# Richardson Electronics, LTD.: Form 10-Q for the period ended Dec 3, 2011

- Company: [Richardson Electronics, LTD.](/companies/rell.md) (CIK 355948)
- Form: 10-Q
- Filed: 2012-01-12
- Accepted by EDGAR: Jan 12, 2012, 17:16 ET
- Period: 2011-12-03
- Accession: 0001193125-12-010705
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/355948/000119312512010705/d278243d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/355948/000119312512010705/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2011-12-03.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2011-09-04 to 2011-12-03 | $39.1m | us-gaap:SalesRevenueNet |
| Revenue | 6 months, 2011-05-29 to 2011-12-03 | $80.6m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2011-09-04 to 2011-12-03 | $27.4m | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2011-05-29 to 2011-12-03 | $56.3m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2011-09-04 to 2011-12-03 | $11.7m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2011-05-29 to 2011-12-03 | $24.4m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2011-09-04 to 2011-12-03 | $10.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2011-05-29 to 2011-12-03 | $20.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2011-09-04 to 2011-12-03 | $1.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2011-05-29 to 2011-12-03 | $3.7m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2011-09-04 to 2011-12-03 | $1.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2011-05-29 to 2011-12-03 | $1.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2011-09-04 to 2011-12-03 | $836.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2011-05-29 to 2011-12-03 | $1.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2011-09-04 to 2011-12-03 | $830.0k | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2011-05-29 to 2011-12-03 | $4.5m | us-gaap:NetIncomeLoss |
| Operating cash flow | 3 months, 2011-09-04 to 2011-12-03 | $621.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Operating cash flow | 6 months, 2011-05-29 to 2011-12-03 | −$47.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2011-05-29 to 2011-12-03 | $74.0k | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 3 months, 2011-09-04 to 2011-12-03 | $832.0k | us-gaap:PaymentsOfDividends |
| Dividends paid | 6 months, 2011-05-29 to 2011-12-03 | $1.7m | us-gaap:PaymentsOfDividends |
| Share repurchases | 3 months, 2011-09-04 to 2011-12-03 | $4.2m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Share repurchases | 6 months, 2011-05-29 to 2011-12-03 | $11.9m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2011-12-03 | $25.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2011-12-03 | $229.4m | us-gaap:AssetsCurrent |
| Total assets | at 2011-12-03 | $253.1m | us-gaap:Assets |
| Current liabilities | at 2011-12-03 | $30.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2011-12-03 | $40.8m | us-gaap:Liabilities |
| Shareholders' equity | at 2011-12-03 | $212.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 38,691 characters.

*Certain statements in this report may constitute “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. The terms “may,” “should,” “could,” “anticipate,” “believe,” “continues,” “estimate,” “expect,” “intend,” “objective,” “plan,” “potential,” “project” and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. These statements are based on management’s current expectations, intentions or beliefs and are subject to a number of factors, assumptions and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Factors that could cause or contribute to such differences or that might otherwise impact the business include the risk factors set forth in Item 1A, of our Annual Report on Form 10-K filed on July 22, 2011, and in the Company’s Proxy Statement on schedule 14A filed on August 23, 2011. We undertake no obligation to update any such factor or to publicly announce the results of any revisions to any forward-looking statements contained herein whether as a result of new information, future events or otherwise.*

*In addition, while we do, from time to time, communicate with securities analysts, it is against our policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts, or opinions, such reports are not our responsibility.*

### INTRODUCTION

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to assist the reader in better understanding our business, results of operations, financial condition, changes in financial condition, critical accounting policies and estimates, and significant developments. MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited consolidated financial statements and the accompanying notes thereto appearing elsewhere herein. This section is organized as follows:

- **Business Overview**
- **Results of Operations –** an analysis and comparison of our consolidated results of operations for the three and six month periods ended December 3, 2011, and November 27, 2010, as reflected in our unaudited consolidated statements of income and comprehensive income (loss).
- **Liquidity, Financial Position, and Capital Resources –** a discussion of our primary sources and uses of cash for the six month periods ended December 3, 2011, and November 27, 2010, and a discussion of changes in our financial position.

### BUSINESS OVERVIEW

Richardson Electronics, Ltd. (“we”, “us”, “the Company”, and “our”) is incorporated in the state of Delaware. We are a leading global provider of engineered solutions, power grid and microwave tubes and related consumables, and customized display solutions, serving customers in the radio frequency (“RF”) and microwave communications, military, marine, aviation, industrial, scientific, and medical markets. Our strategy is to provide specialized technical expertise and “engineered solutions” based on our core engineering and manufacturing capabilities. We provide solutions and add value through design-in support, systems integration, prototype design and manufacturing, testing, logistics, and aftermarket technical service and repair.

Our products include subsystems used in semiconductor manufacturing, electron tubes, microwave generators, and visual technology solutions. These products are used to control, switch or amplify electrical power signals, or used as display devices in a variety of industrial, commercial, medical, and communication applications.

On March 1, 2011, we completed the sale of the assets primarily used or held for use in, and certain liabilities of, our RF, Wireless and Power Division (“RFPD”), as well as certain other Company assets, including our information technology assets, to Arrow Electronics, Inc. (“Arrow”) in exchange for $238.8 million, which included an estimated pre-closing working capital adjustment of approximately $27.0 million (“the Transaction.”) The final purchase price was subject to a post-closing working capital adjustment.

On June 29, 2011, we received notification from Arrow seeking a post-closing working capital adjustment, which would reduce the purchase price by approximately $4.2 million. We recorded the working capital adjustment of $4.2 million in our results from discontinued operations during our fourth quarter of fiscal 2011. During the first quarter of fiscal 2012, we agreed to approximately $3.9 million of the proposed working capital adjustment and adjusted our results from discontinued operations during the first quarter. During the second quarter of fiscal 2012, we paid Arrow $3.9 million to settle the agreed upon working capital adjustment.

On September 5, 2011, we acquired the assets of Powerlink Specialist Electronics Support Limited (“Powerlink”) for approximately $2.3 million, including a working capital adjustment of $0.2 million related to payables of approximately $0.2 million that were paid by Powerlink prior to the close. Powerlink, a UK-based technical service company with locations in London and Dubai, services traveling wave tube (TWT) amplifiers and related equipment for the Satellite Communications market throughout Europe and the Middle East. The company generated revenues of approximately $2.0 million during its fiscal year ended May 31, 2011. This acquisition positions us to provide cost-effective distribution, installation and service of microwave tubes to communications, industrial, military and medical users around the world.

The allocation of the purchase price, recorded during our second quarter of fiscal 2012, includes $0.4 million of trade receivables, $0.2 million of inventory, and $1.7 million of goodwill.

The goodwill recorded of $1.7 million represents the excess of purchase price over the fair market value of the identifiable net assets we acquired. Beginning with our fourth quarter of fiscal year 2012, we will be testing our goodwill for impairment on an annual basis in accordance with Accounting Standards Update (ASU) No. 2011-08, *Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment.* We do not expect the results of our impairment testing to have a material impact to our financial results for fiscal year 2012.

We have two operating segments, which we define as follows:

*Electron Device Group (“*EDG”) provides engineered solutions and distributes electronic components to customers in diverse markets including the steel, automotive, textile, plastics, semiconductor manufacturing, avionics, and broadcast equipment industries. With the acquisition of Powerlink, EDG also serves its customers with technical services for both the microwave and power grid tubes.

*Canvys* provides global customized display solutions serving the financial, corporate enterprise, healthcare, industrial, and medical original equipment manufacturer (“OEM”) markets.

We currently have operations in the following major geographic regions:

- North America;
- Asia/Pacific;
- Europe; and
- Latin America.

### RESULTS OF CONTINUING OPERATIONS

### FINANCIAL SUMMARY — THREE MONTHS ENDED DECEMBER 3, 2011

- Net sales for the second quarter of fiscal 2012 were $39.1 million, down 4.5%, compared to net sales of $41.0 million during the second quarter of last year.
- Gross margin as a percentage of net sales increased to 29.9% during the second quarter of fiscal 2012 compared to 28.8% during the second quarter of last year.
- SG&A expenses during the second quarter of fiscal 2012 were $10.0 million, or 25.5% of net sales, compared to $11.2 million, or 27.3% of net sales, during the second quarter of last year.
- Operating income during the second quarter of fiscal 2012 was $1.7 million, or 4.4% of net sales, compared to operating income of $0.6 million, or 1.5% of net sales, during the second quarter of last year.
- Income from continuing operations during the second quarter of fiscal 2012 was $1.6 million, compared to income from continuing operations of $0.2 million during the second quarter of last year.
- Loss from discontinued operations, net of tax, was $0.8 million during the second quarter of fiscal 2012 compared to income from discontinued operations, net of tax, of $7.3 million during the second quarter of last year.
- Net income during the second quarter of fiscal 2012 was $0.8 million, or $0.04 per diluted common share, compared to net income of $7.5 million, or $0.41 per diluted common share, during the second quarter of last year.

### FINANCIAL SUMMARY — SIX MONTHS ENDED DECEMBER 3, 2011

- Net sales for the first six months of fiscal 2012 were $80.6 million, up 2.8%, compared to net sales of $78.5 million during the first six months of last year.
- Gross margin as a percentage of net sales increased to 30.2% during the first six months of fiscal 2012 compared to 29.5% during the first six months of last year.
- SG&A expenses during the first six months of fiscal 2012 were $20.7 million, or 25.7% of net sales, compared to $21.7 million, or 27.7% of net sales, during the first six months of last year.
- Operating income during the first six months of fiscal 2012 was $3.7 million, or 4.6% of net sales, compared to operating income of $1.4 million, or 1.8% of net sales, during the first six months of last year.
- Income from continuing operations during the first six months of fiscal 2012 was $2.7 million, compared to income from continuing operations of $0.6 million during the first six months of last year.
- Income from discontinued operations, net of tax, was $1.8 million, during the first six months of fiscal 2012 compared to $15.2 million during the first six months of last year.
- Net income during the first six months of fiscal 2012 was $4.5 million, or $0.25 per diluted common share, compared to net income of $15.8 million, or $0.87 per diluted common share, during the first six months of last year.

### Net Sales and Gross Profit Analysis

During the second quarter of fiscal 2012, consolidated net sales decreased 4.5% compared to the second quarter of fiscal 2011. During the first six months of fiscal 2012, consolidated net sales increased 2.8% compared to the first six months of fiscal 2011.

Net sales by segment and percent change during the second quarter and first six months of fiscal 2012 and 2011 were as follows (*in thousands):*

| Net Sales Second Quarter | FY 2012 | FY 2011 | % Change |
| --- | ---: | ---: | ---: |
| EDG | $28,022 | $28,655 | (2.2%) |
| Canvys | 11,116 | 12,325 | (9.8%) |
| Total | $39,138 | $40,980 | (4.5%) |
|  | **FY 2012** | **FY 2011** | **% Change** |
| **First Six Months** |  |  |  |
| EDG | 58,751 | 56,148 | 4.6% |
| Canvys | 21,898 | 22,342 | (2.0%) |
| Total | $80,649 | $78,490 | 2.8% |

Consolidated gross profit as a percentage of net sales increased to 29.9% during the second quarter of fiscal 2012, as compared to 28.8% during the second quarter of fiscal 2011 and to 30.2% during the first six months of fiscal 2012, as compared to 29.5% during the first six months of fiscal 2011.

Gross profit reflects the distribution and manufacturing product margin less manufacturing variances, inventory obsolescence charges, customer returns, scrap and cycle count adjustments, engineering costs, and other provisions.

Gross profit by segment and percent of segment net sales during the second quarter and first six months of fiscal 2012 and 2011 were as follows (*in thousands):*

| Gross Profit Second Quarter | FY 2012 | % of Net Sales | FY 2011 | % of Net Sales |
| --- | ---: | ---: | ---: | ---: |
| EDG | $8,546 | 30.5% | $8,942 | 31.2% |
| Canvys | 3,144 | 28.3% | 2,853 | 23.1% |
| Total | $11,690 | 29.9% | $11,795 | 28.8% |
|  | **FY 2012** | **% of Net Sales** | **FY 2011** | **% of Net Sales** |
| **First Six Months** |  |  |  |  |
| EDG | 18,217 | 31.0% | 17,998 | 32.1% |
| Canvys | 6,175 | 28.2% | 5,188 | 23.2% |
| Total | $24,392 | 30.2% | $23,186 | 29.5% |

### Electron Device Group

Net sales for EDG were $28.0 million, down 2.2%, during the second quarter of fiscal 2012 compared to $28.7 million during the second quarter of fiscal 2011. The decrease in net sales is primarily due to a slowdown in the semiconductor fabrication equipment sector as well as declines in both the textile and broadcast industries. Gross margin as a percentage of net sales decreased to 30.5% during the second quarter of fiscal 2012, compared to 31.2% during the second quarter of fiscal 2011 reflecting the lower-margin business under terms of a strategic distribution agreement in addition to a shift in sales mix between product lines and geographic regions.

Net sales for EDG were $58.8 million, up 4.6%, during the first six months of fiscal 2012 compared to $56.1 million during the first six months of fiscal 2011. The increase in net sales is primarily due to sales growth for our industrial tube products, due to a strategic distribution agreement, and an increase in our sales to end users globally. Gross margin as a percentage of net sales decreased to 31.0% during the first six months of fiscal 2012, compared to 32.1% during the first six months of fiscal 2011 reflecting the lower-margin business under terms of a strategic distribution agreement in addition to a shift in sales mix between product lines and geographic regions.

### Canvys

Net sales for Canvys were $11.1 million, down 9.8%, during the second quarter of fiscal 2012 compared to $12.3 million during the second quarter of fiscal 2011. The decrease in net sales is primarily due to a decline in demand from our European OEM customers. Gross margin as a percentage of net sales for the second quarter of fiscal 2012 increased to 28.3%, compared to 23.1% in the prior year’s quarter. The increase in gross margin was due to continued growth and focus on the more profitable OEM business in both North America and Europe, in addition to a decline in inbound freight costs during the second quarter of fiscal 2012, compared to the second quarter of fiscal 2011.

Net sales for Canvys were $21.9 million, down 2.0%, during the first six months of fiscal 2012 compared to $22.3 million during the first six months of fiscal 2011. The decrease in net sales is primarily due to a decline in demand from our European OEM customers. Gross margin as a percentage of net sales for the first six months of fiscal 2012 increased to 28.2%, compared to 23.2% in the prior year’s first six months. The increase in gross margin was due to continued growth and focus on the more profitable OEM business in both North America and Europe, in addition to a decline in inbound freight costs during the first six months of fiscal 2012, compared to the first six months of fiscal 2011.

### Selling, General, and Administrative Expenses

Selling, general and administrative expenses (“SG&A”) were $10.0 million for the second quarter of fiscal 2012 compared to $11.2 million during the second quarter of fiscal 2011. The $10.0 million and $11.2 million during the second quarter of fiscal 2012 and fiscal 2011, respectively, reflect the SG&A from our continuing operations. The $1.2 million decrease includes a $0.2 million reduction of SG&A for Canvys and a $1.0 million reduction of support function costs. SG&A for EDG remained relatively flat during the second quarter of fiscal 2012 compared to fiscal 2011.

Selling, general and administrative expenses (“SG&A”) were $20.7 million for the first six months of fiscal 2012 compared to $21.7 million during the first six months of fiscal 2011. The $20.7 million and $21.7 million during the first six months of fiscal 2012 and fiscal 2011, respectively, reflect the SG&A from our continuing operations. The $1.0 million decrease in SG&A includes a $1.3 million reduction of support function costs, offset by a $0.3 million increase in SG&A for EDG. SG&A for Canvys remained relatively flat during the first six months of fiscal 2012 compared to fiscal 2011.

### Other (Income) Expense

Other (income) expense was $0.7 million of income during the second quarter of fiscal 2012, as compared to $0.2 million of expense during the second quarter of fiscal 2011. Other (income) expense included a foreign exchange gain of $0.5 million during the second quarter of fiscal 2012, as compared to a foreign exchange loss of $0.2 million during the second quarter of fiscal 2011. Our foreign exchange gains and losses are primarily due to the translation of our U.S. dollars we hold in non-U.S. entities. We currently do not utilize derivative instruments to manage our exposure to foreign currency. The second quarter of fiscal 2012 also included $0.3 million of investment/interest income, while the second quarter of fiscal 2011 included interest expense of less than $0.1 million.

Other (income) expense was $0.4 million of income during the first six months of fiscal 2012, as compared to $0.4 million of expense during the first six months of fiscal 2011. Other (income) expense included a foreign exchange loss of $0.3 million during the first six months of fiscal 2012, as compared to a foreign exchange loss of $0.3 million during the first six months of fiscal 2011. Our foreign exchange gains and losses are primarily due to the translation of our U.S. dollars we hold in non-U.S. entities. We currently do not utilize derivative instruments to manage our exposure to foreign currency. The first six months of fiscal 2012 also included $0.6 million of investment/interest income, while the first six months of fiscal 2011 included interest expense of $0.1 million.

### Income Tax Provision

The effective income tax rate from continuing operations during the second quarter and first six months of fiscal 2012 was 34.0% and 34.7%, respectively, as compared to a tax rate of 61.6% and 39.7% for the second quarter and first six months of the fiscal 2011, respectively.

The difference between the effective tax rate as compared to the U.S. federal statutory rate of 34.0% and 35.0% during the second quarter of fiscal 2012 and fiscal 2011 resulted from our geographical distribution of taxable income or losses and the apportionment of income to various states. There were no changes in judgment during the second quarter regarding the beginning-of-year valuation allowance which would require a benefit to be excluded from the annual effective tax rate and allocated to the interim period.

In the normal course of business, we are subject to examination by taxing authorities throughout the world. We are no longer subject to either U.S. federal, state, or local tax examinations by tax authorities for years prior to fiscal 2004. Currently, we are under federal audit in the U.S. for fiscal years 2009 and 2010. Our primary foreign tax jurisdictions are China, Japan, Germany, Singapore, and the Netherlands. We have tax years open in Singapore beginning in fiscal 2004; in Japan beginning in fiscal 2005, the Netherlands and Germany beginning in fiscal 2006; and in China beginning in calendar year 2005.

As of December 3, 2011, $37.5 million of cumulative positive earnings of some of our foreign subsidiaries are still considered permanently reinvested pursuant to Accounting Standards Codification (“ASC”) 740-30, *Income Taxes—Other Considerations or Special Areas*. It is not practical to determine what, if any, tax liability might exist if such earnings were to be repatriated.

As of December 3, 2011, our worldwide liability for uncertain tax positions related to continuing operations, excluding interest and penalties, was $0.5 million as compared to $0.5 million as of May 28, 2011. We record penalties and interest relating to uncertain tax positions in the income tax expense line item within the unaudited consolidated statements of income and comprehensive income (loss).

It is reasonably possible that there will be a change in the unrecognized tax benefits related to continuing operations, excluding interest and penalties, in the range of $0 to approximately $0.1 million due to the expiration of various statutes of limitations within the next 12 months.

### Discontinued Operations

### Arrow Transaction

On March 1, 2011, we completed the sale of the assets primarily used or held for use in, and certain liabilities of, our RF, Wireless and Power Division (“RFPD”), as well as certain other Company assets, including our information technology assets, to Arrow Electronics, Inc. (“Arrow”) in exchange for $238.8 million, which included an estimated pre-closing working capital adjustment of approximately $27.0 million (“the Transaction.”) The final purchase price is subject to a post-closing working capital adjustment.

On June 29, 2011, we received notification from Arrow seeking a post-closing working capital adjustment, which would reduce the purchase price by approximately $4.2 million. We recorded the working capital adjustment of $4.2 million in our results from discontinued operations during our fourth quarter of fiscal 2011. During the first quarter of fiscal 2012, we agreed to approximately $3.9 million of the proposed working capital adjustment and adjusted our results from discontinued operations during the first quarter. During the second quarter of fiscal 2012, we paid Arrow $3.9 million to settle the agreed upon working capital adjustment.

### Financial Summary – Discontinued Operations

Summary financial results for the first three and six months ended December 3, 2011, and November 27, 2010, are presented in the following table (*in thousands):*

|  | Three Months Dec 3, 2011 | Nov 27, 2010 | Six Months Dec 3, 2011 | Nov 27, 2010 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $816 | $108,786 | $1,691 | $208,420 |
| Gross profit (loss) | (105) | 23,120 | (374) | 44,320 |
| Selling, general, and administrative expenses | 54 | 15,014 | (422) | 27,764 |
| Interest expense, net | — | 101 | — | 268 |
| Purchase price adjustment | (25) | — | (292) | — |
| Income tax provision (benefit) | 665 | 714 | (1,463) | 1,074 |
| Income (loss) from discontinued operations, net of tax | $(799) | $7,291 | $1,803 | $15,214 |

Net sales and gross profit (loss) for the three and six months ended December 3, 2011, reflect our financial results relating to the Manufacturing Agreement with Arrow that we entered into in connection with the Transaction. Pursuant to the three-year agreement, we agreed to continue to manufacture certain RFPD products for Arrow. Selling, general, and administrative expenses for the six months ended December 3, 2011, reflect a benefit of $0.4 million for adjustments recorded due to changes in our estimates related to liabilities for our discontinued operations. During the first quarter of fiscal 2012, in connection with an examination by the Internal Revenue Service, we reduced our deferred tax liability by $2.1 million related to our un-repatriated foreign earnings based on a determination of the amount of earnings and profits remaining in certain foreign subsidiaries after the Arrow transaction. During the second quarter of fiscal 2012, we recorded approximately $0.8 million of additional tax provision which represents return to provision adjustments and other tax adjustments.

In accordance with ASC 205-20, *Presentation of Financial Statements—Discontinued Operations*, the allocation of interest expense to discontinued operations of other consolidated interest that is not directly attributable to, or related to, other operations of the entity is permitted but not required. The consolidated interest that cannot be attributable to other operations of the entity is allocated based on the ratio of net assets to be sold or discontinued to the total consolidated net assets. We appropriately allocated approximately $0.1 million and $0.3 million of interest expense to discontinued operations for the three and six months ended November 27, 2010, respectively, using the ratio of net assets that we sold or that became discontinued to total assets.

Assets and liabilities classified as discontinued operations on our unaudited consolidated balance sheets as of December 3, 2011, and May 28, 2011, include the following (*in thousands):*

|  | Dec 3, 2011 | May 28, 2011 |
| --- | ---: | ---: |
| Accounts receivable | $— | $2,356 |
| Inventories | 1,143 | 1,152 |
| Prepaid expenses and other assets | 126 | 110 |
| Current deferred income taxes | 400 | 400 |
| **Discontinued operations - Assets** | **$1,669** | **$4,018** |
| Accrued liabilities - current (1) | $4,881 | $15,897 |
| Long-term income tax liabilities - non-current | 1,572 | 1,622 |
| **Discontinued operations - Liabilities** | **$6,453** | **$17,519** |

*(1) Included in accrued liabilities as of December 3, 2011, is a payable to Arrow for cash collections of $2.2 million, a payable due to Arrow of $0.4 million, $0.9 million of other accrued liabilities, including severance, and $2.1 million related to the tax error, offset by a receivable due to us from Arrow for transition* services of $0.7 million.

In accordance with ASC 230, *Statement of Cash Flows,* entities are permitted but not required to separately disclose, either in the statement of cash flows or footnotes to the financial statements, cash flows pertaining to discontinued operations.

Entities that do not present separate operating cash flows information related to discontinued operations must do so consistently for all periods presented, which may include periods long after the sale or liquidation of the operation. We currently do not have cash balances that were specific to RFPD and as a result, we believe that it is appropriate not to present separate cash flows from discontinued operations on our statement of cash flows.

### Net Income and Per Share Data

Net income during the second quarter of fiscal 2012 was $0.8 million, or $0.04 per diluted common share and $0.05 per Class B diluted common share, as compared to net income of $7.5 million during the second quarter of fiscal 2011, or $0.41 per diluted common share and $0.38 per Class B diluted common share.

Net income during the first six months of fiscal 2012 was $4.5 million, or $0.25 per diluted common share and $0.24 per Class B diluted common share, as compared to net income of $15.8 million during the first six months of fiscal 2011, or $0.87 per diluted common share and $0.80 per Class B diluted common share.

### LIQUIDITY, FINANCIAL POSITION, AND CAPITAL RESOURCES

Our growth and cash needs have been primarily financed through income from operations. Cash and cash equivalents for the second quarter ended December 3, 2011, were $25.2 million. In addition, CD’s and time deposits classified as short-term investments were $136.1 million and long-term investments were $15.0 million. Cash and investments at December 3, 2011, consisted of $105.1 million in North America, $19.7 million in Europe, $0.8 million in Latin America, and $50.7 million in Asia/Pacific. At May 28, 2011, cash and cash equivalents were $171.0 million. CD’s and time deposits classified as short-term investments were $52.1 million and long-term investments were $16.3 million. Cash and investments at May 28, 2011, consisted of $157.1 million in North America, $36.6 million in Europe, $1.0 million in Latin America, and $44.7 million in Asia/Pacific. While net income will significantly decline as a result of the Transaction, our working capital investment and capital spending requirements will also significantly decline.

### Cash Flows from Discontinued Operations

In accordance with ASC 230, *Statement of Cash Flows,* entities are permitted but not required to separately disclose, either in the statement of cash flows or footnotes to the financial statements, cash flows pertaining to discontinued operations. Entities that do not present separate operating cash flows information related to discontinued operations must do so consistently for all periods presented, which may include periods long after the sale or liquidation of the operation. We currently do not have cash balances that are specific to RFPD and as a result, we believe that the appropriate presentation would be to not separate cash flows from discontinued operations on our statement of cash flows.

### Cash Flows from Operating Activities

Cash used in operating activities, including our discontinued operations, during the first six months of fiscal 2012 was $47.0 million. The $47.0 million of cash used in operating activities primarily reflects a decrease of $42.9 million in accrued liabilities, a $7.0 million decrease in long-term tax liabilities, a $5.6 million increase in income tax receivable, and an increase of $5.6 million in inventory, offset by an $8.4 million decrease in prepaid expenses and other assets. The $42.9 million decrease in accrued liabilities, excluding the impact of foreign exchange of $0.4 million, was due primarily to our tax payment related to the sale of RFPD during the first six months of fiscal 2012. The $7.0 million decrease in long-term tax liabilities, excluding the impact of foreign exchange of less than $0.1 million, relates primarily to estimated tax payments for the fiscal 2012 tax returns. The $5.6 million in income tax receivable relates to an overpayment in our estimated tax during the first six months of fiscal 2012. The $5.6 million in inventory, excluding the impact of foreign exchange of $0.1 million, was due primarily to increased purchasing to support future sales growth. The $8.4 million decrease in prepaid expenses and other assets, excluding the impact of foreign exchange of less than $0.1 million, was due primarily to the final payment received of $4.2 million from Arrow for the sale of RFPD and a $4.1 million decrease of discontinued assets.

Cash provided by operating activities, including our discontinued operations, during the first six months of fiscal 2011 was $3.2 million. The $3.2 million of cash provided by operating activities includes increases in accounts receivable and inventory, partially offset by increases in accounts payable and accrued liabilities. The increase in accounts receivable of $11.2 million, excluding the impact of foreign exchange of $3.5 million, was due primarily to increased sales volume during the first six months of fiscal 2011. The increase in inventory of $10.0 million, excluding the impact of foreign currency exchange of $0.6 million, during the first six months of fiscal 2011, was due primarily to increased purchasing to support future sales growth. The increase in accrued liabilities of $2.0 million, excluding the impact of foreign currency exchange of

$0.6 million, during the first six months of fiscal 2011, was due primarily to the timing of payments. The increase in accounts payable balances of $6.7 million, excluding the impact of foreign currency exchange of $0.5 million, during the first six months of fiscal 2011, was due primarily to the timing of payments as well as the increase in inventory purchases.

### Cash Flows from Investing Activities

Net cash used in investing activities, including our discontinued operations, of $85.1 million during the first six months of fiscal 2012 was due primarily to the purchase of $82.8 million in time deposits and CDs, and $2.3 million paid for the acquisition of Powerlink. Net cash used in investing activities, including our discontinued operations, of $0.5 million during the first six months of fiscal 2011 was due primarily to capital expenditures.

### Cash Flows from Financing Activities

Net cash used in financing activities, including discontinued operations, of $13.2 million during the first six months of fiscal 2012 was due primarily to $11.9 million related to the repurchase of common stock and $1.7 million in cash dividends paid, partially offset by $0.4 million in proceeds from the issuance of common stock. Net cash provided by financing activities, including discontinued operations, of $0.6 million during the first six months of fiscal 2011 was due primarily to borrowings on our credit agreement and proceeds from the issuance of common stock, partially offset by the redemption of our 7 3/4% Notes and cash dividends paid.

Dividend payments for the first six months of fiscal 2012 were approximately $1.7 million. All future payments of dividends are at the discretion of the Board of Directors. Dividend payments will depend on earnings, capital requirements, operating conditions, and such other factors that the Board may deem relevant.

We believe that the existing sources of liquidity, including current cash, will provide sufficient resources to meet known capital requirements and working capital needs for the fiscal year ending June 2, 2012.

### UPDATES TO CRITICAL ACCOUNTING POLICIES AND ESTIMATES

**Inventories:** Our worldwide inventories are stated at the lower of cost or market, generally using a weighted-average cost method. Our inventories included $31.9 million of finished goods and $3.4 million of raw materials and work-in-progress as of December 3, 2011, compared to approximately $28.0 million of finished goods and $2.9 million of raw materials and work-in-progress as of May 28, 2011.

At this time, we do not anticipate any material risks or uncertainties related to possible inventory write-downs for the remainder of our fiscal 2012, ending June 2, 2012.

**Revenue Recognition:** Our product sales are recognized as revenue upon shipment, when title passes to the customer, when delivery has occurred or services have been rendered, and when collectability is reasonably assured. We also record estimated discounts and returns based on our historical experience. Our products are often manufactured to meet the specific design needs of our customers’ applications. Our engineers work closely with customers to ensure that our products will meet their needs. Our customers are under no obligation to compensate us for designing the products we sell.

In a limited number of cases, we provide and bill our customers with non-product related services, such as testing, calibration, non-recurring engineering, tooling, and installation services. We have concluded that the service revenue should not be considered a separate unit of accounting from the product sale as we have determined there is no objective and reliable evidence of the fair value of the undelivered items.

We have also concluded that, in the limited cases where remaining obligations exist after delivery of the product, the obligation relative to the unit of accounting is inconsequential or perfunctory. This conclusion was reached based on the following facts: the timing of any remaining obligation is agreed upon with the customer, which in most cases, is performed immediately after the delivery of the product; the cost and time involved to complete the remaining obligation is minimal, and the costs and time do not vary significantly; we have a demonstrated history of completing the remaining obligations timely; and finally, failure to complete the remaining obligation does not enable the customer to receive a full or partial refund of the product or the service.

**Discontinued Operations:** In accordance with ASC 205-20, *Presentation of Financial Statements- Discontinued Operations (“*ASC 205-20”), we reported the financial results of RFPD as a discontinued operation. Refer to Note 5 “Discontinued Operations” of our notes to our unaudited consolidated financial statements for additional discussion on the sale of RFPD.

**Loss Contingencies:** We accrue a liability for loss contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. If we determine that there is at least a reasonable possibility that a loss may have been incurred, we will include a disclosure describing the contingency.

**New Accounting Pronouncements:** During September 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-08, *Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment, (“*ASU Update No. 2011-08). ASU Update No. 2011-08 is intended to simplify how entities, both public and nonpublic, test goodwill for impairment. ASU Update No. 2011-08 permits an entity to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350, *Intangibles - Goodwill and Other.* The more-likely-than-not threshold is defined as having a likelihood of more than 50%. ASU Update No. 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment test performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made for issuance. We will be adopting ASU Update No. 2011-08 during our fourth quarter of fiscal 2012 and do not expect the adoption to have a material impact to our financial results.

During November 2011, the FASB issued ASU No. 2011-11, *Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities,* (ASU Update No. 2011-11). ASU Update No. 2011-11, requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Offsetting, otherwise known as netting, is the presentation of assets and liabilities as a single net amount in the statement of financial position (balance sheet). An entity is required to apply the amendments for annual reporting periods beginning on or after

January 1, 2013, and interim periods within those annual periods. We will be adopting ASU Update No. 2011-11during our first quarter of fiscal 2014.

## Market risk

As filed, 938 characters.

### Risk Management and Market Sensitive Financial Instruments

We are exposed to many different market risks with the various industries we serve. The primary financial risk we are exposed to is foreign currency exchange, as certain operations, assets, and liabilities of ours are denominated in foreign currencies. We manage these risks through normal operating and financing activities.

The interpretation and analysis of these disclosures should not be considered in isolation since such variances in exchange rates would likely influence other economic factors. Such factors, which are not readily quantifiable, would likely also affect our operations. Additional disclosure regarding various market risks are set forth in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended May 28, 2011, and in our Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on August 23, 2011.

## Controls and procedures

As filed, 1,612 characters.

(a) Evaluation of Disclosure Controls and Procedures

Management of the Company, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 3, 2011.

Disclosure controls and procedures are intended to provide reasonable assurance that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

(b) Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the second quarter of fiscal 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 254 characters.

There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended May 28, 2011, and in our Proxy Statement on Schedule 14A filed with the Security and Exchange Commission on August 23, 2011.

Filed Jan 12, 2012.
Source: SEC EDGAR, the filing index for accession 0001193125-12-010705. Last ingested by Listed: Nov 10, 2026, 23:29 ET. No prices; not investment advice.