level of sales, warranty costs and the competitive factors described previously.
Commercial: The following sets forth our operating expenses for the periods indicated (dollars in thousands):
| | Three Months Ended |
| | October 29, | | October 30, |
| | 2011 | | 2010 |
| | Operating expense | | Percent Change | | As a Percent of Sales | | Operating expense | | As a Percent of Sales |
| Selling expense | $ | 12,926 | | 2.6 | % | | 9.5 | % | | $ | 12,600 | | 9.9 | % |
| General and administrative | | 6,972 | | 24.0 | | | 5.1 | | | | 5,624 | | 4.4 | |
| Product design and development | | 5,636 | | 23.6 | | | 4.1 | | | | 4,561 | | 3.6 | |
| | $ | 25,534 | | 12.1 | % | | 18.8 | % | | $ | 22,785 | | 18.0 | % |
| | | | | | | | | | | | | | | |
| | Six Months Ended |
| | October 29, | | October 30, |
| | 2011 | | 2010 |
| | Operating expense | | Percent Change | | As a Percent of Sales | | Operating expense | | As a Percent of Sales |
| Selling expense | $ | 25,135 | | 0.8 | % | | 9.9 | % | | $ | 24,936 | | 11.0 | % |
| General and administrative | | 13,436 | | 19.8 | | | 5.3 | | | | 11,212 | | 4.9 | |
| Product design and development | | 11,353 | | 24.6 | | | 4.5 | | | | 9,114 | | 4.0 | |
| | $ | 49,924 | | 10.3 | % | | 19.6 | % | | $ | 45,262 | | 19.9 | % |
Operating expenses are comprised of selling, general and administrative expenses and product design and development costs. The changes in the various components of operating expenses are explained below.
Selling Expenses. Selling expenses consist primarily of salaries, other employee-related costs, travel and entertainment expense, facilities-related costs for sales and service offices, and expenditures for marketing efforts, including collateral materials, conventions and trade shows, product demos and supplies.
The increase in selling expense for the second quarter of fiscal 2012 as compared to the same period in fiscal 2011 was due to $0.6 million increase in personnel costs, including taxes and benefits, a $0.2 million increase in travel and entertainment costs, and an increase of $0.1 million of various other expenses, which was partially offset by a decrease of $0.5 million in payments to third party sales representatives and a decrease of $0.1 million of bad debts expense. The increase in personnel costs is a result of an increase in employee count. The increase in travel is a result of the higher level of sales opportunities for the quarter. The decrease in payments to third party sales representatives was a result of the reduction of sales made by the third party sales representatives. The decrease in bad debt expense is due to the inherent volatility of bad debt expense that we experience.
On a year to date basis, selling expense in fiscal 2012 increased $0.2 million from fiscal 2011. The increase was due to a $0.9 million increase in personnel costs, including taxes and benefits, an increase of $0.5 million in travel and entertainment costs, and an increase of $0.2 million in building occupancy costs, offset by a decrease in payments to third party sales representatives of $0.7 million, a decrease of $0.4 million of depreciation expenses and a decrease of $0.3 million in bad debt expenses. The increase in personnel costs is a result of an increase primarily in our International and Commercial business units to support the growth in orders. The increase in travel is a result of the higher level of orders for the quarter. The decrease in payments to third party sales representatives was a result of the reduction of sales made by the third party sales representatives. Payments to third party sales representatives are unpredictable and are based on the mix of sales sold on a commission basis by third parties. The decrease in bad debt expense is due to the inherent volatility of bad debt expense that we experience. The decrease in depreciation costs is a reflection of reduced capital expenditures for the last couple of years, which was a key component of our cost reduction strategy.
General and Administrative. General and administrative expenses consist primarily of salaries, other employee-related costs, professional fees, shareholder relations fees, facilities and equipment-related costs for administration departments, amortization of intangibles, and supplies.
General and administrative expensesgross profit percent increased in the second quarter of fiscalCommercial business unit for the nine months ended January 28, 2012 over the same period in fiscal 2011 due to increases in professional fees of $0.5 million; an increase in personnel costs, including taxes and benefits, of approximately $0.5 million; and a net increase for various other expenses of approximately $0.3 million. For the first six months of fiscal 2012 as compared to the first six months of fiscal 2011, the increase was due to increases in professional fees of $1.0 million; an increase in personnel costs, including taxes and benefits, of approximately $0.6 million; and a net increase for various other expenses of approximately $0.6 million. The increase in professional fees is a result of litigation costs and international expansion initiatives, some of which were one-time costs and are expected to decline in future quarters and higher costs of information systems consulting fees. The increase in personnel costs is the result of an increase in employee count, primarily related to personnel to support further hiring in other areas of the company and in accounting and legal to support international development.
As described above, we expect that general and administrative expenses may increase slightly in future quarters, although our goal is to continue to challenge our cost structure until our operating margin returns to more acceptable levels.
Product Design and Development. Product design and development expenses consist primarily of salaries, other employee-related costs, facilities and equipment-related costs and costs of supplies.
Investments in our DVX and DVN technology platforms, architectural lighting products and various other initiatives to standardize display components and in other display technologies and related items, including control systems for both single site displays and networked displays, continue to drive product design and development expenses. Our costs for product development represent an allocated amount of costs based on time charges, materials costs and overhead of our engineering departments. Generally, between 65% and 75% of our engineering time is spent on product development, while the rest is allocated to large contract work and included in costs of goods sold.
For the second quarter of fiscal 2012 as compared to the same period one year ago our personnel costs, including taxes and benefits, increased by approximately $0.9 million, offset by a $0.4 millionis the net result of:
| · | An increase in the gross profit on large video display contracts, which added approximately 0.7 percentage points to gross margin. |
| · | A decrease in warranty expenses, which added approximately 2.7 percentage points to gross profit and resulted from the actions previously discussed and some unusually higher costs in fiscal 2011, as explained in prior filings. |
| · | An increase in our services overhead, which decreased gross profit by approximately 0.8 percentage points. |
Live Events: The gross profit percent decrease in other expenses. In addition, material costs related to product development increased by $0.6 million in the second quarter of fiscalLive Events business unit for the nine months ended January 28, 2012 compared to the same period of fiscal 2011 as a result of increasing importance placed on prototyping new products and the increase in new product introductions. For the first six months of fiscal 2012 as compared to the same period one year ago our personnel costs, including taxes and benefits, increased by approximately $1.7 million and other expenses decreased $0.6 million. In addition, material costs related to product development increased by $1.1 million.is the net result of:
| · | Improvement in gross profit margin on product sales, which added approximately 1.2 percentage points to gross margin. |
| · | Increases in our services overhead, which decreased gross profit percentages by approximately 2.3 percentage points. |
| · | Lower plant utilization from the overall lower sales volumes, which decreased gross profit percentages by approximately 1.3 percentage points. |
CONTRIBUTION MARGIN BY SEGMENTSchools and Theatres: The gross profit percent decrease in the Schools and Theatres business unit for the nine months ended January 28, 2012 compared to the same period one year ago is the net result of:
| · | A decrease in gross profit percentage in product sales, which decreased the overall gross profit percentage by approximately 1.5 percentage points. |
| · | A decrease in warranty expenses, which added approximately 1.2 percentage points to the gross profit percentage. |
| · | An increase in our services overhead, which reduced the gross profit percentage by approximately 1.8 percentage points. |
Transportation: The following table sets forth contribution margin, defined as gross profit less selling expenses, by segment (dollarspercent increase in thousands):the Transportation business unit for the nine months ended January 28, 2012 compared to the same period one year ago is the net result of:
| · | An increase in the gross profit percentage on product sales, which added approximately 3.7 percentage points on the overall gross profit percentage. |
| · | Lower plant utilization from the overall lower sales volumes, which decreased gross profit percentages by approximately 2.7 percentage points. |
International: The gross profit percent decrease in the International business unit for the nine months ended January 28, 2012 compared to the same period one year ago is the net result of:
| · | A decrease in the gross margin on product sales, which decreased the overall gross profit by approximately 8.5 percentage points. This decrease is the result of a number of factors, including added costs to conform products to local regulatory requirements and a lower margin on contracts booked due to the factors described below. |
| · | An increase in warranty costs, which added approximately 1.3% percentage points. |
| | Three Months Ended | | Six Months Ended | |
| | October 29, | October 30, | | October 29, | October 30, | |
| | 2011 | 2010 | | 2011 | 2010 | |
| Contribution Margin | Amount | | | Percent change | Amount | | Amount | | | Percent change | Amount | |
| Commercial | | $ | 7,449 | | | | 53.2 | % | | $ | 4,861 | | | $ | 11,986 | | | | 75.0 | % | | $ | 6,849 | |
| Live Events | | | 6,021 | | | | (4.0 | ) | | | 6,270 | | | | 9,429 | | | | (16.9 | ) | | | 11,346 | |
| Schools & Theatres | | | 1,409 | | | | (59.5 | ) | | | 3,482 | | | | 4,809 | | | | (26.1 | ) | | | 6,510 | |
| Transportation | | | 2,795 | | | | (4.8 | ) | | | 2,937 | | | | 6,140 | | | | 37.2 | | | | 4,476 | |
| International | | | 869 | | | | (67.4 | ) | | | 2,666 | | | | 3,477 | | | | (34.2 | ) | | | 5,287 | |
| | | $ | 18,543 | | | | (8.3 | ) % | | $ | 20,216 | | | $ | 35,841 | | | | 4.0 | % | | $ | 34,468 | |
Contribution margin by segment is equal toHistorically, our gross profit less selling costs, which includes allocations of various expenses on a discretionary basis that may not be indicative ofmargins in the segment’s actual performance on a stand-alone basis. Therefore, we caution reaching conclusions as to performance based on these disclosures, which are required underInternational business unit have generally accepted accounting principles. All ofbeen higher than in our other business units’ results were impactedunits as a result of the changesfocus on more profitable contracts, as we have limited penetration in salesinternational markets. In prior quarters, we stated that the gross margin levels in our International business unit were not sustainable as we penetrated more deeply in international markets and competition increased. We are now beginning to recognize lower gross margins in our International business unit due to these factors. The recent declines in gross profit as previously described. percentage in the International business unit reflect our deeper penetration and our success with larger international customers, resulting in typically lower gross margins due to the customers’ potential volume and more intense competition.
SELLING EXPENSE
| | Nine Months Ended |
| | January 28, 2012 | | | | | January 29, 2011 |
| | | | As a Percent of Net Sales | | Percent Change | | | | As a Percent of Net Sales |
| (in thousands) | Amount | | | Amount | |
| Commercial | $ | 10,480 | | | 9.1 | % | | | 11.3 | % | | $ | 9,415 | | | 11.2 | % |
| Live Events | | 9,835 | | | 8.0 | | | | (4.6 | ) | | | 10,309 | | | 8.5 | |
| Schools & Theatres | | 8,005 | | | 17.2 | | | | 10.1 | | | | 7,271 | | | 14.6 | |
| Transportation | | 2,501 | | | 7.3 | | | | (2.0 | ) | | | 2,551 | | | 8.5 | |
| International | | 7,654 | | | 13.2 | | | | 1.5 | | | | 7,538 | | | 17.6 | |
| | $ | 38,475 | | | 10.2 | % | | | 3.8 | % | | $ | 37,084 | | | 11.3 | % |
The remainder ofincrease in selling expenses in the changes for both the second quarter and first sixnine months of fiscal 2012 compared to the same period one year ago resulted from changesis the net result of the following:
| · | A $2.0 million increase in personnel costs, including taxes and benefits, primarily in our International and Commercial business units to support the growth in orders. |
| · | An increase of $0.7 million in travel and entertainment costs. |
| · | A decrease in payments to third party sales representatives of $1.0 million due to more direct sales versus sales through third parties. |
| · | A decrease of $0.6 million of depreciation expenses, which reflects reduced capital expenditures for the last couple of years and is a key component of our cost reduction strategy. |
Commercial: The increase in selling expense.
In the Commercial business unit, selling expenses increased approximately 9.4% and 9.9% for the second quarter and first sixnine months of fiscal 2012 compared to the same periods one year ago. The increase for the quarterperiod in fiscal 2011 was thea result of a $0.2$0.7 million increase in personnel costs, including taxes and benefits, and a $0.1$0.4 million increase in travel and entertainment costs. These increases are a result of the increase in orders, as explained previously.
Live Events: The increasedecline in selling expenses for the first sixnine months of fiscal 2012 was a result of $0.4 million of personnel costs, including taxes and benefits and $0.3 million increase in travel and entertainment costs.
In the Live Events business unit, selling expenses declined by 8.1% and 8.9% for the first six months and the second quarter of fiscal 2012 compared to the same periodsperiod in fiscal 2011. The decline for the quarter2011 was thea result of a $0.1reduction of $0.5 million decrease in marketing and convention expenses, bad debt expenses,depreciation and other expenses for reasons explained previously. We also had reductions in various other expenses totaling $0.5 million, which were offset by ana net increase of $0.1 million in personnel costs, including taxes and benefits.
Schools & Theatres: The declineincrease in the first six months of fiscal 2012 was a result of a decline in $0.2 million in personnel costs, including taxes and benefits, and $0.6 million decrease in various other expenses.
Sellingselling expenses for the Schools and Theatres business unit increased by 7.7% and 3.2% for the second quarter and first sixnine months of fiscal 2012 respectively, compared to the same periodsperiod in fiscal 2011. The increase for the quarter2011 was due to an increase in bad debt write-offs and increased personnel costs, including taxes and benefits.
In the Transportation business unit, sellingTransportation: Selling expenses increased 12.8% for the second quarter of fiscal 2012 and were flat for the first six months of fiscal 2012 compared to the same periodsperiod one year ago. The increase for the second quarter was the result of increases in personnel costs, including taxes and benefits.
In the International business unit, sellingInternational: Selling expenses were flat for both the first six months and the second quarter of fiscal 2012 as compared to the first quarter and six months of fiscal 2011, although there were increases in payroll costs, net of taxes and benefits, and various other expenses, which were offset by decreases in commissions and fees to third parties.
INTEREST INCOME AND EXPENSEOTHER OPERATING EXPENSES
| | Nine Months Ended |
| | January 28, 2012 | | | | | January 29, 2011 |
| | | | As a Percent of Net Sales | | Percent Change | | | | As a Percent of Net Sales |
| (in thousands) | Amount | | | Amount | |
| General and administrative | $ | 20,410 | | | 5.4 | % | | | 18.3 | % | | $ | 17,259 | | | 5.3 | % |
| Product design and development | $ | 17,050 | | | 4.5 | % | | | 23.7 | % | | $ | 13,787 | | | 4.2 | % |
The increase in general and administrative expense in the first nine months of fiscal 2012 as compared to the same period one year ago is to the net result of the following:
| · | An increase in professional fees of $1.4 million as a result of higher litigation costs and international expansion initiatives, some of which were one-time costs and are expected to decline, and higher costs of information systems consulting fees, as we outsourced more projects to speed up development where we believed we could achieve a faster payback in efficiencies. |
| · | Increases in personnel costs, including taxes and benefits, of approximately $0.9 million due to an increase in employee count, primarily related to personnel to support hiring in other areas of the company and in accounting and legal to support international development. |
| · | Increases in various other expenses of approximately $0.8 million. |
The increase in product development expense in the first nine months of fiscal 2012 as compared to the same period one year ago is the net result of the following:
| · | An increase in personnel costs, including taxes and benefits, of approximately $1.5 million, as we increased our staff to support the continued rollout of our display and control system platforms. |
| · | An increase in material costs related to product development of $1.1 million as a result of increasing importance placed on prototyping new products and the increase in new product introductions. |
| · | An increase of approximately $1.1 million in various other expenses. |
OTHER EXPENSES
| | Nine Months Ended |
| | January 28, 2012 | | | | | January 29, 2011 |
| | | | As a Percent of Net Sales | | Percent Change | | | | As a Percent of Net Sales |
| (in thousands) | Amount | | | Amount | |
| Interest income, net | $ | 1,095 | | | 0.3 | % | | | (13.4 | ) % | | $ | 1,264 | | | 0.4 | % |
| Other (expense) income, net | $ | (221 | ) | | (0.1 | ) % | | | (127.0 | ) % | | $ | 818 | | | 0.3 | % |
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 increaseddeclined slightly for both the second quarter and first sixnine months of fiscalended January 28, 2012 as compared to the same periodsperiod in fiscal 2011.2011 for the reasons set forth above, in the change in the three months ended January 28, 2012. We expect that the amount of interest income will increase through the rest of fiscal 2012 due to higher levels of interest income we anticipate receiving as we invest excess cash into higher yielding investments, although due to the volatility of working capital needs and changes in investing and financing activities, this expectation could provethere is some uncertainty in the ability to be incorrect.realize this.
Interest expense increased to $0.1 million and $0.2 million for the second quarter and first sixnine months of fiscalended January 28, 2012 respectively, as compared to same periods in fiscal 2011 as a result of borrowings in China to support for the needs of theour expanding business there and the impact of currency controls, which limit our transfers of investment capital from the U.S. to fund operations there.in China. We expect that interest expense will remain at relatively low levels for the rest of fiscal 2012.
OTHER (EXPENSE) INCOME, NET
Other (expense) income, for the second quarternet: The decrease of fiscal 2012 was ($0.1) million as compared to a gain of $0.2$1.0 million for the second quarter of fiscal 2011. For the first sixnine months of fiscal 2012, we recognized a loss of ($0.2) million compared to a gain of $0.3 million for the same period in fiscal 2011. The decrease in the second quarter of fiscalended January 28, 2012 as compared to the same period one year ago wasis due mainly to increasedthe net result of a $0.6 million gain on the settlement of amounts owed by Outcast in fiscal 2011, as described in previous filings, a increase of $0.5 million in foreign currency losses, and by various other non-operating gains which decreased from one year ago.
gains.
In addition, as a result of the decrease in the value of the U.S. dollar, we experienced higher levels of currency losses on U.S. dollar advances to foreign subsidiaries in the first six months of 2012 compared to the same period in fiscal 2011.
INCOME TAX EXPENSETAXES
Income taxes wereThe effective tax rate was approximately $2.3 million in the second quarter of fiscal 2012 and $3.5 million34.7% for the second quarter of fiscal 2011. For the first sixnine months of fiscal 2012 income taxes were $4.3 million as compared to $5.7 million33.6% for the first sixnine months of fiscal 2011. The effective rate for the second quarter of fiscal 2012 was approximately 37.1% as compared to 33.5% for the second quarter of fiscal 2011. The effective rate for the first six months of fiscal 2012 was approximately 37.0% as compared to 37.7% for the first six months of fiscal 2011.
Our effective tax rate can vary significantly due to the mix of pre-tax income in different countries and the estimate of the annual effective rate in each country. In comparing the second quarter and first sixnine months of fiscal 2012 to the same periodsperiod in fiscal 2011, changes in the effective tax rate areis due to the resultnet impact of this mix and the impact that permanent adjustments to taxable income have as a percent of taxable income.following items:
| · | A decrease in the annual estimated effective tax rate of approximately 1 percentage point as a result of the deductibility of the dividends paid in fiscal 2012, which were not deductible in fiscal 2011, increased tax credits, primarily research and development tax credits, and a decrease in estimated non-deductible stock compensation expense, which were partially offset by a change in the mix of income between the United States and foreign jurisdictions where rates are lower, and lower estimated deductions for domestic production activities. |
| · | A increase in the liability for foreign income taxable in the United States under subpart F of the US Tax Code, which increased the effective tax rate by 2 percentage points. |
| · | A decrease in the effective tax rate of approximately 1.5 percentage points as a result of the effect of the change in tax rates on deferred assets in foreign jurisdictions resulting from the termination of the tax holiday. |
| · | Various other items which have a greater impact on the effective rate due to lower income before taxes, but are not material to the results. |
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 as different taxing jurisdictions have different statute of limitations. The United States Internal Revenue Service (IRS) is currently in the process of examining our U.S. federal tax returns for fiscal years 2009 and 2010. In addition, asThe Chinese tax authorities recently completed an audit of tax returns for calendar years prior to 2012 in connection with a resulttransfer of a movelocation of our main facility to a different local taxing jurisdiction within China, which occurredbusiness address in a prior fiscal year, we are required to undergo a tax review to get tax clearance from the previous local taxing jurisdiction since the entity was formed in calendar year 2005.China.
The product order backlog as of January 28, 2012 was approximately $121 million as compared to $128 million as of January 29, 2011 and $136 million at the end of the second quarter of fiscal 2012. Historically, our backlog varies due to the timing of large orders and customer delivery schedules for these orders. The backlog decreased from one year ago in all of our business units, with the exception of Transportation, which increased approximately $5.3 million. Our backlog is not necessarily indicative of future sales or net income.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $135.6 million at October 29, 2011 and $128.2 million at April 30, 2011. We have historically financed working capital needs through a combination of cash flow from operations and borrowings under bank credit agreements.| | Nine Months Ended | |
| | January 28, | | January 29, | | Percent Change | |
| (in thousands) | 2012 | | 2011 | |
| Net cash provided by (used in): | | | | | | |
| Operating activities | $ | 8,393 | | $ | 37,374 | | | (77.5 | ) % |
| Investing activities | | (9,508 | ) | | (20,060 | ) | | (52.6 | ) |
| Financing activities | | (24,707 | ) | | (23,479 | ) | | 5.2 | |
| Effect of exchange rate changes on cash | | 66 | | | 111 | | | (40.5 | ) |
| Net decrease in cash and cash equivalents | $ | (25,756 | ) | $ | (6,054 | ) | | 325.4 | % |
Cash provided by operationsflows from operating activities: The decrease in cash from operating activities for the first sixnine months of fiscal 2012 was $21.5 million. Net income of $7.0 million plus $4.0 million in changes in net operating assets and liabilities, adjusted by depreciation and amortization of $9.1 million and $1.7 million of stock-based compensation, offset by $0.3 million of provision for doubtful accounts, generated most of the cash provided by operations.
The most significant drivers of the change in net operating assets which generated cash from operations were increases in accounts payable and customer deposits and decreases in accounts receivables and income tax receivables. These items were offset by increases in inventories, costs and estimated earnings in excess of billings and long term receivables and decreases in accrued expenses and warranty obligations and billings in excess of costs and estimated earnings. The decrease in income tax receivables was due to refunds received in connection with net operating loss carry backs that originated in fiscal 2010. The increase in inventories was relatedas compared to the higher levels needed to support more short delivery projects andfirst nine months of fiscal 2011 was the transition to new products. Days sales outstanding declined from 54 days as of April 30, 2011 to 46 days as of October 29, 2011. This change results from the natural volatility that can occur with large projects and the timing of customer payments. Days inventory outstanding increased from 42 days as of April 30, 2011 to 53 days as of October 29, 2011. These values fluctuate due to the current mix of business and the timing on orders, primarily large contract orders. net result following:
| · | A decrease in net income of $2.3 million, adjusted by depreciation and amortization of $1.6 million, as previously described. |
| · | A decrease in accounts receivables, which increased cash from operations by approximately $5.1 million. Days sales outstanding declined from 54 days as of April 30, 2011 to 42 days as of January 28, 2012. This change results from the natural volatility that can occur with large projects and the timing of customer payments. |
| · | An increase in the net of costs and earnings in excess of billings and billings in excess of costs and estimated earnings of approximately $16.7 million. This increase is due to the timing of construction type contracts, which can fluctuate significantly based on the particular contracts and their related billings. It is expected that this will turn around in the fourth quarter of fiscal 2012. |
| · | An increase in inventory of approximately $5.1 million. Days inventory outstanding increased from 42 days as of April 30, 2011 to 50 days as of January 28, 2012. |
| · | An increase in various other operating assets and liabilities, net, which reduced cash from operations by approximately $1.4 million. |
Overall, changes in operating assets and liabilities can be impacted by the timing of cash flows on large orders, as described above, which can cause significant fluctuations in the short term. As a resultterm in inventory, accounts receivables, accounts payable, customer deposits, costs and earnings in excess of billings and various initiatives underway, including changesother operating assets and liabilities.
Cash flows from investing activities: The decrease in manufacturing, purchasing, collections and payment processes, we expect to continue improving our cash flow relative to sales and costs of goods sold from operating activities.
Cash used byin investing activities of $8.9 million for the first sixnine months of fiscal 2012 included $7.7as compared to fiscal 2011 was the result of the net effect of the following:
| · | A decrease in the net cash invested in marketable securities, net of maturities. We began investing excess cash in marketable securities in fiscal 2011 and have generally maintained that level of investment during fiscal 2012. To the extent that maturities exceeded purchases in fiscal 2012, it resulted from lags in reinvesting the funds. |
| · | An increase in purchases of property and equipment of approximately $7.0 million. During the first nine months of fiscal 2012, we invested $5.5 in manufacturing equipment, $3.7 million in product demonstration equipment, $2.9 million in information systems infrastructure, including software, and $0.5 million in other assets. These investments were generally for maintenance in the case of information systems and in manufacturing related to the expansion of capability in China and in improving flexibility in the plants as it relates to new products. As of the end of the third quarter of fiscal 2012, capital expenditures were 3.3% of net sales and are expected to be approximately $16 million for the fiscal year as a whole. |
Cash flows from financing activities: The increase in cash used by financing activities for purchases of marketable securities and $6.2 million for purchases of property and equipment, which was offset by $5.0 million in proceeds from sales and maturities of marketable securities. During the first sixnine months of fiscal 2012 we invested approximately $2.3 millionas compared to fiscal 2011 was the result of an increase in manufacturing equipment, $1.5 million in product demonstration equipment, $1.9 million in information systems infrastructure, including software, and $0.4 million in other assets. These investments were generally for maintenance in the case of information systems, in manufacturing related to the expansion of capability in China and in improving flexibility in the plants as it relates to new products. As of the end of the second quarter of fiscal 2012, capital expenditures were 2.4% of net sales. For the remainder of fiscal 2012, our capital expenditures are expected to be closer to 4% of net sales as we expand our manufacturing capabilities in China and enhance our internal systems and operations within and outside of manufacturing.
Cash used by financing activities of $3.5 million for the second quarter of fiscal 2012 consisted of the dividends paid to shareholders of $4.6 million on June 24, 2011 that were partially offset by $0.3 million of proceeds from the exercise of stock options and $0.8 million of net borrowings on notes payable. The increaseas explained elsewhere in notes payable relate to loans in our Chinese subsidiary to fund expansion that were put in place to more effectively deal with currency restrictions imposed on moving currency in and out of the country. this Report.
Other Liquidity and Capital Resource Discussion: Included in receivables and costs in excess of billings as of October 29, 2011January 28, 2012 was approximately $3.3$3.5 million of retainage on long-term contracts, all of which is expected to be collected within one year.
Working capital was $116.2 million at January 28, 2012 and $128.2 million at April 30, 2011. 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 and primarily in China, bank borrowings to meet our short-term working capital requirements. On large product orders, the time between order acceptance and project completion may extend up to and exceed 24 months depending on the amount of custom work and the customer’s delivery needs. We often receive down payments or progress payments on these product orders. To the extent that these payments are not sufficient to fund the costs and other expenses associated with these orders, we use working capital and bank borrowings to finance these cash requirements.
Our product development activities during the secondthird quarter of fiscal 2012 included the enhancement of existing products and control systems and the development of new products from existing technologies.technologies, including new architechtual lighting applications. Product design and development expenses were $5.6$5.7 million for the secondthird quarter of fiscal 2012 as compared to $4.6$4.7 million for the secondthird quarter of fiscal 2011 and were $17.1 million for year to date of fiscal 2012 as compared to $13.8 million for the year to date of fiscal 2011. We expect to incur expenditures at a higher rate than our long-term targeted level of 4.0% of net sales throughout the rest of fiscal 2012 to develop new display products and solutions that will offer higher resolution and more cost-effective and energy-efficient displays, as well as to complement the services and solutionscontrol systems that are provided with the displays. We also intend to continue developing software applications related to our display systems to enable these products to continue to meet the needs and expectations of the marketplace.
We have a credit agreement with a U.S. bank that provides for a $35.0 million line of credit and includes up to $15.0 million for standby letters of credit. The line of credit which was amended on November 15, 2011, is due on November 15, 2012. The interest rate ranges from LIBOR plus 125 basis points to LIBOR plus 175 basis points depending on the ratio of interest-bearing debt to EBITDA. EBITDA is defined as net income before income taxes, interest expense, depreciation and amortization. The effective interest rate was 1.5% at October 29, 2011.January 28, 2012. We are assessed a loan fee equal to 0.125% per annum of any non-used portion of the loan. As of October 29, 2011,January 28, 2012, there were no advances under the line of credit.
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, a capital expenditure reserve of $6 million, and income tax expense, over (b) all principal and interest payments with respect to debt, excluding debt outstanding on the line of credit, and |
· | 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 that also was amendedexpires on November 15, 20112012 that is intended to support our credit needs outside of the U.S., primarily in China. The facility provides for a $20.0 million line of credit and includes facilities to issue up to $20.0 million for letters of credit and bank guarantees and to secure foreign loans. This U.S. credit facility secured the credit facility that we entered into in China with a Chinese affiliate of the U.S. bank. It is also expected to secure another facility in Europe to be used to issue credit enhancements as required under our contracts with our customers. The U.S. credit agreement is unsecured and is cross collateralized with the $35.0 million line of credit described above. It contains the same covenants as the credit agreement for that line of credit. As of October 29, 2011,January 28, 2012, there was $2.6$3.2 million of advances outstanding under the China credit facility.
We were in compliance with all applicable covenants as of October 29, 2011January 28, 2012 and April 30, 2011, and expect to be in compliance with all applicable covenants at the end of fiscal 2012. The minimum fixed charge coverage ratio as of October 29, 2011January 28, 2012 was 135-to-1,83-to-1, and the ratio of interest-bearing debt to EBITDA as of October 29, 2011January 28, 2012 was approximately 0.08-to-1.0.11-to-1.
On June 2, 2011, our Board declared an annual dividend payment of $0.11 per share on our common stock for the fiscal year ended April 30, 2011, which was paid on June 24, 2011.
On December 1, 2011, our Board declared a semi-annual dividend payment of $0.11 per share on our common stock and a special dividend of $0.40 per share on our common stock. The dividend will bewas paid on December 22, 2011. Although we intend to pay regular semi-annual dividends for the foreseeable future, all subsequent dividends will be reviewed annually and declared by our Board of Directors at its discretion.
We are sometimes required to obtain performance bonds for display installations, and we have a bonding line available through a surety company that provides for an aggregate of $100.0 million in bonded work outstanding. At October 29, 2011,January 28, 2012, we had approximately $33.9$38.9 million of bonded work outstanding against this line.
We believe that if our growth extends beyond current expectations or if we make any strategic investments, we may need to increase our credit facilities or seek other means of financing. We anticipate that we will be able to obtain any needed funds under commercially reasonable terms from our current lenders or other sources. We believe that our working capital available from all sources will be adequate to meet the cash requirements of our operations in the foreseeable future.
Item 3I.tem 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY EXCHANGE RATES
Through October 29, 2011,January 28, 2012, most of our net sales were denominated in United States dollars, and our exposure to foreign currency exchange rate changes on net sales had not been significant. For the firstthird quarter and year to date of fiscal 2012, net sales originating outside the United States were approximately 15%7.6% and 9.4% of total net sales, respectively, of which a portion was denominated in Canadian dollars, Euros, Chinese renminbi, British pounds, Hong Kong dollars, Australia dollars or other currencies. If we believed that currency risk in any foreign location was significant, we would utilize foreign exchange hedging contracts to manage our exposure to the currency fluctuations. Over the long term, net sales to international markets are expected to increase as a percentage of net sales and, consequently, a greater portion of this business could be denominated in foreign currencies. In addition, we fund our foreign subsidiaries’ operating cash needs in the form of loans denominated in United States dollars. As a result, their operating results may become subject to fluctuations based upon changes in the exchange rates of certain currencies in relation to the United States dollar. To the extent that we engage in international sales denominated in United States dollars, an increase in the value of the United States dollar relative to foreign currencies could make our products less competitive in international markets. This effect is also impacted by the sources of raw materials from international sources. We will continue to monitor and minimize our exposure to currency fluctuations and, when appropriate, use financial hedging techniques, including foreign currency forward contracts and options, to minimize the effect of these fluctuations. However, exchange rate fluctuations, as well as differing economic conditions, changes in political climates, differing tax structures and other rules and regulations could adversely affect our financial results in the future.
INTEREST RATE RISKS
Our exposure to market rate risk for changes in interest rates relates primarily to our debt, marketing obligations, and long-term accounts receivables. We maintain a blend of both fixed and floating rate debt instruments. As of October 29, 2011,January 28, 2012, our outstanding debt was $3.1$3.2 million, substantially all of which was in variable rate obligations. Each 100 basis point increase or decrease in interest rates would have an insignificant annual effect on variable rate debt based on the balances of such debt as of October 29, 2011.January 28, 2012. As of October 29, 2011,January 28, 2012, our outstanding marketing obligations were $1.0$0.8 million, substantially all of which were in fixed rate obligations. For fixed-rate debt, interest rate changes affect ourthe fair market value of the obligations but do not affect earnings or cash flows.
-26--29-
In connection with the sale of certain display systems, we have entered into various types of financings with customers. The aggregate amounts due from customers include an imputed interest element. The majority of these financings carry fixed rates of interest. As of October 29, 2011,January 28, 2012, our outstanding long-term receivables were approximately $20.0$19.0 million. Each 25 basis point increase in interest rates would have an associated annual opportunity cost to us of approximately $0.1 million.
The following table provides maturities and weighted average interest rates on our financial instruments that are sensitive to changes in interest rates, including debt obligations.
| | | Fiscal Years (dollars in thousands) | | | | | Fiscal Years (in thousands) | | | |
| | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | Thereafter | | 2012 | | 2013 | | | 2014 | | | 2015 | | | 2016 | | Thereafter | |
| Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Long-term receivables, including current maturities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed-rate | | $ | 2,901 | | | $ | 4,945 | | | $ | 3,339 | | | $ | 3,027 | | | $ | 2,402 | | | $ | 3,361 | | $ | 1,908 | | $ | 4,942 | | | $ | 3,322 | | | $ | 3,023 | | | $ | 2,412 | | $ | 3,373 | |
| Average interest rate | | | 8.0 | % | | | 7.9 | % | | | 8.0 | % | | | 8.0 | % | | | 7.8 | % | | | 8.2 | % | | 8.0 | % | | 7.9 | % | | | 8.0 | % | | | 8.0 | % | | | 7.8 | % | | 8.2 | % |
| Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Long- and short-term debt | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed-rate | | $ | 3,140 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | |
| Variable-rate | | $ | 3,180 | | $ | - | | | $ | - | | | $ | - | | | $ | - | | $ | - | |
| Average interest rate | | | 6.4 | % | | | - | | | | - | | | | - | | | | - | | | | - | | | 6.6 | % | | | | | | | | | | | | | | | | | | |
Long-term marketing obligations, including current portion | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed-rate | | $ | 62 | | | $ | 364 | | | $ | 275 | | | $ | 121 | | | $ | 66 | | | $ | - | | $ | 27 | | $ | 347 | | | $ | 265 | | | $ | 110 | | | $ | 61 | | $ | - | |
| Average interest rate | | | 7.7 | % | | | 8.8 | % | | | 9.0 | % | | | 8.9 | % | | | 9.0 | % | | | - | | | 6.5 | % | | 8.7 | % | | | 8.9 | % | | | 8.9 | % | | | 9.0 | % | | | |
Approximately $59.0$22.2 million of our cash balances are denominated in United States dollars. Cash balances in foreign currencies are operating balances maintained in accounts of our foreign subsidiaries. A portion of the cash held in foreign accounts is used to collateralize outstanding bank guarantees issued by the foreign subsidiaries.
Item 4I.tem 4. CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our “disclosure controls and procedures,” as that term is defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as of October 29, 2011,January 28, 2012, which is the end of the period covered by this report.Report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of October 29, 2011,January 28, 2012, our disclosure controls and procedures were effective.
Based on the evaluation described in the foregoing paragraph, our Chief Executive Officer and Chief Financial Officer concluded that during the quarter ended October 29, 2011,January 28, 2012, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
We are involved in a variety of other legal actions relating to various matters that arise in 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 financial results.
The discussion of our business and operations included in this Quarterly Report on Form 10-Q should be read together with the risk factors described in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended April 30, 2011. They describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties, together with other factors described elsewhere in this Report, have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. New risks may emerge at any time, and we cannot predict those risks or estimate the extent to which they may affect our financial condition or financial results.
ItemItem 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
Item 3I.tem 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4I. [REMOVED AND RESERVED]tem 4. MINE SAFETY DISCLOSURES
Not applicable.
Not applicable.
The following exhibits are included as part of this Quarterly Report on Form 10-Q:
| 31.1 | Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1) |
| 31.2 | Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1) |
| 32.1 | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). (1) |
| 32.2 | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). (1) |
| | | |
101 | The following financial information from our Quarterly Report on Form 10-Q for the period ended October 29, 2011,January 28, 2012, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheet, (ii) Consolidated Statement of Operations, (iii) Consolidated Statement of Cash Flows, and (iv) Notes to Consolidated Financial Statements.* |
| | (1) | Filed herewith electronically. | |
| | * | Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q 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. | |
The following exhibits are incorporated by reference into this Quarterly Report on Form 10-Q:
| 10.1 | Tenth Amendment to Loan Agreement dated November 15, 2011 by and between the Company and U.S. Bank National Association (the “Bank”) (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 17, 2011 (the “Form 8-K”)). |
| 10.2 | Renewal Revolving Note dated November 15, 2011 issued by the Company to the Bank (incorporated by reference to Exhibit 10.2 to the Form 8-K). |
| 10.3 | 10.3 Loan Agreement dated December 23, 2010 by and between Bank of America (“BoA”) and the Company (incorporated by reference to Exhibit 10.3 to the Form 8-K). |
| 10.4 | 10.4 First Amendment to Loan Agreement dated February 1, 2011 by and between BoA and the Company (incorporated by reference to Exhibit 10.4 to the Form 8-K). |
| 10.5 | 10.5 Second Amendment to Loan Agreement dated November 15, 2011 by and between BoA and the Company (incorporated by reference to Exhibit 10.5 to the Form 8-K). |
| 10.6 | 10.6 Revolving Note dated November 15, 2011 issued by the Company to BoA (incorporated by reference to Exhibit 10.7 to the Form 8-K). |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this reportReport to be signed on its behalf by the undersigned thereunto duly authorized.
| | /s/ William R. Retterath |
| | Daktronics, Inc. |
| | William R. Retterath |
| | Chief Financial Officer |
| | (Principal Financial Officer and |
| | Principal Accounting Officer) |
Date: DecemberMarch 2, 20112012
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