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Daktronics 10-Q 2008

Documents found in this filing:

  1. 10-Q
  2. Graphic
  3. Graphic
  4. Ex-31
  5. Ex-31
  6. Ex-32
  7. Ex-32
  8. Ex-32






UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549



FORM 10-Q

 

(Mark One)

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the Quarterly Period Ended January 26, 2008

 

OR

 

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the Transition Period From______ to______.



Commission File Number: 0-23246

 

DAKTRONICS, INC.

(Exact name of Registrant as specified in its charter)

 

South Dakota

(State or other jurisdiction of incorporation or organization)

 

46-0306862

(I.R.S. Employer Identification Number)

 


 

331 32nd Avenue

 

 

Brookings, SD

 

57006

(Address of principal executive offices)

 

(Zip Code)

 

 

 

(605) 697-4000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ X ] Non-accelerated Filer o Accelerated filer o Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).                                                                                                                                                                 Yes [ ] No [ X ]

 

The number of shares of the registrant’s common stock outstanding as of February 20, 2008 was 40,181,682.


 

DAKTRONICS, INC. AND SUBSIDIARIES

FORM 10-Q

For the Quarter Ended January 26, 2008

 

TABLE OF CONTENTS

 

 

Page

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

2

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

 

CONSOLIDATED BALANCE SHEETS AS OF JANUARY 26, 2008 AND APRIL 28, 2007

3

 

CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTHS

 

 

 

ENDED JANUARY 26, 2008 AND JANUARY 27,2007

5

 

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS

 

 

 

ENDED JANUARY 26, 2008 AND JANUARY 27, 2007

6

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

7

 

 

 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

 

 

RESULTS OF OPERATIONS

16

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

27

ITEM 4. CONTROLS AND PROCEDURES

28

 

 

PART II.OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

29

ITEM 1A. RISK FACTORS

29

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

29

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

29

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

29

ITEM 5. OTHER INFORMATION

29

ITEM 6. EXHIBITS

29

 

 

SIGNATURE

30

 

 

 

 

 

EXHIBIT INDEX:

 

 

 

 

 

 

 

Ex.

31.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER REQUIRED BY RULE

 

 

 

 

13a-14(a) OR RULE 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934,

 

 

 

 

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

 

 

 

 

OF 2002

 

 

Ex.

31.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER REQUIRED BY RULE

 

 

 

 

13a-14(a) OR RULE 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934,

 

 

 

 

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

 

 

 

 

 OF 2002

 

 

Ex.

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)

 

 

Ex.

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 -

 


 

Special Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q (including exhibits and information incorporated by reference herein) contains both historical and forward-looking statements that involve risks, uncertainties and assumptions. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21B of the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, beliefs, intentions and strategies for the future. These statements appear in a number of places in this Report and include all statements that are not historical statements of fact regarding our intent, belief or current expectations with respect to, among other things: (i) our financing plans; (ii) trends affecting our financial condition or results of operations; (iii) our growth strategy and operating strategy; and (iv) the declaration and payment of dividends. The words “may,” “would,” “could,” “will,” “expect,” “estimate,” “anticipate,” “believe,” “intend,” “plans” and similar expressions and variations thereof are intended to identify forward-looking statements. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, many of which are beyond our ability to control, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors discussed herein, including those discussed in detail in our filings with the Securities and Exchange Commission, including in our Annual Report on Form 10-K for the fiscal year ended April 28, 2007 in the section entitled “Item 1A. Risk Factors.”

 

- 2 -

 


 

PART I. FINANCIAL INFORMATION

 

Item  1. FINANCIAL STATEMENTS

 

DAKTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

January 26,

April 28,

2008

2007

(unaudited)

(note 1)

ASSETS

CURRENT ASSETS:

Cash and cash equivalents

$

3,379

$

2,590

Restricted cash

738

-

Accounts receivable, less allowance for doubtful accounts

66,187

56,692

Inventories

52,305

45,835

Costs and estimated earnings in excess of billings

24,875

22,314

Current maturities of long-term receivables

8,293

6,831

Prepaid expenses and other

4,108

5,044

Deferred income taxes

8,073

7,761

Income taxes receivable

-

731

Rental equipment available for sale

-

188

Total current assets

 

167,958

 

147,986

Advertising rights, net

3,454

3,830

Long-term receivables, less current maturities

15,999

11,211

Investments in affiliates

3,797

8,762

Goodwill

4,733

4,408

Intangible and other assets

3,178

3,391

Deferred income taxes

-

136

 

31,161

 

31,738

PROPERTY AND EQUIPMENT:

Land

3,275

3,275

Buildings

48,055

36,822

Machinery and equipment

44,954

38,420

Office furniture and equipment

43,872

37,520

Equipment held for rental

3,625

2,600

Demonstration equipment

7,482

5,939

Transportation equipment

6,360

6,669

 

157,623

 

131,245

Less accumulated depreciation

58,901

45,119

 

98,722

 

86,126

TOTAL ASSETS

$

297,841

$

265,850

See notes to consolidated financial statements.

 

 

 

 

- 3 -

 


 

DAKTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (continued)

(in thousands, except share data)

 

January 26,

April 28,

2008

2007

(unaudited)

(note 1)

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:

Notes payable, bank

$

13,414

$

24,615

Accounts payable

33,562

26,094

Accrued expenses and warranty obligations

27,282

21,849

Current maturities of long-term debt and marketing obligations

1,039

1,002

Billings in excess of costs and estimated earnings

21,476

18,293

Customer deposits

10,675

5,857

Deferred revenue

7,269

5,333

Income taxes payable

196

39

Total current liabilities

 

114,913

 

103,082

Long-term debt, less current maturities

70

592

Long-term marketing obligations, less current maturities

662

473

Long-term warranty obligations and other payables

3,201

5,366

Deferred income taxes

2,629

2,629

 

6,562

 

9,060

TOTAL LIABILITIES

 

121,475

 

112,142

SHAREHOLDERS' EQUITY:

Common stock, no par value, authorized

120,000,000 shares; 40,170,788 and 39,548,938 shares

issued at January 26, 2008 and April 28, 2007, respectively

24,942

21,954

Additional paid-in capital

9,637

7,431

Retained earnings

142,202

124,469

Treasury stock, at cost, 19,680 shares

(9)

(9)

Accumulated other comprehensive loss

(406)

(137)

TOTAL SHAREHOLDERS' EQUITY

 

176,366

 

153,708

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$

297,841

$

265,850

See notes to consolidated financial statements.

 

 

 

 

 

 

 

 

- 4 -

 


 

DAKTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

(unaudited)

 

Three Months Ended

Nine Months Ended

January 26,

January 27,

January 26,

January 27,

2008

2007

2008

2007

Net sales

$

118,201

$

106,731

$

370,560

$

322,414

Cost of goods sold

83,019

74,375

259,299

228,196

Gross profit

 

35,182

 

32,356

 

111,261

 

94,218

Operating expenses:

Selling

16,379

13,692

46,385

38,666

General and administrative

6,868

5,231

19,304

13,587

Product design and development

4,943

3,611

14,965

11,166

 

28,190

 

22,534

 

80,654

 

63,419

Operating income

 

6,992

 

9,822

 

30,607

 

30,799

Nonoperating income (expense):

Interest income

448

304

1,295

1,459

Interest expense

(515)

(232)

(1,265)

(313)

Other income (expense), net

 

2,015

 

(63)

 

1,510

 

(604)

Income before income taxes

8,940

9,831

32,147

31,341

Income tax expense

3,557

2,804

11,643

10,435

Net income

$

5,383

$

7,027

$

20,504

$

20,906

Weighted average shares outstanding:

Basic

 

39,936

 

39,290

 

39,832

 

39,148

Diluted

 

41,266

 

41,479

 

41,380

 

41,304

Earnings per share:

Basic

$

0.13

$

0.18

$

0.51

$

0.53

Diluted

$

0.13

$

0.17

$

0.50

$

0.51

Cash dividend paid per share

$

-

$

-

 

0.07

$

0.06

See notes to consolidated financial statements.

 

 

 

 

 

 

- 5 -

 


 

DAKTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

Nine Months Ended

January 26,

January 27,

2008

2007

CASH FLOWS FROM OPERATING ACTIVITIES:

Net Income

$

20,504

$

20,906

Adjustments to reconcile net income to net cash provided

by operating activities:

Depreciation

15,389

8,835

Amortization

236

371

(Gain) loss on sale of property and equipment

(11)

4

Gain on sale of equity investments

(2,878)

-

Stock-based compensation

1,939

1,457

Equity in earnings and losses of affiliates

1,604

1,275

Provision for doubtful accounts

363

(166)

Deferred income taxes, net

(176)

(694)

Change in operating assets and liabilities

(1,535)

(22,105)

Net cash provided by operating activities

 

35,435

 

9,883

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of property and equipment

(28,372)

(46,576)

Cash consideration paid for investment in affiliates

(750)

(13,800)

Proceeds from sale of equity investments

7,000

-

Sales (purchases) of marketable securities, net

-

8,310

Proceeds from sale of property and equipment

425

62

Net cash used in investing activities

 

(21,697)

 

(52,004)

CASH FLOWS FROM FINANCING ACTIVITIES:

Borrowings on notes payable

104,108

35,387

Payments on notes payable

(115,308)

(16,170)

Proceeds from exercise of stock options and warrants

1,639

1,083

Excess tax benefits from stock-based compensation

324

926

Principal payments on long-term debt

(538)

(69)

Dividend paid

(2,770)

(2,339)

Net cash provided by (used in) financing activities

 

(12,545)

 

18,818

EFFECT OF EXCHANGE RATE CHANGES ON CASH

(404)

(127)

 

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

789

(23,430)

 

 

CASH AND CASH EQUIVALENTS:

Beginning

2,590

26,921

Ending

$

3,379

$

3,491

Supplemental disclosures of cash flow information:

Cash payments for:

Interest:

$

1,272

$

170

Income taxes, net of refunds

10,948

11,564

Supplemental schedule of non-cash investing and

financing activities:

Demonstration equipment transferred to (from) inventory

1,055

1,625

Purchase of property and equipment included in accounts

payable

447

2,040

Transfers of equipment to affiliates

-

226

Tax benefits related to exercises of stock options

324

1,431

See notes to consolidated financial statements.

 

 

 

- 6 -

 


 

DAKTRONICS, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

 

Note 1. Basis of Presentation

 

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to fairly present our financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts therein. Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from those estimates.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The balance sheet at April 28, 2007 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.These financial statements should be read in conjunction with our financial statements and notes thereto for the year ended April 28, 2007, which are contained in our Annual Report on Form 10-K previously filed with the Securities and Exchange Commission. The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year.

 

The consolidated financial statements include the accounts of our wholly-owned subsidiaries, Daktronics France SARL; Daktronics Shanghai, Ltd.; Daktronics GmbH; Star Circuits, Inc.; Daktronics Media Holdings, Inc.; MSC Technologies, Inc.; Daktronics UK, Ltd.; Daktronics Hong Kong, Ltd.; Daktronics Canada, Inc.; Daktronics Hoist, Inc.; and Daktronics FZE. Intercompany balances and transactions have been eliminated in consolidation.

 

Investments in affiliates are accounted for by the equity method. We have evaluated our relationships with affiliates and have determined that these entities are not variable interest entities and therefore are not required to be considered for consolidation in our consolidated financial statements. Accordingly, our proportional share of the respective affiliate’s earnings or losses is included in other income (expense) in our consolidated statement of income.

 

Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the estimated total costs on long-term construction contracts (“long-term contracts”), estimated costs to be incurred for product warranties and extended maintenance contracts, excess and obsolete inventory, the reserve for doubtful accounts, stock-based compensation and income taxes. Changes in estimates are reflected in the periods in which they become known.

 

Note 2. Significant Accounting Policies

 

Income taxes.  We account for income taxes under Statement of Financial Accounting Standard (SFAS) No. 109, “Accounting for Income Taxes,” which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in our financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. SFAS No. 109 requires the consideration of a valuation allowance for deferred tax assets if it is “more likely than not” that some component or all of the benefits of deferred tax assets will not be realized.

 

 

- 7 -

 


 

We adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes, an Interpretation of SFAS No. 109” on April 29, 2007, the beginning of our fiscal year.  FIN 48 creates a single model to address uncertainty in tax positions and clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. At the adoption date, which was April 29, 2007, we did not have a material liability under FIN 48 for unrecognized tax benefits. As a result of the implementation of FIN 48, we have recognized no material adjustment in the liability for unrecognized income tax benefits, and there is no related effect to our effective tax rate. Our continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense.

 

Our company, along with our subsidiaries, is subject to U.S. Federal income tax as well as income taxes of multiple state jurisdictions. As a result of the completion of IRS exams on prior years, fiscal years 2006 and 2007 are the only years remaining open under statutes of limitations. Certain subsidiaries are also subject to income tax in several foreign jurisdictions which have open tax years varying by jurisdiction back to 2003. 

 

Commitments and Contingencies. We are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, based upon consultation with legal counsel, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position.

 

In connection with the sale of equipment to a financial institution, we entered into a contractual arrangement whereby we agreed to repurchase equipment at the end of the lease term at a fixed price of approximately $1,100. We have recognized a guarantee liability in the amount of $200 under the provisions of FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” In the accompanying financial statements.

 

Product Warranties. We offer standard warranty coverages on many of our products, which include parts and in some cases labor, maintenance and support, for periods varying from one to 10 years. The specific terms and conditions of these warranties vary depending on the product sold and other factors. We estimate the costs that may be incurred under the warranty and record a liability in the amount of such costs at the time the product is shipped in the case of standard orders and prorated over the construction period in the case of custom projects. Factors that affect our warranty liability include historical and anticipated costs. We periodically assess the adequacy of our recorded warranty costs and adjust the amounts as necessary.

 

Changes in our product warranties for the nine months ended January 26, 2008 consisted of the following:

 

Amount

Beginning accrued warranty costs

$

10,515

Warranties issued during the period

5,408

Settlements made during the period

(9,681)

Changes in accrued warranty costs for pre-

existing warranties during the period,

including expirations

5,298

Ending accrued warranty costs

$

11,540

 

Lease Commitments. We lease office space for sales and service locations, vehicles and various equipment, primarily office equipment. Rental expense for operating leases was $1,712 and $1,411 for the nine months ended January 26, 2008 and January 27, 2007, respectively. Future minimum payments under noncancelable operating leases, excluding executory costs such as management and maintenance fees, with initial or remaining terms of one year or more consisted of the following at January 26, 2008:

 

 

 

- 8 -

 


 

 

Fiscal Year

Amount

2008

$

688

2009

2,585

2010

2,157

2011

1,908

2012

2,681

Thereafter

777

Total

$

10,796

 

Purchase Commitments.From time to time, we commit to purchase inventory and advertising rights over periods that extend over a year. As of January 26, 2008, we were obligated to purchase inventory and advertising rights through fiscal year 2010 as follows:

 

Fiscal Year

Amount

2008

$

47

2009

662

2010

88

Total

$

797

 

Impairment of Long-Lived Assets. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we review long-lived assets to be held and used and long-lived assets to be disposed of, including intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of the asset to the future undiscounted net cash flows expected to be generated by the asset. Recoverability of assets held for sale is measured by comparing the carrying amount of the assets to their estimated fair market value less the cost of selling the asset. If any assets are considered to be impaired, the impairment is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value.

 

Note 3. Recently Issued Accounting Pronouncements

 

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Liabilities." SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is expected to expand the use of fair value measurement, which is consistent with FASB’s long-term measurement objectives for accounting for financial instruments. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including financial statements for an interim period within that fiscal year. Adoption is not expected to have a material impact on our consolidated earnings, financial position or cash flows.

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement.”  SFAS No. 157 provides guidance for using fair value to measure assets and liabilities.  SFAS No. 157 clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under SFAS No. 157, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS No. 157 is effective for us beginning in fiscal year 2009; however, early adoption is permitted.  We are currently assessing the impact of our adoption of SFAS No. 157.

 

 

- 9 -

 


 

 

Note 4. Revenue Recognition

 

Long-term construction contracts: Earnings on long-term construction contracts are recognized on the percentage-of-completion method, measured by the percentage of costs incurred to date to estimated total costs for each contract. Operating expenses are charged to operations as incurred and are not allocated to contract costs. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are probable and estimable.

 

Equipment other than long-term contracts: We recognize revenue on equipment sales, other than long-term contracts, when title passes, which is usually upon shipment and then only if the revenue is fixed and determinable and collectability is reasonably assured.

 

Long-term receivables and advertising rights: We occasionally sell and install our products at facilities in exchange for the rights to sell or to retain future advertising revenues. For these transactions, we recognize revenue for the amount of the present value of the future advertising payments if enough advertising is sold to obtain normal margins on the contract, and we record the related receivable in long-term receivables. On those transactions where we have not sold the advertising for the full value of the equipment at normal margins, we record the related cost of equipment as advertising rights. Revenue to the extent of the present value of the advertising payments is recognized in long-term receivables when it becomes fixed and determinable under the provisions of the applicable advertising contracts. At the time the revenue is recognized, costs of the equipment are recognized based on an estimate of overall margin expected.

 

In cases where we receive advertising rights, as opposed to only cash payments, in exchange for the equipment, revenue is recognized as it becomes earned and the related costs of the equipment are amortized over the term of the advertising rights, which are owned by us. On these transactions, advance collections of advertising revenues are recorded as deferred revenue.

 

The cost of advertising rights, net of amortization, was $3,454 as of January 26, 2008 and $3,830 as of April 28, 2007.

 

Product maintenance: In connection with the sale of our products, we also occasionally sell separately priced extended warranties and product maintenance contracts. The revenue related to such contracts is deferred and recognized ratably as net sales over the term of the contracts, which varies up to 10 years.

 

Software: We sell our proprietary software bundled with displays and certain other products. Pursuant to American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, “Software Revenue Recognition,” as amended by SOP 98-4, “Deferral of the Effective Date of a Provision of SOP 97-2,” and SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions,” revenues from software license fees on sales, other than long-term contracts, are recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed and determinable and collection is probable. For sales of software included in long-term contracts, the revenue is recognized under the percentage-of-completion method for long-term contracts starting when all of the above-mentioned criteria have been met.

 

Services: Revenues generated by us for services such as event support, control room design, on-site training, equipment service and continuing technical support for operators of our equipment are recognized as net sales when the services are performed. Net sales from services offerings which are not included in long-term contracts approximated 5.5% net sales for the nine months ended January 26, 2008 and January 27, 2007, respectively.

 

Derivatives: We utilize derivative financial instruments to manage the economic impact of fluctuations in currency exchange rates on those transactions that are denominated in currency other than our functional currency, which is the U.S. Dollar. We enter into currency forward contracts to manage these economic risks. SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137

 

 

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and No.138,” requires us to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through earnings. If a derivative qualifies as an effective hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in the fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in accumulated other comprehensive gain (loss) until the hedged item is recognized in earnings.

 

To protect against the reduction in value of forecasted foreign currency cash flows resulting from export sales over the next year, we have instituted a foreign currency cash flow hedging program. We hedge portions of our forecasted revenue denominated in foreign currencies with forward contracts. When the dollar strengthens significantly against the foreign currencies, the decline in value of future foreign currency revenue is offset by gains in the value of the forward contracts designated as hedges. Conversely, when the dollar weakens, the increase in the value of future foreign currency cash flows is offset by losses in the value of the forward contracts.

 

During the nine months ended January 26, 2008, we assessed all hedges to be effective and recorded changes of value in other comprehensive income. The fair value of all derivatives is included in prepaid expenses and other in the statement of financial condition.

 

As of January 26, 2008, we did not have any derivative instruments outstanding.

 

Note 5. Earnings Per Share

 

Basic earnings per share (EPS) is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that would occur if securities or other obligations to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in our earnings.

 

A reconciliation of the income and common share amounts used in the calculation of basic and diluted EPS for the three and nine months ended January 26, 2008 and January 27, 2007 follows:

 

Net Income

Shares

Per Share Amount

For the three months ended January 26, 2008:

Basic earnings per share

$

5,383

39,936

$

0.13

Effect of dilutive securities:

Exercise of outstanding stock options

-

1,330

-

Diluted earnings per share

$

5,383

 

41,266

$

0.13

For the three months ended January 27, 2007:

Basic earnings per share

$

7,027

39,290

$

0.18

Effect of dilutive securities:

Exercise of outstanding stock options

-

2,189

(0.01)

Diluted earnings per share

$

7,027

 

41,479

$

0.17

For the nine months ended January 26, 2008:

Basic earnings per share

$

20,504

39,832

$

0.51

Effect of dilutive securities:

Exercise of outstanding stock options

-

1,548

(0.01)

Diluted earnings per share

$

20,504

 

41,380

$

0.50

For the nine months ended January 27, 2007:

Basic earnings per share

$

20,906

39,148

$

0.53

Effect of dilutive securities:

Exercise of outstanding stock options

-

2,156

(0.02)

Diluted earnings per share

$

20,906

 

41,304

$

0.51



 

 

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Note 6. Goodwill and Other Intangible Assets

 

We account for goodwill and other intangible assets in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” and we complete an impairment analysis on at least an annual basis and more frequently if circumstances warrant.

Goodwill, net of accumulated amortization, was $4,733 at January 26, 2008 and $4,408 at April 28, 2007. We performed an impairment analysis of goodwill as of October 27, 2007. The result of this analysis indicated that no goodwill impairment existed as of that date.

 

As required by SFAS No. 142, intangibles with finite lives continue to be amortized. Included in intangible assets are non-compete agreements and a patent license. The net value of intangible assets is included as a component of intangible and other assets in the accompanying consolidated balance sheets. Estimated amortization expense based on intangibles as of January 26, 2008 is $315 for each of fiscal 2008, 2009 and 2010, $284 for 2011, $229 for 2012 and $894 thereafter. The following table sets forth the gross carrying amount and accumulated amortization of intangible assets by major intangible class as of January 26, 2008:

 

Gross Carrying

Accumulated

Amount

Amortization

Net Value

Patents

$

2,282

$

304

$

1,978

Non-compete agreements

348

124

224

Registered trademarks

401

-

401

Other

87

40

47

$

3,118

$

468

$

2,650

 

Note 7. Inventories

 

 

Inventories consist of the following:

 

January 26,

April 28,

2008

2007

Raw materials

$

23,497

$

22,830

Work-in-process

8,680

8,502

Finished goods

20,128

14,503

$

52,305

$

45,835

 

Note 8. Segment Disclosure

 

At the beginning of fiscal year 2008, we reorganized our business into five business units, and during the second quarter of fiscal year 2008, we implemented limited discrete financial reporting about these business units to the chief operating decision maker, which required us to change our segment disclosures under SFAS 131, “Disclosures about Segments of an Enterprise and Related Information.” We have five business units which meet the definition of reportable segments under SFAS No. 131: the Commercial segment, the Live Events segment, the Schools and Theatres segment, the Transportation segment and the International segment. The comparable prior period segment information has been retrospectively adjusted to comply with our new reportable segments.

 

Our Commercial segment consists of primarily sales of our ProStar, Galaxy and Valo product lines to resellers, primarily sign companies, outdoor advertisers, national retailers and quick-serve restaurants, casinos and petroleum retailers. Our Live Events segments consists of primarily sales of integrated scoring and ProStar and ProAd video systems to college and professional sports facilities and mobile ProTour displays to video

 

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rental organizations and other live events type venues. Our Schools and Theatres segment primarily consists of sales of scoring systems, Galaxy and ProStar display systems to primary and secondary education facilities and

sales of our Vortek automated rigging systems for theatre applications. Our Transportation segment primarily consists of sales of our Vanguard product line as well as Prostar and Galaxy product lines to governmental transportation departments, airlines and other transportation related customers. Finally, our International segment primarily consists of sales of all product lines throughout the world, except the United States and Canada.

 

Business unit level reports present results through operating income, which is comprised of gross profit less selling, general and administrative and product development costs. Assets are not allocated to the segments. Depreciation and amortization are allocated to each segment based on various financial measures.

 

We do not maintain information on sales by products and, therefore, disclosure of such information is not practical.

 

The following table sets forth certain financial information for each of our five functional operating segments:

 

 

 

 

 

 

 

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Three Months Ended

Nine Months Ended

January 26,

January 27,

January 26,

January 27,

2008

2007

2008

2007

Net Sales

Commercial

$

51,667

$

38,173

$

134,918

$

96,626

Live Events

32,547

39,878

127,922

138,171

Schools & Theatres

12,431

12,157

49,104

38,783

Transportation

8,751

5,919

26,879

18,821

International

12,805

10,604

31,737

30,013

Net Sales

$

118,201

$

106,731

$

370,560

$

322,414

Operating Income

Commercial

$

8,821

$

4,784

$

20,272

$

10,531

Live Events

(2,155)

3,959

5,490

12,678

Schools & Theatres

(1,926)

(1,090)

1,158

2,433

Transportation

335

584

1,546

602

International

1,917

1,585

2,141

4,555

Segment Operating Income

6,992

9,822

30,607

30,799

Nonoperating income (expense):

Interest income

448

304

1,295

1,459

Interest expense

(515)

(232)

(1,265)

(313)

Other income (expense), net

2,015

(63)

1,510

(604)

Income before income taxes

8,940

9,831

32,147

31,341

Income tax expense

3,557

2,804

11,643

10,435

Net income

$

5,383

$

7,027

$

20,504

$

20,906

Depreciation and Amortization

Commercial

$

1,791

$

905

$

4,862

$

2,128

Live Events

2,107

1,216

6,048

3,335

Schools & Theatres

847

1,120

2,576

2,894

Transportation

513

208

677

668

International

171

75

1,463

181

Total

$

5,429

$

3,524

$

15,626

$

9,206

 

No single geographic area comprises a material amount of net sales or long-lived assets other than the United States. The following table presents information about us in the United States and elsewhere:

 

 

 

 

United States

 

Others

 

Total

Net sales for three months ended:

 

 

 

 

 

 

 

 

 

January 26, 2008

$

106,104

 

$

12,097

 

$

118,201

 

January 27, 2007

 

88,819

 

 

17,912

 

 

106,731

 

 

 

 

 

 

 

 

 

 

Net sales for nine months ended:

 

 

 

 

 

 

 

 

 

January 26, 2008

$

329,307

 

$

41,253

 

$

370,560

 

January 27, 2007

 

280,759

 

 

41,655

 

 

322,414

 

 

 

 

 

 

 

 

 

 

Long-lived assets at:

 

 

 

 

 

 

 

 

 

January 26, 2008

$

96,526

 

$

1,868

 

$

98,722

 

April 28, 2007

 

84,746

 

 

1,380