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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.
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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.
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• 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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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