UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark | One) |
x | FOR ANNUAL REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 2, 2012
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-12906
(Exact name of registrant as specified in its charter)
Delaware | 36-2096643 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
40W267 Keslinger Road, P.O. Box 393, LaFox, Illinois 60147-0393 |
(Address of principal executive offices) |
Registrants telephone number, including area code: (630) 208-2200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Common stock, $0.05 Par Value | |
Name of each exchange of which registered | NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act ¨ Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer | ¨ | Accelerated Filer | x | |||
Non-Accelerated Filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
The aggregate market value of the registrants common stock held by non-affiliates of the registrant as of December 3, 2011, was approximately $167.2 million.
As of July 23, 2012, there were outstanding 12,742,748 shares of Common Stock, $.05 par value and 2,919,961 shares of Class B Common Stock, $.05 par value, which are convertible into Common Stock of the registrant on a one-for-one basis.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement for the Annual Meeting of Stockholders scheduled to be held October 9, 2012, which will be filed pursuant to Regulation 14A, are incorporated by reference in Part III of this report. Except as specifically incorporated herein by reference, the above mentioned Proxy Statement is not deemed filed as part of this report.
Page | ||||||
Item 1. |
Business | 3 | ||||
Item 1A. |
Risk Factors | 8 | ||||
Item 1B. |
Unresolved Staff Comments | 12 | ||||
Item 2. |
Properties | 13 | ||||
Item 3. |
Legal Proceedings | 14 | ||||
Item 5. |
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 15 | ||||
Item 6. |
Selected Financial Data | 17 | ||||
Item 7. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 18 | ||||
Item 7A. |
Quantitative and Qualitative Disclosures About Market Risk | 32 | ||||
Item 8. |
Financial Statements and Supplementary Data | 33 | ||||
Item 9A. |
Controls and Procedures | 66 | ||||
Item 9B. |
Other Information | 67 | ||||
Item 10. |
Directors, Executive Officers and Corporate Governance | 68 | ||||
Item 11. |
Executive Compensation | 68 | ||||
Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 68 | ||||
Item 13. |
Certain Relationships and Related Transactions, and Director Independence | 69 | ||||
Item 14. |
Principal Accountant Fees and Services | 69 | ||||
Item 15. |
Exhibits and Financial Statement Schedules | 70 | ||||
71 | ||||||
72 |
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Forward Looking Statements
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 managements 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 this Form 10-K. 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.
General
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 components, and customized display solutions, serving customers in the alternative energy, aviation, broadcast, communications, industrial, marine, medical, military, scientific, and semiconductor 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 electron tubes and related components, microwave generators, subsystems used in semiconductor manufacturing, and visual technology solutions. These products are used to control, switch or amplify electrical power signals, or are 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.
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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. Powerlink generated revenues of approximately $1.5 million during the last nine months of fiscal 2012. This acquisition positions us to provide cost-effective service of microwave and power grid tube equipment for communications, industrial, military and medical users around the world.
The consolidated balance sheets for the fiscal year ended May 28, 2011, and our consolidated statements of comprehensive income for the years ended May 28, 2011, and May 29, 2010, have been restated to reflect the Transaction. Refer to Note 5 Discontinued Operations of our notes to our consolidated financial statements for additional discussion on the sale of RFPD.
Our financial statements for the fiscal year ended May 28, 2011, have been restated to reflect a misstatement. Refer to Note 3 Restatement of our notes to our consolidated financial statements for additional discussion on this misstatement.
Our fiscal year 2012 began on May 29, 2011, and ended on June 2, 2012. Unless otherwise noted, all references in this document to a particular year shall mean our fiscal year.
We have two operating segments, which we define as follows:
Electron Device Group (EDG) provides engineered solutions and distributes electronic components to customers in alternative energy, aviation, broadcast, communications, industrial, marine, medical, military, scientific, and semiconductor markets. EDG focuses on various applications including broadcast transmission, CO2 laser cutting, diagnostic imaging, dielectric and induction heating, high energy transfer, high voltage switching, plasma, power conversion, radar, and radiation oncology. EDG also offers its customers technical services for both microwave and industrial equipment.
Canvys provides global customized display solutions serving the corporate enterprise, financial, 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. |
Selected financial data attributable to each segment and geographic region for fiscal 2012, 2011, and 2010 is set forth in Note 13 Segment and Geographic Information of the notes to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.
Electron Device Group
EDG provides engineered solutions and distributes electronic components to customers in alternative energy, aviation, broadcast, communications, industrial, marine, medical, military, scientific, and semiconductor markets. EDG focuses on various applications including broadcast transmission, CO2 laser cutting, diagnostic imaging, dielectric and induction heating, high energy transfer, high voltage switching, plasma, power conversion, radar, and radiation oncology. EDG also offers its customers technical services for both microwave and industrial equipment.
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We represent leading manufacturers of electron tubes and semiconductor manufacturing equipment used in industrial power applications. Among the suppliers we support are Amperex, CPI, Draloric, Eimac, General Electric, Hitachi, Jennings, L3, National, NJRC, Thales, and Toshiba.
Canvys
Canvys is a global provider of integrated display products, workstations, and value-add services to the healthcare, and medical and industrial original equipment manufacturers (OEM) markets. Our engineers design, manufacture, source, and support a full spectrum of solutions to match the needs of our customers. We offer custom display solutions that include touch screens, protective panels, custom enclosures, specialized cabinet finishes, and application specific software packages. Our volume commitments are much lower than those of the large display manufacturers making us the ideal choice for companies with very specific design requirements. We partner with both private label manufacturing companies and leading branded hardware vendors to offer the highest quality liquid crystal displays, mounting devices, and customized computing platforms.
As a longtime provider of healthcare solutions to hospitals and medical clinics, we specialize in creating comprehensive solutions for diagnostic and clinical review, 3-D and post processing, surgical suites and modality-specific applications. Our solutions meet certifications and calibration standards for patient monitoring, bio-medical displays, ultrasound, cardiac imaging, picture archiving, and communications systems. We offer our PACS and patient monitoring displays under our own brand, Image Systems.
We have long-standing relationships with key component and finished goods manufacturers including 3M, HP, IBM, Intel, LG, NEC Displays, Sharp Electronics, Samsung, and WIDE Corporation. We believe our distributor relationships, combined with our engineering design and manufacturing capabilities and private label partnerships, allow us to maintain a well-balanced and technologically advanced offering of customer specific display solutions.
Products and Suppliers
Our inventory levels reflect our commitment to maintain an inventory of a broad range of products for customers who are buying product for replacement of components used in critical equipment. In many cases, the market for our products is characterized by rapid change and obsolescence as a result of the introduction of new technologies. As of June 2, 2012, on average, we hold 109 days of inventory in the normal course of operations. This level of inventory reflects the fact that we also sell a number of products representing trailing edge technology. While the market for these trailing edge technology products is declining, we are increasing our market share. As manufacturers for these products exit the business, we sometimes purchase a substantial portion of their remaining inventory.
We have distribution agreements with many of our suppliers; however, a number of these agreements provide for nonexclusive distribution rights and often include territorial restrictions that limit the countries in which we can distribute their products. The agreements are subject to periodic renewal, and some contain provisions permitting termination by either party, without cause, upon relatively short notice. Although some of these agreements allow us to return inventory periodically, others do not, in which case we may have obsolete inventory that we cannot return to the supplier.
Our suppliers generally warrant the products we distribute and allow return of defective products, including those returned to us by our customers. Except for certain displays, we generally do not provide additional warranties on the products we sell. For information regarding the warranty reserves, see Note 4 Significant Accounting Policies of the notes to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.
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In addition to third party products, we sell proprietary products principally under certain trade names we own including: Amperex®, Cetron®, Image Systems®, and National®. Our proprietary products include thyratrons and rectifiers, power tubes, ignitrons, magnetrons, phototubes, microwave generators, large screen display monitors, and liquid crystal display monitors. The materials used in the manufacturing process consist of glass bulbs and tubing, nickel, stainless steel and other metals, plastic and metal bases, ceramics, and a wide variety of fabricated metal components. These materials are generally readily available, but some components may require long lead times for production, and some materials are subject to shortages or price fluctuations based on supply and demand.
Sales and Product Management
As of the end of fiscal 2012, we employed 154 sales and product management personnel worldwide. In addition, we have authorized representatives, who are not our employees, selling our products, primarily in regions where we do not have a direct sales presence.
We offer various credit terms to qualifying customers as well as prepayment, credit card, and cash on delivery terms. We establish credit limits for each sale prior to selling product to our customers and routinely review delinquent and aging accounts.
Distribution
We maintain approximately 110,700 part numbers in our product inventory database and we estimate that more than 80% of orders received by 6:00 p.m. local time are shipped complete the same day if product is in stock. Customers can access our products on our web site, www.rell.com, through electronic data interchange, or by telephone. Customer orders are processed by our regional sales offices and supported primarily by one of our distribution facilities in LaFox, Illinois; Amsterdam, Netherlands; Marlborough, Massachusetts; Plymouth, Minnesota; Donaueschingen, Germany; or Singapore, Singapore. We also have satellite warehouses in Sao Paulo, Brazil, and Shenghai, China. Our data processing network provides on-line, real-time interconnection of all sales offices and central distribution operations, 24 hours per day, seven days per week. Information on stock availability, cross-reference information, customers, and market analyses are obtainable throughout the entire distribution network.
International Sales
During fiscal 2012, approximately 53.5% of our sales were made outside the U.S. We continue to pursue new international sales to further expand our geographic reach.
Employees
As of June 2, 2012, we employed 324 individuals, of which 310 were full-time and 14 were part-time. Of these, 191 were located in the United States and 133 were located internationally. The worldwide employee base included 154 in sales and product management, 24 in distribution support, 84 in administrative positions, and 62 in value-add and product manufacturing. All of our employees are non-union, and we consider our relationships with our employees to be good.
Website Access to SEC Reports
We maintain an Internet website at www.rell.com. Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 are accessible through our
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website, free of charge, as soon as reasonably practicable after these reports are filed electronically with the Securities and Exchange Commission. Interactive Data Files pursuant to Rule 405 of Regulation S-T, of these filing dates, formatted in Extensible Business Reporting Language (XBRL) are accessible as well. To access these reports, go to our website at www.rell.com. The foregoing information regarding our website is provided for convenience and the content of our website is not deemed to be incorporated by reference in this report filed with the Securities and Exchange Commission.
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ITEM 1A. | Risk Factors |
Investors should consider carefully the following risk factors in addition to the other information included and incorporated by reference in this Annual Report on Form 10-K. While we believe we have identified the key risk factors affecting our business, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely affect our results of operations.
We intend to grow our sales and reduce costs to improve our profitability.
Our fixed costs are high relative to the size of our operations. Since the sale of the RFPD division in March 2011, we have focused on re-aligning our cost structure to fit our remaining businesses. We have significantly reduced our expenses during Fiscal 2012; and therefore, further expense reduction opportunities may be limited. In addition, cost reduction objectives could have the effect of reducing our talent pool and available resources whether or not achieved, and, consequently, could affect our ability to serve customers and to hire and retain key personnel. Our long-term objective is to double the size of our business over the next three to five years through acquisitions and internal growth initiatives, which will allow us to leverage our support function cost structure. To the extent we do not achieve our growth objectives, it will be difficult to reduce our fixed cost structure to align with the size of our operations
We have historically incurred significant charges for inventory obsolescence, and may incur similar charges in the future.
We maintain significant inventories in an effort to ensure that customers have a reliable source of supply. The market for many of our products is characterized by rapid change resulting from the development of new technologies, evolving industry standards, frequent new product introductions by some of our customers and changing end-user demand, which can contribute to the decline in value or obsolescence of our inventory. We do not have many long-term supply contracts with our customers. If we fail to anticipate the changing needs of our customers or we fail to accurately forecast customer demand, our customers may not continue to place orders with us, and we may accumulate significant inventories of products which we will be unable to sell or return to our vendors. This may result in a significant decline in the value of our inventory.
We face competitive pressure in the markets we serve.
We face many competitors, both global and local, in the markets we serve. Not only do we compete with other distributors, we also compete for customers with many of our own suppliers. Our overall competitive position depends on a number of factors including price, engineering capability, vendor representation, product diversity, lead times and the level of customer service. Our competition includes hundreds of electronic component distributors of various sizes, locations, and market focuses, as well as original equipment manufacturers and refurbishers. Some of our competitors have greater resources and broader name recognition than we do. As a result, these competitors may be able to better withstand changing conditions within our markets and throughout the economy as a whole. Increased competition may result in price reductions, reduced margins, or a loss of market share, any of which could materially and adversely affect our business, operating results, and financial condition.
EDG is dependent on a limited number of vendors to supply it with essential products.
EDGs principal product is vacuum tubes. These tubes and certain other products supplied by EDG are currently produced by a relatively small number of manufacturers. One of EDGs suppliers represents 18% of our total sales volume. Our success depends, in large part, on maintaining current vendor relationships and developing new relationships. We believe that some vendors supplying products to EDG product lines are consolidating their distribution relationships as a result of the declining market for vacuum tubes. To the extent that our significant suppliers reduce the volume of product they sell through distribution and are unwilling to continue to do business with us, or extend lead times, or limiting supplies due to capacity constraints, or other factors, there could be a material adverse effect on our business.
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Economic, political, and other risks associated with international sales and operations could adversely affect our results of operations.
Because we sell and source our products worldwide, our business is subject to risks associated with doing business internationally. We anticipate that revenue from international operations will continue to represent a majority of our total revenue. In addition, many of our employees, suppliers, and warehouse facilities are located outside the United States. Accordingly, our future results could be harmed by a variety of factors including:
| changes in political or economic conditions; |
| trade protection measures and import or export licensing requirements; |
| changes in tax laws; |
| difficulty in staffing and managing global operations; |
| differing labor regulations; |
| difficulty collecting accounts receivable; |
| unexpected changes in regulatory requirements; and |
| geopolitical turmoil, including terrorism, war, or natural disasters, may negatively affect our results from operations |
Our products may be found to be defective or our services performed may result in equipment or product damage and, as a result, warranty and/or product liability claims may be asserted against us.
We sell many of our components at prices that are significantly lower than the cost of the equipment or other goods in which they are incorporated. Additionally, we offer installation and repair services in conjunction with the selling of our components. Since a defect or failure in a product or service could give rise to failures in the end products that incorporate them, we may face claims for damages that are disproportionate to the revenues and profits we receive from the components involved in the claims. While we typically have provisions in our agreements with our suppliers that hold the supplier accountable for defective products, and we and our suppliers generally exclude consequential damages in our standard terms and conditions, our ability to avoid such liabilities may be limited as a result of various factors, including the inability to exclude such damages due to the laws of some of the countries where we do business. Our business could be materially adversely affected as a result of a significant quality or performance issue in the components sold by us if we are required to pay for the damages that result. Although we have product liability insurance, such insurance is limited in coverage and amount.
A single stockholder has voting control over us.
As of July 22, 2012, Edward J. Richardson, our Chairman, Chief Executive Officer and President, beneficially owned approximately 99% of the outstanding shares of our Class B common stock, representing approximately 69% of the voting power of the outstanding common stock. This share ownership permits Mr. Richardson to exert control over the outcome of most stockholder votes, including votes concerning the election of directors, by-law amendments, possible mergers, corporate control contests, and other significant corporate transactions.
Our non-U.S. sales represent a significant portion of our revenues, and consequently, we are exposed to risks associated with operating internationally.
Because a significant portion of our business is conducted outside the U.S., we face exposure to fluctuations in foreign currency exchange rates, which may harm our results of operations. Price increases caused by currency exchange rate fluctuations may make our products less competitive or have an adverse effect on our margins. Our international revenues and expenses generally are derived from sales and operations in currencies other than the U.S. dollar. Accordingly, when the U.S. dollar strengthens in relation to the currencies of the countries in which we sell our products, our U.S. dollar reported net revenue and income will decrease. We currently do not engage in any currency hedging transactions. We cannot predict whether foreign currency exchange risks inherent in doing business in foreign countries will have a material adverse effect on our operations and financial results in the future.
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Substantial defaults by our customers on our accounts receivable or the loss of significant customers could have a significant negative impact on our business.
A significant portion of our working capital consists of accounts receivable from customers. If customers with a significant accounts receivable balance were to become insolvent or otherwise unable to pay for products and services, or were to become unwilling or unable to make payments in a timely manner, our business, results of operations, financial condition, or liquidity could be adversely affected.
Future acquisitions are subject to integration risks and other risks.
As part of our growth strategy, we intend to acquire additional businesses or assets. Acquisitions are accompanied by risks, such as potential exposure to unknown liabilities of acquired companies and the possible loss of key employees and customers of the acquired business. In addition, we may not obtain the expected benefits or cost savings from acquisitions. Acquisitions are subject to risks associated with financing the acquisition and integrating the operations and personnel of the acquired businesses or assets. If any of these risks materialize, they may result in disruptions to our business and the diversion of management time and attention, which could increase the costs of operating our existing or acquired businesses or negate the expected benefits of the acquisitions.
If we fail to maintain an effective system of internal controls or discover material weaknesses in our internal controls over financial reporting, we may not be able to detect fraud or report our financial results accurately or timely.
An effective internal control environment is necessary for us to produce reliable financial reports and is an important part of our effort to prevent financial fraud. We are required to periodically evaluate the effectiveness of the design and operation of our internal controls over financial reporting. Based on these evaluations, we may conclude that enhancements, modifications or changes to internal controls are necessary or desirable. While management evaluates the effectiveness of our internal controls on a regular basis, these controls may not always be effective. There are inherent limitations on the effectiveness of internal controls, including fraud, collusion, management override, and failure in human judgment. In addition, control procedures are designed to reduce rather than eliminate business risks.
If we fail to maintain an effective system of internal controls, or if management or our independent registered public accounting firm discovers material weaknesses in our internal controls, we may be unable to produce reliable financial reports or prevent fraud. In addition, we may be subject to sanctions or investigation by regulatory authorities, such as the Securities and Exchange Commission or NASDAQ Global Select Market. Any such actions could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.
We may be subject to intellectual property rights claims, which are costly to defend, could require payment of damages or licensing fees, and could limit our ability to use certain technologies in the future.
Substantial litigation and threats of litigation regarding intellectual property rights exist in the display systems and electronics industries. From time to time, third parties (including certain companies in the business of acquiring patents not for the purpose of developing technology but with the intention of aggressively seeking licensing revenue from purported infringers) may assert patent and/or other intellectual property rights to technologies that are important to our business. In any dispute involving products that we have sold, our customers could also become the target of litigation. We are obligated in many instances to indemnify and defend our customers if the products we sell are alleged to infringe any third partys intellectual property rights. In some cases, depending on the nature of the claim, we may be able to seek indemnification from our suppliers for our self and our customers against such claims, but there is no assurance that we will be successful in obtaining such indemnification or that we are fully protected against such claims. Any infringement claim brought against us, regardless of the duration, outcome or size of damage award, could:
| result in substantial cost to us; |
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| divert managements attention and resources; |
| be time consuming to defend; |
| result in substantial damage awards; |
| cause product shipment delays; or |
| require us to seek to enter into royalty or other licensing agreements. |
Additionally, if an infringement claim is successful we may be required to pay damages or seek royalty or license arrangements, which may not be available on commercially reasonable terms. The payment of any such damages or royalties may significantly increase our operating expenses and harm our operating results and financial condition. Also, royalty or license arrangements may not be available at all. We may have to stop selling certain products or using technologies, which could affect our ability to compete effectively.
Potential lawsuits, with or without merit, may divert our managements attention, and we may incur significant expenses in our defense. In addition, we may be required to pay damage awards or settlements, become subject to injunctions or other equitable remedies, or determine to abandon certain lines of business, that may cause a material adverse effect on our results of operations, financial position, and cash flows.
We depend on key management and employees, the loss of whom may prevent us from implementing our business plans, limit our profitability and decrease the value of our common stock.
We are dependent on the talent and resources of our key executives and employees. In particular, the success of our business depends to a great extent on Edward J. Richardson, our President, Chief Executive Officer and the Chairman of our Board of Directors. Mr. Richardson has extensive experience in the electron device industry, and his services are critical to our success. We have not obtained key man insurance with respect to Mr. Richardson or any of our executive officers. The loss of Mr. Richardson may prevent us from implementing our business plan, which may limit our profitability and decrease the value of our common stock.
If we are deemed to be an investment company, we will be required to meet burdensome compliance requirements and restrictions on our activities.
As a result of the closing of the Transaction, we have significant cash reserves. If we are deemed to be an investment company as defined under the Investment Company Act of 1940 (the Investment Company Act), the nature of our investments may be subject to various restrictions. In addition, we may be subject to burdensome compliance requirements and may have to:
| register as an investment company; |
| adopt a specific form of corporate structure; and |
| report, maintain records and adhere to voting, proxy, disclosure and other requirements. |
We do not believe that our principal activities subject us to the Investment Company Act. If we are deemed to be subject to the Investment Company Act, compliance with these additional regulatory burdens would increase our operating expenses.
As a global company, we rely heavily on information technology systems, which, if not properly functioning, could materially adversely affect our business.
Pursuant to the Acquisition Agreement with Arrow Electronics, Arrow Electronics purchased our entire IT operations, and pursuant to the Transition Services Agreement between us and Arrow, Arrow provides IT services to us consistent with those services provided to us by our IT operations prior to the
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Transaction. We rely on these information systems to process, analyze, and manage data to facilitate the purchase and distribution of our products, as well as to receive, process, bill, and ship orders on a timely basis. If the IT services provided by Arrow Electronics are not provided to us in an adequate manner, we may be unable to find an alternative means of obtaining such IT services, which could significantly impair our ability to effectively serve our customers and perform other vital company functions. Arrows obligation to provide these IT services ends on March 1, 2014 although we are currently negotiating an extension to the Agreement. We plan to migrate to a new ERP platform prior to the termination of these services. To the extent we cannot timely complete this project, our business may suffer and we may incur significant additional costs.
Economic weakness and uncertainty could adversely affect our revenues and gross margins.
Our revenues and gross profit margins depend significantly on worldwide economic conditions, the demand for our products and services and the financial condition of our customers. Economic weakness and uncertainty have in the past resulted, and may result in the future, in decreased revenues and gross profit margins. Economic weakness and uncertainty also make it more difficult for us to forecast overall supply and demand with a great deal of confidence.
Our operating results during Fiscal 2012 show that the business has experienced a decline in sales volume, and there can be no assurance that we will experience a recovery in the near future; nor can there be any assurance that such worldwide economic volatility experienced recently will not continue.
Major disruptions to our logistics capability could have a material adverse impact on our operations.
Our global logistics services are operated through specialized and centralized distribution centers. We depend on third party transportation service providers for the delivery of products to our customers. A major interruption or disruption in service at one or more of our distribution centers for any reason (such as natural disasters, pandemics, or significant disruptions of services from our third party providers) could cause cancellations or delays in a significant number of shipments to customers and, as a result, could have a severe impact on our business, operations and financial performance.
ITEM 1B. | Unresolved Staff Comments |
None.
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We own three facilities and lease 27 facilities. We own our corporate facility and largest distribution center, which is located on approximately 96 acres in LaFox, Illinois and consists of approximately 242,000 square feet of manufacturing, warehouse, and office space. We maintain geographically diverse facilities because we believe this will limit market risk and exchange rate exposure. We consider our properties to be well maintained, in sound condition and repair, and adequate for our present needs. The extent of utilization varies from property to property and from time to time during the year.
Our facility locations, their primary use, and segments served are as follows:
Location |
Leased/Owned | Use |
Segment | |||
Woodland Hills, California | Leased | Sales | EDG | |||
Farmington, Connecticut | Leased | Sales | EDG | |||
Fort Lauderdale, Florida | Leased | Sales | EDG | |||
LaFox, Illinois * | Owned | Corporate/Sales/Distribution/Manufacturing | EDG/Canvys | |||
Rockland, Massachusetts | Leased | Sales | EDG | |||
Marlborough, Massachusetts | Leased | Sales/Distribution/Manufacturing | Canvys | |||
Plymouth, Minnesota | Leased | Sales/Distribution/Manufacturing | Canvys | |||
Long Beach, New York | Leased | Sales | EDG | |||
Charlotte, North Carolina | Leased | Sales | EDG | |||
Sao Paulo, Brazil | Leased | Sales/Distribution | EDG | |||
Beijing, China | Leased | Sales | EDG | |||
Shanghai, China | Leased | Sales/Distribution | EDG | |||
Shenzhen, China | Leased | Sales | EDG | |||
Colombes, France | Leased | Sales | EDG | |||
Donaueschingen, Germany | Leased | Sales/Distribution/Manufacturing | Canvys | |||
Puchheim, Germany | Leased | Sales | EDG | |||
Noida, India | Leased | Sales | EDG | |||
Florence, Italy | Owned | Sales | EDG | |||
Milan, Italy | Leased | Sales | EDG | |||
Tokyo, Japan | Leased | Sales | EDG | |||
Mexico City, Mexico | Leased | Sales | EDG | |||
Amsterdam, Netherlands | Leased | Sales/Distribution | EDG | |||
Singapore, Singapore | Leased | Sales/Distribution | EDG | |||
Seoul, South Korea | Leased | Sales | EDG | |||
Madrid, Spain | Owned | Sales | EDG | |||
Taipei, Taiwan | Leased | Sales | EDG/Canvys | |||
Bangkok, Thailand | Leased | Sales/Distribution | EDG | |||
Hook Hampshire, United Kingdom | Leased | Sales | EDG | |||
Lincoln, United Kingdom | Leased | Sales | EDG/Canvys | |||
Ho Chi Minh City, Vietnam | Leased | Sales | EDG |
* | LaFox, Illinois is also the location of our corporate headquarters. |
13
From time to time, we or our subsidiaries, are involved in legal actions that arise in the ordinary course of our business. While the outcome of these matters cannot be predicted with certainty, we do not believe that the outcome of any current claims, will have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
14
ITEM 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Unregistered Sales of Equity Securities
None.
Share Repurchases
Period |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Dollar Amount of Shares Purchased Under the Plans or Programs |
Amounts Remaining Under the Share Repurchase Authorization |
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May 28, 2011 |
$ | 16,324,326 | ||||||||||||||||||
May 29, 2011 - July 2, 2011 |
508,500 | $ | 13.30 | 508,500 | $ | 6,761,488 | $ | 9,562,838 | ||||||||||||
July 3, 2011 - July 30, 2011 (1) |
47,100 | $ | 13.49 | 47,100 | $ | 635,576 | $ | 33,927,263 | ||||||||||||
July 31, 2011 - September 3, 2011 |
21,697 | $ | 13.52 | 21,697 | $ | 293,443 | $ | 33,633,820 | ||||||||||||
September 4, 2011 - October 1, 2011 |
199,508 | $ | 13.52 | 199,508 | $ | 2,697,791 | $ | 30,936,029 | ||||||||||||
October 2, 2011 - October 29, 2011 |
109,302 | $ | 13.40 | 109,302 | $ | 1,465,074 | $ | 29,470,955 | ||||||||||||
October 30, 2011 - December 3, 2011 |
2,976 | $ | 11.99 | 2,976 | $ | 35,696 | $ | 29,435,259 | ||||||||||||
December 4, 2011 - December 31, 2011 |
9,923 | $ | 12.01 | 9,923 | $ | 119,180 | $ | 29,316,079 | ||||||||||||
January 1, 2012 - January 28, 2012 |
21,309 | $ | 11.99 | 21,309 | $ | 255,488 | $ | 29,060,591 | ||||||||||||
January 29, 2012 - March 3, 2012 |
67,252 | $ | 12.19 | 67,252 | $ | 819,948 | $ | 28,240,643 | ||||||||||||
March 4, 2012 - March 31, 2012 |
101,966 | $ | 12.17 | 101,966 | $ | 1,240,964 | $ | 26,999,679 | ||||||||||||
April 1, 2012 - April 28, 2012 |
287,643 | $ | 12.00 | 287,643 | $ | 3,450,927 | $ | 23,548,752 | ||||||||||||
April 29, 2012 - June 2, 2012 |
524,170 | $ | 11.86 | 524,170 | $ | 6,215,671 | $ | 17,333,081 |
(1) | On July 19, 2011, the Board of Directors authorized an additional $25.0 million of share repurchases. |
Dividends
Our quarterly dividend was $0.05 per common share and $0.045 per Class B common share. Annual dividend payments for fiscal 2012 and fiscal 2011 were approximately $3.3 million and $1.9 million, respectively. 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. On July 25, 2012, the Board of Directors approved an increase to our quarterly dividend to $0.06 per common share.
Common Stock Information
Our common stock is traded on The NASDAQ Global Select Market (NASDAQ) under the trading symbol (RELL). There is no established public trading market for our Class B common stock. As of July 23, 2012, there were approximately 771 stockholders of record for the common stock and approximately 18 stockholders of record for the Class B common stock. The following table sets forth, for the periods indicated, the high and low closing sales price per share of RELL common stock as reported on the NASDAQ.
15
2012 | 2011 | |||||||||||||||
Fiscal Quarter |
High | Low | High | Low | ||||||||||||
First |
$ | 15.04 | $ | 12.83 | $ | 10.25 | $ | 8.00 | ||||||||
Second |
$ | 14.50 | $ | 11.89 | $ | 12.93 | $ | 8.73 | ||||||||
Third |
$ | 12.62 | $ | 11.99 | $ | 13.32 | $ | 10.60 | ||||||||
Fourth |
$ | 12.70 | $ | 11.50 | $ | 13.82 | $ | 12.27 |
Performance Graph
The following graph compares the performance of our common stock for the periods indicated with the performance of the NASDAQ Composite Index, and NASDAQ Electronic Components Index. The graph assumes $100 invested on the last day of our fiscal year 2007, in our common stock, the NASDAQ Composite Index, and NASDAQ Electronic Components Index. Total return indices reflect reinvestment of dividends at the closing stock prices at the date of the dividend declaration.
16
ITEM 6. Selected Financial Data
Five-Year Financial Review
This information should be read in conjunction with our consolidated financial statements, accompanying notes, and Managements
Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein.
Fiscal Year Ended (1) | ||||||||||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||||||
June 2, 2012 (4) |
May 28, 2011 (2) (4) |
May 29, 2010 (4) |
May 30, 2009 (4) |
May 31, 2008 (3)(4) |
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Statements of Income |
||||||||||||||||||||
Net sales |
$ | 157,836 | $ | 158,867 | $ | 135,372 | $ | 141,190 | $ | 192,206 | ||||||||||
Continuing Operations |
||||||||||||||||||||
Income (loss) from continuing operations before tax |
$ | 7,656 | $ | 2,450 | $ | (4,250 | ) | $ | (27,043 | ) | $ | (28,093 | ) | |||||||
Income tax provision (benefit) |
(334 | ) | 468 | (68 | ) | 600 | (732 | ) | ||||||||||||
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Income (loss) from continuing operations |
$ | 7,990 | $ | 1,982 | $ | (4,182 | ) | $ | (27,643 | ) | $ | (27,361 | ) | |||||||
Discontinued Operations |
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Income from discontinued operations |
$ | 536 | $ | 85,966 | $ | 20,277 | $ | 15,479 | $ | 18,890 | ||||||||||
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Net income (loss) |
$ | 8,526 | $ | 87,948 | $ | 16,095 | $ | (12,164 | ) | $ | (8,471 | ) | ||||||||
Per Share Data |
||||||||||||||||||||
Net income (loss) per Common share - Basic: |
||||||||||||||||||||
Income (loss) from continuing operations |
$ | 0.48 | $ | 0.11 | $ | (0.24 | ) | $ | (1.57 | ) | $ | (1.56 | ) | |||||||
Income from discontinued operations |
0.03 | 4.87 | 1.16 | 0.88 | 1.08 | |||||||||||||||
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Total net income (loss) per Common share - Basic: |
$ | 0.51 | $ | 4.98 | $ | 0.92 | $ | (0.69 | ) | $ | (0.48 | ) | ||||||||
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Net income (loss) per Class B common share - Basic: |
||||||||||||||||||||
Income (loss) from continuing operations |
$ | 0.43 | $ | 0.10 | $ | (0.21 | ) | $ | (1.41 | ) | $ | (1.40 | ) | |||||||
Income from discontinued operations |
0.03 | 4.38 | 1.04 | 0.79 | 0.97 | |||||||||||||||
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Total net income (loss) per Class B common share - Basic: |
$ | 0.46 | $ | 4.48 | $ | 0.83 | $ | (0.62 | ) | $ | (0.43 | ) | ||||||||
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Net income (loss) per Common share - Diluted: |
||||||||||||||||||||
Income (loss) from continuing operations |
$ | 0.47 | $ | 0.11 | $ | (0.24 | ) | $ | (1.57 | ) | $ | (1.56 | ) | |||||||
Income from discontinued operations |
0.03 | 4.72 | 1.16 | 0.88 | 1.08 | |||||||||||||||
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|
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Total net income (loss) per Common share - Diluted: |
$ | 0.50 | $ | 4.83 | $ | 0.92 | $ | (0.69 | ) | $ | (0.48 | ) | ||||||||
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Net income (loss) per Class B common share - Diluted: |
||||||||||||||||||||
Income (loss) from continuing operations |
$ | 0.43 | $ | 0.10 | $ | (0.21 | ) | $ | (1.41 | ) | $ | (1.40 | ) | |||||||
Income from discontinued operations |
0.03 | 4.32 | 1.04 | 0.79 | 0.97 | |||||||||||||||
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Total net income (loss) per Class B common share - Diluted: |
$ | 0.46 | $ | 4.42 | $ | 0.83 | $ | (0.62 | ) | $ | (0.43 | ) | ||||||||
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Cash Dividend Data |
||||||||||||||||||||
Dividends per common share |
$ | 0.200 | $ | 0.110 | $ | 0.080 | $ | 0.080 | $ | 0.120 | ||||||||||
Dividends per Class B common share (5) |
$ | 0.180 | $ | 0.099 | $ | 0.072 | $ | 0.072 | $ | 0.108 | ||||||||||
Balance Sheet Data |
||||||||||||||||||||
Total assets |
$ | 231,423 | $ | 314,054 | $ | 234,815 | $ | 294,198 | $ | 286,235 | ||||||||||
Short-term debt |
$ | | $ | | $ | 19,517 | $ | | $ | | ||||||||||
Long-term debt |
$ | | $ | | $ | | $ | 52,353 | $ | 55,683 | ||||||||||
Stockholders equity |
$ | 200,213 | $ | 222,047 | $ | 129,863 | $ | 222,039 | $ | 141,430 |
(1) | Our fiscal year ends on the Saturday nearest the end of May. Each of the fiscal years presented contain 52/53 weeks. |
(2) | Fiscal 2011 has been restated to reflect a $2.1 million misstatement. See Footnote 3 for further information. |
(3) | A goodwill impairment charge of $9.2 million, net of an income tax benefit of $2.3 million, was recorded during fiscal 2008. We recorded employee termination related charges of approximately $3.3 million during fiscal 2008, primarily relating to implementing a new business plan for Canvys. Canvys incurred inventory obsolescence charges during fiscal 2008 of $1.9 million. |
(4) | Restated to reflect the Transaction. |
(5) | The dividend per Class B common share is 90% of the dividend per Class A common share. |
17
ITEM 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto.
Managements 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 consolidated financial statements and the accompanying notes thereto appearing elsewhere herein. This section is organized as follows:
| Business Overview |
| Results of Continuing Operations an analysis and comparison of our consolidated results of operations for the fiscal years ended June 2, 2012, May 28, 2011, and May 29, 2010, as reflected in our consolidated statements of comprehensive income. |
| Liquidity, Financial Position, and Capital Resources a discussion of our primary sources and uses of cash for the fiscal years ended June 2, 2012, May 28, 2011, and May 29, 2010, and a discussion of selected changes in our financial position. |
Business Overview
Richardson Electronics, Ltd. is incorporated in the state of Delaware. We are a leading global provider of engineered solutions, power grid and microwave tubes and related components, and customized display solutions, serving customers in the alternative energy, aviation, broadcast, communications, industrial, marine, medical, military, scientific, and semiconductor 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 electron tubes and related components, microwave generators, subsystems used in semiconductor manufacturing, and visual technology solutions. These products are used to control, switch or amplify electrical power signals, or are 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 RFPD Division, as well as certain other Company assets, including our information technology assets, to Arrow in exchange for $238.8 million, which included an estimated pre-closing working capital adjustment of approximately $27.0 million. 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 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. This acquisition positions us to provide cost-effective service of microwave and power grid tube equipment for communications, industrial, military and medical users around the world.
18
We have two operating segments, which we define as follows:
EDG provides engineered solutions and distributes electronic components to customers in alternative energy, aviation, broadcast, communications, industrial, marine, medical, military, scientific, and semiconductor markets. EDG focuses on various applications including broadcast transmission, CO2 laser cutting, diagnostic imaging, dielectric and induction heating, high energy transfer, high voltage switching, plasma, power conversion, radar, and radiation oncology. EDG also offers its customers technical services for both microwave and industrial equipment.
Canvys provides global customized display solutions serving the corporate enterprise, financial, 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
Overview Fiscal Year Ended June 2, 2012
| Net sales for fiscal 2012 were $157.8 million, down 0.6%, compared to net sales of $158.9 million during fiscal 2011. |
| Gross margin as a percentage of net sales increased to 29.6% during fiscal 2012, compared to 29.0% during fiscal 2011. |
| Selling, general, and administrative expenses decreased to $40.6 million during fiscal 2012, compared to $43.3 million during fiscal 2011. |
| Operating income during fiscal 2012 was $6.3 million, compared to an operating income of $2.8 million during fiscal 2011. |
| Income from continuing operations during fiscal 2012 was $8.0 million, or $0.47 per diluted common share, versus income of $2.0 million, or $0.11 per diluted common share, during fiscal 2011. |
| Income from discontinued operations, net of tax, was $0.5 million, or $0.03 per diluted common share, during fiscal 2012 compared to $86.0 million, or $4.72 per diluted common share, during fiscal 2011. |
| Net income during fiscal 2012 was $8.5 million, or $0.50 per diluted common share, compared to net income of $87.9 million, or $4.83 per diluted common share, during fiscal 2011. |
19
Net Sales and Gross Profit Analysis
During fiscal 2012 consolidated net sales decreased 0.6 % compared to fiscal 2011. Sales for Canvys grew by 0.2%, offset by a 1.0% decline in sales for EDG. Consolidated net sales during fiscal 2011 increased 17.4% compared to fiscal 2010, reflecting an increase in EDG sales of 31.4%, offset by a 7.5% decline in sales for Canvys.
Net sales by segment and percent change for fiscal 2012, 2011, and 2010 were as follows (in thousands):
Net Sales |
FY 2012 | FY 2011 | FY 2010 | FY12 vs. FY11 % Change |
FY11 vs. FY10 % Change |
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EDG |
$ | 112,586 | $ | 113,715 | $ | 86,541 | (1.0 | %) | 31.4 | % | ||||||||||
Canvys |
45,250 | 45,152 | 48,831 | 0.2 | % | (7.5 | %) | |||||||||||||
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Total |
$ | 157,836 | $ | 158,867 | $ | 135,372 | (0.6 | %) | 17.4 | % | ||||||||||
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Consolidated gross profit was $46.8 million during fiscal 2012, compared to $46.1 million during fiscal 2011. Consolidated gross margin as a percentage of net sales increased to 29.6% during fiscal 2012, from 29.0% during fiscal 2011. Gross margin during fiscal 2012 included expense related to inventory provisions for EDG and Canvys of $0.2 million and $0.2 million, respectively. Gross margin during fiscal 2011 included expense related to inventory provisions for EDG and Canvys of $0.7 million and $0.4 million, respectively.
Consolidated gross profit was $46.1 million during fiscal 2011, compared to $41.3 million during fiscal 2010. Consolidated gross margin as a percentage of net sales decreased to 29.0% during fiscal 2011, from 30.5% during fiscal 2010. Gross margin during fiscal 2011 included expense related to inventory provisions for EDG and Canvys of $0.7 million and $0.4 million, respectively. Gross margin during fiscal 2010 included expense related to inventory provisions for Canvys of $0.2 million.
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 for fiscal 2012, 2011, and 2010 were as follows (in thousands):
Gross Profit |
FY 2012 | FY 2011 | FY 2010 | |||||||||||||||||||||
EDG |
$ | 34,626 | 30.8 | % | $ | 35,020 | 30.8 | % | $ | 28,721 | 33.2 | % | ||||||||||||
Canvys |
12,155 | 26.9 | % | 11,093 | 24.6 | % | 12,563 | 25.7 | % | |||||||||||||||
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Total |
$ | 46,781 | 29.6 | % | $ | 46,113 | 29.0 | % | $ | 41,284 | 30.5 | % | ||||||||||||
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Electron Device Group
Net sales for EDG decreased 1.0% to $112.6 million during fiscal 2012, from $113.7 million during fiscal 2011. Net sales of tubes decreased slightly to $90.1 million during fiscal 2012, as compared to $91.9 million during fiscal 2011, due primarily to declines in the broadcast and textile markets. Net sales of continuous wave magnetrons and related assemblies sold primarily into the semi-conductor fabrication market decreased to $22.1 million during fiscal 2012, as compared to $25.6 million during fiscal 2011. Gross margin as a percentage of net sales remained flat at 30.8% during fiscal 2012, as compared to 30.8% during fiscal 2011.
20
Net sales for EDG increased 31.4% to $113.7 million during fiscal 2011, from $86.5 million during fiscal 2010. The increase reflects incremental sales volume from a strategic distribution agreement and growing demand as our customers benefited from improving economic conditions. Net sales of tubes increased to $91.9 million during fiscal 2011, as compared to $71.3 million during fiscal 2010, due primarily to increased worldwide demand from industrial manufacturers, in addition to the sales volume from a strategic distribution agreement. Net sales of continuous wave magnetrons and value add assemblies sold primarily into the semi-conductor fabrication market increased to $25.6 million during fiscal 2011, as compared to $17.4 million during fiscal 2010. The semiconductor fabrication equipment industry, primarily in North America, continued to improve from the overall industry-wide decline experienced in fiscal 2009. Gross margin as a percentage of net sales decreased to 30.8% during fiscal 2011, as compared to 33.2% during fiscal 2010. This significant decline in gross margin percentage primarily reflects the lower-margin business under the terms of a strategic distribution agreement which began in March 2010. As the pricing commitments included in the strategic distribution agreement expire, we expect EDGs gross margin percentage to improve.
Canvys
Canvys net sales increased 0.2% to $45.3 million during fiscal 2012, from $45.2 million during fiscal 2011. Sales increased in the North America original equipment manufacturer (OEM) market, while sales in Europe were down due to the effect of the economic crisis on German exports. Healthcare revenues were flat. Gross margin as a percentage of net sales increased to 26.9 % during fiscal 2012 as compared to 24.6% during fiscal 2011, due primarily to improved quoting procedures and project selection, and better control of inventory and expedited freight requirements. A warranty charge taken during the fourth quarter of fiscal 2012 relating to a customer specific project had a negative impact on our gross margin of 0.7%.
Canvys net sales declined 7.5% to $45.2 million during fiscal 2011, from $48.8 million during fiscal 2010. Sales were down in both its original equipment manufacturer (OEM) and healthcare segments in North America, while sales in Europe increased slightly. Gross margin as a percentage of net sales decreased to 24.6% during fiscal 2011 as compared to 25.7% during fiscal 2010, due primarily to an increase in inbound freight cost and inventory reserve expense during fiscal 2011.
Sales by Geographic Area
On a geographic basis, our sales are categorized by destination to include: North America; Europe; Asia/Pacific; Latin America; and Other.
Net sales by geographic area and percent change for fiscal 2012, 2011, and 2010 were as follows (in thousands):
Net Sales |
FY 2012 | FY 2011 | FY 2010 | FY12 vs. FY11 % Change |
FY11 vs. FY10 % Change |
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North America |
$ | 68,990 | $ | 67,646 | $ | 64,265 | 2.0 | % | 5.3 | % | ||||||||||
Asia/Pacific |
25,588 | 26,354 | 20,943 | (2.9 | %) | 25.8 | % | |||||||||||||
Europe |
52,039 | 54,040 | 40,800 | (3.7 | %) | 32.5 | % | |||||||||||||
Latin America |
9,870 | 10,239 | 9,049 | (3.6 | %) | 13.2 | % | |||||||||||||
Other |
1,349 | 588 | 315 | |||||||||||||||||
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Total |
$ | 157,836 | $ | 158,867 | $ | 135,372 | (0.6 | %) | 17.4 | % | ||||||||||
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21
Gross profit by geographic area and percent of geographic net sales for fiscal 2012, 2011, and 2010 were as follows (in thousands):
Gross Profit |
FY 2012 | FY 2011 | FY 2010 | |||||||||||||||||||||
North America |
$ | 21,640 | 31.4 | % | $ | 19,873 | 29.4 | % | $ | 17,927 | 27.9 | % | ||||||||||||
Asia/Pacific |
9,061 | 35.4 | % | 9,441 | 35.8 | % | 7,550 | 36.1 | % | |||||||||||||||
Europe |
16,082 | 30.9 | % | 14,356 | 26.6 | % | 12,552 | 30.8 | % | |||||||||||||||
Latin America |
3,710 | 37.6 | % | 4,093 | 40.0 | % | 3,522 | 38.9 | % | |||||||||||||||
Other |
(3,712 | ) | (1,650 | ) | (267 | ) | ||||||||||||||||||
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Total |
$ | 46,781 | 29.6 | % | $ | 46,113 | 29.0 | % | $ | 41,284 | 30.5 | % | ||||||||||||
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Selling, General, and Administrative Expenses
Selling, general, and administrative expenses (SG&A) decreased during fiscal 2012 to $40.6 million from $43.3 million during fiscal 2011. SG&A as a percentage of sales, from continuing operations, declined by 140 basis points to 25.8% during fiscal 2012 from 27.2% during fiscal 2011. The $2.7 million decrease includes a $0.1 million reduction of SG&A for EDG and a $2.8 million reduction of total company support function costs, due primarily to a reduction in headcount and professional services, partially offset by an increase of SG&A costs for Canvys of $0.2 million due primarily to an increase in bad debts from one customer, partially offset by a decrease in salary and severance..
SG&A increased slightly during fiscal 2011 to $43.3 million from $43.2 million during fiscal 2010. SG&A as a percentage of sales, from continuing operations, improved 470 basis points to 27.2% during fiscal 2011 from 31.9% during fiscal 2010. SG&A costs for EDG increased approximately $1.7 million primarily due to incremental costs associated with a strategic distribution agreement. SG&A costs for Canvys decreased by approximately $0.8 million due to headcount reductions. Support function costs decreased approximately $0.8 million which resulted from a $1.5 million decrease in employee related expenses due primarily to headcount reductions, partially offset by higher legal and operating expenses of $0.7 million.
Goodwill and Other Intangible Assets
Goodwill
Goodwill is initially recorded based on the premium paid for acquisitions and is subsequently tested for impairment. We test goodwill for impairment annually and whenever events or circumstances indicates an impairment may have occurred, such as a significant adverse change in the business climate, loss of key personnel or a decision to sell or dispose of a reporting unit. As of the fiscal year ended June 2, 2012, our goodwill balance was $1.3 million and represents the premium we paid for Powerlink during our second quarter of fiscal 2012.
During the fourth quarter of each fiscal year, our goodwill balances are reviewed for impairment using the last day of our third quarter as the measurement date. In accordance with ASC 350 IntangiblesGoodwill and Other, if indicators of impairment are deemed to be present, we would perform an interim impairment test and any resulting impairment loss would be charged to expense in the period identified.
During the fourth quarter of fiscal 2012, we adopted Accounting Standards Update (ASU) 2011-08 which allows for the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of an operating segment. We applied this qualitative approach to our EDG operating segment and concluded that indications of impairment were not present as of June 2, 2012. The qualitative factors considered included macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, and other relevant entity or reporting unit specific events.
22
Intangible Assets
Intangible assets are initially recorded at their fair market values determined on quoted market prices in active markets, if available, or recognized valuation models. Intangible assets that have finite useful lives are amortized on a straight-line basis over their useful lives.
Our intangible asset is the fair value that we determined for customer relationships acquired in connection with the acquisition of Powerlink during the second quarter of our fiscal year 2012. The fair value was based upon discounted cash flows that the customer relationships are expected to generate over the next twenty years.
(Gain) Loss on Disposal of Assets
Loss on disposal of assets from continuing operations was $0.1 million during fiscal 2012.
Other (Income) Expense
Other (income) expense was income of $1.4 million during fiscal 2012, compared with expense of $0.4 million during fiscal 2011. The change from expense to income during fiscal 2012, as compared to fiscal 2011, was due primarily to income from investments of $1.4 million. Foreign exchange was a gain of less than $0.1 million during fiscal 2012, as compared to a foreign exchange loss of $0.6 million during fiscal 2011. Our foreign exchange gains and losses are primarily due to the translation of U.S. currency we have in non-U.S. bank accounts. We currently do not utilize derivative instruments to mitigate our risk with respects to foreign currency. We carried no debt and had no redemptions during fiscal 2012, while fiscal 2011 included a loss of $0.1 million related to the redemption of our 7 3/4% convertible senior subordinated notes. Interest expense decreased to less than $0.1 million during fiscal 2012, as compared to $0.1 million during fiscal 2011, due to the full redemption of our convertible notes. See Note 8 Debt of the notes to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for additional discussion on the redemption of our short-term debt and interest expense.
Other (income) expense was expense of $0.4 million during fiscal 2011, compared with expense of $2.3 million during fiscal 2010. The decrease in expense during fiscal 2011 was due primarily to income from new investments, offset by unfavorable changes in foreign currency exchange rates relative to the U.S. dollar. Other (income) expense included investment/interest income of $0.4 million during fiscal 2011. Foreign exchange was a loss of $0.6 million during fiscal 2011, as compared to a foreign exchange loss of $1.1 million during fiscal 2010. Our foreign exchange gains and losses are primarily due to the translation of U.S. currency we have in non-U.S. bank accounts. We currently do not utilize derivative instruments to mitigate our risk with respects to foreign currency. Fiscal 2011 included a loss of $0.1 million related to the redemption of our 7 3/4% convertible senior subordinated notes, while fiscal 2010 included a loss of $0.2 million related to the redemption of $7.7 million of our 8% convertible senior subordinated notes, as well as the redemption of $25.2 million of our 7 3/4% convertible senior subordinated notes. Interest expense decreased to $0.1 million during fiscal 2011, as compared to $1.2 million during fiscal 2010, due to the full redemption of our convertible notes. See Note 8 Debt of the notes to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for additional discussion on the redemption of our short-term debt and interest expense.
Income Tax Provision (Benefit)
Our income tax benefit during fiscal year 2012 was $0.3 million. Our income tax provision for fiscal year 2011 was $0.5 million. During fiscal 2010, we had an income tax benefit of $0.1 million.
23
The effective income tax rates for continuing operations during fiscal 2012, 2011, and 2010, were (4.37%), 19.1%, and 1.6%, respectively. The difference between the effective tax rates as compared to the U.S. federal statutory rate of 34% during 2012 and 35% during fiscal 2011 and 2010, resulted from our geographical distribution of taxable income or losses, return to provision adjustments, the release of income tax reserves, and a change in the amount of foreign earnings considered to be permanently reinvested in foreign countries. There were no changes in judgment during the fiscal year end 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.
As of June 2, 2012, we had no domestic federal net operating loss (NOL) carryforwards as all NOL carryforwards were fully utilized in the prior year. Domestic state NOL carryforwards amounted to approximately $2.0 million primarily related to states where the utilization of NOLs have been suspended for the next two taxable years. Foreign NOL carryforwards totaled approximately $0.8 million with various or indefinite expiration dates. We also had no alternative minimum tax credit carryforward or foreign tax credit carryforwards as of June 2, 2012, as these attributes were also fully utilized in the prior year. Based on this, our future U.S. federal statutory tax rate is expected to be closer to 34%, our state effective tax rate is expected to be approximately 4.5%, and our foreign effective tax rate is expected to be approximately 26%.
Income taxes paid, including foreign estimated tax payments, were $35.5 million, $3.4 million, and $1.5 million during fiscal 2012, 2011, and 2010, respectively.
As of June 2, 2012, $44.5 million of cumulative positive earnings of some of our foreign subsidiaries are still considered permanently reinvested pursuant to ASC 740-30, Income Taxes Other Considerations or Special Areas (ASC 740-30). Due to various tax attributes that are continuously changing, it is not practical to determine what, if any, tax liability might exist if such earnings were to be repatriated.
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, or non-U.S. tax examinations by tax authorities for years prior to fiscal 2005. Currently, we are under federal audit in the U.S. for fiscal years 2009 and 2010. The IRS has also verbally notified the company that the fiscal year 2011 tax return will be audited. Our primary foreign tax jurisdictions are China, Japan, Germany, Singapore, and the Netherlands. We have tax years open in Germany beginning in fiscal 2005; in Japan and the Netherlands beginning in fiscal 2007; in Singapore beginning in fiscal 2008; and in China beginning in calendar year 2007.
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 RFPD division, as well as certain other Company assets, including our information technology assets, to Arrow in exchange for $238.8 million, which included an estimated pre-closing working capital adjustment of approximately $27.0 million. 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 of fiscal 2012. During the second quarter of fiscal 2012, we paid Arrow $3.9 million to settle the agreed upon working capital adjustment.
Following the Transaction, the Compensation Committee of our Board of Directors granted cash bonus compensation to certain executive officers and former employees in recognition of their efforts for successfully completing the Transaction. The cash bonus compensation amount awarded was approximately $3.8 million, and was recorded as expense from discontinued operations during the fourth quarter of fiscal 2011.
24
To help facilitate the transition of RFPD to Arrow, we agreed to provide certain transitional services to Arrow such as financial support services, warehouse services, and access to facilities in accordance with the terms of the Transition Services Agreement. Arrow also agreed to provide certain transitional services such as information technology services, warehouse services, and access to facilities and equipment in accordance with the terms of the Transition Services Agreement. The duration of the transitional services were less than one year from March 1, 2011, except for the information technology services which is three years. In addition, we entered into a Manufacturing Agreement with Arrow, in connection with the Transaction, for a term of three years. Pursuant to the Manufacturing Agreement, we agreed to manufacture certain products for Arrow.
The Transition Services Agreement, which commenced on March 1, 2011, and ended on March 1, 2012, allowed us to exert very limited influence over Arrows operating and financial policies. The continuing cash flows related to our Transition Services Agreement as well as the Manufacturing Agreement, are insignificant. We believe it is appropriate to include fees and associated costs with the Transition Services Agreement that relate to financial support, certain facilities, and certain warehouse services in discontinued operations as they relate specifically to RFPD. We further believe it is appropriate to treat the revenue and costs associated with the Manufacturing Agreement as discontinued operations as it relates specifically to RFPD.
Honeywell Transaction
On May 31, 2007, we completed the sale of the Security Systems Division/Burtek Systems (SSD/Burtek) to Honeywell International Inc. (Honeywell). The sale agreement of SSD/Burtek to Honeywell contemplated a post-closing working capital-based purchase price adjustment. During the third quarter of fiscal 2008, we received notification from Honeywell seeking a purchase price adjustment and we issued a dispute notice in a timely manner. On December 18, 2009, we reached an agreement with Honeywell to settle the pending working capital disputes as well as other related claims. As a result, we recorded $1.2 million of expense, net of zero tax effect, as a loss from discontinued operations during fiscal 2010.
Financial Summary Discontinued Operations
Summary financial results for fiscal 2012, 2011, and 2010 are presented in the following table (in thousands):
Fiscal 2012 | Fiscal 2011 | Fiscal 2010 | ||||||||||
Net sales |
$ | 2,984 | $ | 321,826 | $ | 356,475 | ||||||
Gross profit (loss) |
(227 | ) | 66,718 | 76,727 | ||||||||
Selling, general, and administrative expenses |
509 | 44,575 | 53,830 | |||||||||
Interest expense, net |
| 387 | 2,718 | |||||||||
Foreign exchange (gain) loss |
43 | (258 | ) | | ||||||||
Additional gain on sale |
(266 | ) | (111,432 | ) | | |||||||
Income tax provision (benefit) |
(1,049 | ) | 47,480 | (98 | ) | |||||||
Income (loss) from discontinued operations, net of tax |
536 | 85,966 | 20,277 |
25
In accordance with ASC 205-20, 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 attributed 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 $0.4 million and $2.7 million of interest expense to discontinued operations for fiscal 2011 and 2010, respectively, using the ratio of net assets that we sold or that became discontinued to total assets. There was no interest expense incurred to allocate to discontinued operations for fiscal 2012.
Assets and liabilities classified as discontinued operations on our consolidated balance sheets as of June 2, 2012, and May 28, 2011, include the following (in thousands):
June 2, 2012 | May 28, 2011 | |||||||
Accounts receivable |
$ | | $ | 2,356 | ||||
Inventories |
503 | 1,152 | ||||||
Prepaid expenses and other assets |
11 | 110 | ||||||
Current deferred income taxes |
| 400 | ||||||
|
|
|
|
|||||
Discontinued operations - Assets |
$ | 514 | $ | 4,018 | ||||
|
|
|
|
|||||
Accrued liabilities (1) (3) |
253 | 15,897 | ||||||
Long-term income tax liabilities (2) |
1,361 | 1,622 | ||||||
|
|
|
|
|||||
Discontinued operations - Liabilities |
$ | 1,614 | $ | 17,519 | ||||
|
|
|
|
(1) | Included in Accrued Liabilities as of June 2, 2012, is $0.2 million of other accrued liabilities primarily related to professional legal and tax services. |
(2) | Included in long-term income tax liabilities-non-current as of June 2, 2012, is the reserve for uncertain tax positions of $1.4 million. |
(3) | Accrued liabilities as of May 28, 2011, includes $11.7 million due to Arrow, which includes a $4.2 million proposed purchase price adjustment, $6.0 million for receivables collected by the Company on behalf of Arrow, and vacation and pension funds of $1.5 million in connection with the transaction. There is also approximately $5.1 million of other accrued liabilities including severance and success bonuses recorded in connection with the Transaction, as well as $2.1 million related to income taxes. These amounts are partially offset by approximately $3.0 million owed to the Company from Arrow in connection with the Transaction which consists of fees of for transition services, facility lease deposits, severance costs, and indirect taxes. |
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 flow 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 did not have cash balances that were specific to RFPD and elected not to present separate cash flows from discontinued operations on our statement of cash flows.
LIQUIDITY, FINANCIAL POSITION, AND CAPITAL RESOURCES
Our growth and cash needs have been primarily financed through income from operations, and, we anticipate that cash flow from operating activities will continue to be a source of cash. While net income will significantly decline as a result of the sale, our working capital investment and capital spending requirements will also significantly decline.
Cash and cash equivalents were $43.9 million at June 2, 2012. In addition, CDs and time deposits classified as short-term investments were $105.0 million and long-term investments were $10.7 million, including equity securities of $0.4 million. Cash and investments at June 2, 2012, consisted of $94.3 million in North America, $20.7 million in Europe, $0.7 million in Latin America, and $43.5 million in Asia/Pacific.
26
At May 28, 2011, cash and cash equivalents were $171.0 million. CDs and time deposits classified as short-term investments were $52.1 million and long-term investments were $16.7 million, including equity securities of $0.4 million. Cash and investments at May 28, 2011, consisted of $157.5 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 has significantly declined as a result of the Transaction, our working capital investment and capital spending requirements have also significantly declined.
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 did not have cash balances that were specific to RFPD and elected not to present separate cash flows from discontinued operations on our statement of cash flows.
We believe we will continue to have sufficient liquidity to fund our future growth strategies for our remaining business.
Cash Flows from Operating Activities
Cash flows used in operating activities, including our discontinued operations, during fiscal 2012 was $48.7 million. The $48.7 million use of cash primarily relates to a $50.1 million use of cash related to accrued liabilities, of which $40.1 million related to taxes paid, a $6.6 million use of cash related to an income tax receivable, and a $4.9 million use of cash from inventory, offset by a source of cash related to decreases in prepaid expense and other assets of $5.1 million and $4.1 million in accounts receivable.
Cash flows provided by operating activities, including our discontinued operations, during fiscal 2011 was $2.1 million. The $2.1 million included a pre-tax gain on the sale of RFPD of $111.4 million, offset by a source of cash of $117.5 million created from the change in assets and liabilities due to the Transaction. Excluding the Transaction, cash used by operating activities, including discontinued operations, was $4.0 million.
Cash Flows from Investing Activities
Net cash used in investing activities, including our discontinued operations, of $49.4 million during fiscal 2012, was due primarily to the purchase of Powerlink of $2.3 million, and the purchase of $423.6 million in time deposits and CDs, offset by proceeds from time deposits and CDs of $376.6 million.
Net cash provided by investing activities, including our discontinued operations, of $160.0 million during fiscal 2011, was due primarily to proceeds from the sale of RFPD of $229.0 million and proceeds of $776.5 million from time deposits and CDs, partially offset by the purchase of $884.9 million in time deposits and CDs, and capital expenditures of $0.5 million for information technology projects and building improvements.
27
Cash Flows from Financing Activities
Net cash used in financing activities, including our discontinued operations, of $26.6 million during fiscal 2012 was due primarily to the repurchase of common stock of $24.0 million, and $3.3 million in cash dividends paid, partially offset by proceeds from the issuance of common stock of $0.8 million.
Net cash used in financing activities, including our discontinued operations, of $24.5 million during fiscal 2011 was due primarily to the repayment of our short-term debt of $19.5 million, $8.8 million for the repurchase of common stock, and $1.9 million in cash dividends paid, partially offset by proceeds from the issuance of common stock of $5.4 million, and a$0.3 million tax benefit from stock option exercises.
Dividend payments during fiscal 2012 were approximately $3.3 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.
As of June 2, 2012, there were no amounts outstanding under the revolving credit agreement, as we paid down the $22.0 million outstanding balance, plus accrued and unpaid interest during fiscal 2011, and terminated the agreement on February 28, 2011. On June 11, 2010, we redeemed all $19.5 million of the aggregate outstanding principal amount of our 7 3/4% Notes, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. See Note 8 Debt of our consolidated financial statements for further discussion on the redemption.
Contractual Obligations
Contractual obligations by expiration period are presented in the table below as of June 2, 2012 (in thousands):
Less than 1 year |
1 - 3 years |
3 - 5 years |
More than 5 years |
Total | ||||||||||||||||
Lease obligations (1) |
$ | 507 | $ | 304 | $ | 2,251 | $ | | $ | 3,062 | ||||||||||
IT services (2) |
| 3,277 | | | 3,277 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 507 | $ | 3,581 | $ | 2,251 | $ | | $ | 6,339 | ||||||||||
|
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|
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|
|
|
|
|
|
(1) | Lease obligations are related to certain warehouse and office facilities under non-cancelable operating leases. |
(2) | IT services are related to the Transaction. |
We believe that 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 1, 2013.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management continuously evaluates its critical accounting policies and estimates, including the allowance for doubtful accounts, revenue recognition, inventory obsolescence, loss contingencies, and income taxes. Management bases the estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances, however, actual results could differ from those estimates.
The policies discussed below are considered by management to be critical to understanding our financial position and results of operations. Their application involves significant judgments and estimates in preparation of our consolidated financial statements. For all of these policies, management cautions that future events rarely develop exactly as forecasted, and the best estimates routinely require adjustment.
28
Allowance for Doubtful Accounts
Our allowance for doubtful accounts includes estimated losses that result from uncollectible receivables. The estimates are influenced by the following: continuing credit evaluation of customers financial conditions; aging of receivables, individually and in the aggregate; a large number of customers which are widely dispersed across geographic areas; collectability and delinquency history by geographic area; and the fact that no single customer accounts for more than 10% of net sales. Significant changes in one or more of these considerations may require adjustments affecting net income and net carrying value of accounts receivable. The allowance for doubtful accounts was approximately $1.1 million and $0.4 million as of June 2, 2012, and May 28, 2011, respectively.
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.
Inventories
Our worldwide inventories are stated at the lower of cost or market, generally using a weighted-average cost method. Our inventories included $31.8 million of finished goods and $2.9 million of raw materials and work-in-progress.
Provisions for obsolete or slow moving inventories are recorded based upon regular analysis of stock rotation privileges, obsolescence, the exiting of certain market segments, and assumptions about future demand and market conditions. If future demand, changes in the industry, or market conditions differ from managements estimates, additional provisions may be necessary.
We recorded provisions to our inventory reserves of $0.4 million, $1.1 million, and $0.2 million during fiscal 2012, 2011, and 2010, respectively, which were included in cost of sales. The provisions were principally for obsolete and slow moving parts. The parts were written down to estimated realizable value.
29
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.
Income Taxes
We recognize deferred tax assets and liabilities based on the differences between financial statement carrying amounts and the tax bases of assets and liabilities. We regularly review our deferred tax assets for recoverability and determine the need for a valuation allowance based on a number of factors, including both positive and negative evidence. These factors include historical taxable income or loss, projected future taxable income or loss, the expected timing of the reversals of existing temporary differences, and the implementation of tax planning strategies. In circumstances where we, or any of our affiliates, have incurred three years of cumulative losses which constitute significant negative evidence, positive evidence of equal or greater significance is needed to overcome the negative evidence before a tax benefit is recognized for deductible temporary differences and loss carryforwards. See Note 10 Income Taxes of the notes to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information.
New Accounting Pronouncements
During December 2011, the FASB issued Accounting Standard Update (ASU) No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The amendments to the Codification in ASU No. 2011-12 are effective at the same time as the amendments in ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, so that entities will not be required to comply with the presentation requirements in ASU No. 2011-05 that ASU No. 2011-12 is deferring. In order to defer only those changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments, the paragraphs in ASU No. 2011-12 supersede certain pending paragraphs in ASU No. 2011-05. The amendments are being made to allow the FASB time to re-deliberate whether to present on the face of the financial statements the effects of the reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the FASB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods with those years, beginning after December 15, 2011, and as such, we have adopted ASU No. 2011-05 during our third quarter of fiscal 2012.
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.
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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 entitys 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 adopted ASU Update No. 2011-08 during our fourth quarter of fiscal 2012 and the adoption did not have a material impact on our financial results.
During May 2011, the FASB issued ASC Update No. 2011-05, Comprehensive Income: Presentation of Comprehensive Income, (ASC Update No. 2011-05). This amends the FASB Accounting Standards Codification to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with the total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU Update No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders equity. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU Update No. 2011-05 should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim period within those years, beginning after December 15, 2011, and as such, we adopted ASC Update No. 2011-05 during our third quarter of fiscal 2012.
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ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Risk Management and Market Sensitive Financial Instruments
We are exposed to various market risks. The primary financial risks include foreign currency exchange risks, as certain operations, assets, and liabilities of ours are denominated in foreign currencies. We manage these risks through normal operating activities.
The interpretation and analysis of these disclosures should not be considered in isolation since such variances in exchange rates and interest 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 this Form 10-K.
Foreign Currency Exposure
Even though we take into account current foreign currency exchange rates at the time an order is taken, our financial statements denominated in a non-U.S. functional currency are subject to foreign exchange rate fluctuations.
Our foreign denominated assets and liabilities are cash, accounts receivable, inventory, accounts payable, and intercompany receivables and payables, as we conduct business in countries of the European Union, Asia/Pacific and, to a lesser extent, Canada and Latin America. We could manage foreign exchange exposures by using currency clauses in sales contracts, local debt to offset asset exposures, and forward contracts to hedge significant transactions. We have not entered into any forward contracts in fiscal 2012, fiscal 2011, or fiscal 2010.
Had the U.S. dollar changed unfavorably 10% against various foreign currencies, foreign denominated net sales would have been lower by an estimated $15.8 million during fiscal 2012 and an estimated $15.9 million during fiscal 2011. Total assets would have declined by an estimated $26.7 million as of the fiscal year ended June 2, 2012, and an estimated $29.4 million as of the fiscal year ended May 28, 2011, while the total liabilities would have decreased by an estimated $0.5 million as of the fiscal year ended June 2, 2012, and an estimated $1.5 million as of the fiscal year ended May 28, 2011.
The interpretation and analysis of these disclosures should not be considered in isolation since such variances in interest rates and exchanges rates would likely influence other economic factors. Such factors, which are not readily quantifiable, would likely also affect our operations.
32
ITEM 8. Financial Statements and Supplementary Data
Richardson Electronics, Ltd.
Consolidated Balance Sheets
(in thousands, except per share amounts)
June 2, 2012 |
May 28, 2011 |
|||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 43,893 | $ | 170,975 | ||||
Accounts receivable, less allowance of $1,058 and $438 |
19,727 | 22,374 | ||||||
Inventories |
34,675 | 30,853 | ||||||
Prepaid expenses and other assets |
806 | 5,768 | ||||||
Deferred income taxes |
2,095 | 2,084 | ||||||
Income tax receivable |
6,572 | | ||||||
Investments - current |
105,009 | 52,116 | ||||||
Discontinued operations - assets |
514 | 4,018 | ||||||
|
|
|
|
|||||
Total current assets |
213,291 | 288,188 | ||||||
|
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|
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Non-current assets: |
||||||||
Property, plant and equipment, net |
4,375 | 5,216 | ||||||
Goodwill |
1,261 | | ||||||
Other Intangibles |
355 | |||||||
Non-current deferred income taxes |
1,458 | 3,994 | ||||||
Investments - non-current |
10,683 | 16,656 | ||||||
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|
|
|||||
Total non-current assets |
18,132 | 25,866 | ||||||
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|
|
|||||
Total assets |
$ | 231,423 | $ | 314,054 | ||||
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Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 12,611 | $ | 17,814 | ||||
Accrued liabilities |
8,466 | 43,719 | ||||||
Discontinued operations - liabilities |
253 | 15,897 | ||||||
|
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|
|
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Total current liabilities |
21,330 | 77,430 | ||||||
|
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|
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Non-current liabilities: |
||||||||
Long-term income tax liabilities |
7,306 | 12,568 | ||||||
Other non-current liabilities |
1,213 | 387 | ||||||
Discontinued operations - non-current liabilities |
1,361 | 1,622 | ||||||
|
|
|
|
|||||
Total non-current liabilities |
9,880 | 14,577 | ||||||
|
|
|
|
|||||
Total liabilities |
31,210 | 92,007 | ||||||
|
|
|
|
|||||
Commitments and contingencies |
| | ||||||
Stockholders equity |
||||||||
Common stock, $0.05 par value; issued 13,074 shares at June 2, 2012, and 14,921 shares at May 28, 2011 |
654 | 746 | ||||||
Class B common stock, convertible, $0.05 par value; issued 2,920 shares at June 2, 2012, and 2,952 shares at May 28, 2011 |
146 | 147 | ||||||
Preferred stock, $1.00 par value, no shares issued |
| | ||||||
Additional paid-in-capital |
88,217 | 112,179 | ||||||
Common stock in treasury, at cost, 18 shares at June 2, 2012, and 112 shares at May 28, 2011 |
(216 | ) | (1,493 | ) | ||||
Retained earnings |
104,139 | 98,927 | ||||||
Accumulated other comprehensive income |
7,273 | 11,541 | ||||||
|
|
|
|
|||||
Total stockholders equity |
200,213 | 222,047 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 231,423 | $ | 314,054 | ||||
|
|
|
|
33
Richardson Electronics, Ltd.
Consolidated Statements of Comprehensive Income
(in thousands, except per share amounts)
Fiscal Year Ended | ||||||||||||
June 2, 2012 |
May 28, 2011 |
May 29 2010 |
||||||||||
Statements of Income |
||||||||||||
Net sales |
$ | 157,836 | $ | 158,867 | $ | 135,372 | ||||||
Cost of sales |
111,055 | 112,754 | 94,088 | |||||||||
|
|
|
|
|
|
|||||||
Gross profit |
46,781 | 46,113 | 41,284 | |||||||||
Selling, general, and administrative expenses |
40,603 | 43,255 | 43,183 | |||||||||
Loss (gain) on disposal of assets |
(77 | ) | 12 | 20 | ||||||||
|
|
|
|
|
|
|||||||
Operating income (loss) |
6,255 | 2,846 | (1,919 | ) | ||||||||
|
|
|
|
|
|
|||||||
Other (income) expense: |
||||||||||||
Interest expense |
1 | 141 | 1,176 | |||||||||
Investment income |
(1,387 | ) | (369 | ) | (34 | ) | ||||||
Foreign exchange (gain) loss |
(5 | ) | 607 | 1,116 | ||||||||
Loss on retirement of short-term debt |
| 60 | 203 | |||||||||
Other, net |
(10 | ) | (43 | ) | (130 | ) | ||||||
|
|
|
|
|
|
|||||||
Total other (income) expense |
(1,401 | ) | 396 | 2,331 | ||||||||
|
|
|
|
|
|
|||||||
Income (loss) from continuing operations before income taxes |
7,656 | 2,450 | (4,250 | ) | ||||||||
Income tax provision (benefit) |
(334 | ) | 468 | (68 | ) | |||||||
|
|
|
|
|
|
|||||||
Income (loss) from continuing operations |
7,990 | 1,982 | (4,182 | ) | ||||||||
Income from discontinued operations, net of tax |
536 | 85,966 | 20,277 | |||||||||
|
|
|
|
|
|
|||||||
Net income |
$ | 8,526 | $ | 87,948 | $ | 16,095 | ||||||
|
|
|
|
|
|
|||||||
Net income per Common share - Basic: |
||||||||||||
Income (loss) from continuing operations |
$ | 0.48 | $ | 0.11 | $ | (0.24 | ) | |||||
Income from discontinued operations |
0.03 | 4.87 | 1.16 | |||||||||
|
|
|
|
|
|
|||||||
Total net income (loss) per Common share - Basic: |
$ | 0.51 | $ | 4.98 | $ | 0.92 | ||||||
|
|
|
|
|
|
|||||||
Net income per Class B common share - Basic: |
||||||||||||
Income (loss) from continuing operations |
$ | 0.43 | $ | 0.10 | $ | (0.21 | ) | |||||
Income from discontinued operations |
0.03 | 4.38 | 1.04 | |||||||||
|
|
|
|
|
|
|||||||
Total net income (loss) per Class B common share - Basic: |
$ | 0.46 | $ | 4.48 | $ | 0.83 | ||||||
|
|
|
|
|
|
|||||||
Net income per Common share - Diluted: |
||||||||||||
Income (loss) from continuing operations |
$ | 0.47 | $ | 0.11 | $ | (0.24 | ) | |||||
Income from discontinued operations |
0.03 | 4.72 | 1.16 | |||||||||
|
|
|
|
|
|
|||||||
Total net income (loss) per Common share - Diluted: |
$ | 0.50 | $ | 4.83 | $ | 0.92 | ||||||
|
|
|
|
|
|
|||||||
Net income per Class B common share - Diluted: |
||||||||||||
Income (loss) from continuing operations |
$ | 0.43 | $ | 0.10 | $ | (0.21 | ) | |||||
Income from discontinued operations |
0.03 | 4.32 | 1.04 | |||||||||
|
|
|
|
|
|
|||||||
Total net income (loss) per Class B common share - Diluted: |
$ | 0.46 | $ | 4.42 | $ | 0.83 | ||||||
|
|
|
|
|
|
|||||||
Weighted average number of shares: |
||||||||||||
Common shares - Basic |
14,025 | 14,926 | 14,766 | |||||||||
|
|
|
|
|
|
|||||||
Class B common shares - Basic |
2,941 | 3,019 | 3,048 | |||||||||
|
|
|
|
|
|
|||||||
Common shares - Diluted |
17,118 | 18,203 | 14,766 | |||||||||
|
|
|
|
|
|
|||||||
Class B common shares - Diluted |
2,941 | 3,019 | 3,048 | |||||||||
|
|
|
|
|
|
|||||||
Dividends per common share |
$ | 0.200 | $ | 0.110 | $ | 0.080 | ||||||
|
|
|
|
|
|
|||||||
Dividends per Class B common share |
$ | 0.180 | $ | 0.099 | $ | 0.072 | ||||||
|
|
|
|
|
|
|||||||
Other Comprehensive Income |
||||||||||||
Foreign currency translation gain (loss), net of tax |
(4,227 | ) | 7,988 | (2,663 | ) | |||||||
Fair value adjustments on investments |
(40 | ) | 64 | (7 | ) | |||||||
|
|
|
|
|
|
|||||||
Comprehensive Income |
$ | 4,259 | $ | 96,000 | $ | 13,425 | ||||||
|
|
|
|
|
|
34
Richardson Electronics, Ltd.
Consolidated Statements of Cash Flows
(in thousands)
Fiscal Year Ended | ||||||||||||
June 2, 2012 |
May 28, 2011 |
May 29, 2010 |
||||||||||
Operating activities: |
||||||||||||
Net income |
$ | 8,526 | $ | 87,948 | $ | 16,095 | ||||||
Adjustments to reconcile net income to cash provided by (used in) operating activities: |
||||||||||||
Pre-tax gain on sale of RFPD |
| (111,432 | ) | | ||||||||
Depreciation and amortization |
1,112 | 1,964 | 4,052 | |||||||||
Inventory provisions |
512 | 1,926 | 1,260 | |||||||||
Settlement from SSD transaction |
| | 1,173 | |||||||||
Loss on retirement of short-term debt |
| 60 | 204 | |||||||||
Gain on sale of investments |
| (6 | ) | (35 | ) | |||||||
(Gain) Loss on disposal of assets |
(77 | ) | (11 | ) | 19 | |||||||
Income tax receivable |
(6,572 | ) | | | ||||||||
Stock compensation expense |
481 | 1,188 | 657 | |||||||||
Deferred income taxes |
2,855 | 252 | (146 | ) | ||||||||
Accounts receivable |
4,112 | (6,611 | ) | (8,002 | ) | |||||||
Inventories |
(4,941 | ) | (17,491 | ) | 444 | |||||||
Prepaid expenses |
5,058 | (6,108 | ) | 556 | ||||||||
Accounts payable |
(4,712 | ) | 2,043 | 9,070 | ||||||||
Accrued liabilities |
(50,115 | ) | 37,612 | 663 | ||||||||
Long-term income tax liabilities |
(5,205 | ) | 12,091 | (1,298 | ) | |||||||
Other |
243 | (1,291 | ) | (416 | ) | |||||||
|
|
|
|
|
|
|||||||
Net cash provided by operating activities |
(48,723 | ) | 2,134 | 24,296 | ||||||||
|
|
|
|
|
|
|||||||
Investing activities: |
||||||||||||
Cash consideration paid for acquired business |
(2,291 | ) | | | ||||||||
Capital expenditures |
(218 | ) | (533 | ) | (1,332 | ) | ||||||
Settlement from SSD transaction |
| | (1,000 | ) | ||||||||
Proceeds from sale of assets |
25 | 3 | 6 | |||||||||
Proceeds from sale of RFPD, less costs to sell |
| 228,973 | | |||||||||
Proceeds from maturity of investments |
376,633 | 776,541 | | |||||||||
Purchases of investments |
(423,585 | ) | (844,907 | ) | | |||||||
Proceeds from sales of available-for-sale securities |
208 | 186 | 186 | |||||||||
Purchases of available-for-sale securities |
(208 | ) | (186 | ) | (186 | ) | ||||||
Other |
39 | (64 | ) | 7 | ||||||||
|
|
|
|
|
|
|||||||
Net cash provided by (used in) investing activities |
(49,397 | ) | 160,013 | (2,319 | ) | |||||||
|
|
|
|
|
|
|||||||
Financing activities: |
||||||||||||
Proceeds from borrowings |
| 181,800 | 45,100 | |||||||||
Payments on debt |
| (181,800 | ) | (45,100 | ) | |||||||
Payments on retirement of short-term debt |
| (19,517 | ) | (32,807 | ) | |||||||
Repurchase of common stock |
(23,991 | ) | (8,838 | ) | (2,192 | ) | ||||||
Proceeds from issuance of common stock |
807 | 5,434 | 680 | |||||||||
Tax benefit from stock option exercises |
| 346 | | |||||||||
Cash dividends paid |
(3,315 | ) | (1,946 | ) | (1,399 | ) | ||||||
Other |
(75 | ) | | (1 | ) | |||||||
|
|
|
|
|
|
|||||||
Net cash used in financing activities |
(26,574 | ) | (24,521 | ) | (35,719 | ) | ||||||
|
|
|
|
|
|
|||||||
Effect of exchange rate changes on cash and cash equivalents |
(2,388 | ) | 4,311 | (1,107 | ) | |||||||
|
|
|
|
|
|
|||||||
Increase (decrease) in cash and cash equivalents |
(127,082 | ) | 141,937 | (14,849 | ) | |||||||
Cash and cash equivalents at beginning of period |
170,975 | 29,038 | 43,887 | |||||||||
|
|
|
|
|
|
|||||||
Cash and cash equivalents at end of period |
$ | 43,893 | $ | 170,975 | $ | 29,038 | ||||||
|
|
|
|
|
|
|||||||
Supplemental Disclosure of Cash Flow Information: |
||||||||||||
Cash paid during the fiscal year for: |
||||||||||||
Interest |
$ | 1 | $ | 1,229 | $ | 5,001 | ||||||
Income taxes |
$ | 40,143 | $ | 3,356 | $ | 1,468 |
35
Richardson Electronics, Ltd.
Consolidated Statement of Stockholders Equity
(in thousands)
Common | Class B Common |
Par Value |
Additional Paid In Capital |
Common Stock in Treasury |
Retained Earnings |
Accumulated Other Comprehensive Income |
Total | |||||||||||||||||||||||||
Balance May 30, 2009: |
15,930 | 3,048 | $ | 949 | $ | 120,370 | $ | (6,310 | ) | $ | (2,475 | ) | $ | 6,159 | $ | 118,693 | ||||||||||||||||
Comprehensive income |
||||||||||||||||||||||||||||||||
Net income |
| | | | | 16,095 | | 16,095 | ||||||||||||||||||||||||
Foreign currency translation |
| | | | | | (2,663 | ) | (2,663 | ) | ||||||||||||||||||||||
Fair value adjustments on investments |
| | | | | | (7 | ) | (7 | ) | ||||||||||||||||||||||
Comprehensive income |
||||||||||||||||||||||||||||||||
Share - based compensation: |
||||||||||||||||||||||||||||||||
Non-vested restricted stock |
| | | 29 | | | | 29 | ||||||||||||||||||||||||
Stock options |
| | | 628 | (11 | ) | | | 617 | |||||||||||||||||||||||
Common stock: |
||||||||||||||||||||||||||||||||
Employee stock option grant |
| | 5 | 5 | | | | 10 | ||||||||||||||||||||||||
Options Exercised |
99 | | | 670 | | | | 670 | ||||||||||||||||||||||||
ESOP transfer |
| | | | 10 | | | 10 | ||||||||||||||||||||||||
Repurchase of common stock |
| | | | (2,192 | ) | | | (2,192 | ) | ||||||||||||||||||||||
Dividends paid to: |
||||||||||||||||||||||||||||||||
Common ($0.08 per share) |
| | | (594 | ) | | (585 | ) | | (1,179 | ) | |||||||||||||||||||||
Class B ($0.072 per share) |
| | | (110 | ) | | (110 | ) | | (220 | ) | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance May 29, 2010: |
16,029 | 3,048 | $ | 954 | $ | 120,998 | $ | (8,503 | ) | $ | 12,925 | $ | 3,489 | $ | 129,863 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Comprehensive income |
||||||||||||||||||||||||||||||||
Net income |
| | | | | 87,948 | | 87,948 | ||||||||||||||||||||||||
Foreign currency translation |
| | | | | | 7,988 | 7,988 | ||||||||||||||||||||||||
Fair value adjustments on investments |
| | | | | | 64 | 64 | ||||||||||||||||||||||||
Comprehensive income |
||||||||||||||||||||||||||||||||
Share - based compensation: |
||||||||||||||||||||||||||||||||
Non-vested restricted stock |
| | | 11 | | | | 11 | ||||||||||||||||||||||||
Stock options |
| | | 1,177 | | | | 1,177 | ||||||||||||||||||||||||
Common stock: |
||||||||||||||||||||||||||||||||
Employee stock option grant |
1 | | | 5 | | | | 5 | ||||||||||||||||||||||||
Options Exercised |
700 | | 34 | 5,741 | | | | 5,775 | ||||||||||||||||||||||||
Converted Class B to Common |
96 | (96 | ) | | | | | | | |||||||||||||||||||||||
Repurchase of common stock |
| | | | (8,837 | ) | | | (8,837 | ) | ||||||||||||||||||||||
Treasury stock |
(1,905 | ) | | (95 | ) | (15,753 | ) | 15,847 | | | (1 | ) | ||||||||||||||||||||
Dividends paid to: |
||||||||||||||||||||||||||||||||
Common ($0.11 per share) |
| | | | | (1,647 | ) | | (1,647 | ) | ||||||||||||||||||||||
Class B ($0.099 per share) |
| | | | | (299 | ) | | (299 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance May 28, 2011: |
14,921 | 2,952 | $ | 893 | $ | 112,179 | $ | (1,493 | ) | $ | 98,927 | $ | 11,541 | $ | 222,047 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Comprehensive income |
||||||||||||||||||||||||||||||||
Net income |
| | | | | 8,526 | | 8,526 | ||||||||||||||||||||||||
Foreign currency translation |
| | | | | | (4,227 | ) | (4,227 | ) | ||||||||||||||||||||||
Fair value adjustments on investments |
| | | | | | (40 | ) | (40 | ) | ||||||||||||||||||||||
Comprehensive income |
||||||||||||||||||||||||||||||||
Share - based compensation: |
||||||||||||||||||||||||||||||||
Stock options |
| | | 481 | | | | 481 | ||||||||||||||||||||||||
Common stock: |
||||||||||||||||||||||||||||||||
Options Exercised |
121 | | 5 | 799 | (79 | ) | | | 725 | |||||||||||||||||||||||
Converted Class B to Common |
| (32 | ) | | | | | | | |||||||||||||||||||||||
Repurchase of common stock |
| | | | (23,991 | ) | | | (23,991 | ) | ||||||||||||||||||||||
Treasury stock |
(2,000 | ) | | (100 | ) | (25,242 | ) | 25,347 | | | 5 | |||||||||||||||||||||
Other |
32 | | 2 | | | 1 | (1 | ) | 2 | |||||||||||||||||||||||
Dividends paid to: |
||||||||||||||||||||||||||||||||
Common ($0.20 per share) |
| | | | | (2,787 | ) | | (2,787 | ) | ||||||||||||||||||||||
Class B ($0.18 per share) |
| | | | | (528 | ) | | (528 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance June 2, 2012: |
13,074 | 2,920 | $ | 800 | $ | 88,217 | $ | (216 | ) | $ | 104,139 | $ | 7,273 | $ | 200,213 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
Notes to Consolidated Financial Statements
(in thousands, except per share amounts)
1. DESCRIPTION OF THE COMPANY
Richardson Electronics, Ltd. is incorporated in the state of Delaware. We are a leading global provider of engineered solutions, power grid and microwave tubes and related components, and customized display solutions, serving customers in the alternative energy, aviation, broadcast, communications, industrial, marine, medical, military, scientific, and semiconductor 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 electron tubes and related components, microwave generators, subsystems used in semiconductor manufacturing, 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.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) for all fiscal years presented.
The consolidated financial statements include our wholly owned subsidiaries. All intercompany transactions and account balances have been eliminated in consolidation.
The consolidated balance sheets for the fiscal year ended May 28, 2011, and our consolidated statements of comprehensive income for the years ended May 28, 2011, and May 29, 2010, have been restated to reflect the Transaction. Refer to Note 5 Discontinued Operations of our notes to our consolidated financial statements for additional discussion on the sale of RFPD.
Our financial statements for the fiscal year ended May 28, 2011, have been restated to reflect a misstatement. Refer to Note 3 Restatement of our notes to our consolidated financial statements for additional discussion on this misstatement.
Our fiscal year 2012 began on May 29, 2011, and ended on June 2, 2012. Unless otherwise noted, all references to a particular year in this document shall mean our fiscal year.
3. RESTATEMENT
During the second quarter of fiscal 2012, in connection with an ongoing IRS examination, we determined that a deduction taken on our fiscal year 2006 federal tax return was taken in error. As a result, the tax impact of the Net Operating Loss (NOL) carry forward from fiscal 2006 was overstated by approximately $2.1 million. The NOL from fiscal 2006 was fully utilized and the reversal of all associated valuation allowances was recorded in our results from discontinued operations during fiscal 2011. The deferred tax asset related to the NOL was fully reserved prior to the fourth quarter of fiscal 2011.
The Securities and Exchange Commission (the SEC or Commission) Staff Accounting Bulletin 108 (SAB 108) provides guidance on quantifying and evaluating the materiality of errors. SAB 108 requires that a company considers the iron curtain and the rollover approach when quantifying misstatement amounts. Under the rollover approach, the error is quantified as the amount by which the current year income statement is misstated. The iron curtain approach quantifies the error using both a balance sheet and an income statement approach and evaluates whether either of these approaches results in quantifying a misstatement that is material, considering all relevant quantitative and qualitative factors.
37
Materiality was also assessed from a qualitative perspective based on whether it was probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item. We do not believe the effect of this error would have changed or influenced the judgment of a reasonable person.
We have performed an analysis of this error using both the rollover and iron curtain methods and have concluded that this error is material to our current periods financial statements and immaterial to fiscal 2011 financial statements. Accordingly, we restated our fiscal 2011 financial statements to correct the error in this Form 10-K. This error did not impact the financial statements prior to fiscal 2011, as the NOL was fully reserved prior to the fourth quarter of fiscal 2011.
During fiscal 2012, the effect on retained earnings and net income were as follows (in thousands):
Effect on Retained Earnings |
Effect on Net Income |
|||||||
Recording of prior years income tax expense |
$ | (2,126 | ) | $ | | |||
Income tax effect on the above |
$ | | $ | | ||||
|
|
|
|
|||||
Net SAB 108 Effect |
$ | (2,126 | ) | $ | | |||
|
|
|
|
The understatement of our income tax accrual as of our fiscal year ended May 28, 2011, affected our consolidated balance sheet as follows (in thousands):
As Reported | Restated | |||||||
Discontinued Liabilities |
$ | 13,771 | $ | 15,897 | ||||
Retained Earnings |
$ | 101,053 | $ | 98,927 |
The understatement of income tax expense for our fiscal year ended May 28, 2011, affected our consolidated statement of operations as follows (in thousands, except per share data):
As Reported | Restated | |||||||
Income from discontinued operations, net of tax |
$ | 88,092 | $ | 85,966 | ||||
Net Income |
$ | 90,074 | $ | 87,948 | ||||
Income from discontinued operations per diluted share |
$ | 4.84 | $ | 4.72 | ||||
Net Income per diluted share |
$ | 4.95 | $ | 4.83 |
4. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management continuously evaluates its critical accounting policies and estimates, including the allowance for doubtful accounts, revenue recognition, inventory obsolescence, loss contingencies and income taxes. Management bases the estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances, however, actual results could differ from those estimates.
38
Fair Values of Financial Instruments: The fair values of financial instruments are determined based on quoted market prices and market interest rates as of the end of the reporting period. Our financial instruments include investments, accounts receivable, accounts payable, and accrued liabilities. The fair values of these financial instruments were not materially different from their carrying values at June 2, 2012, and May 28, 2011.
Cash and Cash Equivalents: We consider short-term, highly liquid investments that are readily convertible to known amounts of cash, and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates, and that have a maturity of three months or less, when purchased, to be cash equivalents. The carrying amounts reported in the balance sheet for cash and cash equivalents approximate the fair market value of these assets.
Allowance for Doubtful Accounts: Our allowance for doubtful accounts includes estimated losses that result from uncollectible receivables. The estimates are influenced by the following: continuing credit evaluation of customers financial conditions; aging of receivables, individually and in the aggregate; a large number of customers which are widely dispersed across geographic areas; collectability and delinquency history by geographic area; and the fact that no single customer accounts for more than 10% of net sales. Significant changes in one or more of these considerations may require adjustments affecting net income and net carrying value of accounts receivable. The allowance for doubtful accounts was approximately $1.1 million as of June 2, 2012, and $0.4 million as of May 28, 2011.
Goodwill and Other Intangible Assets: Goodwill is initially recorded based on the premium paid for acquisitions and is subsequently tested for impairment. We test goodwill for impairment annually and whenever events or circumstances indicates an impairment may have occurred, such as a significant adverse change in the business climate, loss of key personnel or a decision to sell or dispose of a reporting unit. As of the fiscal year ended June 2, 2012, our goodwill balance was $1.3 million and represents the premium we paid for Powerlink during our second quarter of fiscal 2012.
During the fourth quarter of each fiscal year, our goodwill balances are reviewed for impairment using the last day of our third quarter as the measurement date. In accordance with ASC 350 IntangiblesGoodwill and Other, if indicators of impairment are deemed to be present, we would perform an interim impairment test and any resulting impairment loss would be charged to expense in the period identified.
During the fourth quarter of fiscal 2012, we adopted Accounting Standards Update (ASU) 2011-08 which allows for the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of an operating segment. We applied this qualitative approach to our EDG operating segment and concluded that indications of impairment were not present as of June 2, 2012. The qualitative factors considered included macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, and other relevant entity or reporting unit specific events.
Intangible assets are initially recorded at their fair market values determined on quoted market prices in active markets, if available, or recognized valuation models. Intangible assets that have finite useful lives are amortized on a straight-line basis over their useful lives.
Our intangible asset is the fair value that we determined for customer relationships acquired in connection with the acquisition of Powerlink during the second quarter of our fiscal year 2012. The fair value was based upon discounted cash flows that the customer relationships are expected to generate over the next twenty years.
Inventories: Our worldwide inventories are stated at the lower of cost or market, generally using a weighted-average cost method. Our inventories include $31.8 million of finished goods and $2.9 million of raw materials and work-in-progress.
39
Property, Plant and Equipment: Property, plant and equipment are stated at cost, net of accumulated depreciation. Improvements and replacements are capitalized while expenditures for maintenance and repairs are charged to expense as incurred. Provisions for depreciation are computed using the straight-line method over the estimated useful life of the asset. Depreciation expense was approximately $1.1 million, $1.2 million, and $1.4 million during fiscal 2012, 2011, and 2010, respectively. Property, plant and equipment consist of the following (in thousands):
June 2, 2012 |
May 28, 2011 |
|||||||
Land and improvements |
$ | 1,447 | $ | 1,388 | ||||
Buildings and improvements |
18,394 | 18,515 | ||||||
Computer and communications equipment |
1,698 | 1,651 | ||||||
Machinery and other equipment |
4,772 | 4,904 | ||||||
|
|
|
|
|||||
26,311 | 26,458 | |||||||
Accumulated depreciation |
(21,936 | ) | (21,242 | ) | ||||
|
|
|
|
|||||
Property, plant, and equipment, net |
$ | 4,375 | $ | 5,216 | ||||
|
|
|
|
Supplemental disclosure information of the estimated useful life of the asset:
Land improvements |
10 years | |||||
Buildings and improvements |
10 - 30 years | |||||
Computer and communications equipment |
3 - 10 years | |||||
Machinery and other equipment |
3 - 10 years |
Investments: During fiscal 2012, we invested in time deposits and certificate of deposits (CD) in the amount of $115.3 million. Of this, $105.0 million mature in less than twelve months and $10.3 million mature in greater than twelve months. The fair value of these investments is the face value of each time deposit and CD.
We also have investments in equity securities, all of which are classified as available-for-sale and are carried at their fair value based on quoted market prices. Our investments, which are included in non-current investments, had a carrying amount of $0.4 million at June 2, 2012, and at May 28, 2011. Proceeds from the sale of securities were $0.2 million during fiscal 2012, fiscal 2011, and fiscal 2010. We reinvested proceeds from the sale of securities, and the cost of the equity securities sold was based on a specific identification method. Gross realized gains and losses on those sales were less than $0.1 million during fiscal 2012, fiscal 2011, and fiscal 2010. Net unrealized holding losses during fiscal 2012, fiscal 2011, and fiscal 2010 were $0.1 million or less, and have been included in accumulated comprehensive income (loss) during its respective fiscal year.
Accrued Liabilities: Accrued liabilities consist of the following (in thousands):
June 2, 2012 |
May 28, 2011 |
|||||||
Compensation and payroll taxes |
$ | 3,442 | $ | 4,330 | ||||
Income taxes |
1,196 | 31,659 | ||||||
Professional fees |
603 | 623 | ||||||
Other accrued expenses |
3,225 | 7,107 | ||||||
|
|
|
|
|||||
Accrued Liabilities |
$ | 8,466 | $ | 43,719 | ||||
|
|
|
|
40
Warranties: We offer warranties for the limited number of specific products we manufacture. We also provide extended warranties for some products we sell that lengthen the period of coverage specified in the manufacturers original warranty. Our warranty terms generally range from one to three years.
We estimate the cost to perform under the warranty obligation and recognize this estimated cost at the time of the related product sale. We record expense related to our warranty obligations as cost of sales in our consolidated statements of comprehensive income. Each quarter, we assess actual warranty costs incurred on a product-by-product basis and compare the warranty costs to our estimated warranty obligation. With respect to new products, estimates are based generally on knowledge of the products, the extended warranty period, and warranty experience.
Warranty reserves are established for costs that are expected to be incurred after the sale and delivery of products under warranty. Warranty reserves are included in accrued liabilities on our consolidated balance sheets. The warranty reserves are determined based on known product failures, historical experience, and other available evidence.
Changes in the warranty reserve during fiscal 2012 and 2011 were as follows (in thousands):
Warranty Reserve |
||||
Balance at May 29, 2010 |
$ | 138 | ||
Accruals for products sold |
341 | |||
Utilization |
(322 | ) | ||
Adjustment |
(26 | ) | ||
Foreign exchange |
7 | |||
|
|
|||
Balance at May 28, 2011 |
$ | 138 | ||
Accruals for products sold |
328 | |||
Utilization |
(305 | ) | ||
Adjustment |
(10 | ) | ||
Foreign exchange |
(3 | ) | ||
|
|
|||
Balance at June 2, 2012 |
$ | 148 |
Other Non-Current Liabilities: Other non-current liabilities of $1.2 million at June 2, 2012, and $0.4 million at May 28, 2011, primarily represent retirement obligations in various non-US locations.
Foreign Currency Translation: Balance sheet items for our foreign entities, included in our consolidated balance sheet are translated into U.S. dollars at end-of-period spot rates. Gains and losses resulting from translation of foreign subsidiary financial statements are credited or charged directly to accumulated other comprehensive income/(loss), a component of stockholders equity. Revenues and expenses are translated at the current rate on the date of the transaction. Gains and losses resulting from foreign currency transactions are included in income. Foreign currency translation reflected in our consolidated statements of comprehensive income was a gain of less than $0.1 million during fiscal 2012, a loss of $0.6 million during fiscal 2011, and a loss of $1.1 million during fiscal 2010.
41
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.
Shipping and Handling Fees and Costs: Shipping and handling costs billed to customers are reported as revenue and the related costs are reported as a component of cost of sales.
Income Taxes: We recognize deferred tax assets and liabilities based on the differences between financial statement carrying amounts and the tax bases of assets and liabilities. We regularly review our deferred tax assets for recoverability and determine the need for a valuation allowance based on a number of factors, including both positive and negative evidence. These factors include historical taxable income or loss, projected future taxable income or loss, the expected timing of the reversals of existing temporary differences, and the implementation of tax planning strategies. In circumstances where we, or any of our affiliates, have incurred three years of cumulative losses which constitute significant negative evidence, positive evidence of equal or greater significance is needed to overcome the negative evidence before a tax benefit is recognized for deductible temporary differences and loss carryforwards.
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 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.
Share-Based Compensation: We measure and recognize compensation cost at fair value for all share-based payments, including stock options. We estimate fair value using the Black-Scholes option-pricing model, which requires assumptions such as expected volatility, risk-free interest rate, expected life, and dividends. Compensation cost is recognized using a graded-vesting schedule over the applicable vesting period, or date on which retirement eligibility is achieved, if shorter (non-substantive vesting period approach). Share-based compensation expense totaled approximately $0.5 million during fiscal 2012, $1.2 million during fiscal 2011, and $0.6 million during fiscal 2010.
42
Stock options granted to members of the Board of Directors generally vest immediately and stock options granted to employees generally vest over a period of five years and have contractual terms to exercise of 10 years. A summary of stock option activity is as follows (in thousands, except option prices and years):
Number of Options |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Life |
Aggregate Intrinsic Value |
|||||||||||||
Options outstanding at May 30, 2009 |
1,673 | $ | 8.38 | |||||||||||||
Granted |
303 | 5.67 | ||||||||||||||
Exercised |
(98 | ) | 6.88 | |||||||||||||
Forfeited |
(42 | ) | 6.30 | |||||||||||||
Cancelled |
(153 | ) | 7.70 | |||||||||||||
|
|
|||||||||||||||
Options outstanding at May 29, 2010 |
1,683 | $ | 8.09 | |||||||||||||
Granted |
209 | 12.94 | ||||||||||||||
Exercised |
(699 | ) | 7.77 | |||||||||||||
Forfeited |
(114 | ) | 5.99 | |||||||||||||
Cancelled |
(196 | ) | 13.69 | |||||||||||||
|
|
|||||||||||||||
Options outstanding at May 28, 2011 |
883 | $ | 8.51 | |||||||||||||
Granted |
140 | 12.87 | ||||||||||||||
Exercised |
(121 | ) | 6.68 | |||||||||||||
Forfeited |
(62 | ) | 8.91 | |||||||||||||
Cancelled |
(74 | ) | 7.92 | |||||||||||||
|
|
|||||||||||||||
Options outstanding at June 2, 2012 |
766 | $ | 9.52 | 6.9 | $ | 2,026 | ||||||||||
|
|
|||||||||||||||
Options vested at June 2, 2012 |
329 | $ | 8.66 | 5.0 | $ | 1,028 | ||||||||||
|
|
There were 121,000 stock options exercised during fiscal 2012, with cash received of $0.8 million. The total intrinsic value of options exercised totaled $0.6 million during fiscal 2012, $2.8 million during fiscal 2011, and $0.3 million during fiscal 2010. The weighted average fair value of stock option grants was $5.83 during fiscal 2012, $6.72 during fiscal 2011, and $2.81 during fiscal 2010. As of June 2, 2012, total unrecognized compensation costs related to unvested stock options was approximately $1.7 million which is expected to be recognized over the remaining weighted average period of five years. The total grant date fair value of stock options vested during fiscal 2012 was $0.8 million.
The fair value of stock options is estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:
June 2, 2012 |
May 28, 2011 |
May 29, 2010 |
||||||||||
Expected volatility |
53.91 | % | 54.56 | % | 55.99 | % | ||||||
Risk-free interest rate |
1.52 | % | 2.73 | % | 2.85 | % | ||||||
Expected lives (years) |
6.29 | 6.32 | 6.38 | |||||||||
Annual cash dividend |
$ | 0.20 | $ | 0.11 | $ | 0.08 |
The expected volatility assumptions are based on historical experience. The risk-free interest rate is based on the yield of a treasury note with a remaining term equal to the expected life of the stock option.
43
The expected stock option life assumption is based on the Securities and Exchange Commissions (SEC) guidance in Staff Accounting Bulletin (SAB) No. 107 (SAB No. 107). On December 21, 2007, the SEC issued SAB No. 110 stating that they will continue to accept SAB No. 107, past the original expiration date of December 31, 2007. For stock options granted during fiscal years 2012, 2011, and 2010, we believe that our historical stock option experience does not provide a reasonable basis upon which to estimate expected term. We utilized the Safe Harbor option, or Simplified Method, to determine the expected term of these options in accordance with SAB No. 107 for options granted. We intend to continue to utilize the Simplified Method for future grants in accordance with SAB No. 110 until such time that we believe that our historical stock option experience will provide a reasonable basis to estimate an expected term.
The following table summarizes information about stock options outstanding at June 2, 2012 (in thousands, except option prices and years):
Outstanding | Vested | |||||||||||||||||||||||||||||||
Exercise Price Range |
Shares | Price | Life | Aggregate Intrinsic Value |
Shares | Price | Life | Aggregate Intrinsic Value |
||||||||||||||||||||||||
$3.46 to $5.67 |
236 | $ | 5.43 | 7.0 | $ | 1,438 | 85 | $ | 5.36 | 7.0 | $ | 521 | ||||||||||||||||||||
$7.06 to $12.11 |
257 | $ | 9.26 | 5.2 | $ | 588 | 194 | $ | 8.92 | 4.2 | $ | 507 | ||||||||||||||||||||
$12.95 to $13.76 |
273 | $ | 13.30 | 8.3 | $ | | 50 | $ | 13.23 | 4.7 | $ | | ||||||||||||||||||||
|
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|
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|
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|
|
|
|||||||||||||||||
Total |
766 | $ | 9.52 | 6.9 | $ | 2,026 | 329 | $ | 8.66 | 5.0 | $ | 1,028 | ||||||||||||||||||||
|
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A summary of restricted stock award transactions was as follows (in thousands):
Shares | ||||
Unvested at May 30, 2009 |
8 | |||
Granted |
| |||
Vested |
(4 | ) | ||
Cancelled |
| |||
|
|
|||
Unvested at May 29, 2010 |
4 | |||
Granted |
| |||
Vested |
(4 | ) | ||
Cancelled |
| |||
|
|
|||
Unvested at May 28, 2011 |
| |||
Granted |
| |||
Vested |
| |||
Cancelled |
| |||
|
|
|||
Unvested at June 2, 2012 |
| |||
|
|
There were no stock awards issued in fiscal 2012. Compensation effects arising from issuing stock awards in fiscal 2012 and fiscal 2011, have been charged against income and recorded as additional paid-in-capital in the consolidated statements of stockholders equity and were immaterial.
The Employees 2011 Incentive Compensation Plan authorizes the issuance of up to 750,000 shares as incentive stock options, non-qualified stock options, or stock awards. Under this plan, 655,000 shares are reserved for future issuance. The Plan authorizes the granting of stock options at the fair market value at the date of grant. Generally, these options become exercisable over five years and expire up to 10 years from the date of grant.
44
On June 16, 2005, our Board of Directors adopted the 2006 Stock Option Plan for Non-Employee Directors which authorizes the issuance of up to 400,000 shares as non-qualified stock options. Under this plan, 185,000 shares of common stock have been reserved for future issuances relating to stock options exercisable based on the passage of time. Each option is exercisable over a period of time from its date of grant at the market value on the grant date and expires after 10 years. This plan replaces the 1996 Stock Option Plan for Non-Employee Directors which was terminated on June 16, 2005.
Earnings per Share: We have authorized 30,000,000 shares of common stock, 10,000,000 shares of Class B common stock, and 5,000,000 shares of preferred stock. The Class B common stock has 10 votes per share and has transferability restrictions; however, Class B common stock may be converted into common stock on a share-for-share basis at any time. With respect to dividends and distributions, shares of common stock and Class B common stock rank equally and have the same rights, except that Class B common stock cash dividends are limited to 90% of the amount of Class A common stock cash dividends.
In accordance with ASC 260-10, Earnings Per Share (ASC 260), our Class B common stock is considered a participating security requiring the use of the two-class method for the computation of basic and diluted earnings per share. The two-class computation method for each period reflects the cash dividends paid per share for each class of stock, plus the amount of allocated undistributed earnings per share computed using the participation percentage which reflects the dividend rights of each class of stock. Basic and diluted earnings per share were computed using the two-class method as prescribed in ASC 260. The shares of Class B common stock are considered to be participating convertible securities since the shares of Class B common stock are convertible on a share-for-share basis into shares of common stock and may participate in dividends with common stock according to a predetermined formula which is 90% of the amount of Class A common stock cash dividends.
Diluted earnings per share is calculated by dividing net income, adjusted for interest savings, net of tax, on assumed conversion of convertible debentures and notes, by the actual shares outstanding and share equivalents that would arise from the exercise of stock options, certain restricted stock awards, and the assumed conversion of convertible debentures and notes when dilutive. For fiscal 2010, the assumed conversion and the effect of the interest savings of our 7 3/4% Notes were excluded because their inclusion would have been anti-dilutive.
For fiscal 2010, the weighted-average number of shares used to calculate diluted earnings per share is equal to the basic weighted average shares due to the loss from continuing operations during these periods.
45
The per share amounts presented in the consolidated statements of comprehensive income are based on the following (amounts in thousands, except per share amounts):
For the Fiscal Year Ended | ||||||||||||||||||||||||
June 2, 2012 | May 28, 2011 | May 29, 2010 | ||||||||||||||||||||||
Basic | Diluted | Basic | Diluted | Basic | Diluted | |||||||||||||||||||
Numerator for Basic and Diluted EPS: |
||||||||||||||||||||||||
Income (loss) from continuing operations |
$ | 7,990 | $ | 7,990 | $ | 1,982 | $ | 1,982 | $ | (4,182 | ) | $ | (4,182 | ) | ||||||||||
Less dividends: |
||||||||||||||||||||||||
Common stock |
2,787 | 2,787 | 1,647 | 1,647 | 1,179 | 1,179 | ||||||||||||||||||
Class B common stock |
528 | 528 | 299 | 299 | 220 | 220 | ||||||||||||||||||
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|
|
|
|||||||||||||
Undistributed earnings (losses) |
$ | 4,675 | $ | 4,675 | $ | 36 | $ | 36 | $ | (5,581 | ) | $ | (5,581 | ) | ||||||||||
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|
|||||||||||||
Common stock undistributed earnings (losses) |
$ | 3,933 | $ | 3,939 | $ | 30 | $ | 31 | $ | (4,707 | ) | $ | (4,707 | ) | ||||||||||
Class B common stock undistributed earnings (losses) |
742 | 736 | 6 | 5 | (874 | ) | (874 | ) | ||||||||||||||||
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|
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|||||||||||||
Total undistributed earnings (losses) |
$ | 4,675 | $ | 4,675 | $ | 36 | $ | 36 | $ | (5,581 | ) | $ | (5,581 | ) | ||||||||||
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Income from discontinued operations |
$ | 536 | $ | 536 | $ | 85,966 | $ | 85,966 | $ | 20,277 | $ | 20,277 | ||||||||||||
Less dividends: |
||||||||||||||||||||||||
Common stock |
2,787 | 2,787 | 1,647 | 1,647 | 1,179 | 1,179 | ||||||||||||||||||
Class B common stock |
528 | 528 | 299 | 299 | 220 | 220 | ||||||||||||||||||
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Undistributed earnings (losses) |
$ | (2,779 | ) | $ | (2,779 | ) | $ | 84,020 | $ | 84,020 | $ | 18,878 | $ | 18,878 | ||||||||||
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Common stock undistributed earnings (losses) |
$ | (2,338 | ) | $ | (2,342 | ) | $ | 71,081 | $ | 71,267 | $ | 15,920 | $ | 15,920 | ||||||||||
Class B common stock undistributed earnings (losses) |
(441 | ) | (437 | ) | 12,939 | 12,753 | 2,958 | 2,958 | ||||||||||||||||
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Total undistributed earnings (losses) |
$ | (2,779 | ) | $ | (2,779 | ) | $ | 84,020 | $ | 84,020 | $ | 18,878 | $ | 18,878 | ||||||||||
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|||||||||||||
Net income |
$ | 8,526 | $ | 8,526 | $ | 87,948 | $ | 87,948 | $ | 16,095 | $ | 16,095 | ||||||||||||
Less dividends: |
||||||||||||||||||||||||
Common stock |
2,787 | 2,787 | 1,647 | 1,647 | 1,179 | 1,179 | ||||||||||||||||||
Class B common stock |
528 | 528 | 299 | 299 | 220 | 220 | ||||||||||||||||||
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Undistributed earnings |
$ | 5,211 | $ | 5,211 | $ | 86,002 | $ | 86,002 | $ | 14,696 | $ | 14,696 | ||||||||||||
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|||||||||||||
Common stock undistributed earnings |
$ | 4,384 | $ | 4,391 | $ | 72,757 | $ | 72,948 | $ | 12,394 | $ | 12,394 | ||||||||||||
Class B common stock undistributed earnings |
827 | 820 | 13,245 | 13,054 | 2,302 | 2,302 | ||||||||||||||||||
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Total undistributed earnings |
$ | 5,211 | $ | 5,211 | $ | 86,002 | $ | 86,002 | $ | 14,696 | $ | 14,696 | ||||||||||||
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Denominator for basic and diluted EPS: |
||||||||||||||||||||||||
Common stock weighted average shares |
14,025 | 14,025 | 14,926 | 14,926 | 14,766 | 14,766 | ||||||||||||||||||
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Class B common stock weighted average shares, and shares under if-converted method for diluted EPS |
2,941 | 2,941 | 3,019 | 3,019 | 3,048 | 3,048 | ||||||||||||||||||
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Effect of dilutive securities |
||||||||||||||||||||||||
Dilutive stock options |
152 | 258 | | |||||||||||||||||||||
Denominator for diluted EPS adjusted for weighted average shares and assumed conversions |
17,118 | 18,203 | 17,814 | |||||||||||||||||||||
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Income (loss) from continuing operations per share: |
||||||||||||||||||||||||
Common stock |
$ | 0.48 | $ | 0.47 | $ | 0.11 | $ | 0.11 | $ | (0.24 | ) | $ | (0.24 | ) | ||||||||||
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Class B common stock |
$ | 0.43 | $ | 0.43 | $ | 0.10 | $ | 0.10 | $ | (0.21 | ) | $ | (0.21 | ) | ||||||||||
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Income from discontinued operations per share: |
||||||||||||||||||||||||
Common stock |
$ | 0.03 | $ | 0.03 | $ | 4.87 | $ | 4.72 | $ | 1.16 | $ | 1.16 | ||||||||||||
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Class B common stock |
$ | 0.03 | $ | 0.03 | $ | 4.38 | $ | 4.32 | $ | 1.04 | $ | 1.04 | ||||||||||||
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Net income per share: |
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Common stock |
$ | 0.51 | $ | 0.50 | $ | 4.98 | $ | 4.83 | $ | 0.92 | $ | 0.92 | ||||||||||||
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Class B common stock |
$ | 0.46 | $ | 0.46 | $ | 4.48 | $ | 4.42 | $ | 0.83 | $ | 0.83 | ||||||||||||
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Note: Common stock options that were anti-dilutive and not included in diluted earnings per common share for fiscal 2012, fiscal 2011, and fiscal 2010 were 272,864, 237,064, and 339,714 respectively.
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New Accounting Pronouncements: During December 2011, the FASB issued Accounting Standard Update (ASU) No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The amendments to the Codification in ASU No. 2011-12 are effective at the same time as the amendments in ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, so that entities will not be required to comply with the presentation requirements in ASU No. 2011-05 that ASU No. 2011-12 is deferring. In order to defer only those changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments, the paragraphs in ASU No. 2011-12 supersede certain pending paragraphs in ASU No. 2011-05. The amendments are being made to allow the FASB time to re-deliberate whether to present on the face of the financial statements the effects of the reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the FASB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods with those years, beginning after December 15, 2011, and as such, we have adopted ASU No. 2011-05 during our third quarter of fiscal 2012.
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.
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 entitys 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 adopted ASU Update No. 2011-08 during our fourth quarter of fiscal 2012 and the adoption did not have a material impact on our financial results.
During May 2011, the FASB issued ASC Update No. 2011-05, Comprehensive Income: Presentation of Comprehensive Income, (ASC Update No. 2011-05). This amends the FASB Accounting Standards Codification to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with the total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU Update No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders equity. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or
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when an item of other comprehensive income must be reclassified to net income. ASU Update No. 2011-05 should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim period within those years, beginning after December 15, 2011, and as such, we adopted ASC Update No. 2011-05 during our third quarter of fiscal 2012.
5. 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 RFPD division, as well as certain other Company assets, including our information technology assets, to Arrow in exchange for $238.8 million, which included an estimated pre-closing working capital adjustment of approximately $27.0 million. 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 of fiscal 2012. During the second quarter of fiscal 2012, we paid Arrow $3.9 million to settle the agreed upon working capital adjustment.
Following the Transaction, the Compensation Committee of our Board of Directors granted cash bonus compensation to certain executive officers and former employees in recognition of their efforts for successfully completing the Transaction. The cash bonus compensation amount awarded was approximately $3.8 million, and was recorded as expense from discontinued operations during the fourth quarter of fiscal 2011.
To help facilitate the transition of RFPD to Arrow, we agreed to provide certain transitional services to Arrow such as financial support services, warehouse services, and access to facilities in accordance with the terms of the Transition Services Agreement. Arrow also agreed to provide certain transitional services such as information technology services, warehouse services, and access to facilities and equipment in accordance with the terms of the Transition Services Agreement. The duration of the transitional services were less than one year from March 1, 2011, except for the information technology services which is three years. In addition, we entered into a Manufacturing Agreement with Arrow, in connection with the Transaction, for a term of three years. Pursuant to the Manufacturing Agreement, we agreed to manufacture certain products for Arrow.
The Transition Services Agreement, which commenced on March 1, 2011, and ended on March 1, 2012, allowed us to exert very limited influence over Arrows operating and financial policies. The continuing cash flows related to our Transition Services Agreement as well as the Manufacturing Agreement, are insignificant. We believe it is appropriate to include fees and associated costs with the Transition Services Agreement that relate to financial support, certain facilities, and certain warehouse services in discontinued operations as they relate specifically to RFPD. We further believe it is appropriate to treat the revenue and costs associated with the Manufacturing Agreement as discontinued operations as it relates specifically to RFPD.
Honeywell Transaction
On May 31, 2007, we completed the sale of the Security Systems Division/Burtek Systems (SSD/Burtek) to Honeywell International Inc. (Honeywell). The sale agreement of SSD/Burtek to Honeywell contemplated a post-closing working capital-based purchase price adjustment. During the third quarter of fiscal 2008, we received notification from Honeywell seeking a purchase price adjustment and we issued a dispute notice in a timely manner. On December 18, 2009, we reached an agreement with Honeywell to settle the pending working capital disputes as well as other related claims. As a result, we recorded $1.2 million of expense, net of zero tax effect, as a loss from discontinued operations during fiscal 2010.
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Financial Summary Discontinued Operations
Summary financial results for fiscal 2012, 2011, and 2010 are presented in the following table (in thousands):
Fiscal 2012 | Fiscal 2011 | Fiscal 2010 | ||||||||||
Net sales |
$ | 2,984 | $ | 321,826 | $ | 356,475 | ||||||
Gross profit (loss) |
(227 | ) | 66,718 | 76,727 | ||||||||
Selling, general, and administrative expenses |
509 | 44,575 | 53,830 | |||||||||
Interest expense, net |
| 387 | 2,718 | |||||||||
Foreign exchange (gain) loss |
43 | (258 | ) | | ||||||||
Additional gain on sale |
(266 | ) | (111,432 | ) | | |||||||
Income tax provision (benefit) |
(1,049 | ) | 47,480 | (98 | ) | |||||||
Income (loss) from discontinued operations, net of tax |
536 | 85,966 | 20,277 |
In accordance with ASC 205-20, 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 attributed 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 $0.4 million and $2.7 million of interest expense to discontinued operations for fiscal 2011 and 2010, respectively, using the ratio of net assets that we sold or that became discontinued to total assets. There was no interest expense incurred to allocate to discontinued operations for fiscal 2012.
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Assets and liabilities classified as discontinued operations on our consolidated balance sheets as of June 2, 2012, and May 28, 2011, include the following (in thousands):
June 2, 2012 | May 28, 2011 | |||||||
Accounts receivable |
$ | | $ | 2,356 | ||||
Inventories |
503 | 1,152 | ||||||
Prepaid expenses and other assets |
11 | 110 | ||||||
Current deferred income taxes |
| 400 | ||||||
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Discontinued operations - Assets |
$ | 514 | $ | 4,018 | ||||
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Accrued liabilities (1) (3) |
253 | 15,897 | ||||||
Long-term income tax liabilities (2) |
1,361 | 1,622 | ||||||
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Discontinued operations - Liabilities |
$ | 1,614 | $ | 17,519 | ||||
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(1) | Included in Accrued Liabilities as of June 2, 2012, is $0.2 million of other accrued liabilities primarily related to professional legal and tax services. |
(2) | Included in long-term income tax liabilities-non-current as of June 2, 2012, is the reserve for uncertain tax positions of $1.4 million. |
(3) | Accrued liabilities as of May 28, 2011, includes $11.7 million due to Arrow, which includes a $4.2 million proposed purchase price adjustment, $6.0 million for receivables collected by the Company on behalf of Arrow, and vacation and pension funds of $1.5 million in connection with the transaction. There is also approximately $5.1 million of other accrued liabilities including severance and success bonuses recorded in connection with the Transaction, as well as $2.1 million related to income taxes. These amounts are partially offset by approximately $3.0 million owed to the Company from Arrow in connection with the Transaction which consists of fees for transition services, facility lease deposits, severance costs, and indirect taxes. |
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 flow 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 did not have cash balances that were specific to RFPD and elected not to present separate cash flows from discontinued operations on our statement of cash flows.
6. ACQUISITION OF POWERLINK
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. Powerlink generated revenues of approximately $1.5 million during the last nine months of fiscal 2012. This acquisition positions us to provide cost-effective service of microwave and power grid tube equipment for communications, industrial, military and medical users around the world.
The allocation of the final purchase price, recorded during fiscal year 2012, included $0.4 million of trade receivables, $0.2 million of inventory, $0.4 million of other intangibles, and $1.3 million of goodwill. The goodwill represents the excess of purchase price over the fair market value of the identifiable net assets we acquired. Pro forma financial information is not presented due to immateriality.
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7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is initially recorded based on the premium paid for acquisitions and is subsequently tested for impairment. We test goodwill for impairment annually and whenever events or circumstances indicates an impairment may be occurred, such as a significant adverse change in the business climate, loss of key personnel, or a decision to sell or dispose of a reporting unit. As of the fiscal year ended June 2, 2012, our goodwill balance was $1.3 million and represents the premium we paid for Powerlink during our second quarter of fiscal 2012.
During the fourth quarter of each fiscal year, our goodwill balances are reviewed for impairment using the last day of our third quarter as the measurement date. In accordance with ASC 350 IntangiblesGoodwill and Other, if indicators of impairment are deemed to be present, we would perform an interim impairment test and any resulting impairment loss would be charged to expense in the period identified.
During the fourth quarter of fiscal 2012, we early adopted Accounting Standards Update (ASU) 2011-08, which allows for the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of an operating segment. We applied this qualitative approach to our EDG operating segment and concluded that indications of impairment were not present as of June 2, 2012. The qualitative factors considered included macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, and other relevant entity or reporting until specific events.
Intangible assets are initially recorded at their fair market values determined on quoted market prices in active markets, if available, or recognized valuation models. Intangible assets that have finite useful lives are amortized on a straight-line basis over their useful lives.
Our intangible asset is the fair value we assigned to customer relationships acquired in connection with the acquisition of Powerlink during the second quarter of our fiscal year 2012.
Intangible assets subject to amortization as well as amortization expense are as follows (in thousands):
Intangible Assets Subject to Amortization as of |
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June 2, 2012 | May 28, 2011 | |||||||
Gross Amounts: |
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Customer Relationship |
$ | 363 | $ | | ||||
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Total Gross Amounts |
$ | 363 | $ | | ||||
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$ | 8 | $ | | ||||
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$ | 8 | $ | | ||||
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The amortization expense associated with the intangible assets subject to amortization for the next five years is presented in the following table (in thousands) :
Fiscal Year |
Amortization Expense |
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2013 |
$ | 92 | ||
2014 |
$ | 43 | ||
2015 |
$ | 37 | ||
2016 |
$ | 31 | ||
2017 |
$ | 18 | ||
Thereafter |
$ | 134 |
The weighted average number of years of amortization expense remaining is 19.25.
8. DISPOSAL OF ASSETS
Loss on disposal of assets, from continuing operations, was $0.1 million during fiscal 2012.
9. DEBT
Credit Agreement
As of June 2, 2012, there were no amounts outstanding under the revolving credit agreement, as we paid down the $22.0 million outstanding balance, plus accrued and unpaid interest during fiscal 2011, and terminated the agreement on February 28, 2011.
On November 10, 2010, we notified JP Morgan Bank, N.A., to reduce our aggregate commitment on our revolving credit line from $36.0 million to $32.0 million.
On August 26, 2010, we notified JP Morgan Bank, N.A., to reduce our aggregate commitment on our revolving credit line from $40.0 million to $36.0 million.
On May 28, 2010, we entered into a ninth amendment (Credit Agreement Amendment) to the revolving credit agreement (Credit Agreement) by and among us, certain of our subsidiaries, the lenders party thereto, and JP Morgan Bank, N.A., as administrative agent. The Credit Agreement Amendment increased the aggregate commitment for the revolving credit facility under the Credit Agreement from $20.0 million to $40.0 million and extended the termination date of the Credit Agreement from October 31, 2010, to May 31, 2013, or any earlier day on which the aggregate commitment is reduced to zero or the Credit Agreement is otherwise terminated pursuant to its terms. The Credit Agreement Amendment also required us to maintain a leverage ratio of less than 2.5 to 1.0 at all times after March 1, 2008. The Credit Agreement Amendment permitted us to redeem all of our outstanding 7 3/4% convertible senior subordinated notes (7 3/4% Notes), provided that no default or un-matured default under the Credit Agreement has occurred and continued on the date of the redemption and provided further that the representations and warranties contained in the Credit Agreement were true and correct on the date of the redemption and remain true and correct after giving effect to the redemption. We used borrowings from the Credit Agreement to redeem the 7 3/4% Notes.
7 3/4% Convertible Senior Subordinated Notes
On June 1, 2010, we notified the holders of our 7 3/4% Notes that we elected to redeem all $19.5 million of the aggregate outstanding principal amount. We redeemed the 7 3/4% Notes on June 11, 2010, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest.
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On December 9, 2009, we redeemed $0.9 million, on March 22, 2010, we redeemed $10.0 million, on April 30, 2010 we redeemed $0.3 million, and on May 14, 2010, we redeemed $14.0 million of the 7 3/4% Notes, leaving a remaining balance of $19.5 million outstanding on the 7 3/4% Notes as of May 29, 2010. The redemptions were financed through cash generated from operating activities. We recorded costs associated with these redemptions of long-term debt of $0.1 million due to the write-off of the remaining deferred financing costs associated with the 7 3/4% Notes.
On February 15, 2005, we issued the 7 3/4% notes pursuant to an indenture dated February 14, 2005. The 7 3/4% notes bear interest at the rate of 7 3/4% per annum. Interest is due on June 15 and December 15 of each year. The 7 3/4% notes are convertible at the option of the holder, at any time on or prior to maturity, into shares of our common stock at a price equal to $18.00 per share, subject to adjustment in certain circumstances. On or after December 19, 2006, we may elect to automatically convert the 7 3/4% notes into shares of common stock if the trading price of the common stock exceeds 125% of the conversion price of the 7 3/4% notes for at least twenty trading days during any thirty trading day period ending within five trading days prior to the automatic conversion notice. The 7 3/4% notes are unsecured and subordinated to our existing and future senior debt. The 7 3/4% notes rank on parity with the 8% notes.
8% Convertible Senior Subordinated Notes
On January 11, 2010, we redeemed $7.7 million, or the remaining full balance plus accrued and unpaid interest, of the 8% Notes at par value, which resulted in a loss of $0.2 million due to the write-off of the remaining deferred financing costs associated with the 8% Notes. As the revolving credit agreement allows us to redeem up to $15.0 million of our outstanding notes or equity, we did not need to obtain a waiver from our lending group to permit the redemption of the $7.7 million of the 8% Notes. The redemption was financed through cash generated from operating activities.
The indenture provides that on or after December 20, 2008, we have the option of redeeming the 8% notes, in whole or in part, for cash, at a redemption price equal to 100% of the principal amount of the 8% notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. Holders may require us to repurchase all or a portion of their 8% notes for cash upon a change-of-control event, as described in the indenture, at a repurchase price equal to 100% of the principal amount of the 8% notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding the repurchase date. The 8% notes are unsecured and subordinate to our existing and future senior debt. The 8% notes rank on parity with the existing 7 3/4% convertible senior subordinated notes (7 3/4% notes) due December 2011.
On November 7, 2008, we retired $3.3 million of the 8% notes at approximately 71% of par value, which resulted in a gain of $0.8 million, net of deferred financing costs of $0.1 million. As the revolving credit agreement allows us to retire up to $15.0 million of our outstanding notes, we did not need to obtain a waiver from our lending group to permit the retirement of $3.3 million of the 8% notes. The retirement was financed through the use of cash available as of November 7, 2008.
On November 21, 2005, we sold $25.0 million in aggregate principal amount of 8% notes due 2011 pursuant to an indenture dated November 21, 2005. The 8% notes bear interest at a rate of 8% per annum. Interest is due on June 15 and December 15 of each year. The 8% notes are convertible at the option of the holder, at any time on or prior to maturity, into shares of our common stock at a price equal to $10.31 per share, subject to adjustment in certain circumstances.
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10. LEASE OBLIGATIONS, OTHER COMMITMENTS, AND CONTINGENCIES
We lease certain warehouse and office facilities and office equipment under non-cancelable operating leases. Rent expense from continuing operations for fiscal 2012, 2011, and 2010 was $1.6 million, $2.7 million, and $2.5 million, respectively. Under the terms of the Transaction, Arrow assumed many of our facility leases and we are sub-leasing space from Arrow. Our future lease commitments for minimum rentals, including common area maintenance charges and property taxes during the next five years have been adjusted to reflect the Transaction as follows (in thousands):
Fiscal Year |
Payments | |||
2013 |
$ | 1,220 | ||
2014 |
$ | 684 | ||
2015 |
$ | 668 | ||