10-K 1 dakt_2019042710-k.htm 10-K Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended April 27, 2019
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ___ to ___.
Commission File Number: 0-23246

daklogo.jpg

Daktronics, Inc.
(Exact Name of Registrant as Specified in Its Charter)
South Dakota
 
46-0306862
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
 
201 Daktronics Drive
Brookings, SD
 
 
57006
(Address of Principal Executive Offices)
 
(Zip Code)
(605) 692-0200
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, No Par Value
DAKT
NASDAQ Global Select Market
Preferred Stock Purchase Rights
DAKT
NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes o  No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes o  No x

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes x No o
                                             

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o
 
Emerging growth company o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

The aggregate market value of the registrant's common stock held by non-affiliates at October 27, 2018 (which is the last business day of the Registrant’s most recently completed second quarter), computed by reference to the closing sales price of the Registrant’s common stock on the NASDAQ Global Select Market on such date, was approximately $332,784,773. For purposes of determining this number, individual shareholders holding more than 10 percent of the Registrant’s outstanding Common Stock are considered affiliates. This number is provided only for the purpose of this Annual Report on Form 10-K and does not represent an admission by either the Registrant or any such person as to the status of such person.

The number of shares of the Registrant’s Common Stock outstanding as of June 3, 2019 was 45,180,770.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for its Annual Meeting of Shareholders to be held September 4, 2019 are incorporated by reference in Part III of the Form 10-K, as indicated in Items 10 through 14 of Part III.







DAKTRONICS, INC. AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED APRIL 27, 2019

Table of Contents

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 






SPECIAL NOTE REGARDING FORWARD–LOOKING STATEMENTS
 
This Annual Report on Form 10-K (including exhibits and any information incorporated by reference herein) (the "Form 10-K" or the "Report") contains both historical and forward-looking statements that involve risks, uncertainties and assumptions. The statements contained in this Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21B of the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, beliefs, intentions and strategies for the future. These statements appear in a number of places in this Report and include all statements that are not historical statements of fact regarding the intent, belief or current expectations with respect to, among other things: (i.) our competition; (ii.) our financing plans; (iii.) trends affecting our financial condition or results of operations; (iv.) our growth and operating strategies; (v.) the declaration and payment of dividends; (vi.) the timing and magnitude of future contracts; (vii.) raw material shortages and lead times; (viii.) fluctuations in margins; (ix.) the seasonality of our business; (x.) the introduction of new products and technology; (xi.) the amount and frequency of warranty claims; (xii.) our ability to manage the impact that new or adjusted tariffs may have on the cost of raw materials and components and our ability to sell product internationally; (xiii.) the resolution of litigation contingencies; and (xiv.) the timing and magnitude of any acquisitions or dispositions. The words “may,” “would,” “could,” “should,” “will,” “expect,” “estimate,” “anticipate,” “believe,” “intend,” “plan” 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 the section of this Form 10-K entitled “Part I, Item 1A. Risk Factors” and “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and those factors discussed in detail in our other filings with the Securities and Exchange Commission.

PART I.

Item 1.  BUSINESS

Business Overview

Daktronics, Inc. and its subsidiaries (the “Company”, “Daktronics”, “we”, “our”, or “us”) are the world's industry leader in designing and manufacturing electronic scoreboards, programmable display systems and large screen video displays for sporting, commercial and transportation applications.  We serve our customers by providing the highest quality standard display products as well as custom-designed and integrated systems.  We offer a complete line of products, from small scoreboards and electronic displays to large multimillion-dollar video display systems as well as related control, timing, and sound systems.  We are recognized as a technical leader with the capabilities to design, market, manufacture, install and service complete integrated systems displaying real-time data, graphics, animation and video. We engage in a full range of activities: marketing and sales, engineering and product design and development, manufacturing, technical contracting, professional services and customer service and support.

We were founded in 1968 by Drs. Aelred Kurtenbach and Duane Sander, professors of electrical engineering at South Dakota State University in Brookings, South Dakota. The Company began with the design and manufacture of electronic voting systems for state legislatures. In 1971, Daktronics developed the patented Matside® wrestling scoreboard, the first product in the Company's growing and evolving line. In 1994, Daktronics became a publicly traded company and invested in display technologies and new markets. We have continued these investments and have supported our long-term customer relationships to grow from a small company operating out of a garage to the world leader in the display industry. We currently employ 2,722 people globally. We are headquartered at 201 Daktronics Dr., Brookings, SD 57006 telephone 605-692-4200. Our Internet address is https://www.daktronics.com.

Our annual, quarterly and current reports and any amendments to those reports are freely available in the "Investor Relations" section of our website. We post each of these documents on our website as soon as reasonably practicable after it is electronically filed with the Securities and Exchange Commission (the "SEC"). These reports and other reports, proxy, and electronic filings are also found on the SEC’s website at www.sec.gov. Information contained on our website is not deemed to be incorporated by reference into this Report or filed with the SEC.

We have organized our business into five segments: Commercial, Live Events, High School Park and Recreation, Transportation, and International. These segments are based on the type of customer or geography and are the same as our business units. Financial information concerning these segments is set forth in this Form 10-K in "Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" and "Note 3. Segment Reporting" of the Notes to our Consolidated Financial Statements included in this Form 10-K.

Industry Background


1


Over the years, our products have evolved significantly from scoreboards and matrix displays with related software applications to complex, integrated visual display systems which include full color video with text and graphics displays located on a local or remote network that are tied together through sophisticated control systems.  In the mid-1990's, as light emitting diodes (“LEDs”) became available in red, blue and green colors with outdoor brightness, we pioneered the development of full color LED video displays capable of replicating trillions of colors, thereby producing large format video systems with excellent color, brightness, energy efficiency and lifetime.  Due to our foundation of developing scoring and graphics display systems, we were able to add video capabilities so we could meet all our customers' large format display needs in a complete, integrated system.  This has proven to be a key factor in Daktronics becoming a leader in large electronic displays.  LED technologies continue to evolve and advance, creating new high-resolution and micro-LED display options. Today, the industry continues development in both the construct of the micro-LED and production methods of micro-LED display panels using mass-transfer technology.

Description of Business

We are engaged in a full range of activities: marketing and sales, engineering and product design and development, manufacturing, technical contracting, professional services and customer service and support.  Each of those activities is described below:

Marketing and Sales.  Our sales force is comprised of direct sales staff and resellers located throughout the world supporting all customer types in both sales and service. We primarily use a direct sales force for large integrated display system sales in professional sports, colleges and universities, and commercial spectacular projects.  We also use our direct sales force to sell third-party advertising and transportation applications.  We utilize resellers outside North America for large integrated system sales where we do not have a direct sales presence.  The majority of our products sold by resellers in North America are standard catalog products.  We support our resellers through direct mail/email advertising, trade journal advertising, product and installation training, trade show exhibitions and accessibility to our regional sales or service teams and demonstration equipment.

Engineering and Product Design and Development.  The large format electronic display industry is characterized by ongoing product innovations and developments in technology and complementary services.  To remain competitive, we have a tradition of applying engineering resources throughout our business to anticipate and respond rapidly to the system needs in the marketplace. We employ engineers and technicians in the areas of mechanical and electrical design; applications engineering; software design; quality design; and customer and product support.  We assign product managers to each product family to assist our sales staff in training and implementing product improvements which ensures each product is designed for maximum reliability and serviceability.  We employ process engineers to assist in quality and reliability processing in our product design testing and manufacturing areas.  

Manufacturing. The majority of our products are manufactured in the United States, specifically in South Dakota and Minnesota. We also have manufacturing facilities in China and Ireland. We perform component manufacturing, system manufacturing (metal fabrication, electronic assembly, sub-assembly and final assembly) and testing in-house for most of our products to control quality, improve response time and maximize cost-effectiveness. Our manufacturing facilities are somewhat aligned with our business segments' sales, marketing, and product design and development areas to accelerate technology improvements and improve our cost structure. Given the cyclical nature of some parts of our business and dispersed sales geography, we balance and maintain our ability to manufacture the same products across our plants so we can efficiently utilize our capacity and reduce costs. A key strategy of ours is to increase standardization and commonality of parts and manufacturing processes across product lines through use of product platforms to increase efficiencies. Other strategies include supplier management programs and lean manufacturing techniques. For more details on our facilities, see "Part II, Item 2. Properties".

Technical Contracting.  We serve as a technical contractor for larger display system installations requiring custom designs and innovative product solutions.  The purchase of display systems typically involves competitive proposals.  As part of our response to a proposal request, we may suggest additional products or features to assist the prospective customer in analyzing the optimal type of display system.  We usually include site preparation and installation services related to the display system in our proposal.  In these cases, we serve as a contractor and may retain subcontractors for electrical, steel and installation labor.  We have developed relationships with many subcontractors throughout the United States and the world, which is an advantage for us in bidding and delivering on these projects. We are licensed as a general contractor in many jurisdictions.  

Professional Services. To assist our clients' ability to engage, inform and entertain their audiences, we provide professional services including event support, content creation, product maintenance, marketing assistance, training on hardware and software, control room design, and continuing technical support training for operators.

Customer Service and Support.  We offer limited warranties on our products, ranging from one to 10 years, against failure due to defective parts or workmanship. In addition, we offer service agreements of various scopes.  To serve our customers, we provide help-desk access, parts repair and replacement, display monitoring and on-site support.  Our technical help desk has experienced technicians who are on-call 24 hours a day to support events and sites. Our field service personnel and third-party service partners are trained to provide on-site support. We use third-party service partners to allow us to respond to changes in volume of service during our seasonal peaks.

2



Products and Technologies

The two principal components of our systems are the display and the controller, which manages the operation of the display.  We produce displays varying in complexity, size and resolution.  The physical dimensions of a display depend on the size of the viewing area, the distance from the viewer to the display, and the amount and type of information to be displayed.  The controller is comprised of computer hardware and software products designed to compile information provided by the operator and other integrated sources to display information, graphics or animation on the displays. We customize our products according to the design specifications of the customer and the conditions of the environment in which our products function.

Our products are comprised of the following product families, all of which include software and controller options:

Video displays
Scoreboards and timing systems
Message displays
ITS (intelligent transportation systems) dynamic message signs
Space availability displays
Sound systems
Out-of-Home advertising displays
Digit and price displays
Indoor dynamic messaging systems

Each of these product families is described below:

Video Displays.  These displays are comprised of a large number of full-color pixels capable of showing various levels of video, graphics and animation.  These displays include red, green and blue LEDs arranged in various combinations to form pixels.  The electronic circuitry, which controls the pixels, allows for variances in the relative brightness of each LED to provide a full color spectrum, thereby displaying video images in striking, vibrant colors. Variables in video displays include the spacing of the pixels (pixel pitch), the resolution of the displays (number of pixels), the brightness of the displays (nits), the number of discrete colors the display is able to produce (color depth), the viewing angles, and the LED mount technology (surface mount vs. through-hole). 

We offer a broad range of indoor and outdoor LED video displays with these varying features. Examples of indoor offerings include centerhung displays, landmark displays, video walls, ribbon board displays, hanging banners, corporate office entrance displays, and video displays designed for retail stores, restaurants, malls, transportation hubs and other similar indoor facilities.

 Video displays provide content to serve as a revenue generation source through advertising, an information and communication medium (e.g. scoring, statistics, way-finding, advertising), or provide interior design elements to create luxurious space to feature digital art.

Our mobile and modular display systems are transportable and are comprised of lightweight individual LED video panels less than a square meter in size and are assembled together to form a display in a customizable size.  These displays are used for both indoor and outdoor touring shows and for other live events.

Our display technology may be integrated with architectural mesh to deliver a dynamic communication medium that provides a semi-transparent viewing experience within a building. These displays can be mounted over a solid facade or in front of windows, resulting in a finished solution that is free from visible cabling and delivers a clean, semi-transparent view. These displays are less than one inch in depth and provide an elegant, refined structural appearance.

Our line of freeform LED displays is architectural lighting and display products. The ProPixel® freeform products use mountable LED elements to transform ordinary structures into stunning visual landmarks. A flexible mounting platform allows designers to transform any structure into a full-motion video display.

The control components for video displays in live event applications include our Show Control Software Suite, proprietary digital media players and video processors. These control components provide advanced capabilities for the display of live video and real-time content on our displays. The Show Control Software Suite can operate entire networks of displays from a single, intuitive control interface.  Its features allow users to instantly deliver media clips, camera feeds, and streaming information to any display in a network.

Scoreboards and Timing Systems.  Our line of scoreboards and timing products include indoor and outdoor scoreboards for many different sports, digit displays, scoring and timing controllers, statistics software and other related products.  Indoor and outdoor systems range in complexity from small scoreboards to larger systems incorporating scoring, timing, video, message centers, advertising panels and control software.

3



We offer a variety of controllers complementing our scoreboards and displays.  These controllers vary in complexity from the All Sport® 100, a handheld controller for portable scoreboards, to the All Sport® 5500, designed for more sophisticated scoring systems and allowing for more user-defined options.  

We also offer timing systems for sports events, primarily aquatics and track competitions.  A component of these systems is our OmniSport® 2000 timing console.  The system has the capability to time and rank the competitors and to interface with event management software to facilitate the sporting event.  Other timing system components include swimming touchpads, race start systems, and relay take-off platforms.

As a key component of an integrated system, we market sports statistics and results software under the DakStats® trademark.  The software allows the entry and display of sports statistics and other information.  It is one of the leading applications of its type in collegiate and high school sports.

Message Displays.  The Galaxy® product line is a family of full-matrix displays, available in both indoor and outdoor models and controlled with the Venus® Control Suite. Galaxy® displays are full color or monochrome with varying pixel spacing depending on color, size and viewing distance. Galaxy® displays can display text, graphics and animation, as well as prerecorded video clips. They are used primarily as message centers to convey information and advertising to consumers.  

The Venus® Control Suite software is used to control the creation of messages and graphic sequences for uploading to the Galaxy® displays.  This software is designed to be user friendly and applicable to all general advertising or message applications.  It can be used to control a single message display or can scale up to provide a secure, cloud-based control center for large networks of message displays.  

ITS Dynamic Message Signs ("DMS"). DMS products include a wide range of LED displays for road management, mass transit and aviation applications.  The Vanguard® family of dynamic message displays is typically used to direct traffic and inform motorists.  These displays are used over freeways, on arterial roads, near bridges, at toll booths and in other locations.  We have also developed a control system for these displays to help transportation agencies manage large networks of displays.

Space Availability Displays. This product line is our digit and directional displays, which are primarily marketed and sold for use in parking facilities.  They include multi-line displays delivered in vertical cabinets or drop-in digit panels designed to be mounted in existing structures or signs.

Sound Systems.  Our sound systems include both standard and custom options.  Standard systems are designed to meet the needs of a variety of indoor and outdoor sports venues based on the size and configuration of the facility.  Custom indoor and outdoor systems are tailored for larger venues and venues with unique seating configurations and are often integrated into an overall venue solution for scoring, timing, message display and/or video capability. Our audio systems also complement our video display systems used in mall applications.

Out-of-Home Advertising Displays.  Our line of out-of-home advertising displays includes billboards and street furniture displays. Our line of digital billboards offers a unique display solution for the Out-of-Home (“OOH”) advertising industry.  The products are used to display images which change at regular intervals.  These systems include many features unique to the outdoor advertising market, such as our patented mounting system, self-adjusting brightness, improved energy consumption, and enhanced network security.

Our line of digital street furniture engages people with advertising content at eye level as they walk through campuses, cityscapes, and outlet malls. This design enhances the message and complements surrounding architecture. These street furniture displays are our most flexible solution for digital OOH campaigns.

Digit and Price Displays.  This product line includes our DataTime® and Fuelight™ displays. The DataTime® product line consists of outdoor time and temperature displays which use a remote sensor for temperature data. Fuelight™ digit displays are specifically designed for the petroleum industry, offering high visibility and quick fuel price updates using the Fuelink™ control software.

Indoor Dynamic Messaging Systems. Our ADFLOW DMSTM systems include indoor networked solutions for retailers, convenience stores and other businesses. These solutions allow customers to broadcast advertising campaigns and other information through the software, media players and visual hardware.

Software and Controller Options. The Venus® Control Suite, Show Control, Vanguard®, and other options offer easy control solutions to help customers manage content on their displays. Content includes media, scoring, timing, statistics, advertising, way-finding information, playback loops and entertainment type visualizations.  Software and controller options are available in on-premise and hosted cloud-based configurations and are accessible by multiple devices.

Raw Materials

4



Materials used in the production of our video display systems are sourced from around the world. Examples of the materials we use in production include LEDs, integrated circuits, printed circuit boards, power supplies, plastics, aluminum, and steel. We source some of our materials from a single-source or a limited number of suppliers due to the proprietary nature of the materials. The loss of a key supplier, part unavailability, price changes or defects in the supplied material or component could have an adverse impact on our business and operations.  Our sourcing group works to implement strategies to mitigate these risks. Periodically, we enter into pricing agreements or purchasing contracts under which we agree to purchase a minimum amount of product in exchange for guaranteed price terms over the length of the contract, which generally does not exceed one year.

During fiscal 2019, many electrical components were in high demand or market factors impacted availability, both of which caused extended lead-times and price volatility and resulted in an additional cost of $3.8 million for these materials. We also incurred $2.5 million of tariff related expenses on imports of materials to the U.S. due to the U.S. administration's implementation of tariffs on aluminum, steel, and items made in China. We believe this estimate is useful to investors in evaluating our operating performance; however, this estimate is not a measure defined by generally accepted accounting principles in the United States ("GAAP"), and our methodology for determining this estimate may vary from the methodology used by other companies.

Intellectual Property

We own or hold licenses to use numerous patents, copyrights, and trademarks on a global basis. Our policy is to protect our competitive position by filing U.S. and international patent applications to protect technology and improvements that we consider important to the development of our business. This will allow us to pursue infringement claims against competitors for protection due to patent violations. We also rely on nondisclosure agreements with our employees and agents to protect our intellectual property.  Despite these intellectual property protections, there can be no assurance a competitor will not copy the functions or features of our products.

Seasonality

Our net sales and profitability historically have fluctuated due to the impact of uniquely configured orders, such as display systems for professional sports facilities, colleges and universities, and spectacular projects in the commercial area, as well as the seasonality of the sports market. Uniquely configured orders can include several displays, controllers, and subcontracted structure builds, each of which can occur on varied schedules per the customer's needs. Outdoor installation sales can be impacted by outdoor weather conditions and the construction season. Our third fiscal quarter tends to be a slower quarter because it includes two holidays, it is affected by sports seasonality, and generally less outdoor construction work occurs due to weather conditions.

Our gross margins tend to fluctuate more on uniquely configured orders than on limited configured orders.  Uniquely configured orders involving competitive bidding and substantial subcontract work for product installation generally have lower gross margins.  Although we follow the over time method of recognizing revenues for uniquely configured orders, we nevertheless have experienced fluctuations in operating results and expect our future results of operations will be subject to similar fluctuations.

Because of the seasonality and volatility in business demand and variety of product types, we may not be able to utilize our capacity efficiently or accurately plan our capacity requirements, which may negatively affect our business and operating results.

Working Capital

For information regarding working capital items, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources” in this Form 10-K.

Customers

We have a large and diverse worldwide customer base, ranging from local main street business owners and out-of-home companies to the owners and operators of premier professional sports arenas. Our customers are important to us, and we strive to serve them over the long-term to earn their future business. The loss of one or more customers could have an adverse effect on us. See "Note 3. Segment Reporting" of the Notes to our Consolidated Financial Statements included in this Form 10-K for our primary markets and customers of each business unit.

Backlog

Our remaining performance obligations ("backlog") consist of contractually binding sales agreements or purchase orders for integrated electronic display systems and related products and service. Orders are included in backlog when we are in receipt of an executed contract and any required deposits or security. As a result, certain orders for which we have received binding letters of intent or contracts will not be included in backlog until all required contractual documents and deposits are received. Backlog can fluctuate due to large order

5


bookings and the timing and seasonality of net sales. Because order backlog fluctuates and may be subject to extended delivery schedules, orders may be canceled and have varied estimated profitability. Our backlog is not necessarily indicative of future net sales or net income. Backlog is not a measure defined by GAAP, and our methodology for determining backlog may vary from the methodology used by other companies in determining their backlog amounts.

Our backlog as of April 27, 2019 was $257 million as compared to $219 million as of April 28, 2018. We expect to fulfill this backlog within the next 24 months.

Government and Other Regulation

In the United States and other countries, various laws, regulations and ordinances related to our products and controllers restrict the installation of outdoor signs and displays, particularly in the commercial and transportation markets.  These laws and regulations impose greater restrictions on electronic displays versus non-electronic displays due to alleged concerns over aesthetics or driver safety. Globally, our products are also subject to various regulations and standards including electromagnetic interference, electromagnetic compatibility, electrical safety, and flammability standards. We design and have our products tested for these regulations; however, these factors may prevent or inhibit us from selling products to some prospective customers in certain geographies.

Our manufacturing facilities and products comply with industry specific requirements, including environmental rules and regulations and safety standards. These requirements include quality, manufacturing process controls, manufacturing documentation, supplier certification of raw materials, and various safety tests. Our products and production processes require the storage, use and disposal of a variety of hazardous chemicals under applicable laws.

Our global supply chain and sales distribution channels subject us to various trade compliance regulations. These requirements can include certification of country of origin, classification within the various tariff codes and trade agreements, compliance with other specific product or country import/export regulations, and payment of certain import or export tariffs, duties, or taxes.

Our global operations subject us to various laws and regulations, including laws and regulations relating to tax compliance, anti-corruption, and data privacy. These requirements vary and can include things like records management, policy creation and maintenance, data protection programs, compliance filings, and continued training of employees.

We believe we are in material compliance with these requirements.

Competition

We encounter a wide variety of competitors that vary by product, geographic area, and business unit. Our competitors include both United States and foreign companies and range in size and product offerings. Our competitors may develop lower-cost or lower-featured products, may be willing to charge lower prices to increase their market share, or include different service and controller offerings.  Some competitors have more capital and other resources, which may allow them to take advantage of acquisition opportunities or adapt more quickly to changes in customer requirements. Other competitors use sponsorships as a way to win business at a particular location or market. In addition, our products compete with other forms of advertising, such as television, print media and fixed display signs.

We believe that our ability to compete depends upon customer centric product and service quality and features, technical expertise, service breadth, and cost-effective solutions.

Research and Development

Our engineering, process design, and product and service design and development capabilities and experience are very important factors in continuing to develop, produce, and offer the most up-to-date digital displays and control system solutions desired by the market.

Employees

As of April 27, 2019, we employed approximately 2,412 full-time employees and 310 part-time and temporary employees.  Of these employees, approximately 879 were in manufacturing, 570 were in sales and marketing, 570 were in customer service, 450 were in engineering and 253 were in general and administrative.  None of our employees are represented by a collective bargaining agreement.  We believe employee relations are good.

Item 1A.  RISK FACTORS

The factors that are discussed below, as well as the matters that are generally set forth in this Form 10-K and the documents incorporated by reference herein, could materially and adversely affect the Company’s business, results of operations and financial condition.

6



We operate in highly competitive markets and face significant competition and pricing pressure. If we are unable to keep up with the rapidly changing product market or to compete effectively, we could lose market share as well as limited and uniquely configured orders, which could negatively impact our results of operations.

The electronic display industry is characterized by ongoing product improvement, innovations and development. We compete against products produced in foreign countries and the United States. Our competitors may develop lower-cost or lower-featured products, may be willing to charge lower prices to increase their market share, or include different service and controller offerings.  Some competitors have more capital and other resources, which may allow them to take advantage of acquisition opportunities or adapt more quickly to changes in customer requirements. Other competitors use sponsorships as a way to win business at a particular location or market. In addition, our products compete with other forms of advertising, such as television, print media and fixed display signs. To remain competitive, we must anticipate and respond quickly to our customers’ needs, enhance our existing products, introduce new products and features, and continue to price our products competitively.

Our results of operations on a quarterly and annual basis are likely to fluctuate and are substantially affected by the size and timing of large contract order awards.

Our net sales and earnings have varied in the past and are likely to vary in the future. When awarded large contracts, primarily in the college and professional sports facilities markets, the OOH niche, the transportation market, and the large spectacular niche, the timing and amount of these contracts could cause material fluctuations in our net sales and earnings.  Awards of large contracts and their timing and amounts are difficult to predict, may not be repeatable, and are outside of our control. Operating results in one quarter or fiscal year may not be indicative of future operating results. Some factors that may cause our operating results to vary include:

new product introductions;
variations in product mix;
production capacity utilization; and
delays or cancellations of orders.

Our actual results could differ from the estimates and assumptions we make to prepare our financial statements, which could have a material impact on our financial condition and results of operations.

In connection with the preparation of our financial statements, including the Consolidated Financial Statements included in this Form 10-K, our management is required under GAAP to make estimates and assumptions based on historical experience and other factors. Our most critical accounting estimates are described in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Form 10-K. These estimates and assumptions affect the timing of net sales, costs, and profits or losses in applying the principles to contracts with customers under the cost incurred input method; estimated amounts for warranty costs; the valuation of our deferred tax assets; fair value estimates used in goodwill and long-term assets testing; and estimating the impact of uncertainties in the application of complex tax laws. Although we believe these estimates and assumptions are reasonable under the circumstances, they are subject to significant uncertainties, some of which are beyond our control. If management's estimates and assumptions change or are not correct, our financial condition or results of operation could be adversely affected.

Unanticipated warranty and other costs for defective products could adversely affect our financial condition, results of operations and reputation.

We provide warranties on our products with terms varying from one to 10 years.  In addition, we offer extended warranties.  These warranties require us to repair or replace faulty products and meet certain performance standards, among other customary warranty provisions.  Although we continually monitor our warranty claims and accrue a liability for estimated warranty costs, unanticipated claims could have a material adverse impact on our financial results. In some cases, we may be able to subrogate a claim back to a subcontractor or supplier if the subcontractor or supplier supplied the defective product or performed the service, but this may not always be possible. In addition, the need to repair or replace products with design and manufacturing defects could adversely affect our reputation. Remediation of a claim may take time and could result in lost or deferred revenue, lead to costly warranty expenses, and could have a material adverse impact on our financial condition and operating results.

During fiscal 2016, we discovered a warranty issue caused by a mechanical device failure within a module for displays primarily in our OOH application built prior to fiscal 2013. During our fiscal years 2019, 2018, and 2017, we recognized warranty expense and estimated equipment service agreement losses for probable and reasonably estimated costs to remediate this issue of $2.4 million, $4.5 million, and $1.8 million, respectively. The increased warranty expense in fiscal 2018 is primarily based on our decision to preserve our market leadership and for customer relationship purposes in certain cases beyond our contractual obligations. See "Note 18. Commitments and Contingencies" of the Notes to our Consolidated Financial Statements included in this Form 10-K for more information regarding our warranty accrual.

7



We enter into fixed-price contracts, which could reduce our profits if actual costs exceed estimated costs.

Because of the complexity of many of our client contracts, accurately estimating the cost, scope and duration of a particular contract can be a difficult task. Unanticipated costs that exceed our original estimates may not be recoverable under fixed price contracts. Unanticipated cost increases may occur as a result of several factors including, but not limited to: increases in the cost, shortages or non-availability of materials or labor; unanticipated technical problems; required project modifications not initiated by the customer; suppliers’ or subcontractors’ failure to perform or delay in performing their obligations; logistics disruptions or delays; and capacity constraints.  In addition to increased costs, these factors could delay delivery of products, which may result in the assessment of liquidated damages or other contractual damages which would negatively impact our profits.  

Backlog may not be indicative of future revenue or profitability.

Many of our products have long sales, delivery and acceptance cycles. In addition, our backlog is subject to order cancellations and delays. Orders normally contain cancellation provisions to permit our recovery of costs expended as well as a pro-rata portion of the profit.  If projects are delayed, revenue recognition can occur over longer periods of time, and projects may remain in backlog for extended periods of time.  If we receive relatively large orders in any given quarter, fluctuations in the levels of the quarterly backlog can result because the backlog may reach levels which may not be sustained in subsequent quarters.

We depend on a single-source or a limited number of suppliers for our raw materials and components. The loss, interruption, or material change in our business relationships with our suppliers could cause a disruption in supply and a substantial increase in the costs of such materials. Such changes could cause harm to our sales, financial condition, and results of operations.

We obtain some of our raw materials and components used to manufacture our products from one or a limited number of suppliers in countries around the world. An interruption from our suppliers of raw materials or components could affect our ability to manufacture our products until a new source of supply is located and, therefore, could have a material adverse effect on our business, financial condition or results of operations.  Although we believe our supply of raw materials and components is adequate for the needs of our business, we cannot assure that new sources of supply will be available if needed.

If we fail to timely and effectively obtain shipments of raw materials and components from our suppliers or to send shipments of our manufactured product to our customers, our business and operating results could be adversely affected.

We cannot control all the various factors that might affect our suppliers' timely and effective delivery of raw materials and components to our manufacturing facilities or the availability of freight capacity for us to deliver products to our customers.

Our utilization of a complex supply chain for raw material and component imports and the global distribution of our products makes us vulnerable to many risks, including, among other things, risks of damage, destruction or confiscation of products while in transit to and from our manufacturing facilities; organized labor strikes and work stoppages, such as labor disputes, that could disrupt operations at ports-of-entry; transportation and other delays in shipments, including as a result of heightened security screening and inspection processes or other port-of-entry limitations or restrictions; unexpected or significant port congestion; lack of freight availability; and freight cost increases. In addition, we may be required to arrange for products to be delivered through airfreight, which is significantly more expensive than standard shipping by sea. We may not be able to obtain sufficient freight capacity on a timely basis or at favorable shipping rates and, therefore, may not be able to timely receive shipments of raw materials and components or deliver products to customers.

Price fluctuations in, and shortages of, raw materials and components can have a significant impact on our price competitiveness and/or ability to produce our products which could cause harm to our sales, financial condition and results of operations.

Price fluctuations and shortages of any raw materials and components used to manufacture our products can occur due to various factors (such as worldwide demand, natural disasters, logistic disruptions, and trade regulations). Electronic components used in our products are sometimes in short supply, which may impact our ability to meet customer demand. If we experience shortages or increases in the price of raw materials and components and are unable to pass on those increases to our customers or are unable to manufacture our products, it could negatively affect our business, financial condition or results of operations. In addition to increased costs, these factors could delay delivery of products, which may result in the assessment of liquidated damages or other contractual damages that could negatively impact our profits.

During fiscal 2019, many electrical components were in high demand or market factors impacted availability, both of which caused extended lead-times and price volatility resulting in an estimated additional cost of $3.8 million for these materials.

We may depend on third parties to complete our contracts.


8


Depending on the scope of work of a contract, we may hire third-party subcontractors to perform on-site installation and service-related activities, hire manufacturers of structures or elements of structures related to on-site installation, hire contract manufacturers for certain product lines, or purchase specialty non-display related system elements from other companies. If we are unable to hire qualified subcontractors, find qualified manufacturers for on-site elements, find qualified contract manufacturers, or purchase specialty non-display system elements, our ability to successfully complete a project could be impaired. If we are not able to locate qualified third-party subcontractors or manufacturers, the amount we are required to pay may exceed what we have estimated, and we may suffer losses on these contracts. If the subcontractor or manufacturer fails to perform, we may be required to source these services to other third parties on a delayed basis or on less favorable terms, which could impact contract profitability. There is a risk that we may have disputes with our subcontractors relating to, among other things, the quality and timeliness of work performed, customer concerns about the subcontractor, or faulty workmanship resulting in claims against us for failure to meet required project specifications and negatively impacting our financial condition and results of operations.

Unanticipated events resulting in credit losses could have a material adverse impact on our financial results.
    
Significant portions of our sales are to customers who place large orders for custom products.  We closely monitor the creditworthiness of our customers and have not, to date, experienced significant credit losses.  We mitigate our exposure to credit risk, to some extent, by requiring deposits, payments prior to shipment, progress payments and letters of credit. However, because some of our exposure to credit losses is outside of our control, unanticipated events resulting in credit losses could have a material adverse impact on our operating results.

We may not be able to utilize our capacity efficiently or accurately plan our capacity requirements, which may negatively affect our business and operating results.

We increase our production capacity and the overhead supporting production based on anticipated market demand.  Market demand, however, has not always developed as expected or remained at a consistent level.  This underutilization risk can potentially decrease our profitability and result in the impairment of certain assets.

The following factors are among those that could complicate capacity planning for market demand:

changes in the demand for and mix of products that our customers buy;
our ability to add and train our manufacturing staff in advance of demand;
the market’s pace of technological change;
variability in our manufacturing productivity;
long lead time for components used in production;
geography of the order and related shipping methods; and
long lead times for our plant and equipment expenditures.

Insurance coverage can be difficult or expensive to obtain, and our failure to obtain adequate insurance coverage could adversely affect our financial condition or results of operations.

We maintain insurance both as a corporate risk management strategy and to satisfy the requirements of many of our contracts with customers. As the costs and availability of insurance change, we may decide not to be covered against certain losses where, in the judgment of management, the insurance is not warranted due to the cost or availability of coverage or the remoteness of the perceived risk. We cannot provide assurance that all necessary or appropriate insurances will be available, cover every type of loss incurred, or be able to be economically secured. For example, some insurers limit coverages, increase premium costs or increase deductibles when global catastrophic events occur. As part of our corporate risk management strategy, we monitor and place our coverages with financially strong insurers, layer our risk with multiple insurers, and seek advice on the amount, breadth and type of insurance coverages to protect our interests. We also contractually require subcontractors and others working on our behalf to carry common insurance coverages for the types of work they perform to mitigate any risk of our loss. Our failure to obtain adequate insurance coverage could adversely affect our financial condition or results of operations.

The terms and conditions of our credit facilities impose restrictions on our operations, and if we default on our credit facilities, it could have a material adverse effect on our results of operations and financial condition and make us vulnerable to adverse economic or industry conditions.

The terms and conditions of our credit facilities impose restrictions limiting our ability to incur debt, contingent liabilities, lease obligations or liens; make a substantial change of ownership; or acquire or purchase a business or its assets. The availability of our credit facilities is also subject to certain financial covenants which impose restrictions on the level of cash dividends and capital expenditures. A breach of any of these covenants could result in an event of default under our credit facility. Upon the occurrence of an event of default, the lender could elect to declare any and all amounts outstanding under such facility to be immediately due and payable and terminate all

9


commitments to extend further credit. For additional information on financing agreements, see "Note 10. Financing Agreements" of the Notes to our Consolidated Financial Statements included in this Form 10-K.

For the foreseeable future, it is anticipated that our cash on hand, marketable securities, cash provided by operating activities, and borrowings from our existing credit facilities should provide sufficient funds to finance our capital expenditures and working capital needs and otherwise meet operating expenses and debt service requirements.  However, if additional capital is required or we are unable to renew our existing credit facilities, there can be no assurance we will be able to obtain such capital when needed or on satisfactory terms. Also, market conditions can negatively impact our customers' ability to fund their projects and can impact our vendors, suppliers, and subcontractors and may not allow them to perform their obligations to us. We expect to enter into a new credit facility, loan agreement, and guaranty agreement prior to our current agreements expiring in November 2019.

The transition away from LIBOR may adversely affect our cost to obtain financing.

Central banks around the world, including the Board of Governors of the Federal Reserve, have commissioned working groups of market participants and official sector representatives with the goal of finding suitable replacements for the London Interbank Offered Rate (“LIBOR”) based on observable market transactions. It is expected that a transition away from the widespread use of LIBOR to alternative rates will occur over the course of the next few years. The U.K. Financial Conduct Authority, which regulates LIBOR, has announced that it has commitments from panel banks to continue to contribute to LIBOR through the end of 2021, but that it will not use its powers to compel contributions beyond such date. Accordingly, there is considerable uncertainty regarding the publication of such rates beyond 2021. The Federal Reserve Bank of New York and various other authorities have commenced the publication of reforms and actions relating to alternatives to U.S. dollar LIBOR. Although the full impact of such reforms and actions, together with any transition away from LIBOR, including the potential or actual discontinuance of LIBOR publication, remains unclear, these changes may have a material adverse impact on the availability of financing, including LIBOR-based loans, and on our financing costs.

If we became unable to obtain adequate surety bonding or letters of credit, it could adversely affect our ability to bid on new work, which could have a material adverse effect on our future revenue and business prospects.

In line with industry practice, we are often required to provide performance and surety bonds to customers and may be required to provide letters of credit. These bonds and letters of credit provide credit support for the client if we fail to perform our obligations under the contract. If security is required for a particular project and we are unable to obtain a bond or letter of credit on terms acceptable to us and our client, we may not be able to pursue that project. In addition, bonding may be more difficult to obtain in the future or may be available only at significant additional cost as a result of general conditions that affect the insurance and bonding markets.

We may be unable to protect our intellectual property rights effectively, or we may infringe upon the intellectual property of others, either of which may have a material adverse effect on our operating results and financial condition.

We rely on a variety of intellectual property rights we use in our products and services.  We may not be able to successfully preserve our intellectual property rights in the future, and these rights could be invalidated, circumvented or challenged.  In particular, the laws of certain countries in which our products are sold do not protect our products and intellectual property rights to the same extent as the laws of the United States. If litigation is necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others, such litigation could result in substantial costs and diversion of resources even if we ultimately prevail.

In addition, intellectual property of others also has an impact on our ability to offer some of our products and services for specific uses or at competitive prices. Competitors' patents or other intellectual property may limit our ability to offer products or services to our customers. Any infringement or claimed infringement by us of the intellectual property rights of others could result in litigation and adversely affect our ability to continue to provide, or could increase the cost of providing, products and services.

Weakened global economic conditions may adversely affect our industry, business and results of operations.

Our overall performance depends in part on worldwide economic conditions. The United States and other key international economies have experienced cyclical downturns from time to time in which economic activity was impacted by falling demand for a variety of goods and services; restricted credit; poor liquidity; reduced corporate profitability; volatility in credit, equity and foreign exchange markets; bankruptcies; and overall uncertainty with respect to the economy. These conditions affect consumer spending and could adversely affect our customers’ ability or willingness to purchase our products, delay prospective customers’ purchasing decisions, reduce the value of their contracts, or affect attrition rates, all of which could adversely affect our operating results.

Unexpected events, including natural disasters, may increase our cost of doing business or disrupt our operations.


10


The occurrence of one or more unexpected events, including war, terrorist acts, fires, tornadoes, floods and severe weather in the United States or in other countries in which we operate, may disrupt our operations as well as the operations of our customers. Such acts could create additional uncertainties, forcing customers to reduce, delay, or cancel already planned projects. These events could result in damage to, and a complete or partial closure of, one or more of our manufacturing facilities, which could make it difficult to supply our customers with product and provide our employees with work, thereby adversely affecting our business, operating results or financial condition.

Our global operations expose us to global regulatory, geopolitical, economic and social changes and add additional risks and uncertainties which can harm our business, operating results, and financial condition.

Our United States and foreign operations, sales, earnings, and strategies for profitable growth can be adversely affected by global conditions and compliance with global regulations. Global conditions include political developments, economic changes, unfavorable trading policies, difficulties in staffing and managing global operations, changes in foreign and domestic governmental regulations or requirements, treaty and trade relationships, changes in monetary and fiscal policies, changes in laws and regulations, or other activities of the United States and other foreign governments, agencies, and similar organizations. These conditions include, but are not limited to, changes in a country's or region's economic or political conditions; pricing and marketing of products; local labor conditions and regulations; reduced protection of intellectual property rights; changes in the regulatory or legal environment; lack of well-developed legal systems; restrictions and foreign exchange rate fluctuations; and burdensome taxes and tariffs and other trade regulations or barriers. Other exposures and uncertainties exist include changing social conditions and attitudes, terrorism, or political hostilities and war. Other difficulties of global operations include staffing and managing our various locations, including logistical and communication challenges. The likelihood of such occurrences and their overall effect on us vary greatly from country to country and are not predictable.

As a result of U.S. Administrative trade actions in 2018 and 2019, we experienced volatility in supply and increases in pricing of aluminum, electrical, and other components we use in our production. Further trade disputes could make us subject to additional regulatory costs and challenges, affect global economic and market conditions, and contribute to volatility in foreign exchange markets, which we may be unable to effectively manage through our foreign exchange risk management program. We continue to monitor the situation and evaluate ways to minimize these impacts through vendor negotiations, alternative sources, and potential price adjustments. We estimate fiscal 2019 results were impacted by approximately $6.3 million of additional costs for price changes and tariffs.

Our business could be impacted by the United Kingdom's potential withdrawal from the European Union (known as "Brexit"). Brexit may adversely affect global economic and market conditions and could contribute to volatility in foreign exchange markets, which we may be unable to effectively manage through our foreign exchange risk management program. Brexit may also adversely affect our revenues and could subject us to new regulatory costs and challenges in addition to other adverse effects that we are unable to effectively anticipate.

Our future results may be affected by compliance risks related to United States and other countries' anti-bribery and anti-corruption laws, trade controls, economic sanctions, and similar laws and regulations. Our failure to comply with these laws and regulations could subject us to civil, criminal and administrative proceedings or penalties and harm our reputation.

Doing business on a worldwide basis requires us to comply with the laws and regulations of the United States government and various foreign jurisdictions. These laws and regulations place restrictions on our operations, trade practices, partners, and investments.

In particular, we and our operations are subject to U.S. and foreign anti-corruption and trade control laws and regulations, such as the United States Foreign Corrupt Practices Act (the “FCPA”); United Kingdom Bribery Act (the “Bribery Act”); and export controls and economic sanctions programs, including those administered by the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”), the State Department’s Directorate of Defense Trade Controls (the “DDTC”), and the Bureau of Industry and Security of the U.S. Department of Commerce.

As part of our business, we deal with state-owned business enterprises, the employees of which are considered to be foreign officials for purposes of the FCPA's prohibition on United States companies from engaging in bribery, providing anything of value, or making other prohibited payments to foreign officials for the purpose of obtaining or retaining business, and other similar regulations in other areas of the world. In addition, the provisions of the Bribery Act apply to bribery of foreign officials and also to transactions with individuals that a government does not employ. The FCPA also requires us to maintain specific record-keeping standards and adequate internal accounting controls. In addition, we are subject to similar requirements in other countries. Some of the international locations in which we do business lack a developed legal system and have higher than normal levels of corruption. Our expansion outside of the United States, and our development of new partnerships and joint venture relations worldwide, could increase the risk of violation of the FCPA, OFAC, the Bribery Act or similar laws and regulations.

As an exporter, we must comply with various laws and regulations relating to the export of products and technology from the U.S. and other countries having jurisdiction over our operations and trade sanctions against embargoed countries and destinations administered by OFAC. Before shipping certain items, we must obtain an export license or verify that license exemptions are available. Any failures

11


to comply with these laws and regulations could result in fines, adverse publicity, and restrictions on our ability to export our products. Repeat failures could carry more significant penalties.

Bribery, corruption, and trade laws and regulations, and the enforcement thereof, are increasing in frequency, complexity and severity on a global basis. Violations of anti-corruption, anti-bribery and trade control laws and sanctions regulations are punishable by civil penalties, including fines, denial of export privileges, injunctions, asset seizures, debarment from government contracts and revocations or restrictions of licenses, as well as criminal fines and imprisonment, and could harm our reputation, create negative shareholder sentiment and affect our share value. We have established policies and procedures with the intention of providing reasonable assurance of compliance with these laws and regulations and trained our employees to comply with these laws and regulations. However, our employees, contractors, agents and licensees involved in our international operations may take actions in violations of such policies. If our employees, agents, distributors, suppliers and other third parties with whom we do business violate anti-bribery, anti-corruption or similar laws and regulations, we may incur severe fines, penalties and reputational damage. Additionally, there can be no assurance that our policies and procedures will effectively prevent us from violating these regulations in every transaction in which we may engage or provide a defense to any alleged violation. In particular, we may be held liable for the actions that our joint venture partners take inside or outside of the United States even though our partners may not be subject to these laws. Such a violation, even if our policies prohibit it, could have an adverse effect on our reputation, business, financial condition and results of operations. In addition, various state and municipal governments, universities and other investors maintain prohibitions or restrictions on investments in companies that do business with sanctioned countries, persons and entities, which could adversely affect our reputation, business, financial condition and results of operations.

Global tax law changes may adversely affect our business, financial condition and results of operations.

We are subject to the income tax laws of the United States and its various state and local governments as well as several foreign tax jurisdictions. Our future income taxes could be materially adversely affected by changes in the amount or mix of earnings amongst countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax rates or the interpretation of tax rules and regulations in jurisdictions in which we do business, changes in tax laws, or the outcome of income tax audits and any related litigation. The U.S. Tax Cuts and Jobs Act is one such example of recent legislation that impacts our effective tax rate.

Further changes in the tax laws of the United States and foreign jurisdictions could arise, including additional tax reform in the United States and the base erosion and profit shifting project undertaken by the Organisation for Economic Co-operation and Development (“OECD”). Both the United States tax reform and the OECD proposed recommendations, that, in some cases, would make substantial changes to numerous long-standing tax positions and principles. These contemplated changes could increase tax uncertainty and may adversely affect our business, financial condition and results of operations.

Acquisitions and divestitures pose financial, management and other risks and challenges.

We routinely explore acquiring other businesses and assets. Periodically, we may also consider disposing of certain assets, subsidiaries, or lines of business. Acquisitions or divestitures present financial, managerial and operational challenges. These include, but are not limited to, the following:

diversion of management attention;
difficulty with integrating acquired businesses;
difficulty with the integration of different corporate cultures;
personnel issues;
increased expenses;
assumption of unknown liabilities and indemnification obligations;
potential disputes with the buyers or sellers;
the time involved in evaluating or modifying the financial systems of an acquired business; and
establishment of appropriate internal controls.

There can be no assurance that we will engage in any acquisitions or divestitures or that we will be able to do so on terms that will result in any expected benefits.

If goodwill or other intangible assets in connection with our acquisitions become impaired, we could take significant non-cash charges against earnings.

We have pursued and will continue to seek potential acquisitions to complement and expand our existing businesses, increase our revenues and profitability, and expand our markets.  As a result of prior acquisitions, we have goodwill and intangible assets recorded in our consolidated balance sheets as described in "Note 7. Goodwill and Intangible Assets" of the Notes to our Consolidated Financial Statements included in this Form 10-K. Goodwill represents the purchase price paid in excess of the fair value of net tangible and intangible assets

12


acquired in a business combination. Goodwill is not amortized and remains in our consolidated balance sheets indefinitely unless there is an impairment or a sale of a portion of the business. Under current accounting guidelines, we must assess, at least annually, whether the value of goodwill and other intangible assets has been impaired. Any reduction or impairment of the value of goodwill or other intangible assets will result in charges against earnings, which would adversely affect our results of operations in future periods. During fiscal 2017, we recorded a technology and customer list intangible asset impairment of $0.8 million and a gain from the sale of our non-digital assets of $1.3 million in fiscal 2018. We had no impairments in fiscal 2018 or 2019.

Our data systems could fail or their security could be compromised, causing a material adverse effect on our business.

We rely heavily on digital technologies for the successful operation of our business, for the support of our controller offerings, and for the collection and retention of business data. Any failure of our digital systems, or any breach of our systems’ security measures, could adversely affect our operations, at least until our data can be restored and/or the breaches remediated. Despite the security measures we have in place, our facilities and systems and those of our third-party service providers may be vulnerable to cybersecurity breaches, acts of vandalism, computer viruses, misplaced or lost data, programming issues, and/or human errors or other similar events. Any misappropriation, loss or other unauthorized disclosure of confidential or personally identifiable information, whether by us or by our third-party service providers, could adversely affect our business and operations. We could face significant fines and penalties under various global laws revolving around data loss, lack of adequate date protection or lack of required reporting. Any disruption in our digital technologies could affect our business and operations, causing potentially significant expenses to recover and modify the data systems, to reimburse customers losses, and to investigate and remediate any vulnerabilities, which could severely damage our reputation with customers, suppliers, employees and investors and expose us to risk of litigation and liability.

Regulation in the areas of privacy, data protection and information security could increase our costs and affect or limit our business opportunities and how we collect or use personal information.

As privacy, data protection and information security laws, including data localization laws, are interpreted and applied, compliance costs may increase, particularly in the context of ensuring that adequate data protection and data transfer mechanisms are in place. In recent years, there has been increasing regulatory enforcement and litigation activity in the areas of privacy, data protection and information security in the U.S. and in various countries in which we operate. For example, effective in May 2018, the General Data Protection Regulation (“GDPR”) became effective, and the GDPR applies to any organization, including Daktronics, that holds or uses data on people inside the European Union (“EU”). Under the GDPR, businesses must generally obtain consent from individuals in the EU before they store or process personal information, and data cannot be held longer than necessary. The GDPR creates new compliance obligations, which have caused us to change some of our business practices relative to the EU. The GDPR greatly increases the jurisdictional reach of EU law and significantly increases financial penalties for noncompliance, including possible fines of up to 4% of global annual turnover for the preceding financial year or €20 million (whichever is higher) for the most serious infringements.

In addition, state and federal legislators and/or regulators in the U.S. and other countries in which we operate are increasingly adopting or revising privacy, data protection and information security laws that potentially could have significant impact on our current and planned privacy, data protection and information security-related practices; our collection, use, sharing, retention and safeguarding of consumer and/or employee information; and some of our current or planned business activities. New legislation or regulation could increase our costs of compliance and business operations and could reduce revenues from certain business initiatives. Moreover, the application of existing or new laws to existing technology and practices can be uncertain and may lead to additional compliance risk and cost.

Compliance with current or future privacy, data protection and information security laws relating to consumer and/or employee data could result in higher compliance and technology costs and could restrict our ability to provide certain products and services, which could materially and adversely affect our results of operations. Our failure to comply with privacy, data protection and information security laws could result in potentially significant regulatory and/or governmental investigations and/or actions, litigation, fines, sanctions, ongoing regulatory monitoring, customer attrition, customer indemnity claims, decreases in the use or acceptance of our products and services, and damage to our reputation and our brand.

We may fail to continue to attract, develop and retain key management personnel, which could negatively impact our operating results.

We depend on the performance of our senior executives and key employees, including experienced and skilled technical personnel.  The loss of any of our senior executives could negatively impact our operating results and ability to execute our business strategy.  Our future success will also depend upon our ability to attract, train, motivate and retain qualified personnel.

Although we intend to continue to provide competitive compensation packages to attract and retain key personnel, some of our competitors for these employees have greater resources and more experience, making it difficult for us to compete successfully for key personnel. If we cannot attract and retain sufficiently qualified technical employees for our research and development and manufacturing operations, we may be unable to achieve the synergies expected from mergers and acquisitions, or to develop and commercialize new products or

13


new applications for existing products. Furthermore, possible shortages of key personnel, including engineers, in the regions surrounding our facilities could require us to pay more to hire and retain key personnel, thereby increasing our costs.

The outcome of pending and future claims, investigations or litigation can have a material adverse impact on our business, financial condition, and results of operations.

We are involved from time to time in a variety of litigation, investigations, inquires or similar matters arising in our business. Litigation, investigations and regulatory proceedings are subject to inherent uncertainties, and unfavorable rulings and outcomes can and do occur. Pending or future claims against us could result in professional liability, product liability, criminal liability, warranty obligations, indemnity claims, or other liabilities to the extent we are not insured against a loss or our insurance fails to provide adequate coverage. Also, a well-publicized actual or perceived threat of litigation could adversely affect our reputation and reduce the demand for our products. See "Note 18. Commitments and Contingencies" of the Notes to our Consolidated Financial Statements included in this Form 10-K for further information on litigation obligations.

Our business involves the use of hazardous materials, and we must comply with environmental, health and safety laws and regulations, which can be expensive and restrict how we do business.

Our business involves the blending, controlled storage, use and disposal of hazardous materials. We and our suppliers are subject to federal, state, local and foreign laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials. Although we believe the safety procedures we utilize for handling and disposing of these materials comply with the standards prescribed by these laws and regulations, we cannot eliminate the risk of accidental contamination or injury from these materials. In the event of an accident, local, state, federal or foreign authorities may curtail the use of these materials and interrupt our business operations. If we are subject to any liability as a result of activities involving hazardous materials, our business, financial condition and results of operations may be adversely affected and our reputation may be harmed.

If our internal control over financial reporting is found to be ineffective, our financial statements may not be fairly stated, raising concerns for investors and potentially adversely affecting our stock price.

Under Section 404 of the Sarbanes-Oxley Act of 2002, we are required to evaluate and determine the effectiveness of our internal controls over financial reporting.  We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a public company. We may encounter problems or delays in completing the review and evaluation, implementing improvements, or receiving a positive attestation from our independent registered public accounting firm.  In addition, our assessment of internal controls may identify deficiencies in our internal controls over financial reporting or other matters which may raise concerns for investors, which may adversely affect our stock price.

The protections we have adopted and to which we are subject may discourage takeover offers favored by our shareholders.

Our articles of incorporation, by-laws and other corporate governance documents and the South Dakota Business Corporation Act ("SD Act") contain provisions that could have an anti-takeover effect and discourage, delay or prevent a change in control or an acquisition that many shareholders may find attractive. These provisions make it more difficult for our shareholders to take some corporate actions. These provisions relate to:

the ability of our Board of Directors, without shareholder approval, to authorize and issue shares of stock with voting, liquidation, dividend and other rights and preferences that are superior to our common stock;
the classification of our Board of Directors, which effectively prevents shareholders from electing a majority of the directors at any one meeting of shareholders;
the adoption of a shareholder rights plan providing for the exercise of junior participating preferred stock purchase rights when a person becomes the beneficial owner of 20 percent or more of our outstanding common stock and upon the occurrence of certain similar events (subject to certain exceptions);
under the SD Act, limitations on the voting rights of shares acquired in specified types of acquisitions and restrictions on specified types of business combinations; and
under the SD Act, prohibitions against engaging in a “business combination” with an “interested shareholder” for a period of four years after the date of the transaction in which the person became an interested shareholder unless the business combination is approved.

These provisions may deny shareholders the receipt of a premium on their common stock, which in turn may have a depressive effect on the market price of our common stock.

Our common stock has at times been thinly traded, which may result in low liquidity and price volatility.


14


The daily trading volume of our common stock has at times been relatively low. If this were to occur in the future, the liquidity and appreciation of our common stock may not meet our shareholders’ expectations, and the price at which our stock trades may be volatile. The market price of our common stock could be adversely impacted as a result of sales by existing shareholders of a large number of shares of common stock in the market or by the perception such sales could cause.

Significant changes in the market price of our common stock could result in securities litigation claims against us.

The market price of our common stock has fluctuated and will likely continue to fluctuate and, in the past, companies that have experienced significant changes in the market price of their stock have been subject to securities litigation claims. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could harm our business.

Additionally, if we fail to meet or exceed the expectations of security analysts and investors, or if one or more of the security analysts who cover us adversely change their recommendation regarding our stock, the market price of our common stock could decline. Moreover, our stock price may be based on expectations, estimates and forecasts of our future performance that may be unrealistic or that may not be met. Further, our stock price may fluctuate based on reporting by the financial media, including television, radio, press reports and blogs.

There can be no assurance that we will pay dividends on our common stock.

Our Board of Directors has approved a regular dividend since fiscal 2006. The declaration, amount and timing of such dividends are determined by our Board of Directors at their discretion. Such determinations are subject to capital availability, compliance with all respective laws and our agreements applicable to the declaration and payment of cash dividends, strategic investment cash needs, business outlook and other factors balancing our long-term needs of our business and the interests of our shareholders.

Our ability to pay dividends will depend upon, among other factors, our cash balances and potential future capital requirements for strategic transactions, including acquisitions, results of operations, financial condition and other factors that our Board of Directors may deem relevant. A reduction in or elimination of our dividend payments and/or our dividend program could have a material negative effect on our stock price.

Our executive officers, directors and principal shareholders have the ability to significantly influence all matters submitted to our shareholders for approval.

Dr. Aelred Kurtenbach served as our Chairman of the Board until September 3, 2014, when he retired. Mr. Reece Kurtenbach, who is Dr. Aelred Kurtenbach's son, serves as our Chairman of the Board and Chief Executive Officer. In addition, Dr. Aelred Kurtenbach has two other children who serve as our Vice President of Human Resources and as our Vice President of Manufacturing. Together, these individuals, in the aggregate, beneficially owned 8.9% of our outstanding common stock as of June 3, 2019, assuming the exercise by them of all of their options that were currently exercisable or that vest within 60 days of June 3, 2019. Our other executive officers and directors, in the aggregate, beneficially owned an additional 4.5% of our outstanding common stock as of June 3, 2019, assuming the exercise by them of all of their options currently exercisable or that vest within 60 days of June 3, 2019. Although this does not represent a majority of our outstanding common stock, if these shareholders were to choose to act together, they would be able to significantly influence all matters submitted to our shareholders for approval, as well as our management and affairs. For example, these persons, if they choose to act together, could significantly influence the election of directors and the approval of any merger, consolidation, sale of all or substantially all of our assets or other business combination or reorganization requiring shareholder approval. This concentration of voting power could delay or prevent an acquisition of us on terms that other shareholders may desire. The interests of this group of shareholders may not always coincide with the interests of other shareholders, and they may act in a manner that advances their best interests and not necessarily those of other shareholders, including seeking a premium value for their common stock, that might affect the prevailing market price for our common stock.

We have been required to conduct a good faith reasonable country of origin analysis on our use of “conflict minerals”, which has imposed and may impose additional costs on us and could raise reputational challenges and other risks.

The SEC has promulgated rules in connection with the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding disclosure of the use of certain minerals, known as conflict minerals, mined from the Democratic Republic of the Congo and adjoining countries. As required, we have filed annual Forms SD since 2014 reporting our work performed to gain information on the source of conflict minerals we use. We incur costs associated with complying with these disclosure requirements. As we continue our due diligence, we may face reputational challenges if we continue to be unable to verify the origins of all conflict minerals used in our products. We may also encounter challenges in our efforts to satisfy customers that may require all of the components of products purchased to be certified as conflict free. If we are not able to meet customer requirements, customers may choose to disqualify us as a supplier.


15


Item 1B.  UNRESOLVED STAFF COMMENTS

None.

Item 2.  PROPERTIES

Our principal properties include space for manufacturing products, designing and testing new developments or processes, and employee collaboration space. Our properties are somewhat aligned with our business segments; however, we manufacture the same products across our manufacturing facilities to efficiently utilize capacity and reduce costs. We consider all our properties to be both suitable and adequate to meet our requirements for the foreseeable future.

Our principal properties consist of the following:
Facilities
Owned or Leased
Square Footage
Facility Activities
Brookings, SD, USA
Owned
773,000
Corporate Office, Manufacturing, Sales, Service
Redwood Falls, MN, USA
Owned
151,000
Manufacturing, Sales, Service, Office
Ennistymon, Ireland
Owned
60,000
Manufacturing, Sales, Service, Office
Sioux Falls, SD, USA
Leased
278,000
Manufacturing, Sales, Service, Office
Shanghai, China
Leased
137,000
Manufacturing, Sales, Service, Office

 
We also utilize sales and service offices located throughout the United States, Canada, Europe, South America, and the Asia-Pacific regions. These spaces are generally small leased offices used for sales related activities. See "Note 18. Commitments and Contingencies" of the Notes to our Consolidated Financial Statements included in this Form 10-K for further information on lease obligations.

Item 3.  LEGAL PROCEEDINGS

We are involved in a variety of legal actions relating to various matters during the normal course of business.  Although we are unable to predict the ultimate outcome of these legal actions, it is the opinion of management that the disposition of these matters, taken as a whole, will not have a material adverse effect on our financial condition or results of operations. See "Note 18. Commitments and Contingencies" of the Notes to our Consolidated Financial Statements included in this Form 10-K for further information on any legal proceedings and claims.

Item 4.  MINE SAFETY DISCLOSURES

Not applicable.


16


PART II

Item 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Stock Performance
 
Our common stock is quoted on The NASDAQ Global Select Market under the ticker symbol DAKT.  Daily market activity along with quoted prices and other trading information are readily available for our common stock on numerous websites including www.nasdaq.com. As of June 3, 2019, we had 1,024 shareholders of record.

The following graph shows changes during the period from April 26, 2014 to April 27, 2019 in the value of $100 invested in: (1) our common stock; (2) The NASDAQ Composite; and (3) the Standard and Poor's 600 Index for Electronic Equipment Manufacturers.  The values of each investment as of the dates indicated are based on share prices plus any cash dividends, with the dividends reinvested on the date they were paid.  The calculations exclude trading commissions and taxes.

dakt_2019042710kchart.jpg

Share Repurchases

On June 17, 2016, our Board of Directors approved a stock repurchase program under which Daktronics, Inc. may purchase up to $40 million of its outstanding shares of common stock. Under this program, we may repurchase shares from time to time in open market transactions and in privately negotiated transactions based on business, market, applicable legal requirements and other considerations. The repurchase program does not require the repurchase of a specific number of shares and may be terminated at any time. During fiscal 2019 and 2018, we had no repurchases of shares of our outstanding common stock. During fiscal 2017, we repurchased 0.3 million shares of common stock at a total cost of $1.8 million. As of April 27, 2019, we had $38 million of remaining capacity under our current share repurchase program.


17


Item 6.  SELECTED FINANCIAL DATA (in thousands, except per share data)

The table below provides selected historical financial data, which should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements, which are included in Part II, Items 7 and 8 in this Form 10-K.  The statement of operations data for the fiscal years ended April 27, 2019, April 28, 2018 and April 29, 2017 and the balance sheet data at April 27, 2019 and April 28, 2018 are derived from, and are qualified by reference to, the audited Consolidated Financial Statements included elsewhere in this Form 10-K.  The statement of operations data for the fiscal years ended April 30, 2016 and May 2, 2015 and the balance sheet data at April 29, 2017, April 30, 2016 and May 2, 2015 are derived from audited financial statements that are not included in this Form 10-K.

 
2019(2)(3)(5)(7)
 
2018(4)(5)(7)
 
2017(6)(7)
 
2016(7)(8)
 
2015(1)(9)(10)
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Net sales
$
569,704

 
$
610,530

 
$
586,539

 
$
570,168

 
$
615,942

Gross profit
130,294

 
145,669

 
140,415

 
121,019

 
144,579

Gross profit margin
22.9
 %
 
23.9
%
 
23.9
%
 
21.2
%
 
23.5
%
Operating (loss) income
(4,728
)
 
12,460

 
15,421

 
2,495

 
31,285

Operating margin
(0.8
)%
 
2.0
%
 
2.6
%
 
0.4
%
 
5.1
%
Net (loss) income
(958
)
 
5,562

 
10,342

 
2,061

 
20,882

Diluted (loss) earnings per share
(0.02
)
 
0.12

 
0.23

 
0.05

 
0.47

Weighted average diluted shares outstanding
44,926

 
44,873

 
44,303

 
44,456

 
44,443

Balance Sheet Data:
 

 
 

 
 

 
 

 
 

Working capital
$
119,601

 
$
132,825

 
$
127,130

 
$
123,714

 
$
149,075

Total assets
349,216

 
358,800

 
355,433

 
349,948

 
379,479

Total long-term liabilities
27,481

 
29,876

 
26,552

 
27,364

 
25,420

Total shareholders' equity
187,663

 
197,616

 
198,286

 
201,067

 
212,039

Cash dividends per share
0.28

 
0.28

 
0.31

 
0.40

 
0.40

(1) Fiscal year 2015 consisted of 53 weeks. Each of the other fiscal years presented consisted of 52 weeks.
(2) Includes the net assets acquired of AJT Systems, Inc. See "Note 5. Business Combination" of the Notes to our Consolidated Financial Statements included in this Form 10-K for further information.
(3) Includes the release of $2.7 million in unrecognized tax benefits related to the lapse of a statute of limitations and the release of $0.5 million for a valuation allowance reversal related to foreign net operating loss carryforwards. See "Note 14. Income Taxes" of the Notes to our Consolidated Financial Statements included in this Form 10-K for further information.
(4) Includes the sale of our non-digital division assets. See "Note 6. Sale of Non-Digital Division Assets" of the Notes to our Consolidated Financial Statements included in this Form 10-K for further information.
(5) Includes the effects of the U.S. Tax Cuts and Jobs Act, which impacted our deferred tax asset valuation and increased tax expense. See "Note 14. Income Taxes" of the Notes to our Consolidated Financial Statements included in this Form 10-K for further information.
(6) Includes an impairment loss on intangible assets. See "Note 6. Sale of Non-Digital Division Assets" of the Notes to our Consolidated Financial Statements included in this Form 10-K for further information.
(7) Includes an additional warranty charge in our OOH product application in fiscal years 2019, 2018, 2017, and 2016 of $2.4 million, $4.5 million, $1.8 million, and $9.2 million, respectively. See "Note 18. Commitments and Contingencies" of the Notes to our Consolidated Financial Statements included in this Form 10-K for further information.
(8) Includes the acquisition of ADFLOW Networks, Inc. in March 2016. See "Note 4. Business Combinations" of the Notes to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2016 for further information.
(9) Includes the acquisition of Data Display in August 2014. See "Note 4. Business Combinations" of the Notes to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended May 2, 2015 for further information.
(10) Includes the sale of our automated rigging systems division for theatre applications. See "Note 5. Sale of Theatre Rigging Division" of the Notes to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended May 2, 2015 for further information.
    

Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


18


The following discussion provides our highlights and commentary related to factors impacting our financial conditions and further describes the results of operations. The most significant risks and uncertainties are discussed in "Item 1A. Risk Factors."

This discussion should be read in conjunction with the accompanying Consolidated Financial Statements and Notes to the Consolidated Financial Statements included in this Form 10-K.

EXECUTIVE OVERVIEW

Our mission is to be the world leader at informing and entertaining audiences through dynamic audio-visual communication systems. We organize into business units to focus on customer loyalty over time to earn new and replacement business because our products have a finite lifetime. See "Note 3. Segment Reporting" of the Notes to our Consolidated Financial Statements included in this Form 10-K for further information. Our strategies include the creation of a comprehensive line of innovative solutions and systems and our ability to create and leverage platform designs and technologies. These strategies align us to effectively deliver value to our varied customers and their market needs, while serving our stakeholders over the long-term. We focus on creating local capabilities for sales, service, and manufacturing in geographies with expected digital market opportunities. We believe consistently generating profitable growth will provide value to our stakeholders (customers, employees, shareholders, suppliers, and communities).

We measure our success using a variety of measures including:
Our percentage of market share by comparing our estimated revenue to the total estimated global digital display revenue,
Our order growth compared to the overall digital market order change,
Financial metrics such as annual order volume and profit change as compared to our previous financial results,
Customer retention and expansion rates, and
Our ability to generate profits over the long-term to provide a shareholder return.

Certain factors impact our ability to succeed in these strategies and impact our business units to varying degrees. For example, the overall cost to manufacture and the selling prices of our products have decreased over the years and are expected to continue to decrease in the future. Our competitors outside the U.S. are impacted differently by the global trade environment allowing them to avoid tariff costs or reduce prices. As a result, additional competitors have entered the market and each year we must sell more product to generate the same or greater level of net sales as in previous fiscal years. However, the decline of digital solution pricing over the years and increased user adoption and applications have increased the size of the global market.

Competitor offerings, actions and reactions also can vary and change over time or in certain customer situations. Projects with multimillion-dollar revenue potential attracts competition, and competitors can use marketing or other tactics to win business.

Each of our business unit's long-term performance can be impacted by 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 also be seriously impacted.

We can be impacted by short-term events like the U.S. Administrative trade actions in 2018 or a number of other factors that are disclosed in "Item 1A. Risk Factors" included in this Form 10-K.

The outlook and unique key growth drivers and challenges by our business units include:

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

Standard display product market growth due to market adoption and lower product costs, which drive marketplace expansion. Standard display products are used to attract or communicate with customers and potential customers of retail, commercial, and other establishments.  Pricing and economic conditions are the principal factors that impact our success in this business unit. We utilize a reseller network to distribute our standard products.
National accounts standard display market opportunities due to customers' desire to communicate their message, advertising and content consistently across the country. Increased demand is possible from national retailers, quick-serve restaurants, petroleum retailers, and other nationwide organizations.
Additional standard display offerings using micro-LED designs.
Increasing use of LED technologies replacing signage previously using liquid crystal display ("LCD") technology by existing and new customers.
Increasing interest in spectaculars, which include very large and sometimes highly customized displays as part of entertainment venues such as casinos, shopping centers, cruise ships and Times Square type locations.
Dynamic messaging systems demand growth due to market adoption and expanded use of this technology.

19


The use of architectural lighting products for commercial buildings, which real estate owners use to add accents or effects to an entire side or circumference of a building to communicate messages or to decorate the building.
The continued deployment of digital billboards as out-of-home ("OOH") advertising companies continue developing new sites and replacing digital billboards reaching end of life.  This is dependent on no adverse changes occurring in the digital billboard regulatory environment restricting future billboard deployments, as well as maintaining our current market share in a business that is concentrated in a few large OOH companies.
Replacement cycles within each of these areas.

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

Facilities spending more on larger display systems to enhance the game-day and event experience for attendees.
Lower product costs, driving an expansion of the marketplace.
Our product and service offerings, including additional micro-LED 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.
Dynamic messaging system needs throughout a sports facility.
Increasing use of LED technologies replacing signage previously using LCD technology in and surrounding live events facilities.
Replacement cycles within each of these areas.

High School Park and Recreation Business Unit: Over the long-term, we believe growth in the High School Park and Recreation business unit will result from a number of factors, including:

Increased demand for video systems in high schools as school districts realize the revenue generating potential of these displays compared to traditional scoreboards and these systems' ability to provide or enhance academic curriculum offerings for students.
Increased demand for different types of displays and dynamic messaging systems, such as message centers at schools to communicate to students, parents and the broader community.
Lower system costs driving the use of more sophisticated displays in school athletic facilities, such as large integrated video systems.
Expanding control system options tailored for the markets' needs.

Transportation Business Unit: Over the long-term, we believe growth in the Transportation business unit will result from increasing applications and acceptance of electronic displays to manage transportation systems, including roadway, airport, parking, transit and other applications. Effective use of the United States transportation infrastructure requires intelligent transportation systems. This growth is highly dependent on government spending, primarily by state and federal governments, along with the continuing acceptance of private/public partnerships as an alternative funding source. Growth is also expected in dynamic messaging systems for advertising and way-finding use in public transport and airport terminals due to expanded market usage and displays, with LED technology replacing prior LCD installations and additional display offerings using micro-LEDs.

International Business Unit: Over the long-term, we believe growth in the International business unit will result from achieving greater penetration in various geographies and building products more suited to individual markets. We continue to broaden our product offerings into the transportation segment in Europe and the Middle East. We also focus on sports facility, spectacular-type, OOH advertising products, and architectural lighting market opportunities and the factors listed in each of the other business units to the extent they apply outside of the United States and Canada. Additional opportunities exist with expanded market usage of LED technology due to price considerations, usage of LED technology replacing prior LCD installations and additional display offerings using micro-LEDs.


20


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP"). This discussion should be read in conjunction with the accompanying Consolidated Financial Statements and Notes to the Consolidated Financial Statements included in this Report. The preparation of these financial statements requires us to make estimates and judgments affecting the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Although our significant accounting policies are described in "Note 1. Nature of Business and Summary of Significant Accounting Policies", the following discussion is intended to highlight and describe those accounting policies that are especially critical to the preparation of our consolidated financial statements.

 A critical accounting policy is defined as a policy that is both very important to the portrayal of a company's financial condition and results and requires management's most difficult, subjective or complex judgments. We regularly review our critical accounting policies and evaluate them based on these factors. We believe the estimation process for uniquely configured contracts and warranties are most material and critical. These areas contain estimates with a reasonable likelihood to change, and those changes could have a material impact on our financial condition and reported results of operations. The estimation processes for these areas are also difficult, subjective and use complex judgments. Our critical accounting estimates are based on historical experience; on our interpretation of GAAP, current laws and regulations; and on various other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other sources.  Actual results may differ from these estimates.

Revenue recognition on uniquely configured contracts.  Revenue for uniquely configured (custom) or integrated systems is recognized over time using the cost incurred input method. Over time revenue recognition is appropriate because we have no alternative use for the uniquely configured system and have an enforceable right to payment for work performed. The cost incurred input method measures cost incurred to date compared to estimated total costs for each contract. This method is the most faithful depiction of our performance because it measures the value of the contract transferred to the customer. Costs to perform the contract include direct and indirect costs for contract design, production, integration, installation, and assurance-type warranty reserve. Direct costs include material and components; manufacturing, project management and engineering labor; and subcontracting expenses. Indirect costs include allocated charges for such items as facilities and equipment depreciation and general overhead. Provisions of estimated losses on uncompleted contracts are made in the period when such losses are capable of being estimated.

We account for these types of contracts as a combined single performance obligation with no segmentation between types of products and services. In our judgment, this accounting treatment is most appropriate because the substantial part of our promise to our customer is to provide significant integration services and incorporate individual goods and services into a combined output or system. Often times the system is customized or significantly modified to the customer's desired configurations and location, and the interrelated goods and services provide utility to the customer as a package. See "Note 1. Nature of Business and Summary of Significant Accounting Policies" of the Notes to our Consolidated Financial Statements included in this Form 10-K for further information on our revenue recognition policies.

Warranties.  We have recognized an accrued liability for warranty obligations equal to our estimate of the actual costs to be incurred in connection with our performance under the contractual warranties.  Warranty estimates include the cost of direct material and labor estimates to repair products over their warranty coverage period. Generally, estimates are based on historical experience considering known or expected changes.  If we would become aware of an increase in our estimated warranty costs, additional accruals may become necessary, resulting in an increase in cost of sales. Although prior estimates have been materially correct, estimates for warranty liabilities can change based on actual versus estimated defect rates over the lifetime of the warranty coverage, a difference in actual to estimated costs to conduct repairs for the components and related labor needed, and other site related actual to estimated cost changes.

As of April 27, 2019 and April 28, 2018, we had approximately $24.5 million and $30.0 million accrued for these warranty obligations, respectively. Due to the difficulty in estimating probable costs related to certain warranty obligations, there is a reasonable likelihood that the ultimate remaining costs to remediate the warranty claims could differ materially from the recorded accrued liabilities. See "Note 18. Commitments and Contingencies" of the Notes to our Consolidated Financial Statements included in this Form 10-K for further information on warranties.

RECENT ACCOUNTING PRONOUNCEMENTS

For a summary of recently issued accounting pronouncements and the effects those pronouncements have on our financial results, refer to "Note 1. Nature of Business and Summary of Significant Accounting Policies" of the Notes to our Consolidated Financial Statements included elsewhere in this Form 10-K.

RESULTS OF OPERATIONS

21



Net Sales

The following table shows information regarding net sales for the fiscal years ended April 27, 2019, April 28, 2018, and April 29, 2017:
 
 
 
April 27, 2019
 
April 28, 2018
 
2019 vs 2018
 
April 29, 2017
 
2018 vs 2017
(dollars in thousands)
Amount
 
Amount
 
Dollar Change
Percent Change
 
Amount
 
Dollar Change
Percent Change
Net Sales:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
148,833

 
$
134,535

 
$
14,298

10.6
 %
 
$
148,073

 
$
(13,538
)
(9.1
)%
Live Events
170,952

 
236,333

 
(65,381
)
(27.7
)
 
213,982

 
22,351

10.4

High School Park and Recreation
91,187

 
87,627

 
3,560

4.1

 
82,798

 
4,829

5.8

Transportation
64,391

 
59,578

 
4,813

8.1

 
52,426

 
7,152

13.6

International
94,341

 
92,457

 
1,884

2.0

 
89,260

 
3,197

3.6

 
$
569,704

 
$
610,530

 
$
(40,826
)
(6.7
)%
 
$
586,539

 
$
23,991

4.1
 %
Orders:
 

 
 

 


 
 
 
 




Commercial
$
162,592

 
$
135,363

 
$
27,229

20.1
 %
 
$
151,562

 
$
(16,199
)
(10.7
)%
Live Events
179,217

 
203,036

 
(23,819
)
(11.7
)
 
222,965

 
(19,929
)
(8.9
)
High School Park and Recreation
98,139

 
87,243

 
10,896

12.5

 
83,605

 
3,638

4.4

Transportation
73,059

 
50,581

 
22,478

44.4

 
62,638

 
(12,057
)
(19.2
)
International
95,873

 
107,244

 
(11,371
)
(10.6
)
 
92,734

 
14,510

15.6

 
$
608,880

 
$
583,467

 
$
25,413

4.4
 %
 
$
613,504

 
$
(30,037
)
(4.9
)%

Fiscal Year 2019 as compared to Fiscal Year 2018

Commercial: The increase in net sales for fiscal 2019 compared to fiscal 2018 was primarily due to the timing of large custom projects in the spectacular niche and increased order volumes in the on-premise and OOH niches.

The increase in orders for fiscal 2019 compared to fiscal 2018 was primarily due to an active spectacular market in Times Square, Las Vegas, and other similar locations. In addition, orders grew in the OOH niche because of higher demand for digital billboard replacements and new installations and due to winning a multimillion-dollar OOH airport installation.

We continue to see increased adoption of video solutions in our Commercial business unit marketplace. We see opportunity for orders and sales over the coming years in our OOH, on-premise, and spectacular focused niches due to replacement cycles, expansion of dynamic messaging systems usage, our releases of new solutions, additional distribution methods, and increased market size due to the decline of digital pricing over the years as well as the desire for higher resolution technology. Due to a number of factors, such as the discretionary nature of customers committing to a system, economic dependencies, regulatory environments, and competitive factors, it is difficult to predict orders and net sales for fiscal 2020. We expect growth in the Commercial business unit over the long-term, assuming favorable economic conditions and our success in counteracting competitive pressures.

Live Events:  The decrease in net sales for fiscal 2019 compared to fiscal 2018 was primarily due to decreased orders for the reasons described below.

We had continued order success throughout most of our Live Event sports and entertainment markets; however, we had a decrease in orders for fiscal 2019 compared to fiscal 2018, which was primarily the result of fewer project wins in professional sports due to fewer project opportunities in the market and strong competition. During fiscal 2018, we were awarded three projects each valued at over $5 million as compared to one project valued at over $5 million in fiscal 2019.
  
We continue to see ongoing interest from venues at all levels to increase the size and capability of their display systems and in the usage of dynamic messaging systems throughout their facilities in our Live Events business unit marketplace. A number of factors, such as the discretionary nature of customers committing to upgrade systems, long replacement cycles, the limited number of large custom projects, and competitive factors, make forecasting fiscal 2020 orders and net sales difficult. We expect similar results in fiscal 2020 and continued growth in this business unit over the long-term, assuming favorable economic conditions and success in counteracting competitive pressures.


22


High School Park and Recreation:  The increase in net sales for fiscal 2019 compared to fiscal 2018 was primarily due to increased order volumes described below and the related timing of converting orders into sales dependent on customers' schedules.

The increase in orders for fiscal 2019 compared to fiscal 2018 was primarily due to the market’s increased demand for video products and control systems and our on-going success selling catalog marques and scoring systems. Video projects have a larger average selling price than historical sales, which consisted of a higher concentration of classic scoring systems in this business unit.

We expect larger video systems and our classic scoring and message centers to remain in demand in fiscal 2020, primarily in high school facilities, which benefit from our sports marketing services that generate advertising revenue to fund the display systems and because of schools' desires to communicate with students and parents using these systems.  Several factors, such as the discretionary nature of customers committing to upgrade systems, replacement cycles and competitive factors, make forecasting fiscal 2020 orders and net sales difficult. We expect growth in this business unit over the long-term, assuming favorable economic conditions.

Transportation:  The increase in net sales for fiscal 2019 compared to fiscal 2018 was primarily due to the increased production of large orders, the timing of customer schedules, and an increase in demand for intelligent transportation systems.

The increase in orders for fiscal 2019 compared to fiscal 2018 was primarily due to increased orders for intelligent transportation systems and tolling applications as state transportation departments and private public partnerships continue to invest in ways to better inform travelers, manage transport systems, and collect revenues.

Several factors, such as transportation funding, the competitive environment, and customer delivery changes, make forecasting orders and net sales difficult for fiscal 2020. However, the stability of long-term federal transportation funding and the number of capital projects for highways and public transit that include dynamic message signs and for advertising and way-finding use in public transport and airport terminals continues to rise. We expect continued growth in this business unit over the long-term, assuming favorable economic conditions and continued transportation funding.
  
International:  The increase in net sales for fiscal 2019 compared to fiscal 2018 was primarily the result of timing on large project orders being completed.

The decrease in orders for fiscal 2019 compared to fiscal 2018 was primarily due to the general variations in timing of large contracts and account-based order placements.

We expect demand for larger video systems for commercial and sports applications, indoor and outdoor OOH applications, and transportation applications to remain strong over the long-term. Macroeconomic factors, the discretionary nature of customers committing to new systems or replacements, and the pace of market growth may impact order bookings and timing, making it difficult to predict order and sales levels for fiscal 2020. For the long-term, we believe the International business unit has the potential for sales growth as we penetrate markets with our established sales networks to increase our International market share, continue to enhance our tailored portfolio of product and control solution offerings, and increase the use and adoption of our technology globally.

Product Order Backlog: The product order backlog as of April 27, 2019 was $202 million as compared to $171 million as of April 28, 2018.  Historically, our backlog varies due to the seasonality of our business, the timing of large projects, and customer delivery schedules for these orders.  The product order backlog increased from one year ago in our Commercial, Transportation, Live Events, and High School Park and Recreation business units and decreased in our International business unit.

Fiscal Year 2018 as compared to Fiscal Year 2017

Commercial: The decrease in net sales for fiscal 2018 compared to fiscal 2017 was primarily due to lower order volume in the on-premise niche and the timing of delivery of large projects in the spectacular niche, which was partially offset by an increase in sales in the OOH niche.

The decrease in orders for fiscal 2018 compared to fiscal 2017 was primarily due to decreases in orders in the on-premise and spectacular focused niches due to several factors, including competitive market pricing, a timing difference in national account-based opportunities, and the natural volatility of large project timing, which was partially offset by an increase in orders in the OOH niche.

Live Events:  The increase in net sales for fiscal 2018 compared to fiscal 2017 was primarily the timing of the demand for upgraded or new solutions for arenas, professional sports, and colleges and universities. These types of installations occur for new construction or refurbishment needs of the customer and can vary in timing and size in accordance with the needs of the customer. During fiscal 2018, we completed and recognized more than $21 million of sales for two specific significant customer orders, which contributed to the increase in sales.


23


The decrease in orders for fiscal 2018 compared to fiscal 2017 was primarily the result of the size and timing of large contract order awards. During fiscal 2017, we were awarded five projects valued at over $5 million as compared to three of such contracts in fiscal 2018.

High School Park and Recreation:  The increase in net sales for fiscal 2018 compared to fiscal 2017 was primarily due to continued success in winning orders in the growing market and the timing of shipments of scoring systems and message centers.

The increase in orders for fiscal 2018 compared to fiscal 2017 was primarily due to overall strong market demand and an increase in the number of projects for larger video systems.

Transportation:  The increase in net sales for fiscal 2018 compared to fiscal 2017 was primarily due to the variability of large order production timing caused by customer project schedules.

The decrease in orders for fiscal 2018 compared to fiscal 2017 was primarily due to the variability of the size of orders and large order timing.

International:  The increase in net sales for fiscal 2018 compared to fiscal 2017 was primarily the result of increased demand in the OOH niche market and improved economic conditions.

The increase in orders for fiscal 2018 compared to fiscal 2017 was primarily due to variability caused by large order timing and included a number of orders for global OOH niche customers and professional soccer sports stadiums. In addition, we continued to market our solutions through multiple geographies to gain recognition and increase our market share.

Gross Profit
 
 
Year Ended
 
 
April 27, 2019
 
April 28, 2018
 
April 29, 2017
 
(dollars in thousands)
 Amount
 
As a Percent of Net Sales
 
 Amount
 
As a Percent of Net Sales
 
 Amount
 
As a Percent of Net Sales
 
 
Commercial
$
31,785

 
21.4
%
 
$
26,665

 
19.8
%
 
$
36,514

 
24.7
%
 
Live Events
32,164

 
18.8

 
49,755

 
21.1

 
40,810

 
19.1

 
High School Park and Recreation
26,858

 
29.5

 
29,317

 
33.5

 
26,388

 
31.9

 
Transportation
22,525

 
35.0

 
21,247

 
35.7

 
18,027

 
34.4

 
International
16,962

 
18.0

 
18,685

 
20.2

 
18,676

 
20.9

 
 
$
130,294

 
22.9
%
 
$
145,669

 
23.9
%
 
$
140,415

 
23.9
%

Fiscal Year 2019 as compared to Fiscal Year 2018

Gross profit is net sales less cost of sales. Cost of sales consists primarily of inventory, consumables, salaries, other employee-related costs, facilities-related costs for manufacturing locations, machinery and equipment maintenance and depreciation, site sub-contractors, warranty costs, and other service delivery expenses.

The gross profit percentage decrease for fiscal 2019 compared to fiscal 2018 was primarily due to lower sales volumes over relatively fixed infrastructure costs, $3.4 million in expenses for an unprofitable project and a litigation claim, and an increase in commodity costs due to the current global trade environment, which was partly offset by lower warranty expenses and a change in sales mix. The following describes the overall impact by business unit:

Commercial:  The gross profit percent increase in the Commercial business unit for fiscal 2019 compared to fiscal 2018 was primarily the result of lower warranty expenses and sales mix.

Live Events:  The gross profit percent decrease in the Live Events business unit for fiscal 2019 compared to fiscal 2018 was the result of lower sales volumes over relatively fixed infrastructure costs and an unprofitable project, which was partly offset by lower warranty expenses.

High School Park and Recreation:  The gross profit percent decrease in the High School Park and Recreation business unit for fiscal 2019 compared to fiscal 2018 was primarily due to a litigation claim, a change in sales mix, and competitive bidding on large projects, which was partly offset by higher sales volumes over relatively fixed infrastructure costs.
 

24


Transportation: The gross profit percent decrease in the Transportation business unit for fiscal 2019 compared to fiscal 2018 was primarily due to a change in sales mix, which was partly offset by higher sales volumes over relatively fixed infrastructure costs.

International:  The gross profit percent decrease in the International business unit for fiscal 2019 compared to fiscal 2018 was primarily the result of a $1.3 million gain from the sale of our non-digital assets that was recorded in fiscal 2018, which was partly offset by higher sales volumes over relatively fixed infrastructure costs.

It is difficult to project gross profit levels for fiscal 2020 because of the uncertainty regarding the level of sales, the sales mix and timing, tariff impact, and the competitive factors in our business. We are focused on improving our gross profit margins as we execute our strategies for improved profitability, which include releasing new product designs to lower overall costs of the product; improving reliability to reduce warranty expenses; expanding our global capacity and planning; meeting customer solution expectations; and continued improvements in operational effectiveness in manufacturing, installation, and service delivery areas.
 
Fiscal Year 2018 as compared to Fiscal Year 2017

The gross profit percentage remained flat for fiscal 2018 compared to fiscal 2017. The following describes the overall impact by business unit:

Commercial:  The gross profit percent decrease in the Commercial business unit for fiscal 2018 compared to fiscal 2017 was primarily the result of higher warranty expenses and lower sales volumes over relatively fixed infrastructure costs.

Live Events:  The gross profit percent increase in the Live Events business unit for fiscal 2018 compared to fiscal 2017 was the result of an increased volume of sales over relatively fixed infrastructure costs and improved performance on large projects as compared to original estimates.

High School Park and Recreation:  The gross profit percent increase in the High School Park and Recreation business unit for fiscal 2018 compared to fiscal 2017 was primarily due to a favorable sales mix and improved productivity.
 
Transportation: The gross profit percent increase in the Transportation business unit for fiscal 2018 compared to fiscal 2017 was primarily due to an increased volume of sales over relatively fixed infrastructure costs and improved productivity.

International:  The gross profit percent decrease in the International business unit for fiscal 2018 compared to fiscal 2017 was primarily the result of higher warranty expenses, which were offset by a $1.3 million gain from the sale of our non-digital division assets.

Contribution Margin
 
Year Ended
 
April 27, 2019
 
April 28, 2018
 
April 29, 2017
(dollars in thousands)
Amount
 
As a Percent of Net Sales
 
Percent Change
 
Amount
 
As a Percent of Net Sales
 
Percent Change
 
Amount
 
As a Percent of Net Sales
Commercial
$
13,218

 
8.9
%
 
65.5
 %
 
$
7,986

 
5.9
%
 
(55.7
)%
 
$
18,046

 
12.2
%
Live Events
18,484

 
10.8

 
(47.8
)
 
35,439

 
15.0

 
27.7

 
27,750

 
13.0

High School Park and Recreation
14,518

 
15.9

 
(20.7
)
 
18,317

 
20.9

 
13.7

 
16,114

 
19.5

Transportation
18,260

 
28.4

 
7.1

 
17,048

 
28.6

 
26.6

 
13,465

 
25.7

International
1,166

 
1.2

 
(71.7
)
 
4,119

 
4.5

 
22.8

 
3,353

 
3.8

 
$
65,646

 
11.5
%
 
(20.8
)%
 
$
82,909

 
13.6
%
 
5.3
 %
 
$
78,728

 
13.4
%

Fiscal Year 2019 as compared to Fiscal Year 2018

Contribution margin consists of gross profit less selling expenses. Selling expenses consist primarily of salaries, other employee-related costs, travel and entertainment expenses, facility-related costs for sales and service offices, bad debt expenses, third-party commissions, and expenditures for marketing efforts, including the costs of collateral materials, conventions and trade shows, product demonstrations, customer relationship management systems, and supplies.

Contribution margin is impacted by the previously discussed sales and gross margin for each business unit. The impact of changes in selling expenses on each business unit's contribution margin are as follows:


25


Selling expense for fiscal 2019 compared to fiscal 2018 increased in our High School Park and Recreation and International business units, decreased in our Live Events business unit, and remained relatively flat in our Commercial and Transportation business units. High School Park and Recreation selling expenses increased year-over-year primarily due to the allocation of additional resources to this unit's selling efforts. International selling expenses increased year-over-year primarily due to third-party commissions and increased personnel related expenses. Live Events selling expenses decreased year-over-year primarily due to decreases in bad debt expenses and travel and entertainment expenses.

During fiscal 2020, we plan to invest in areas to enable order growth, but we continue to expect constraints in selling expenses. We expect selling expenses will increase in dollars for fiscal 2020 as compared to fiscal 2019 because fiscal 2020 will be a 53-week year, adding an additional week of expenses.

Fiscal Year 2018 as compared to Fiscal Year 2017

Selling expense for fiscal 2018 compared to fiscal 2017 increased in our Commercial, Live Events, and High School Park and Recreation business units and decreased in our Transportation and International business units. Live Events selling expense increased year-over-year primarily due to increased conventions/advertising expenses and bad debt expenses. Commercial and High School Park and Recreation business unit selling expense increased year-over-year primarily due to increased personnel expenses. Transportation business unit selling expense decreased primarily due to lower bad debt expense. International business unit selling expense decreased primarily due to lower bad debt expense and personnel expenses.

Other Operating Expenses
 
Year Ended
 
April 27, 2019
 
April 28, 2018
 
April 29, 2017
(dollars in thousands)
Amount
 
As a Percent of Net Sales
 
Percent Change
 
Amount
 
As a Percent of Net Sales
 
Percent Change
 
Amount
 
As a Percent of Net Sales
General and administrative
$
34,817

 
6.1
%
 
(0.3
)%
 
$
34,919

 
5.7
%
 
2.0
%
 
$
34,226

 
5.8
%
Product design and development
$
35,557

 
6.2
%
 
0.1
 %
 
$
35,530

 
5.8
%
 
22.2
%
 
$
29,081

 
5.0
%

Fiscal Year 2019 as compared to Fiscal Year 2018

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, and the cost of supplies.

General and administrative expenses in fiscal 2019 as compared to fiscal 2018 remained relatively flat.

We expect general and administrative expenses to increase in dollars for fiscal 2020 as compared to fiscal 2019 due to planned investments in information technology and due to the additional week of personnel expenses for fiscal 2020 as compared to fiscal 2019 because fiscal 2020 will be a 53-week year.

Product design and development expenses consist primarily of salaries, other employee-related costs, professional services, facilities costs and equipment-related costs and supplies. Product design and development investments in the near term are focused on developing or improving our video technology over a wide range of pixel pitches for both indoor and outdoor applications. These new or improved technologies are focused on varied pixel density for image quality and use, expanded product line offerings for our various markets and geographies, improved quality and reliability, and improved cost points. During fiscal 2020, we plan to make continued investments in our software and controller capabilities throughout our various product offerings. Through our design efforts, we focus on standardizing display components and control systems for both single site and network displays.  

Our costs for product design and development represent an allocated amount of costs based on time charges, professional services, material costs and the overhead of our engineering departments.  Generally, a significant portion of our engineering time is spent on product design and development, while the rest is allocated to large contract work and included in cost of sales.

Product design and development expenses in fiscal 2019 compared to fiscal 2018 remained relatively flat. To deliver value to our customers and serve the markets' expectations, we expect a slight increase in expenditures for new or enhanced customer solutions and the additional week of personnel expenses for fiscal 2020 as compared to fiscal 2019 because fiscal 2020 will be a 53-week year.

Fiscal Year 2018 as compared to Fiscal Year 2017


26


General and administrative expenses in fiscal 2018 increased as compared to fiscal 2017 primarily due to increases in personnel expenses and information technology software and hardware expenses.

Product design and development expenses in fiscal 2018 increased compared to fiscal 2017 primarily due to increased labor costs and professional services assigned to product design and development projects relating to our strategy to accelerate the deployment of products and solutions to our markets.

Other Income and Expenses
 
Year Ended
 
April 27, 2019
 
April 28, 2018
 
April 29, 2017
(dollars in thousands)
Amount
 
As a Percent of Net Sales
 
Percent Change
 
Amount
 
As a Percent of Net Sales
 
Percent Change
 
Amount
 
As a Percent of Net Sales
Interest income, net
$
871

 
0.2
 %
 
72.1
%
 
$
506

 
0.1
 %
 
(2.9
)%
 
$
521

 
0.1
 %
Other (expense) income, net
$
(1,087
)
 
(0.2
)%
 
102.4
%
 
$
(537
)
 
(0.1
)%
 
51.7
 %
 
$
(354
)
 
(0.1
)%

Fiscal Year 2019 as compared to Fiscal Year 2018

Interest income, net:  We generate interest income through short-term cash investments, marketable securities, and product sales on an installment basis or in exchange for the rights to sell and retain advertising revenues from displays, which result in long-term receivables.  Interest expense is comprised primarily of interest costs on long-term obligations.  

The change in interest income, net for fiscal 2019 as compared to fiscal 2018 was primarily due to the change in investment levels caused by the volatility of working capital needs.
 
Other (expense) income, netThe change in other income and expense, net for fiscal 2019 as compared to fiscal 2018 was primarily due to foreign currency volatility and losses recorded from an equity method affiliate.

Fiscal Year 2018 as compared to Fiscal Year 2017

Interest income, net decreased in fiscal 2018 as compared to fiscal 2017 due to lower long-term receivables which bore imputed interest rates.

Other (expense) income, net: The change in other income and expense, net for fiscal 2018 as compared to fiscal 2017 was primarily due to foreign currency volatility and the losses recorded from an equity method affiliate.

Income Taxes

Our effective tax rate was approximately 80.6 percent, 55.2 percent and 33.7 percent for fiscal years 2019, 2018, and 2017, respectively.

Fiscal 2019 effective tax rate increased primarily due to the tax benefits of a book loss plus permanent credits and deductions, the release of $2.7 million in unrecognized tax benefits, and the reversal of a valuation allowance of $0.5 million related to foreign net operating loss carryforwards as compared to the prior year. See "Note 14. Income Taxes" of the Notes to our Consolidated Financial Statements included in this Form 10-K for further information.

Our fiscal 2018 tax rate was significantly impacted by the Tax Act, which was signed into law on December 22, 2017. Most notably, the Tax Act reduced the statutory U.S. federal corporate income tax rate from 35% to 21%. Because we file our tax return based on our fiscal year rather than the calendar year, the statutory tax rate for our fiscal 2018 tax return was a blended rate of 30.4%. In addition to the effect of the lower overall federal tax rate, the Tax Act resulted in a provisional $3.5 million one-time expense for the estimated re-measurement of our net deferred tax asset and a $0.3 million estimated one-time transition tax on certain undistributed earnings of our foreign subsidiaries in fiscal 2018.

Our fiscal 2017 tax rate was impacted by the benefits of increased research and development tax credits, which was offset by valuation allowances in certain foreign jurisdictions.

Our consolidated effective tax rate is impacted by the statutory income tax rates applicable to each of the jurisdictions in which we operate. Due to various factors, and because we operate in multiple state and foreign jurisdictions, our effective tax rate is subject to fluctuation; however, with the lower U.S. statutory tax rate enacted by the Tax Act, we expect our fiscal 2020 effective tax rate to be approximately 21%.

27



LIQUIDITY AND CAPITAL RESOURCES
 
Year Ended
 
April 27,
2019
 
April 28,
2018
 
Percent Change
(dollars in thousands)
Net cash provided by (used in):
 
 
 
 
 
Operating activities
$
29,546

 
$
30,361

 
(2.7
)%
Investing activities
(11,842
)
 
(19,563
)
 
(39.5
)
Financing activities
(11,932
)
 
(13,262
)
 
(10.0
)
Effect of exchange rate changes on cash
215

 
(620
)
 
(134.7
)
Net increase (decrease) in cash, cash equivalents and restricted cash
$
5,987

 
$
(3,084
)
 
294.1
 %

Net cash provided by operating activities:  Operating cash flows consist primarily of net income adjusted for non-cash items, including depreciation and amortization, stock-based compensation, deferred income taxes, and the effect of changes in operating assets and liabilities.

Net cash provided by operating activities was $29.5 million for fiscal 2019 compared to $30.4 million in fiscal 2018. The $0.8 million decrease in cash from operating activities from fiscal 2018 to fiscal 2019 was the result of changes in net operating assets and liabilities of $10.0 million; a $0.9 million increase in depreciation and amortization; a $0.8 million gain on the sale of property, equipment and other assets; and a $0.4 million increase in other non-cash items, net, adjusted by a decrease of $6.5 million in net income and a decrease of $6.5 million in our deferred income taxes, net.

Overall, changes in operating assets and liabilities can be impacted by the timing of cash flows on large orders, which can cause significant short-term and seasonal fluctuations in inventory, accounts receivables, accounts payable, contract assets and liabilities, and various other operating assets and liabilities. Variability in contract assets and liabilities relates to the timing of billings on construction-type contracts and revenue recognition, which can vary significantly depending on contractual payment terms and build and installation schedules. Balances are also impacted by the sports market seasonality. For specific quantitative changes in operating assets and liabilities, see "Note 15. Cash Flow Information" of the Notes to our Consolidated Financial Statements included in this Form 10-K.
 
Net cash used in investing activities:  Net cash used in investing activities totaled $11.8 million for fiscal 2019 compared to $19.6 million in fiscal 2018. Purchases of property and equipment totaled $17.3 million in fiscal 2019 compared to $18.1 million in fiscal 2018. Marketable securities, net totaled $8.4 million for fiscal 2019 as compared to $(2.2) million for fiscal 2018. Proceeds from the sale of property, equipment and other assets totaled $0.6 million for fiscal 2019 compared to $2.2 million for fiscal 2018; this was mostly related to the sale of our non-digital division assets in fiscal 2018. During fiscal 2019, we had a net cash outflow of $2.3 million for the acquisition of assets of AJT Systems, Inc.

Net cash used in financing activities:  Net cash used in financing activities was $11.9 million for fiscal 2019 compared to $13.3 million in fiscal 2018. Dividends of $12.6 million, or $0.28 per share, were paid to Daktronics shareholders during fiscal 2019 compared to $12.4 million, or $0.28 per share, paid to Daktronics shareholders during fiscal 2018. Principal payments on long-term obligations for fiscal 2019 was $0.5 million compared to $1.0 million in fiscal 2018, which was mostly related to a contingent liability payment. Proceeds from the exercise of stock options for fiscal 2019 were $1.3 million compared to $0.5 million in fiscal 2018.

Other Liquidity and Capital Resources Discussion: The timing and amounts of working capital changes, dividend payments, stock repurchase program, and capital spending impact our liquidity.

Working capital was $119.6 million at April 27, 2019 and $132.8 million at April 28, 2018.  The changes in working capital, particularly changes in accounts receivable, accounts payable, inventory, and contract assets and liabilities, and the sports market seasonality can have a significant impact on the amount of net cash provided by operating activities largely due to the timing of payments and receipts. On multimillion-dollar orders, the time between order acceptance and project completion may extend up to or exceed 12 months depending on the amount of custom work and a customer’s delivery needs.  We often receive down payments or progress payments on these orders.

We had $2.9 million of retainage on long-term contracts included in receivables and contract assets as of April 27, 2019, which has an impact on our liquidity. We expect to collect these amounts within one year. When working capital is needed, we have historically financed our cash needs through a combination of cash flow from operations and borrowings under bank credit agreements. During the fourth quarter of fiscal 2019, we violated one of our bank covenants, but we received a waiver from our banking institution for the year ended April 27, 2019. For additional information on financing agreements, see, "Note 10. Financing Agreements" of the Notes to our Consolidated Financial Statements included in this Form 10-K.


28


We utilize cash on hand to pay dividends to our shareholders. The following table summarizes the quarterly dividends declared and/or paid since the prior fiscal year end of April 28, 2018:
Date Declared
Record Date
Payment Date
Amount per Share
May 31, 2018
June 11, 2018
June 21, 2018
$0.07
September 6, 2018
September 17, 2018
September 27, 2018
$0.07
November 29, 2018
December 10, 2018
December 20, 2018
$0.07
February 28, 2019
March 11, 2019
March 21, 2019
$0.07
May 30, 2019
June 10, 2019
June 20, 2019
$0.05

Although we expect to continue to pay dividends for the foreseeable future, the nature and amounts of dividends will be reviewed regularly and declared by the Board of Directors at its discretion. In addition, our credit facility imposes limitations on our ability to pay dividends as further described in "Note 10. Financing Agreements" of the Notes to our Consolidated Financial Statements included in this Form 10-K.

We have an authorized share repurchase program allowing for the purchase of shares from the open market and in privately negotiated transactions. During fiscal 2017, we repurchased 0.3 million shares. Although we have authorization for additional share repurchases and could use repurchased shares in treasury after purchase, all subsequent purchases or sales are reviewed regularly for price, market conditions, and compliance with various regulations for company share repurchase programs. For additional information on the share repurchase program, see, "Note 11. Share Repurchase Program" of the Notes to our Consolidated Financial Statements included in this Form 10-K.

We are sometimes required to obtain performance bonds for display installations, and we have a bonding line available through a surety company for an aggregate of $150.0 million in bonded work outstanding. If we were unable to complete the work and our customer would call upon the bond for payment, the surety company would subrogate its loss to Daktronics. At April 27, 2019, we had $9.9 million of bonded work outstanding against this line.

Our business growth and profitability improvement strategies depend on investments in capital expenditures and strategic investments. We are projecting capital expenditures to be less than $25 million for fiscal 2020 for purchases of manufacturing equipment for new or enhanced product production, expanded capacity, investments in quality and reliability equipment, and continued information infrastructure investments. We also evaluate and may invest in new technologies or acquire companies aligned with our business strategy.

We believe our working capital available from all sources will be adequate to meet the cash requirements of our operations and strategies in the foreseeable future. If our growth extends beyond current expectations, or if we make significant strategic investments, we may need to utilize and possibly increase our credit facilities or seek other means of financing.  We anticipate we will be able to obtain any needed funds under commercially reasonable terms from our current lenders or other sources, although this availability cannot be guaranteed.  


29


OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

We are obligated to make cash payments in connection with non-cancelable operating leases for facilities and for unconditional purchase obligations primarily for inventory, information technology maintenance or software as a service commitment, advertising rights, and various other commitments.

Our acquisition-related contingent payments are liabilities contingent on project milestones or certain employment conditions. The present value of these payment obligations is recorded in the "Accrued expense" line item in our Consolidated Balance Sheet.

We provide bank or insurance company issued standby letters of credit, bank guarantees, or surety bonds to certain customers to guarantee our ability to complete a contract.  If we do not meet the contractual specifications, the customer may obtain cash payment through these guarantees. We have provided an indemnity to the bank and insurance companies for these instruments.  

We enter into written agreements with our customers, and those agreements often contain indemnification provisions that require us to make the customer whole if certain acts or omissions by us cause the customer financial loss.  We make efforts to negotiate reasonable caps and limitations on the recovery of such damages. As of April 27, 2019, we were not aware of any indemnification claim from a customer.

As of April 27, 2019, our contractual obligations were as follows (in thousands):
Contractual Obligations
 
Total
 
Less than 1 year
 
1-3 Years
 
4-5 Years
 
After 5 Years
Cash commitments:
 
 
 
 
 
 
 
 
 
 
Unconditional purchase obligations
 
$
15,319

 
$
6,055

 
$
7,178

 
$
1,933

 
$
153

Operating leases
 
7,719

 
3,038

 
4,118

 
462

 
101

Acquisition-related contingency payments
 
2,688

 
2,088

 
600

 

 

Unrecognized tax benefits(1)
 
578

 

 

 

 

Total
 
$
26,304

 
$
11,181

 
$
11,896

 
$
2,395

 
$
254

Other off-balance sheet arrangements:
 
 

 
 

 
 

 
 

 
 

Standby letters of credit and bank guarantees
 
$
13,293

 
$
12,501

 
$
792

 
$

 
$

Surety bonds
 
$
9,900

 
$
9,900

 
$

 
$

 
$

(1) We are not able to reasonably estimate the timing of future payments relating to these non-current tax benefits. This
obligation is retired when the uncertain tax position is settled or when the applicable tax year is no longer subject to examination by the tax authorities.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Rates
Our results of operations could be affected by factors such as changes in foreign currency rates or weak economic conditions in foreign markets. We derive net sales in U.S. dollars and other currencies including Canadian dollars, Euros, Chinese renminbi, British pounds, Australian dollars, or other currencies.  For fiscal 201919% of net sales were derived in currencies other than U.S. dollars. We incur expenses in currencies other than U.S. dollars relating to specific contracts with customers and for our operations outside the U.S.

If we believe currency risk in any foreign location or specific sales or purchase transaction is significant, we utilize foreign exchange hedging contracts to manage our exposure to the currency fluctuations.  The notional amount of the foreign currency agreements as of April 27, 2019 was $7.8 million, and all contracts mature within 23 months. These contracts are marked to market each balance sheet date and are not designated as hedges. See "Note 17. Derivative Financial Instruments" of the Notes to our Consolidated Financial Statements included in this Form 10-K for further details. We estimate that a 10 percent change in all foreign exchange rates would impact our reported income before taxes by approximately $1.0 million. This sensitivity analysis disregards the possibilities that rates can move in opposite directions and that losses from one geographic area may be offset by gains from another geographic area.

Over the long term, net sales to international markets are expected to increase as a percentage of total net sales and, consequently, a greater portion of our business could be denominated in foreign currencies.  As a result, operating results may become more subject to fluctuations based upon changes in the exchange rates of certain currencies in relation to the U.S. dollar.  To the extent we engage in international sales denominated in U.S. dollars, an increase in the value of the U.S. dollar relative to foreign currencies could make our products less competitive in international markets.  This effect is also impacted by sources of raw materials from international sources and costs of our sales, service, and manufacturing locations outside the U.S.  


30


We will continue to monitor and minimize our exposure to currency fluctuations and, when appropriate, use financial hedging techniques to minimize the effect of these fluctuations.  However, exchange rate fluctuations as well as differing economic conditions, changes in political climates, and other rules and regulations could adversely affect our ability to effectively hedge exchange rate fluctuations in the future.

We have foreign currency cash accounts to operate our global business. These accounts are impacted by changes in foreign currency rates. Of our $35.4 million in cash balances at April 27, 2019, $28.5 million were denominated in U.S. dollars, of which $3.0 million were held by our foreign subsidiaries.  As of April 27, 2019, we had an additional $6.9 million in cash balances denominated in foreign currencies, of which $6.3 million were maintained in accounts of our foreign subsidiaries.

Interest Rate Risks
Our exposure to market risks relate primarily to changes in interest rates on cash and marketable securities. We do not expect our income or cash flows to be significantly impacted by interest rates.

Commodity Risk
We are dependent on basic raw materials, sub-assemblies, components, and other supplies used in our production operations. Our financial results could be affected by changes in the availability, prices, and global tariff regulations of these materials. Some of these materials are sourced from one or a limited number of suppliers in countries around the world. Some of these materials are also key source materials for our competitors and for other technology companies. Some of these materials are sourced outside of the countries in which we manufacture our products and are subject to transportation delays. Any of these factors may cause a sudden increase in costs and/or limited or unavailable supplies. As a result, we may not be able to acquire key production materials on a timely basis, which could impact our ability to produce products and satisfy incoming sales orders on a timely basis. Our sourcing and material groups work to implement strategies to monitor and mitigate these risks. Periodically, we enter into pricing agreements or purchasing contracts under which we agree to purchase a minimum amount of product in exchange for guaranteed price terms over the length of the contract, which generally does not exceed one year. Over the years, we have been impacted by the factors noted; however, we believe that we have adequate sources of supply for our key materials in the near-term.



31


Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Daktronics, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Daktronics, Inc. and subsidiaries (the "Company") as of April 27, 2019 and April 28, 2018, the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows, for each of the two years in the period ended April 27, 2019, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of April 27, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of April 27, 2019 and April 28, 2018, and the results of its operations and its cash flows for each of the two years in the period ended April 27, 2019, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of April 27, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


32


/s/ Deloitte & Touche LLP

Minneapolis, Minnesota
June 7, 2019

We have served as the Company's auditor since 2017.


33


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Daktronics, Inc.

We have audited the accompanying consolidated statements of operations, comprehensive income, shareholders' equity and cash flows of Daktronics, Inc. and subsidiaries (the Company) for the year in the period ended April 29, 2017. Our audit also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of Daktronics, Inc. and subsidiaries operations and their cash flows for the year in the period ended April 29, 2017, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.

/s/ Ernst & Young LLP

Minneapolis, Minnesota
June 9, 2017



34


DAKTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
 
 
April 27,
2019
 
April 28,
2018
ASSETS
 
 
 
 
CURRENT ASSETS:
 
 
 
 
Cash and cash equivalents
 
$
35,383

 
$
29,727

Restricted cash
 
359

 
28

Marketable securities
 
26,344

 
34,522

Accounts receivable, net
 
65,487

 
77,387

Inventories
 
78,832

 
75,335

Contract assets
 
33,704

 
30,968

Current maturities of long-term receivables
 
2,300

 
1,752

Prepaid expenses and other current assets
 
8,319

 
9,029

Income tax receivables
 
1,087

 
5,385

Property and equipment and other assets available for sale
 
1,858

 

Total current assets
 
253,673

 
264,133

 
 
 
 
 
Property and equipment, net
 
65,314

 
68,059

Long-term receivables, less current maturities
 
1,214

 
1,641

Goodwill
 
7,889

 
8,264

Intangibles, net
 
4,906

 
3,682

Investment in affiliates and other assets
 
5,052

 
5,091

Deferred income taxes
 
11,168

 
7,930

TOTAL ASSETS
 
$
349,216

 
$
358,800

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 

 
 

CURRENT LIABILITIES:
 
 
 
 
Accounts payable
 
$
44,873

 
$
48,845

Contract liabilities
 
47,178

 
39,379

Accrued expenses
 
32,061

 
28,533

Warranty obligations
 
9,492

 
13,891

Income taxes payable
 
468

 
660

Total current liabilities
 
134,072

 
131,308

 
 
 
 
 
Long-term warranty obligations
 
14,978

 
16,062

Long-term contract liabilities
 
10,053

 
7,475

Other long-term obligations
 
1,339

 
2,285

Long-term income tax payable
 
578

 
3,440

Deferred income taxes
 
533

 
614

Total long-term liabilities
 
27,481

 
29,876

 
 
 
 
 
SHAREHOLDERS' EQUITY:
 
 

 
 

Common stock, no par value, authorized 115,000,000 shares; 45,317,267 and 44,779,534 shares issued at April 27, 2019 and April 28, 2018, respectively
 
57,699

 
54,731

Additional paid-in capital
 
42,561

 
40,328

Retained earnings
 
93,593

 
107,105

Treasury stock, at cost, 303,957 and 303,957 shares at April 27, 2019 and April 28, 2018, respectively
 
(1,834
)
 
(1,834
)
Accumulated other comprehensive loss
 
(4,356
)
 
(2,714
)
TOTAL SHAREHOLDERS' EQUITY
 
187,663

 
197,616

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
349,216

 
$
358,800

 
 
 
 
 
See notes to consolidated financial statements.
 
 

 
 



35


DAKTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

 
Year Ended
 
April 27,
2019
 
April 28,
2018
 
April 29,
2017
Net sales
$
569,704

 
$
610,530

 
$
586,539

Cost of sales
439,410

 
464,861

 
446,124

Gross profit
130,294

 
145,669

 
140,415

 
 
 
 
 
 
Operating expenses:
 

 
 

 
 

Selling
64,648

 
62,760

 
61,687

General and administrative
34,817

 
34,919

 
34,226

Product design and development
35,557

 
35,530

 
29,081

 
135,022

 
133,209

 
124,994

Operating (loss) income
(4,728
)
 
12,460

 
15,421

 
 
 
 
 
 
Nonoperating income (expense):
 

 
 

 
 

Interest income
1,031

 
723

 
751

Interest expense
(160
)
 
(217
)
 
(230
)
Other (expense) income, net
(1,087
)
 
(537
)
 
(354
)
 
 
 
 
 
 
(Loss) income before income taxes
(4,944
)
 
12,429

 
15,588

Income tax (benefit) expense
(3,986
)
 
6,867

 
5,246

Net (loss) income
$
(958
)
 
$
5,562

 
$
10,342

 
 
 
 
 
 
Weighted average shares outstanding:
 

 
 

 
 

Basic
44,926

 
44,457

 
44,114

Diluted
44,926

 
44,873

 
44,303

 
 
 
 
 
 
(Loss) earnings per share:
 

 
 

 
 

Basic
$
(0.02
)
 
$
0.13

 
$
0.23

Diluted
$
(0.02
)
 
$
0.12

 
$
0.23

 
 
 
 
 
 
See notes to consolidated financial statements.
 
 
 

 
 



36


DAKTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

 
 
Year Ended
 
 
April 27,
2019
 
April 28,
2018
 
April 29,
2017
 
 
 
 
 
 
 
Net (loss) income
 
$
(958
)
 
$
5,562

 
$
10,342

 
 
 
 
 
 
 
Other comprehensive (loss) income:
 
 
 
 
 
 
Cumulative translation adjustments
 
(1,749
)
 
1,808

 
(1,472
)
Unrealized gain (loss) on available-for-sale securities, net of tax
 
107

 
(141
)
 
(11
)
Total other comprehensive (loss) income, net of tax
 
(1,642
)
 
1,667

 
(1,483
)
Comprehensive (loss) income
 
$
(2,600
)
 
$
7,229

 
$
8,859

 
 
 
 
 
 
 
See notes to consolidated financial statements.
 
 
 
 
 
 


37


DAKTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Treasury Stock
 
Accumulated Other Comprehensive Loss
 
Total
Balance as of April 30, 2016:
$
51,347

 
$
35,351

 
$
117,276

 
$
(9
)
 
$
(2,898
)
 
$
201,067

Net income

 

 
10,342

 

 

 
10,342

Cumulative translation adjustments

 

 

 

 
(1,472
)
 
(1,472
)
Unrealized gain (loss) on available-for-sale securities, net of tax

 

 

 

 
(11
)
 
(11
)
Share-based compensation

 
2,914

 

 

 

 
2,914

Exercise of stock options
343

 

 

 

 

 
343

Tax payments related to RSU issuances

 
(261
)
 

 

 

 
(261
)
Employee savings plan activity
840

 

 

 

 

 
840

Dividends paid ($0.31 per share)

 

 
(13,651
)
 

 

 
(13,651
)
Treasury stock purchase

 

 

 
(1,825
)
 

 
(1,825
)
Balance as of April 29, 2017:
52,530

 
38,004

 
113,967

 
(1,834
)
 
(4,381
)
 
198,286

Net income

 

 
5,562

 

 

 
5,562

Cumulative translation adjustments

 

 

 

 
1,808

 
1,808

Unrealized gain (loss) on available-for-sale securities, net of tax

 

 

 

 
(141
)
 
(141
)
Share-based compensation

 
2,635

 

 

 

 
2,635

Exercise of stock options
519

 

 

 

 

 
519

Tax payments related to RSU issuances

 
(311
)
 

 

 

 
(311
)
Employee savings plan activity
1,682

 

 

 

 

 
1,682

Dividends paid ($0.28 per share)

 

 
(12,424
)
 

 

 
(12,424
)
Balance as of April 28, 2018:
54,731

 
40,328

 
107,105

 
(1,834
)
 
(2,714
)
 
197,616

Net loss

 

 
(958
)
 

 

 
(958
)
Cumulative translation adjustments

 

 

 

 
(1,749
)
 
(1,749
)
Unrealized gain (loss) on available-for-sale securities, net of tax

 

 

 

 
107

 
107

Share-based compensation

 
2,479

 

 

 

 
2,479

Exercise of stock options
1,318

 

 

 

 

 
1,318

Tax payments related to RSU issuances

 
(246
)
 

 

 

 
(246
)
Employee savings plan activity
1,650

 

 

 

 

 
1,650

Dividends paid ($0.28 per share)

 

 
(12,554
)
 

 

 
(12,554
)
Balance as of April 27, 2019:
$
57,699

 
$
42,561

 
$
93,593

 
$
(1,834
)
 
$
(4,356
)
 
$
187,663

 
 
 
 
 
 
 
 
 
 
 
 
See notes to consolidated financial statements.
 
 

 
 

 
 

 
 

 
 



38


DAKTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

 
Year Ended
 
April 27,
2019
 
April 28,
2018
 
April 29,
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
Net (loss) income
$
(958
)
 
$
5,562

 
$
10,342

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 

 
 

 
 
Depreciation and amortization
18,635

 
17,784

 
18,562

Impairment of intangible assets

 

 
830

(Gain) loss on sale of property, equipment and other assets
(441
)
 
(1,252
)
 
36

Share-based compensation
2,479

 
2,635

 
2,914

Contingent consideration adjustment
286

 

 

Equity in loss of affiliate
844

 
481

 
136

Provision for doubtful accounts
194

 
140

 
1,426

Deferred income taxes, net
(3,379
)
 
3,148

 
(2,043
)
Change in operating assets and liabilities
11,886

 
1,863

 
7,204

Net cash provided by operating activities
29,546

 
30,361

 
39,407

 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

 
 
Purchases of property and equipment
(17,268
)
 
(18,127
)
 
(8,502
)
Proceeds from sales of property, equipment and other assets
607

 
2,179

 
199

Purchases of marketable securities
(25,337
)
 
(17,438
)
 
(24,159
)
Proceeds from sales or maturities of marketable securities
33,706

 
15,273

 
15,928

Purchases of and loans to equity investment
(1,300
)
 
(1,450
)
 
(1,646
)
Acquisitions, net of cash acquired
(2,250
)
 

 

Net cash used in investing activities
(11,842
)
 
(19,563
)
 
(18,180
)
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

 
 
Payments on notes payable

 

 
(8
)
Principal payments on long-term obligations