DAKTRONICS INC /SD/ - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

The following discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate our estimates, including those related to estimated total costs on long-term construction-type contracts, estimated costs to be incurred for product warranties and extended maintenance contracts, bad debts, excess and obsolete inventory, income taxes, stock-based compensation and contingencies. Our estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

OVERVIEW We design, manufacture and sell a wide range of display systems to customers throughout the world. We focus our sales and marketing efforts on markets, geographical regions and products. Our five business segments consist of four domestic business units and an International business unit. The four domestic business units consist of Live Events, Commercial, Schools and Theatres, and Transportation, which include the geographic territories of the United States and Canada.

Our net sales and profitability historically have fluctuated due to the impact of large product orders, such as display systems for professional sports facilities and colleges and universities, as well as the seasonality of the sports market. Net sales and gross profit percentages also have fluctuated due to other seasonal factors, including the impact of holidays, which primarily affects our third quarter. Our gross margins on large custom and standard orders tend to fluctuate more than small standard orders. Large product orders that involve competitive bidding and substantial subcontract work for product installation generally have lower gross margins. Although we follow the percentage of completion method of recognizing revenues for large custom orders, we nevertheless have experienced fluctuations in operating results and expect that our future results of operations will be subject to similar fluctuations.

Orders are booked and included in backlog only upon receipt of a firm contract and after receipt of any required deposits. As a result, certain orders for which we have received binding letters of intent or contracts will not be booked until all required contractual documents and deposits are received. In addition, order bookings can vary significantly on a quarterly basis as a result of the timing of large orders.

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

16-------------------------------------------------------------------------------- Table of contents GENERAL Our business, especially the large video display business in all of our business units, is very competitive, and generally our margins on these large contracts are similar across the business units over the long-term. There are, however, differences that arise in the short term among the business units, which are discussed more fully in the following analysis.

Overall, our business growth is driven by the market demand for large format electronic displays and the depth and quality of our products, including related control systems, the depth of our service offerings and our technology that serve these market demands. This growth, however, is partially offset by declines in product prices caused by increasing competition. Within each business unit, there are also key growth drivers that apply uniquely to that business unit.

Commercial Business Unit: Over the long-term, we believe that growth in the Commercial business unit will result from a number of factors, including: • The growing interest in our standard display products that are used in many different retail-type establishments, among other types of applications. The demand in this area is driven by retailers' and other types of commercial establishments' desire to attract the attention of motorists and others into their storefront. It is also driven by the need to communicate messages to the public. National accounts may replace their displays that are reaching end of life, which could lead to increased sales. Furthermore, we believe that in the future there will be increased demand from national accounts, including retailers, quick serve restaurants and other types of nationwide organizations, which could lead to increasing sales.

• Increasing interest in spectaculars, which include very large and sometimes highly customized displays as part of entertainment venues such as casinos, amusement parks and Times Square type locations.

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

• The continued deployment of digital billboards as billboard companies continue developing new sites for digital billboards and start to replace digital billboards which are reaching end of life. This is dependent on there being no adverse changes in the digital billboard regulatory environment, which could restrict future deployments of billboards, as well as maintaining our current market share of the business that is concentrated in a few large billboard companies.

Live Events Business Unit: Over the long-term, we believe that growth in the Live Events business unit will result from a number of factors, including: • Facilities spending more on larger display systems.

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

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

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

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

Schools and Theatres Business Unit: Over the long-term, we believe that growth in the Schools and Theatres business unit will result from a number of factors, including: • Increasing demand for video systems in high schools as school districts realize the revenue generating potential of these displays versus traditional scoreboards.

• Increasing demand for different types of displays, such as message centers at schools to communicate to students, parents and the broader community.

• The use of more sophisticated displays in more athletic venues, such as aquatics in schools.

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

International Business Unit: Over the long-term, we believe that growth in the International business unit will result from achieving greater penetration in various geographies, building products more suited to individual markets, and the reasons listed in each of the other business units to the extent they apply outside the United States and Canada.

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

17-------------------------------------------------------------------------------- Table of contents The cost and selling prices of our products have decreased over time and are expected to continue to decrease in the future. As a result, each year we must sell more products to generate the same or a greater level of net sales as in previous fiscal years. This price decline has been significant as a result of increased competition across all business units.

RESULTS OF OPERATIONS COMPARISON OF THE THREE MONTHS ENDED JANUARY 26, 2013 AND JANUARY 28, 2012 Net Sales Three Months Ended January 26, January 28, (in thousands) 2013 2012 Percent Change Net Sales: Commercial $ 30,997 $ 38,833 (20.2 )% Live Events 26,528 38,496 (31.1 ) Schools & Theatres 11,778 10,696 10.1 Transportation 23,546 10,261 129.5 International 18,201 24,639 (26.1 ) $ 111,050 $ 122,925 (9.7 )% Orders: Commercial $ 36,988 $ 30,720 20.4 % Live Events 47,391 38,684 22.5 Schools & Theatres 10,183 9,941 2.4 Transportation 19,972 15,443 29.3 International 19,776 12,218 61.9 $ 134,310 $ 107,006 25.5 % Commercial: The decrease in net sales for the three months ended January 26, 2013 compared to the same period one year ago was the net result of: • A decrease of $5.7 million in sales of large custom video contracts due to a multi-million dollar custom video project converting to sales in the third quarter of fiscal 2012. The level of large custom contract orders and sales in this niche is subject to volatility and, during the third quarter of fiscal 2013, we did not have the same level of large video projects converting to sales.

• A decrease of $2.8 million in our billboard niche due to lower demand from our billboard customers.

• An increase of $1.5 million in sales of on-premise advertising displays resulting from an improved economy.

The increase in orders for the three months ended January 26, 2013 compared to the same period one year ago was the net result of: • An increase in orders for large custom video projects. During the third quarter of fiscal 2013, we booked two video system orders for a combined total of $7.5 million.

• An increase in orders for our on-premise advertising standard order business.

• A decrease in orders for billboard customers resulting from variability in timing of orders being booked and softening demand.

Live Events: The decrease in net sales for the three months ended January 26, 2013 compared to the same period one year ago was the net result of timing of booking orders, large project timing and plant production cycles, coupled with a lower backlog at the beginning of the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012.

Orders increased for the three months ended January 26, 2013 compared to the same period one year ago as the current period included contracts for video display systems at two NFL stadiums and a university with a combined total of $19 million.

Schools and Theatres: The increase in net sales for the three months ended January 26, 2013 compared to the same period one year ago was primarily the result of increased demand in video projects, which converted to sales in the third quarter of fiscal 2013. Orders for the three months ended January 26, 2013 compared to the same period one year ago increased as the result of schools demonstrating more willingness to move forward with projects and the increasing demand in video systems for high schools.

Transportation: The increase in net sales for the three months ended January 26, 2013 compared to the same period one year ago was primarily the result of production on an order booked during the first quarter of fiscal 2013 for a major airport, as previously disclosed.

18-------------------------------------------------------------------------------- Table of contents The increase in orders for the three months ended January 26, 2013 compared to the same period one year ago was the result of being awarded contracts with three different state transportation authorities totaling $11.1 million.

International: The decrease in net sales in our International business unit for the three months ended January 26, 2013 compared to the same period one year ago is the net result of a lower beginning backlog for the third quarter of fiscal 2013 compared to the same period of fiscal 2012, timing of orders, and progress on large projects. We believe sales during the fourth quarter of fiscal 2013 will be higher compared to the same period of the previous year.

The increase in orders for the three months ended January 26, 2013 compared to the same period one year ago was led by a $3.1 million order from a third-party advertising company and a $3.9 million order for a video display system for a horse race track.

Backlog The product order backlog as of January 26, 2013 was $149 million as compared to $121 million as of January 28, 2012 and $128 million at the end of second quarter of fiscal 2013. Historically, our backlog varies due to the seasonality of our business, the timing of large orders, and customer delivery schedules for these orders. The backlog increased from one year ago in our Commercial, Live Events, Schools and Theatres and International business units and decreased in our Transportation business unit.

Backlog is not a measure defined by U.S. generally accepted accounting principles, and our methodology for determining backlog may vary from the methodologies used by other companies in determining their backlog amounts. Our backlog is equal to the amount of net sales expected to be recognized in future periods on standard product and contract sales that are evidenced by an arrangement, with prices that are fixed and determinable and with collectability being reasonably assured. Arrangements in our backlog may be canceled, modified or otherwise altered. Lead times for orders in our backlog can range from a week to several years. Most standard product lead time is less than eight weeks, but large contracts can range from 12 weeks to more than a year. Thus, overall backlog is not directly indicative of sales in future quarters.

Gross Profit Three Months Ended January 26, 2013 January 28, 2012 As a Percent As a Percent (in thousands) Amount of Net Sales Amount of Net Sales Commercial $ 7,549 24.4 % $ 10,355 26.7 % Live Events 4,358 16.4 6,218 16.2 Schools & Theatres 2,647 22.5 1,917 17.9 Transportation 7,118 30.2 2,892 28.2 International 5,377 29.5 6,473 26.3 $ 27,049 24.4 % $ 27,855 22.7 % The increase in our gross profit percentage for the three months ended January 26, 2013 compared to the same period one year ago was the net result of the following: Commercial: The gross profit percent decrease for the three months ended January 26, 2013 compared to the same period one year ago was the result of competitive market pressures on pricing in the billboard niche, costs incurred to cover a product outside of warranty obligations, which were partially offset by an improvement of reseller and national account business due to sales mix, increased manufacturing and services infrastructure utilization and cost management, and a reduction in warranty costs as a percentage of sales.

Live Events: The gross profit percent for the three months ended January 26, 2013 compared to the same period one year ago was flat.

Schools and Theatres: The gross profit percent increase for the three months ended January 26, 2013 compared to the same period one year ago was the result of a more favorable product sales mix, increased manufacturing utilization and cost management, and lower warranty costs as a percentage of sales.

Transportation: The gross profit percent increase for the three months ended January 26, 2013 compared to the same period one year ago was the net result of an increase in margin from a more favorable product sales mix and improved profitability on the contracts produced this quarter, increased manufacturing and services infrastructure utilization and a decrease in warranty expenses as a percentage of sales.

19-------------------------------------------------------------------------------- Table of contents International: The gross profit percent increase for the three months ended January 26, 2013 compared to the same period one year ago was primarily the result of improved margins on product sales mix.

Selling Expense Three Months Ended January 26, 2013 January 28, 2012 As a Percent As a Percent (in thousands) Amount of Net Sales Percent Change Amount of Net Sales Commercial $ 3,287 10.6 % (6.7 )% $ 3,522 9.1 % Live Events 3,114 11.7 (12.9 ) 3,574 9.3 Schools & Theatres 2,568 21.8 (6.5 ) 2,747 25.7 Transportation 800 3.4 (1.6 ) 813 7.9 International 3,883 21.3 44.6 2,685 10.9 $ 13,652 12.3 % 2.3 % $ 13,341 10.9 % Selling expenses were slightly higher in the three months ended January 26, 2013 compared to the same period one year ago due to the net effect of the following: Commercial: Commercial selling expenses decreased approximately seven percent in the third quarter of fiscal 2013 compared to the same period one year ago. The decrease was the result of reductions in travel and entertainment expenses and various other expenses.

Live Events: Selling expenses decreased by approximately 13 percent in the third quarter of fiscal 2013 compared to the same period in fiscal 2012. This was primarily the result of a decrease of $0.3 million in personnel costs, including salary, taxes, and employee benefits, and a decrease of $0.1 million in convention expenses.

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

Transportation: Selling expenses remained flat for the third quarter of fiscal 2013 compared to the same period one year ago.

International: Selling expenses increased by approximately 45 percent compared to the same period in fiscal 2012 due to increases in third-party commissions and bad debt expense. We use third parties in various locations around the world to expand market opportunities, and these types of expenses will recur only if the third party is successful in procuring sales.

Other Operating Expenses Three Months Ended January 26, 2013 January 28, 2012 As a As a Percent of Percent of (in thousands) Amount Net Sales Percent Change Amount Net Sales General and administrative $ 6,717 6.0 % (3.7 )% $ 6,974 5.7 % Product design and development $ 5,611 5.1 % (1.5 )% $ 5,696 4.6 % General and administrative expenses consist primarily of salaries, other employee-related costs, professional fees, shareholder relations costs, facilities and equipment related costs for administrative departments, training costs, amortization of intangibles and the costs of supplies.

General and administrative expenses in the third quarter of fiscal 2013 as compared to the same period one year ago decreased primarily due to reductions in information system related expenses and professional services expenses. These reductions in expenses relate to one-time costs incurred in the third quarter of fiscal 2012 related to information technology consulting on development projects and professional services costs to support the expansion of our international business.

Product design and development expenses consist primarily of salaries, other employee-related costs, facilities cost and equipment-related costs and supplies. Product development investments in the near term are focused on video technology with a range of pixel pitches for outdoor applications using LED surface mount technology, which offer improved performance at a lower cost point over our current offerings. In addition, we continue to focus on a new full-color family of Vanguard displays for the transportation market and various other products to standardize display components and control systems for both single site displays and networked displays. Our costs for product development represent engineering time charges, materials costs and an allocation of overhead based on time charges of our 20-------------------------------------------------------------------------------- Table of contents engineering departments. Approximately 70 percent of our engineering time is spent on product development, while the rest is allocated to large contract work and included in cost of goods sold.

Product development expenses remained flat in the third quarter of fiscal 2013 as compared to the same period one year ago.

Other Income and Expenses Three Months Ended January 26, 2013 January 28, 2012 As a As a Percent of Percent of(in thousands) Amount Net Sales Percent Change Amount Net Sales Interest income, net $ 358 0.3 % (4.0 )% $ 373 0.3 % Other expense, net $ (193 ) (0.2 )% 565.5 % $ (29 ) - % Interest income, net: We generate interest income through short-term cash investments, marketable securities, and product sales on an installment basis, under lease arrangements, or in exchange for the rights to sell and retain advertising revenues from displays, which generates interest income from long-term receivables. Interest expense is comprised primarily of interest costs on long-term marketing obligations and the unused portion of our line of credit.

Interest income was relatively flat in the third quarter of fiscal 2013 compared to the same period one year ago. Interest expense decreased slightly in the third quarter of fiscal 2013 as compared to the same period in fiscal 2012 due to the full repayment of outstanding debt on our line of credit in China.

Other expense, net: We realized an increase of $0.2 million in expenses from the net result of other income and expenses for the third quarter of fiscal 2013 as compared to the same period one year ago due to an increase in foreign currency losses for changes in the fair value of currency hedges and various other non-operating gains.

Income Taxes Our effective tax rate was 31.2 percent, excluding a one-time retroactive extension of the research tax credit, which resulted in an effective tax benefit rate of 119.6 percent for the third quarter of fiscal 2013 as compared to an effective tax rate of 23.9 percent for the third quarter of fiscal 2012. On January 2, 2013, the President signed into law The American Taxpayer Relief Act of 2012. Under prior law, a taxpayer was entitled to a research tax credit for qualifying amounts paid or incurred on or before December 31, 2011 and extends the research credit for two years to December 31, 2013. As a result of the retroactive extension, we recognized in the third quarter of fiscal 2013 approximately $1.9 million in tax benefits from the credit. In addition, we received a tax benefit for the dividend payment to employees in the Daktronics 401k ESOP plan of $0.6 million.

Our effective tax rate can vary significantly due to the mix of pre-tax income and permanent adjustments to taxable income in different countries and the estimate of the annual effective rate in each country.

21-------------------------------------------------------------------------------- Table of contents COMPARISON OF THE NINE MONTHS ENDED JANUARY 26, 2013 AND JANUARY 28, 2012 Net Sales Nine Months Ended January 26, January 28, (in thousands) 2013 2012 Percent Change Net Sales: Commercial $ 109,127 $ 115,239 (5.3 )% Live Events 121,641 123,676 (1.6 ) Schools & Theatres 51,639 46,418 11.2 Transportation 57,713 34,201 68.7 International 53,720 57,998 (7.4 ) $ 393,840 $ 377,532 4.3 % Orders: Commercial $ 113,622 $ 111,319 2.1 % Live Events 132,285 122,507 8.0 Schools & Theatres 48,106 41,589 15.7 Transportation 59,504 43,459 36.9 International 64,667 46,117 40.2 $ 418,184 $ 364,991 14.6 % Commercial: The decrease in net sales for the nine months ended January 26, 2013 compared to the same period one year ago was the net result of: • A decrease of $8.0 million in sales for large video display projects due to delayed orders for custom video projects.

• A decrease of $2.2 million in sales to outdoor advertising companies due to lower demand from our billboard customers.

• An increase of $2.9 million in sales of on-premise advertising displays, which was primarily due to an increase in orders for a national account customer replacement program, as previously disclosed, and an improved economy.

The increase in orders for the nine months ended January 26, 2013 compared to the same period one year ago was the result of an increase of $2.3 million in service maintenance agreements.

Live Events: The slight decrease in net sales for the nine months ended January 26, 2013 compared to the same period one year ago was the net result of the timing of sales recognition due to customers' schedules and related production plans. Orders for the nine months ended January 26, 2013 compared to the same period one year ago increased $9.8 million, which was attributed to increases in orders for NFL stadiums, universities, and arena systems.

Schools and Theatres: The increase in net sales for the nine months ended January 26, 2013 compared to the same period one year ago was the result of schools demonstrating more willingness this year than in fiscal 2012 to move forward with projects and the increasing demand in video projects for high schools. Increase in orders for the nine months ended January 26, 2013 compared to the same period one year ago was the result of factors in net sales as noted already.

Transportation: The increase in net sales for the nine months ended January 26, 2013 compared to the same period one year ago was led by sales recorded from a large procurement contract compared to the previous year and an order for $21 million in video displays at the LAX Bradley International Terminal in Los Angeles. Increase in orders for the nine months ended January 26, 2013 compared to the same period one year ago was the result of factors in net sales as noted above.

International: The decrease in net sales for the nine months ended January 26, 2013 compared to the same period one year ago was the result of timing differences in the production and installation of orders booked. The increase in orders was led by orders from a number of outdoor advertising companies located around the world, a $6 million large architectural lighting project, orders for two international sports stadiums totaling in excess of $3 million, and large orders for third-party advertising.

22-------------------------------------------------------------------------------- Table of contents Gross Profit Nine Months Ended January 26, 2013 January 28, 2012 As a Percent As a Percent (in thousands) Amount of Net Sales Amount of Net Sales Commercial $ 29,435 27.0 % $ 29,299 25.4 % Live Events 26,016 21.4 21,908 17.7 Schools & Theatres 13,858 26.8 11,984 25.8 Transportation 20,730 35.9 10,720 31.3 International 15,752 29.3 14,919 25.7 $ 105,791 26.9 % $ 88,830 23.5 % The increase in our gross profit percentage for the nine months ended January 26, 2013 compared to the same period one year ago was the net result of the changes described below: Commercial: The gross profit percent increase in the Commercial business unit for the nine months ended January 26, 2013 compared to the same period one year ago was primarily the result of sales mix.

Live Events: The gross profit percent increase in the Live Events business unit for the nine months ended January 26, 2013 compared to the same period one year ago was the result of lowered manufacturing infrastructure costs and improved sales mix.

Schools and Theatres: The gross profit percent increase in the Schools and Theatres business unit for the nine months ended January 26, 2013 compared to the same period one year ago primarily was the result of increased manufacturing utilization from the overall higher sales volumes and cost reduction initiatives.

Transportation: The gross profit percent increase in the Transportation business unit for the nine months ended January 26, 2013 compared to the same period one year ago was the net result of: • Increased manufacturing utilization from the overall higher sales volumes, which increased gross profit percentages by approximately three percentage points.

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

International: The gross profit percent increase in the International business unit for the nine months ended January 26, 2013 compared to the same period one year ago was the net result of: • An increase in the gross margin on product sales, which increased the overall gross profit by approximately six percentage points. This increase was the result of a number of factors, including increased demand for higher quality products in large video displays and architectural lighting applications that provide higher margins.

• A decrease of approximately two percentage points due to increased costs from services.

• A decrease of approximately one percentage point as a result of higher warranty expenses that occurred during the first quarter of fiscal 2013 due to one significant claim.

Selling Expense Nine Months Ended January 26, 2013 January 28, 2012 As a Percent As a Percent (in thousands) Amount of Net Sales Percent Change Amount of Net Sales Commercial $ 10,405 9.5 % (0.7 )% $ 10,480 9.1 % Live Events 9,624 7.9 (2.1 ) 9,835 8.0 Schools & Theatres 7,767 15.0 (3.0 ) 8,005 17.2 Transportation 2,408 4.2 (3.7 ) 2,501 7.3 International 9,324 17.4 21.8 7,654 13.2 $ 39,528 10.0 % 2.7 % $ 38,475 10.2 % 23-------------------------------------------------------------------------------- Table of contents The increase in selling expenses in the first nine months of fiscal 2013 compared to the same period one year ago was the net result of the following: Commercial: Selling expenses remained flat for the first nine months of fiscal 2013 compared to the same period in fiscal 2012 due to a $0.4 million increase in personnel costs, including taxes and benefits, which were partially offset by a $0.2 million decrease in travel and entertainment expenses and a $0.3 million decrease in various other expenses.

Live Events: The decrease in selling expenses for the first nine months of fiscal 2013 compared to the same period in fiscal 2012 was the result of a decrease of a $0.2 million decrease in travel and entertainment and convention expenses.

Schools & Theatres: The decrease in selling expenses for the first nine months of fiscal 2013 compared to the same period in fiscal 2012 was a result of a $0.2 million decrease in bad debts and various other expenses.

Transportation: Selling expenses for the first nine months of fiscal 2013 compared to the same period one year ago decreased as a result of cost containment efforts offsetting increases in other variable expenses.

International: The increase in selling expenses for the first nine months of fiscal 2013 compared to the same period one year ago was the net result of: • A $1.0 million increase in third-party commissions on significant contracts. Third-party sales agents are contracted from time-to-time to penetrate geographic locations where we have limited presence.

• A $0.4 million increase in personnel costs, including taxes and benefits, due to increases in headcount from the previous year to support our growth in international orders for fiscal 2013.

• A net increase of $0.2 million in various other expenses.

Other Operating Expenses Nine Months Ended January 26, 2013 January 28, 2012 As a As a Percent of Percent of (in thousands) Amount Net Sales Percent Change Amount Net Sales General and administrative $ 20,148 5.1 % (1.3 )% $ 20,410 5.4 % Product design and development $ 17,477 4.4 % 2.5 % $ 17,050 4.5 % General and administrative expenses in the first nine months of fiscal 2013 have declined as compared to the same period one year ago. The reduction in expenses was due to our continued focus on reducing spending during the current year as a part of our strategic goals to improve operating income.

The increase in product development expense in the first nine months of fiscal 2013 as compared to the same period one year ago was the net result of the following: • An increase in personnel costs, including taxes and benefits, of $0.8 million as a result of slight increases in headcount, salary and benefit costs due to normal variations within the business and our continued focus to support the growth of our display and control system platforms.

• A decrease in material costs related to product development of $0.2 million as a result of the timing of projects for prototyping new products and the stage of product development.

• A decrease of $0.2 million in various other expenses.

Other Income and Expenses Nine Months Ended January 26, 2013 January 28, 2012 As a As a Percent of Percent of(in thousands) Amount Net Sales Percent Change Amount Net Sales Interest income, net $ 1,014 0.3 % (7.4 )% $ 1,095 0.3 % Other expense, net $ (224 ) (0.1 )% 1.4 % $ (221 ) (0.1 )% 24-------------------------------------------------------------------------------- Table of contents Interest income, net: Interest income declined slightly for the nine months ended January 26, 2013 as compared to the same period in fiscal 2012 primarily due to lower levels of long-term receivables. Interest expense decreased for the nine months ended January 26, 2013 compared to the nine months ended January 28, 2012 as a result of repayments in full on borrowings in China during fiscal 2013.

Other expense, net: Other expenses, net remained flat for the nine months ended January 26, 2013 as compared to the same period one year ago.

Income Taxes The effective tax rate was approximately 28.9 percent for the first nine months of fiscal 2013 as compared to 34.7 percent for the first nine months of fiscal 2012. In comparing the first nine months of fiscal 2013 to the same period in fiscal 2012, changes in the effective tax rate were primarily due to the net impact of the following items: • A decrease in the annual estimated effective tax rate of approximately 2.7 percentage points as a result of the impact of non- deductible meals and entertainment costs and stock compensation expense on a higher projected income compared to similar level expenses on a lower projected income in fiscal 2012.

• A decrease in the effective tax rate of approximately 1.2 percentage points due to an international tax change.

• A combined decrease in the annual estimated effective tax rate and current effective tax rate of approximately 1.4 percentage points due to the reinstated research and development tax credit, which was not in effect for three months near the end of fiscal 2012.

We operate within multiple taxing jurisdictions, both domestic and international, and we are subject to audits in these jurisdictions. These audits can involve complex issues, including challenges regarding the timing and amount of deductions and the allocation of income amounts to various tax jurisdictions.

At any one time, multiple tax years are subject to audit by various tax authorities because different taxing jurisdictions have different statutes of limitations. During the third quarter of fiscal 2013, the United States Internal Revenue Service (IRS) completed and approved the examination of our U.S. federal tax returns for fiscal years 2009 and 2010. The Chinese tax authorities recently completed an audit of our tax returns for calendar years prior to 2012 in connection with a transfer of location of our business address in China.

LIQUIDITY AND CAPITAL RESOURCES Nine Months Ended January 26, January 28, (in thousands) 2013 2012 Percent Change Net cash provided by (used in): Operating activities $ 33,255 $ 8,393 296.2 % Investing activities (7,105 ) (9,508 ) (25.3 ) Financing activities (31,112 ) (24,707 ) 25.9 Effect of exchange rate changes on cash 43 66 (34.8 ) Net decrease in cash and cash equivalents $ (4,919 ) $ (25,756 ) (80.9 )% Cash flows from operating activities: The increase in cash from operating activities for the first nine months of fiscal 2013 as compared to the first nine months of fiscal 2012 was the net result of the following: • An increase in net income of $11.9 million plus $14.6 million from a reduction of changes in net operating assets and liabilities, adjusted by depreciation and amortization of $1.6 million.

• The most significant drivers of the change in net operating assets and liabilities were the net result of the following: • A decrease in cash resulting from an increase in costs and earnings in excess of billings of $18.1 million. Variability in costs and earnings in excess of billings 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. As of January 26, 2013, $17.7 million of the increase related to three different transportation projects.

• A reduction in accounts receivable that improved cash from operations by $7.5 million primarily due to receiving two significant progress payments totaling $4.2 million that were outstanding at the end of fiscal 2012. The remaining decline relates to a decrease in sales volume that we realized during the third quarter and the timing of billings related to projects in progress.

• A decline in inventories, which increased cash fromoperations by $6.0 million. Changes in inventory are primarily the result of using inventory in production specified for a significant transportation project and inventory management initiatives. Inventory levels can be impacted by timing of large orders.

25-------------------------------------------------------------------------------- Table of contents • A net change in various other operating assets and liabilities, which decreased cash from operations by $3.1 million.

Overall, changes in operating assets and liabilities can be impacted by the timing of cash flows on large orders, which can cause significant fluctuations in the short term in inventory, accounts receivables, accounts payable, customer deposits, costs and earnings in excess of billings and various other operating assets and liabilities.

Cash flows from investing activities: The decrease in cash used in investing activities for the first nine months of fiscal 2013 as compared to the same period in fiscal 2012 was the result of the net effect of the following: • An increase in the net cash invested in marketable securities, net of maturities. Our investment approach has remained consistent year over year as we try to maintain a consistent level of marketable securities and, therefore, the change was the result of the timing of investment decisions and investments of excess cash in marketable securities.

• A decrease in purchases of property and equipment of $5.8 million. During the first nine months of fiscal 2013, we invested $2.6 million in manufacturing equipment, $1.6 million in product demonstration equipment, $1.7 million in information systems infrastructure, including software, and $0.8 million in other assets. Capital expenditures are expected to be less than $11 million for the 2013 fiscal year as a whole.

Cash flows from financing activities: The increase in cash used in financing activities for the first nine months of fiscal 2013 as compared to the same period in fiscal 2012 was the result of a $4.9 million increase in dividends paid to shareholders as explained elsewhere in this Report and net repayments of our short-term debt obligations.

Other Liquidity and Capital Resource Discussion: Included in receivables and costs in excess of billings as of January 26, 2013 was approximately $2.4 million of retainage on long-term contracts, all of which is expected to be collected within one year.

Working capital was $122.7 million at January 26, 2013 and $119.8 million at April 28, 2012. The increase in working capital was primarily the result of higher sales and the net changes between accounts receivable, inventories and cost and estimated earnings in excess of billings. We have historically financed working capital needs through a combination of cash flow from operations and borrowings under bank credit agreements.

We have used and expect to continue to use cash reserves and, to a lesser extent , bank borrowings to meet our short-term working capital requirements. On large product orders, the time between order acceptance and project completion may extend up to and exceed 24 months depending on the amount of custom work and a customer's delivery needs. We often receive down payments or progress payments on these product orders. To the extent that these payments are not sufficient to fund the costs and other expenses associated with these orders, we use working capital and bank borrowings to finance these cash requirements.

We have a credit agreement with a U.S. bank that provides for a $35.0 million line of credit and includes up to $15.0 million for standby letters of credit. The line of credit is due on November 15, 2013. The interest rate ranges from LIBOR plus 125 basis points to LIBOR plus 175 basis points depending on the ratio of our interest-bearing debt to EBITDA. EBITDA is defined as net income before income taxes, interest expense, depreciation and amortization. The effective interest rate was 1.5 percent at January 26, 2013. We are assessed a loan fee equal to 0.125 percent per annum of any non-used portion of the loan. As of January 26, 2013, there were no advances under the line of credit.

The credit agreement is unsecured and requires us to be in compliance with the following financial ratios: • A minimum fixed charge coverage ratio of at least 2 to 1 at the end of any fiscal year. The ratio is equal to (a) EBITDA less dividends, a capital expenditure reserve of $6 million, and income tax expense, over (b) all principal and interest payments with respect to debt, excluding debt outstanding on the line of credit; and • A ratio of interest-bearing debt, excluding any marketing obligations, to EBITDA of less than 1 to 1 at the end of any fiscal quarter.

We have an additional credit agreement with another U.S. bank that expires on November 15, 2013 that is intended to support our credit needs outside of the United States. The facility provides for a $35.0 million line of credit and includes facilities for letters of credit and bank guarantees and to secure foreign loans for our international subsidiaries. The U.S. credit agreement is unsecured and is cross collateralized with the $35.0 million line of credit described above. It contains the same covenants as the credit agreement for that line of credit. As of January 26, 2013, there were no advances under the line of credit.

We were in compliance with all applicable covenants as of January 26, 2013 and April 28, 2012. The minimum fixed charge coverage ratio as of January 26, 2013 was 91-to-1, and the ratio of interest-bearing debt to EBITDA as of January 26, 2013 was 0.02-to-1.

26-------------------------------------------------------------------------------- Table of contents On May 24, 2012, our Board of Directors declared a semi-annual dividend of $0.115 per share on our common stock for the fiscal year ended April 28, 2012, which was paid on June 25, 2012.

On November 29, 2012, our Board of Directors declared a semi-annual dividend payment of $0.115 and a special dividend of $0.50 per share on our common stock.

The dividend was paid on December 20, 2012. Although we expect to continue to pay dividends for the foreseeable future, any and all subsequent dividends will be reviewed regularly and declared by the Board at its discretion.

We are sometimes required to obtain performance bonds for display installations, and we have a bonding line available through a surety company that provides for an aggregate of $100.0 million in bonded work outstanding. At January 26, 2013, we had $21.6 million of bonded work outstanding against this line.

We believe that if our growth extends beyond current expectations, or if we make any strategic investments, we may need to increase our credit facilities or seek other means of financing. We anticipate that we will be able to obtain any needed funds under commercially reasonable terms from our current lenders or other sources. We believe that our working capital available from all sources will be adequate to meet the cash requirements of our operations in the foreseeable future.

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