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RICHARDSON ELECTRONICS LTD/DE - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) Certain statements in this report may constitute "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. The terms "may," "should," "could," "anticipate," "believe," "continues," "estimate," "expect," "intend," "objective," "plan," "potential," "project" and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. These statements are based on management's current expectations, intentions or beliefs and are subject to a number of factors, assumptions and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Factors that could cause or contribute to such differences or that might otherwise impact the business include the risk factors set forth in Item 1A, of our Annual Report on Form 10-K filed on July 27, 2012, and in the Company's Proxy Statement on Schedule 14A filed on August 30, 2012. We undertake no obligation to update any such factor or to publicly announce the results of any revisions to any forward-looking statements contained herein whether as a result of new information, future events or otherwise. In addition, while we do, from time to time, communicate with securities analysts, it is against our policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts, or opinions, such reports are not our responsibility. INTRODUCTION Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to assist the reader in better understanding our business, results of operations, financial condition, changes in financial condition, critical accounting policies and estimates, and significant developments. MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited consolidated financial statements and the accompanying notes thereto appearing elsewhere herein. This section is organized as follows: • Business Overview • Results of Operations - an analysis and comparison of our consolidated results of operations for the three and six months ended December 1, 2012, and December 3, 2011, as reflected in our unaudited consolidated statements of comprehensive income (loss.) • Liquidity, Financial Position, and Capital Resources - a discussion of our primary sources and uses of cash for the six months ended December 1, 2012, and December 3, 2011, and a discussion of changes in our financial position. BUSINESS OVERVIEW Richardson Electronics, Ltd. ("we", "us", "the Company", and "our") is incorporated in the state of Delaware. We are a leading global provider of engineered solutions, power grid and microwave tubes and related 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. 18-------------------------------------------------------------------------------- Table of Contents 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.") During the fourth quarter of fiscal 2011, we recorded a working capital adjustment of $4.2 million in our results from discontinued operations. During the second quarter of fiscal 2012, we paid Arrow $3.9 million to settle the agreed upon working capital adjustment. On September 5, 2011, we acquired the assets of Powerlink Specialist Electronics Support Limited ("Powerlink") for approximately $2.3 million, including a working capital adjustment of $0.2 million related to payables of approximately $0.2 million that were paid by Powerlink prior to the close. Powerlink, a UK-based technical service company with locations in London and Dubai, services traveling wave tube ("TWT") amplifiers and related equipment for the Satellite Communications market throughout Europe and the Middle East. 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. On September 4, 2012, we acquired the assets of D and C Import-Export, Inc. ("D and C") for approximately $2.6 million. D and C, a Florida-based distributor of power grid tubes and associated RF components, services the commercial, broadcast, medical, industrial, scientific, and military markets. This acquisition provides us with access to additional product lines, vendors, and customers. 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. RESULTS OF CONTINUING OPERATIONS FINANCIAL SUMMARY-THREE MONTHS ENDED DECEMBER 1, 2012 • Net sales for the second quarter of fiscal 2013 were $36.6 million, down 6.5%, compared to net sales of $39.1 million during the second quarter of last year. • Gross margin as a percentage of net sales decreased to 29.3% during the second quarter of fiscal 2013, compared to 29.9% during the second quarter of last year. • SG&A expenses during the second quarter of fiscal 2013 were $10.2 million, or 27.9% of net sales, compared to $10.0 million, or 25.5% of net sales, during the second quarter of last year. • Operating income during the second quarter of fiscal 2013 was $0.5 million, or 1.4% of net sales, compared to operating income of $1.7 million, or 4.4% of net sales, during the second quarter of last year. 19 -------------------------------------------------------------------------------- Table of Contents • Income from continuing operations during the second quarter of fiscal 2013 was $0.6 million, or $0.04 per diluted common share, compared to income from continuing operations of $1.6 million, or $0.09 per diluted common share, during the second quarter of last year. • Loss from discontinued operations, net of tax, was $0.2 million, during the second quarter of fiscal 2013 compared to a loss from discontinued operations, net of tax, of $0.8 million, during the second quarter of last year. • Net income during the second quarter of fiscal 2013 was $0.4 million, or $0.03 per diluted common share, compared to net income of $0.8 million, or $0.04 per diluted common share, during the second quarter of last year. FINANCIAL SUMMARY-SIX MONTHS ENDED DECEMBER 1, 2012 • Net sales for the first six months of fiscal 2013 were $72.3 million, down 10.4%, compared to net sales of $80.6 million during the first six months of last year. • Gross margin as a percentage of net sales decreased to 29.6% during the first six months of fiscal 2013, compared to 30.2% during the first six months of last year. • SG&A expenses during the first six months of fiscal 2013 were $20.4 million, or 28.2% of net sales, compared to $20.7 million, or 25.7% of net sales, during the first six months of last year. • Operating income during the first six months of fiscal 2013 was $1.0 million, or 1.4% of net sales, compared to operating income of $3.7 million, or 4.6% of net sales, during the first six months of last year. • Income from continuing operations during the first six months of fiscal 2013 was $1.3 million, or $0.08 per diluted common share, compared to income from continuing operations of $2.7 million, or $0.15 per diluted common share, during the first six months of last year. • Loss from discontinued operations, net of tax, was $0.3 million, during the first six months of fiscal 2013 compared to income from discontinued operations, net of tax, of $1.8 million, or $0.10 per diluted common share, during the first six months of last year. • Net income during the first six months of fiscal 2013 was $1.0 million, or $0.06 per diluted common share, compared to net income of $4.5 million, or $0.25 per diluted common share, during the first six months of last year. Net Sales and Gross Profit Analysis During the second quarter of fiscal 2013, consolidated net sales decreased 6.5% to $36.6 million, compared to $39.1 million during the second quarter of fiscal 2012. During the first six months of fiscal 2013, consolidated net sales decreased 10.4% to $72.3 million, compared to $80.6 million during the first six months of fiscal 2012. 20 -------------------------------------------------------------------------------- Table of Contents Net sales by segment and percent change during the second quarter and first six months of fiscal 2013 and 2012 were as follows (in thousands): Net Sales FY 2013 FY 2012 % Change Second Quarter EDG $ 26,186 $ 28,022 (6.6 %) Canvys 10,417 11,116 (6.3 %) Total $ 36,603 $ 39,138 (6.5 %) FY 2013 FY 2012 % Change First Six Months EDG $ 51,813 $ 58,751 (11.8 %) Canvys 20,440 21,898 (6.7 %) Total $ 72,253 $ 80,649 (10.4 %) Consolidated gross profit as a percentage of net sales decreased to 29.3% during the second quarter of fiscal 2013, as compared to 29.9% during the second quarter of fiscal 2012 and to 29.6% during the first six months of fiscal 2013, as compared to 30.2% during the first six months of fiscal 2012. Gross profit reflects the distribution and manufacturing product margin less manufacturing variances, inventory obsolescence charges, customer returns, scrap and cycle count adjustments, engineering costs, and other provisions. Gross profit by segment and percent of segment net sales during the second quarter and first six months of fiscal 2013 and 2012 were as follows (in thousands): Gross Profit % of % of FY 2013 Net Sales FY 2012 Net Sales First Quarter EDG $ 7,930 30.3 % $ 8,546 30.5 % Canvys 2,812 27.0 % 3,144 28.3 % Total $ 10,742 29.3 % $ 11,690 29.9 % % of % of FY 2013 Net Sales FY 2012 Net Sales First Six Months EDG $ 15,930 30.7 % $ 18,217 31.0 % Canvys 5,458 26.7 % 6,175 28.2 % Total $ 21,388 29.6 % $ 24,392 30.2 % Electron Device Group Net sales for EDG decreased 6.6% to $26.2 million during the second quarter of fiscal 2013, from $28.0 million during the second quarter of fiscal 2012. Net sales of tubes decreased to $20.9 million during the second quarter of fiscal 2013, as compared to $22.7 million during the second quarter of fiscal 2012, due primarily to economic concerns and weaker demand in the plastic, wood and semiconductor fabrication markets. Gross margin as a percentage of net sales decreased slightly to 30.3% during the second quarter of fiscal 2013, as compared to 30.5% during the second quarter of fiscal 2012. The overall decrease in gross margin primarily reflects unabsorbed manufacturing labor and overhead costs associated with the decline in demand for semiconductor wafer fabrication components. 21 -------------------------------------------------------------------------------- Table of Contents Net sales for EDG decreased 11.8% to $51.8 million during the first six months of fiscal 2013, from $58.8 million during the first six months of fiscal 2012. Net sales of tubes decreased to $41.3 million during the first six months of fiscal 2013, as compared to $47.9 million during the first six months of fiscal 2012, relating to the reasons mentioned above. Gross margin as a percentage of net sales decreased slightly to 30.7% during the first six months of fiscal 2013, as compared to 31.0% during the first six months of fiscal 2012. The overall decrease in gross margin primarily reflects under absorption in manufacturing due to the decline in demand for semiconductor wafer fabrication components. Canvys Canvys net sales decreased 6.3% to $10.4 million during the second quarter of fiscal 2013, from $11.1 million during the second quarter of fiscal 2012. Sales increased in the North America Custom OEM and Healthcare segments, while sales in Europe were down due to the continuing effect of the economic environment. Gross margin as a percentage of net sales decreased to 27.0% during the second quarter of fiscal 2013 as compared to 28.3% during the second quarter of fiscal 2012, due primarily to lower margin in Europe associated with customer mix and currency exchange. Canvys net sales decreased 6.7% to $20.4 million during the first six months of fiscal 2013, from $21.9 million during the first six months of fiscal 2012. Sales increased in the North America Custom OEM and Healthcare segments, while sales in Europe were down due to the continuing effect of the economic environment on German exports. Gross margin as a percentage of net sales decreased to 26.7% during the first six months of fiscal 2013 as compared to 28.2% during the first six months of fiscal 2012, due primarily to lower margin in Europe associated with customer mix and currency exchange. Selling, General, and Administrative Expenses Selling, general, and administrative expenses ("SG&A") increased during the second quarter of fiscal 2013 to $10.2 million from $10.0 million during the second quarter of fiscal 2012. The $0.2 million increase includes a $0.5 million increase of SG&A for EDG and a $0.1 million increase of SG&A for Canvys, offset by a $0.4 million reduction of total company support function costs. The increase of $0.5 million within EDG was due primarily to increases in bad debt expense, employee related costs, and product development costs. The increase of $0.1 million within Canvys was due primarily to employee related costs. The decrease of $0.4 million in total company support function costs was due primarily to decreases in professional services. SG&A decreased during the first six months of fiscal 2013 to $20.4 million from $20.7 million during the first six months of fiscal 2012. The $0.3 million decrease includes a $0.2 million reduction of SG&A for Canvys and a $0.7 million reduction of total company support function costs, offset by a $0.6 million increase of SG&A for EDG. The decrease of $0.2 million within Canvys was due primarily to a reduction in bad debt expense. The decrease of $0.7 million in support functions was due primarily to headcount reductions and professional services. The increase in SG&A for EDG of $0.6 million was due primarily to increases in bad debt expense and product development costs. Other (Income) Expense Other (income) expense was $0.1 million of income during the second quarter of fiscal 2013, as compared to $0.7 million of income during the second quarter of fiscal 2012. Other (income) expense included a foreign exchange loss of $0.3 million during the second quarter of fiscal 2013, as compared to a foreign exchange gain of $0.5 million during the second quarter of fiscal 2012. Our foreign exchange gains and losses are primarily due to the translation of our U.S. dollars we hold in non-U.S. entities. We currently do not utilize derivative instruments to manage our exposure to foreign currency. The second quarter of fiscal 2013 and fiscal 2012 also included $0.4 million and $0.3 million, respectively, of investment/interest income. 22-------------------------------------------------------------------------------- Table of Contents Other (income) expense was $0.5 million of income during the first six months of fiscal 2013, as compared to $0.4 million of income during the first six months of fiscal 2012. Other (income) expense included a foreign exchange loss of $0.3 million during the first six months of fiscal 2013 and fiscal 2012. Our foreign exchange gains and losses are primarily due to the translation of our U.S. dollars we hold in non-U.S. entities. We currently do not utilize derivative instruments to manage our exposure to foreign currency. The first six months of fiscal 2013 and fiscal 2012 also included $0.7 million and $0.6 million, respectively, of investment/interest income. Income Tax Provision The effective income tax rate from continuing operations during the first six months of fiscal 2013 was 15.3% as compared to 34.7% during the first six months of fiscal 2012. The decrease in rate during the first six months of fiscal 2013, as compared to fiscal 2012, was due to the decrease in available cash in foreign jurisdictions to distribute unremitted foreign earnings with respect to ASC 740-30, Income Taxes - Other Considerations or Special Areas. The effective rate as compared to the federal statutory rate of 34.0% resulted from our geographical distribution of taxable income or losses, apportionment of income to various states, in addition to our position with respect to ASC 740-30, Income Taxes - Other Considerations or Special Areas. 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 2004. Currently, we are under federal audit in the U.S. for fiscal year 2011. Based on the recent commencement of the audit, no tax matters have arisen that would result in material adjustments. Our primary foreign tax jurisdictions are Germany and the Netherlands. We have tax years open in Germany and the Netherlands beginning in fiscal 2007. As of December 1, 2012, $46.7 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. It is not practical to determine what, if any, tax liability might exist if such earnings were to be repatriated. As of December 1, 2012, our worldwide liability for uncertain tax positions related to continuing operations, excluding interest and penalties, was $0.4 million as compared to $0.5 million as of June 2, 2012. We record penalties and interest relating to uncertain tax positions in the income tax expense line item within the unaudited consolidated statements of income and comprehensive income. It is reasonably possible that there will be a change in the unrecognized tax benefits related to continuing operations, excluding interest and penalties, in the range of $0 to approximately $0.03 million due to the expiration of various statutes of limitations within the next 12 months. Discontinued Operations Arrow Transaction On March 1, 2011, we completed the sale of the assets primarily used or held for use in, and certain liabilities of, our RF, Wireless and Power Division ("RFPD"), as well as certain other Company assets, including our information technology assets, to Arrow Electronics, Inc. ("Arrow") in exchange for $238.8 million, which included an estimated pre-closing working capital adjustment of approximately $27.0 million ("the Transaction.") During the fourth quarter of fiscal 2011, we recorded a working capital adjustment of $4.2 million in our results from discontinued operations. During the second quarter of fiscal 2012, we paid Arrow $3.9 million to settle the working capital adjustment. 23-------------------------------------------------------------------------------- Table of Contents Financial Summary - Discontinued Operations Summary financial results for the three and six months ended December 1, 2012, and December 3, 2011, are presented in the following table (in thousands): Three Months Six Months Dec 1, 2012 Dec 3, 2011 Dec 1, 2012 Dec 3, 2011 Net sales $ 278 $ 816 $ 499 $ 1,691 Gross profit (loss) (128 ) (105 ) (221 ) (374 ) Selling, general, and administrative expenses 201 29 266 (448 ) Other (income) expense 1 - 1 - Additonal gain on sale - - - (266 ) Income tax provision (benefit) (127 ) 665 (198 ) (1,463 ) Income (loss) from discontinued operations, net of tax $ (203 ) $ (799 ) $ (290 ) $ 1,803 Net sales and gross profit (loss) for the three and six months ended December 1, 2012, reflect our financial results relating to the Manufacturing Agreement with Arrow that we entered into in connection with the Transaction. Pursuant to the three-year agreement, we agreed to continue to manufacture certain RFPD products for Arrow. During the first quarter ended September 3, 2011, in connection with an examination by the Internal Revenue Service, we reduced our deferred tax liability by $2.1 million related to our un-repatriated foreign earnings based on a determination of the earnings and profits that would remain in certain foreign subsidiaries after the Arrow transaction. Assets and liabilities classified as discontinued operations on our unaudited consolidated balance sheets as of December 1, 2012, and June 2, 2012, include the following (in thousands): Dec 1, 2012 Jun 2, 2012 Inventories $ 248 $ 503 Prepaid expenses and other assets - 11 Discontinued operations-Assets $ 248 $ 514 Accrued liabilities-current (1) $ 418 $ 253 Long-term income tax liabilities (2) 1,380 1,361 Discontinued operations-Liabilities $ 1,798 $ 1,614 (1) Included in accrued liabilities as of December 1, 2012, is a payable to Arrow for transition services of $1.8 million, offset by a receivable due to us from Arrow for transition services of $1.4 million. (2) Included in long-term income tax liabilites as of December 1, 2012, is the reserve for uncertain tax positions. 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. Cash flows related to our discontinued operations are not material. Net Income and Per Share Data Net income during the second quarter of fiscal 2013 was $0.4 million, or $0.03 per diluted common share and $0.02 per Class B diluted common share, as compared to net income of $0.8 million during the second quarter of fiscal 2012, or $0.04 per diluted common share and $0.05 per Class B diluted common share. 24-------------------------------------------------------------------------------- Table of Contents Net income during the first six months of fiscal 2013 was $1.0 million, or $0.06 per diluted common share and $0.06 per Class B diluted common share, as compared to net income of $4.5 million during the first six months of fiscal 2012, or $0.25 per diluted common share and $0.24 per Class B diluted common share. LIQUIDITY, FINANCIAL POSITION, AND CAPITAL RESOURCES Our growth and cash needs have been primarily financed through income from operations. Cash and cash equivalents for the first six months ended December 1, 2012, were $53.5 million. In addition, time deposits and CD's classified as short-term investments were $86.4 million and long-term investments were $7.4 million, including equity investments of $0.4 million. Cash and investments at December 1, 2012, consisted of $84.6 million in North America, $19.8 million in Europe, $1.3 million in Latin America, and $41.2 million in Asia/Pacific. At June 2, 2012, cash and cash equivalents were $43.9 million. Time deposits and CD's classified as short-term investments were $105.0 million and long-term investments were $10.7 million, including equity investments 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. 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. Cash flows related to our discontinued operations are not material. Cash Flows from Operating Activities The cash flow from operating activities primarily resulted from our net income, adjusted for non-cash items, and changes in our operating assets and liabilities. Operating activities, which include our discontinued operations, provided $2.9 million of cash during the first six months of fiscal 2013. We had net income of $1.0 million in the first six months of fiscal 2013, which included non-cash stock-based compensation expense of $0.3 million associated with the issuance of stock option awards primarily to our directors and officers and non-cash depreciation and amortization expense of $0.6 million associated with our investments in property and equipment as well as amortization of our intangible assets. Changes in our operating assets and liabilities, net of effects of acquired businesses, provided $1.0 million of cash during the first six months of fiscal 2013, due primarily to the decrease in our inventory of $1.7 million, increase in our accounts payable of $1.2 million, partially offset by an increase in our accounts receivable of $1.4 million and an increase to our prepaid expenses of $0.4 million. The decrease in our inventory was the result of reduced inventory purchases during the first six months due to the decline in net sales. The increase in accounts payable of $1.2 million was due primarily to an increase in accrued vouchers of $0.6 million and $0.6 million related to re-classes of customer credit balances in accounts receivable to accounts payable. The increase in our receivables of $1.4 million was due primarily to the timing of customer payments and a $0.6 million reclass of customer credit balances to accounts payable. The increase in prepaid expenses of $0.4 million was due primarily to the renewal of our liability insurance coverage. Operating activities, which include our discontinued operations, used $47.0 million of cash during the first six months of fiscal 2012. We had net income of $4.5 million in the first six months of fiscal 2012, which included non-cash stock-based compensation expense of $0.3 million associated with the issuance of stock option awards to our directors and officers and non-cash depreciation expense of $0.6 million associated with our investments in property and equipment as well as amortization of our intangible assets. Changes in our operating assets and liabilities used $52.3 million of cash during the first six months of fiscal 2012, due primarily to decreases in our operating liabilities, including accounts payable, accrued liabilities, and long-term income tax liabilities, and decreases in our operating assets, including prepaid expenses, as well as increases in our operating assets including inventories and income tax receivable. The decrease in accounts payable of $3.1 million, excluding the impact of foreign currency exchange of $0.2 million, was due primarily to the timing of vendor payments. The decrease in accrued liabilities of $42.9 million, excluding the impact of foreign currency exchange of $0.4 million, was due primarily to $33.9 million of cash used for our tax payment related to the sale of RFPD. The decrease in long-term income tax liabilities of $7.0 million was due primarily to estimated tax payments for the fiscal 2012 and fiscal 2011 tax returns. The increase in prepaid expenses of $8.4 million was due primarily to the final payment received of $4.2 million from Arrow for the sale of RFPD and a $4.1 million decrease of discontinued assets. The increase in inventories of $5.7 million, excluding the impact of foreign currency exchange of $0.1 million, was due primarily to increased purchasing to support expected future sales growth. The increase in our income tax receivable of $5.6 million relates to an overpayment in our estimated federal tax for fiscal year 2011. 25-------------------------------------------------------------------------------- Table of Contents Cash Flows from Investing Activities The cash flow from investing activities has consisted primarily of purchases and maturities of investments and capital expenditures. Cash provided by investing activities during the first six months of fiscal 2013, included proceeds from maturities of investments of $97.5 million, offset by purchases of investments of $75.6 million, $2.6 million for the acquisition of D and C, and $0.6 million in capital expenditures. Cash used in investing activities during the first six months of fiscal 2012, included purchases of investments of $285.2 million, $2.3 million for the acquisition of Powerlink, and $0.1 million in capital expenditures, offset by proceeds from maturities of investments of $202.4 million. Our purchases and proceeds from investments consist of time deposits and CDs. Purchasing of future investments may vary from period to period due to interest and foreign currency exchange rates. Cash Flows from Financing Activities The cash flow from financing activities primarily consists of repurchases of common stock and cash dividends paid. Cash used in financing activities of $13.3 million during the first six months of fiscal 2013, resulted from $11.6 million of cash used to repurchase common stock and $1.8 million in dividends paid, offset by $0.1 million of proceeds from the issuance of common stock. The repurchase of common stock relates to our share repurchase authorizations. Cash dividends paid of $1.8 million were approved by the Board of Directors on July 24, 2012 and October 9, 2012. Cash used in financing activities of $13.2 million during the first six months of fiscal 2012, resulted from $11.9 million of cash used to repurchase common stock and $1.7 million in dividends paid, offset by $$0.4 million of proceeds from the issuance of common stock. The repurchase of common stock relates to our share repurchase authorization. Cash dividends paid of $1.7 million were approved by the Board of Directors on July 19, 2011 and October 4, 2011. Dividend payments for the first six months of fiscal 2013 were approximately $1.8 million. All future payments of dividends are at the discretion of the Board of Directors. Dividend payments will depend on earnings, capital requirements, operating conditions, and such other factors that the Board may deem relevant. We believe that the existing sources of liquidity, including current cash, will provide sufficient resources to meet known capital requirements and working capital needs for the fiscal year ending June 1, 2013. UPDATES TO CRITICAL ACCOUNTING POLICIES AND ESTIMATES Inventories: Our worldwide inventories are stated at the lower of cost or market, generally using a weighted-average cost method. Our inventories included approximately $32.7 million of finished goods and $2.6 million of raw materials and work-in-progress as of December 1, 2012, as compared to approximately $31.8 million of finished goods and $2.9 million of raw materials and work-in-progress as of June 2, 2012. At this time, we do not anticipate any material risks or uncertainties related to possible inventory write-downs for the remainder of fiscal 2013, ending June 1, 2013. 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. 26-------------------------------------------------------------------------------- Table of Contents 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 service. Discontinued Operations: In accordance with Accounting Standards Codification ("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 4 "Discontinued Operations" of our notes to our unaudited consolidated financial statements for additional discussion on the sale of RFPD. Loss Contingencies: We accrue a liability for loss contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. If we determine that there is at least a reasonable possibility that a loss may have been incurred, we will include a disclosure describing the contingency. 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 indicate 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 December 1, 2012, our goodwill balance was $2.3 million and represents the premium we paid for Powerlink of $1.4 million during our second quarter of fiscal 2012, adjusted for foreign currency translation and the premium we paid for D and C of $0.9 million during our second quarter of fiscal 2013. 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 "Intangibles-Goodwill and Other" ("ASC 350"), 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 a company the option to perform 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. 27 -------------------------------------------------------------------------------- Table of Contents HTTP/1.1 404 Not Found Connection: close Date: Thu, 10 Jan 2013 19:19:22 GMT Server: Microsoft-IIS/6.0 X-Powered-By: ASP.NET Error-Code: 1000 Error-Message: Unknown error |