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DAKT > SEC Filings for DAKT > Form 10-Q on 30-Nov-2012All Recent SEC Filings

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Form 10-Q for DAKTRONICS INC /SD/


30-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (including exhibits and any information incorporated by reference herein) contains both historical and forward-looking statements that involve risks, uncertainties and assumptions. The statements contained in this Report that are not purely historical are forward-looking statements that are subject to the safe harbors created under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, beliefs, intentions and strategies for the future. These statements appear in a number of places in this Report and include all statements that are not historical statements of fact regarding our intent, belief or current expectations with respect to, among other things: (i) our financing plans; (ii) trends affecting our financial condition or results of operations; (iii) our growth strategy and operating strategy; (iv) the declaration and payment of dividends; (v) the timing and magnitude of future contracts; (vi) parts shortages and longer lead times; (vii) fluctuations in margins; and (viii) the introduction of new products and technology. The words "may," "would," "could," "should," "will," "expect," "estimate," "anticipate," "believe," "intend," "plans" and similar expressions and variations thereof are intended to identify forward-looking statements. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, many of which are beyond our ability to control, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors discussed herein, including those discussed in our filings with the Securities and Exchange Commission, including in our Annual Report on Form 10-K for the fiscal year ended April 28, 2012 in the section entitled "Item 1A. Risk Factors."

The following discussion highlights the principal factors affecting changes in financial condition and results of operations. This discussion should be read in conjunction with the accompanying Consolidated Financial Statements and Notes to the Consolidated Financial Statements.

The following discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments 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.

OVERVIEW

We design, manufacture and sell a wide range of display systems to customers throughout the world. We focus our sales and marketing efforts on markets, geographical regions and products. Our five segments consist of four domestic business units and an International business unit. The four domestic business units 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 seasonal factors, including the impact of holidays, which primarily affects our third quarter. Our gross margins on large custom and standard orders tend to fluctuate more than small standard orders. Large product orders 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 on a quarterly basis as a result of the timing of large orders.

For a summary of recently issued accounting pronouncements and the affects of those pronouncements on our financial results, refer to Note 1 of the Notes to the Consolidated Financial Statements, which is included elsewhere in this Report.


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GENERAL

Our business, especially the large video display business in all of our business units, is very competitive, and generally our margins on these large 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. Within each business unit, there are also key growth drivers that apply uniquely to that business unit.

Commercial Business Unit: Over the long-term, we believe that the following factors are important growth drivers to our Commercial business 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. 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.

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 desire to attract the attention of motorists and others into their storefront. It is also driven by the need to communicate messages to the 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 and sometimes highly customized displays as part of entertainment venues such as casinos, amusement parks and Times Square type locations.

The introduction of architectural lighting products for commercial buildings, which real estate owners use to add accents or effects to an entire side or circumference of a building to communicate messages or to decorate the building.

Live Events Business Unit: Over the long-term, we believe that growth in the Live Events business unit will result from a number of factors, including:

Facilities spending more on larger display systems.

Lower product costs, which are driving an expansion of the marketplace.

Our product and service offerings, which remain the most integrated and comprehensive offerings in the industry.

The competitive nature of sports teams, which strive to out-perform their competitors with display systems.

The desire for high-definition video displays, which typically drives larger displays or higher resolution displays, both of which increase the average transaction size.

Schools and Theatres Business Unit: Over the long-term, we believe 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 in more athletic venues, such as aquatics in schools.

Transportation Business Unit: Over the long-term, we believe that growth in the Transportation business unit will result from increasing applications of electronic displays to manage commuters, including roadway, airport, parking, transit and other applications. This growth is highly dependent on government spending, primarily federal government spending.

International Business Unit: 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 other business units to the extent they apply outside the United States.

Each of our business units is impacted by adverse economic conditions in different ways and to different degrees. The effects of an adverse economy are generally less severe on our sports related business as compared to our other businesses, although in severe economic downturns, the sports business can be severely impacted. Our Commercial and International business units are highly dependent on economic conditions in general.


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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 as a result of increased competition across all business units.

RESULTS OF OPERATIONS

COMPARISON OF THE THREE MONTHS ENDED OCTOBER 27, 2012 AND OCTOBER 29, 2011

Net Sales
                                  Three Months Ended
                    October 27,      October 29,
(in thousands)          2012             2011        Percent Change
Net Sales:
Commercial         $      39,773    $      43,704          (9.0 )%
Live Events               50,604           46,664           8.4
Schools & Theatres        21,688           17,239          25.8
Transportation            17,571           12,439          41.3
International             20,235           15,864          27.6
                   $     149,871    $     135,910          10.3  %
Orders:
Commercial         $      32,035    $      33,358          (4.0 )%
Live Events               34,195           44,488         (23.1 )
Schools & Theatres        14,465           13,475           7.3
Transportation             7,496           12,342         (39.3 )
International             22,141           14,132          56.7
                   $     110,332    $     117,795          (6.3 )%

Commercial: The decrease in net sales for the three months ended October 27, 2012 compared to the same period one year ago was the net result of:

A decrease in sales of large custom video contracts, due to a multi-million dollar custom video project converting to sales in the second quarter of fiscal 2012. The level of large custom contract orders and sales in this niche is subject to volatility and, during the second quarter of fiscal 2013, we did not have the same level of large video projects to convert to sales.

An increase in sales of on-premise advertising displays resulting from orders for a national account customer replacement program.

Sales in our billboard niche were relatively flat.

The decrease in orders for the three months ended October 27, 2012 compared to the same period one year ago was the net result of:

An increase in orders for large custom video projects net of a decline in orders for on-premise advertising displays due to order timing and, to some degree, the economic uncertainty.

A decrease in orders for our national account business and outdoor advertising customers resulting from variability in timing of orders being booked.

Live Events: The increase in net sales for the three months ended October 27, 2012 compared to the same period one year ago was the result of the higher order volume in the first quarter of fiscal 2013, which we converted to net sales during the second quarter of fiscal 2013.

Orders decreased for the three months ended October 27, 2012 compared to the same period one year ago due to order timing as a number of expected orders have pushed into our third quarter of fiscal 2013.

Schools and Theatres: The increase in net sales for the three months ended October 27, 2012 compared to the same period one year ago was primarily the result of increased demand in video projects which converted to sales in the second quarter of fiscal 2013.

The increase in orders for the three months ended October 27, 2012 compared to the same period one year ago appears to be resulting from an overall improvement in the market, which we believe is related to less impact of public school spending pressures and the growing interest in video systems in high schools. In addition, orders for video projects increased by 92 percent over the second quarter of fiscal 2012.


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Transportation: The increase in net sales for the three months ended October 27, 2012 compared to the same period one year ago was the result of an increase of $4.6 million in sales related to orders under a large procurement contract and some production on an order booked during the first quarter of fiscal 2013 for a major airport.

The decrease in orders for the three months ended October 27, 2012 compared to the same period one year ago is the result of order timing.

International: The increase in net sales in our International business unit for the three months ended October 27, 2012 compared to the same period one year ago is the result of a significant increase in orders booked during the first and second quarters of fiscal 2013 compared to the same period of the previous year. There were a number of orders that were delayed in booking in the fourth quarter of fiscal 2012 that ultimately booked in the first quarter of fiscal 2013, which led to a higher level of sales during the first half of fiscal 2013.

The increase in orders for the three months ended October 27, 2012 compared to the same period one year ago is the result of a $6.1 million order for a large architectural lighting project and orders for two international sports stadiums in excess of $3 million.

Backlog

The product order backlog as of October 27, 2012 was $128 million as compared to $137 million as of October 29, 2011 and $164 million at the end of first quarter of fiscal 2013. Historically, our backlog varies due to the timing of large orders and customer delivery schedules for these orders. The backlog increased from one year ago in our Transportation and Schools and Theatres business units and decreased in our Commercial, Live Events and International business units.

Backlog is not a measure defined by U.S. generally accepted accounting principles, and our methodology for determining backlog may vary from the methodologies used by other companies in determining their backlog amounts. Our backlog is equal to the amount of net sales expected to be recognized in future periods on standard product and contract sales that are evidenced by an arrangement, with prices that are fixed and determinable and with collectability reasonably assured. Arrangements in our backlog may be canceled, modified or otherwise altered. Lead times for orders in our backlog can range from a week to several years. Most standard product lead time is less than 8 weeks, but large contracts can range from twelve weeks to more than a year. Thus, overall backlog is not directly indicative of sales in future quarters.

Gross Profit
                                                           Three Months Ended
                                  October 27, 2012                                    October 29, 2011
                                            As a Percent                                        As a Percent
(in thousands)                 Amount       of Net Sales     Percent Change        Amount       of Net Sales
Commercial                 $    12,038         30.3 %                9.8 %     $    10,964         25.1 %
Live Events                     11,421         22.6                 24.1             9,200         19.7
Schools & Theatres               6,022         27.8                 43.7             4,191         24.3
Transportation                   6,881         39.2                 85.1             3,717         29.9
International                    5,990         29.6                 76.3             3,398         21.4
                           $    42,352         28.3 %               34.6 %     $    31,470         23.2 %

The increase in our gross profit percentage for the three months ended October 27, 2012 compared to the same period one year ago was the net result of:

An increase of approximately two percentage points in margin on product sales because of sales mix. During the second quarter of fiscal 2013 we produced a higher volume of standard orders with higher margins versus the same quarter of fiscal 2012.

An increase of approximately one percentage point due to lower manufacturing conversion costs resulting from increased manufacturing utilization and decreased component costs.

An increase of approximately one percentage point due to lower warranty costs as a percentage of net sales.

An increase of approximately one percentage point due to the increased services infrastructure utilization and other cost containment measures.

Commercial: The gross profit percent increase for the three months ended October 27, 2012 compared to the same period one year ago was the result of an improvement of reseller and national account business due to sales mix, increased manufacturing and services infrastructure utilization, and a reduction of warranty costs as a percentage of sales, partially offset by a small decline in the outdoor advertising niche due to competitive market pressures on pricing.


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Live Events: The gross profit percent increase for the three months ended October 27, 2012 compared to the same period one year ago was the result of improvements from manufacturing utilization, a reduction of warranty costs as a percentage of sales, and improved margin based on sales mix.

Schools and Theatres: The gross profit percent increase for the three months ended October 27, 2012 compared to the same period one year ago was the result of higher gross profit percentages on product sales mix, increased manufacturing utilization, and lower warranty costs as a percentage of sales.

Transportation: The gross profit percent increase for the three months ended October 27, 2012 compared to the same period one year ago was the net result of an increase of approximately four percentage points in margin on product sales because of sales mix and profitability on the contracts produced this quarter, increased manufacturing and services infrastructure utilization and a decrease in warranty expenses as a percentage of sales.

International: The gross profit percent increase for the three months ended October 27, 2012 compared to the same period one year ago was primarily the result of improved margins on product sales mix.

Selling Expense
                                                           Three Months Ended
                                  October 27, 2012                                    October 29, 2011
                                            As a Percent                                        As a Percent
(in thousands)                Amount        of Net Sales     Percent Change       Amount        of Net Sales
Commercial                 $     3,472          8.7 %             (1.2 )%      $     3,515          8.0 %
Live Events                      3,348          6.6                5.3               3,179          6.8
Schools & Theatres               2,589         11.9               (6.9 )             2,781         16.1
Transportation                     855          4.9               (7.3 )               922          7.4
International                    2,532         12.5                0.1               2,529         15.9
                           $    12,796          8.5 %             (1.0 )%      $    12,926          9.5 %

Selling expenses were slightly lower in the three months ended October 27, 2012 compared to the same period one year ago as a result of our cost containment efforts offsetting nearly $0.7 million in increased personnel costs, including salary, taxes, and employee benefits.

Commercial: Commercial selling expenses decreased approximately one percent in the second quarter of fiscal 2013 compared to the same period one year ago. The decrease was the result of reductions in convention expenses and travel and entertainment expenses, offset by an increase in personnel costs.

Live Events: Selling expenses increased by approximately five percent in the second quarter of fiscal 2013 compared to the same period in fiscal 2012. This was primarily the result of an increase in the cost of employee benefits due to an increase in workers compensation claims.

Schools and Theatres: Selling expenses decreased approximately seven percent compared to the same period in fiscal 2012. This was mainly due to a decrease in bad debt expense.

Transportation: Selling expenses declined approximately seven percent for the second quarter of fiscal 2013 compared to the same period one year ago. The decline for the second quarter was due to cost reductions in travel and entertainment and convention expenses.

International: Selling expenses remained flat compared to the same period in fiscal 2012 due to increases in personnel costs, including taxes and benefits that were offset by reductions in various other expenses consistent with those noted above.

Other Operating Expenses
                                                               Three Months Ended
                                      October 27, 2012                                    October 29, 2011

                                                      As a                                                As a
                                                   Percent of                                          Percent of
(in thousands)                      Amount         Net Sales     Percent Change         Amount         Net Sales
General and administrative     $     6,850              4.6 %         (1.7 )%      $     6,972              5.1 %
Product design and development $     5,845              3.9 %          3.7  %      $     5,636              4.1 %


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General and administrative expenses consist primarily of salaries, other employee-related costs, professional fees, shareholder relations costs, facilities and equipment related costs for administrative departments, training costs, amortization of intangibles and the costs of supplies. General and administrative expenses in the second quarter of fiscal 2013 as compared to the same period one year ago remained relatively flat as increases in payroll costs, including taxes and benefits, were offset by net decreases in information system related maintenance expenses, professional services expenses and various other expenses. These reductions in expenses were due to one-time costs incurred in the second quarter of fiscal 2012 and continued traction on our initiatives to reduce variable spending during the current year as a part of our strategic goals to improve operating income.

Product design and development expenses consist primarily of salaries, other employee-related costs, facilities and equipment-related costs and supplies. Product development investments in the near term are focused on video technology with a range of pixel pitches for outdoor applications using LED surface mount technology, which offer improved performance at a lower cost point over our current offerings. In addition, we continue to focus on a new full-color family of Vanguard displays for the transportation market and various other products to standardize display components and control systems for both single site displays and networked displays. Our costs for product development represent an allocated amount of costs based on time charges, materials costs and overhead of our engineering departments. Generally, a significant portion of our engineering time is spent on product development, while the rest is allocated to large contract work and included in cost of goods sold.

The increase in product development expense in the second quarter of fiscal 2013 as compared to the same period one year ago was due to the increase in time allocated to product development efforts of $0.6 million for new product offering development, partially offset by a decrease of $0.2 million in costs of material used to prototype and test new products and a decrease of $0.2 million in various other expenses.

Other Income and Expenses
                                                             Three Months Ended
                                     October 27, 2012                                 October 29, 2011

                                                   As a                                             As a
                                                Percent of                                       Percent of
(in thousands)                      Amount      Net Sales     Percent Change       Amount         Net Sales
Interest income, net             $      312          0.2 %         (13.8 )%     $      362            0.3  %
Other income (expense), net      $      150          0.1 %        (419.1 )%     $      (47 )            -  %

Interest income, net: We generate interest income through short-term cash investments, marketable securities, and 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 and the unused portion of our line of credit.

Interest income was relatively flat in the second quarter of fiscal 2013 compared to the same period one year ago. Interest expense decreased slightly in . . .

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