10-K 1 rell-2014531x10xk.htm 10-K RELL-2014.5.31-10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-K 
 
ý
FOR ANNUAL REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 2014
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)
Registrant’s 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    ý  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     ý   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.    ý  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).    ý  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 registrant’s 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.  ý



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
 
ý
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    ý   No
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of November 30, 2013, was approximately $128.7 million.
As of July 18, 2014, there were outstanding 11,802,733 shares of Common Stock, $0.05 par value and 2,190,644 shares of Class B Common Stock, $0.05 par value, which are convertible into Common Stock of the registrant on a one-for-one basis.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the Annual Meeting of Stockholders scheduled to be held October 7, 2014, 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 abovementioned Proxy Statement is not deemed filed as part of this report.



TABLE OF CONTENTS
 
 
 
Page
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
 
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9A.
Item 9B.
 
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
 
Item 15.
 
 

3


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 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 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.
PART I
ITEM 1. Business
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 July 5, 2013, we acquired the assets of WVS-Technology ("WVS") for approximately $1.0 million. WVS, located in Meerbusch, Germany, develops and sells radio frequency ("RF") and microwave products, power grid tubes, vacuum capacitors, as well as industrial microwave equipment. This acquisition provides us with engineering and sales expertise to help expand our presence in the vacuum capacitor market.
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 broadcast, commercial, industrial, medical, military, and scientific markets. This acquisition provides us with access to additional product lines, vendors, and customers.
On September 5, 2011, we acquired the assets of Powerlink Specialist Electronics Support Limited (“Powerlink”) for approximately $2.3 million. 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.
Our fiscal year 2014 began on June 2, 2013, and ended on May 31, 2014. Unless otherwise noted, all references in this document to a particular year shall mean our fiscal year.

4


Geography
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 2014, 2013, and 2012 is set forth in Note 10 “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.
We have two operating segments, which we define as follows:
Electron Device Group
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.
EDG represents leading manufacturers of electron tubes and components used in semiconductor manufacturing equipment and industrial power applications. Among the suppliers they support are Amperex, CPI, Draloric, Eimac, General Electric, Hitachi, Jennings, L3, National, NJRC, Thales, Toshiba, and Vishay.
EDG's inventory levels reflect our commitment to maintain an inventory of a broad range of products for customers who are buying products for replacement of components used in critical equipment. As of May 31, 2014, on average, we hold 120 days of inventory in the normal course of operations. This level of inventory reflects the fact that EDG also sells a number of products representing trailing edge technology. While the market for these trailing edge technology products is declining, EDG is increasing its market share. EDG often buys products it knows it can sell ahead of any supplier price increases. As manufacturers for these products exit the business, EDG has the option to purchase a substantial portion of their remaining inventory.
EDG has distribution agreements with many of its suppliers; most of these agreements provide exclusive distribution rights which often include global responsibility. The agreements are typically long term, and usually contain provisions permitting termination by either party if there are significant breaches which are not cured within a reasonable period of time. Although some of these agreements allow EDG to return inventory periodically, others do not, in which case EDG may have obsolete inventory that they cannot return to the supplier.
EDG's suppliers provide warranty coverage for the products and allow return of defective products, including those returned to EDG by its customers. For information regarding the warranty reserves, see Note 3 “Significant Accounting Policies” of the notes to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.
In addition to third party products, we sell proprietary products principally under certain trade names we own including: Amperex®, Cetron®, and National®. Our proprietary products include thyratrons and rectifiers, power tubes, ignitrons, magnetrons, phototubes, microwave generators, 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.

5


Canvys
Canvys provides customized display solutions serving the corporate enterprise, financial, healthcare, industrial, and original equipment manufacturer ("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 picture archiving communication system (“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.
Sales and Product Management
As of the end of fiscal 2014, we employed 139 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 cash in advance and credit card 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 90% 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 sites, www.rell.com, www.canvys.com, and www.rellaser.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; Shanghai, China; Bangkok, Thailand; and Hook, United Kingdom. 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 2014, approximately 58% 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 May 31, 2014, we employed 308 individuals, of which 293 were full-time and 15 were part-time. Of these, 191 were located in the United States and 117 were located internationally. The worldwide employee base included 139 in sales and product management, 20 in distribution support, 82 in administrative positions, and 67 in value-add and product manufacturing. All of our employees are non-union, and we consider our relationships with our employees to be good.

6


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 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.

7


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 that we believe are applicable to our businesses and the industries in which we operate. While we believe we have identified the key risk factors affecting our businesses, 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 may not achieve our growth, margin expansion or cost-reduction goals.
We have established goals to improve our profitability by growing our sales with new and existing customers, reducing our expenses, and increasing our margins. If we do not achieve our growth objectives, the complexity of our global infrastructure makes it difficult to reduce our fixed cost structure to align with the size of our operations. Factors that could have a significant effect on our ability to achieve these goals include the following:
Failure to achieve our sales and margin growth objectives in our product lines and business units;
Failure to identify, consummate and integrate future acquisitions;
Declining gross margin reflecting competitive pricing pressures or product mix; and,
Limitations on our ability to leverage our support-function cost structure while maintaining an adequate structure to achieve our long-term growth objectives.
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. Our products generally support industrial machinery that is powered by tube technology. As technology evolves and this capital equipment is replaced, the market for our products potentially declines. In addition, the market for many of our other products is characterized by rapid change resulting from the development of new technologies, evolving industry standards, frequent new product introductions by some of our suppliers 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 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 pressures in the markets we serve.
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. There are very few vacuum tube competitors in the markets EDG serves. There are also a limited number of Chinese manufacturers whose ability to produce vacuum tubes has progressed over the past several years. The most significant competitive risk comes from technical obsolescence. Canvys faces many competitors in the markets we serve. 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.
A single stockholder has voting control over us.
As of July 22, 2014, 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 65% of the voting power of the outstanding common stock. This share ownership permits Mr. Richardson to exert control over the outcome of stockholder votes, including votes concerning the election of directors, by-law amendments, possible mergers, corporate control contests, and other significant corporate transactions.
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.

8


EDG is dependent on a limited number of vendors to supply it with essential products.
EDG’s principal products are capacitors, vacuum tubes and related products, microwave generators, and high voltage power supplies. The products supplied by EDG are currently produced by a relatively small number of manufacturers. One of EDG’s suppliers represents 17% 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. To the extent that our significant suppliers reduce the volume of product they sell through distribution and are unwilling or unable to continue to do business with us, or extend lead times, or limit supplies due to capacity constraints, or other factors, there could be a material adverse effect on our business.
International operations represent a significant percentage of our business and present a variety of unique risks which could impact our results of operations.
Because we source and sell our products worldwide, our business is subject to risks associated with doing business internationally. These risks include the costs and difficulties of managing foreign entities, limitations on the repatriation and investment of funds, currency fluctuations, cultural differences that affect customer preferences and business practices, unstable political or economic conditions, trade protection measures and import or export licensing requirements, changes in tax laws, and difficulty in staffing global operations.
We also face exposure to fluctuations in foreign currency exchange rates because we conduct business outside of the U.S. Price increases caused by currency exchange rate fluctuations may make our products less competitive or may 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 base 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.
We rely heavily on information technology systems, which, if not properly functioning, could materially adversely affect our business.
Pursuant to a Transition Services Agreement with Arrow Electronics, Arrow provides IT services to us. 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, our ability to serve our customers and to perform other vital company functions may be affected. On July 8, 2014, we received notice from Arrow that it will cease to provide these IT services as of January 8, 2015. We are in the process of migrating to a new ERP platform with the intent of completing the migration prior to January 8, 2015. A significant disruption or failure in the design, implementation or support of the new information technology systems could significantly disrupt our business, result in increased costs or decreased revenues, harm our reputation, or expose us to liability. To the extent we cannot timely complete this project, our business may suffer and we may incur significant additional costs.
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.
Many of our components are sold at prices that are significantly lower than the cost of the equipment or other goods in which they are incorporated. Since a defect or failure in a product could give rise to failures in the equipment that incorporates 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 adversely affected as a result of a significant quality or performance issues in the components sold by us if we are required to pay for the damages. Although we have product liability insurance, such insurance is limited in coverage and amount.
Substantial defaults by our customers on our accounts receivable or the loss of significant customers could have a significant negative impact on our business.
We extend credit to our customers. The failure of a significant customer or a significant group of customers to timely pay all amounts due could have a material adverse effect on our financial condition and results of operations. The extension of credit involves considerable judgment and is based on management’s evaluation of factors which include such things as a customer’s financial condition, payment history, and the availability of collateral to secure customers’ receivables.

9


We may not be successful in identifying, consummating and integrating future acquisitions.
As part of our growth strategy, our intent is to acquire additional businesses or assets. We may not be able to identify attractive acquisition candidates or complete the acquisition of identified candidates at favorable prices and upon advantageous terms. Also, acquisitions are accompanied by risks, such as potential exposure to unknown liabilities 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, personnel and systems of the acquired businesses. 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.
Economic weakness and uncertainty could adversely affect our revenues and gross margins.
Our revenues and gross profit margins depend significantly on global 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 2014 reflect 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 any 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.
We may be subject to intellectual property rights claims, which are costly to defend, could require payment of damages or licensing fees, and/or 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 party’s 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, divert our management’s attention, be time consuming to defend, result in significant damage awards, cause product shipment delays, or require us 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 certain technologies, which could affect our ability to compete effectively.
Potential lawsuits, with or without merit, may divert management’s 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.

10


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. 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.
If we are deemed to be an investment company, we will be required to meet burdensome compliance requirements and restrictions on our activities.
We currently have significant cash and investments. 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. 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 required additional regulatory burdens would increase our operating expenses.
The company's identifiable intangible assets could become impaired, which could reduce the value of our assets and reduce our net income in the year in which the write-off occurs.
Our intangible assets could become impaired, which could reduce the value of our assets and reduce our net income in the year in which the write-off occurs. We ascribe value to certain intangible assets, which consist of customer lists and trade names resulting from acquisitions. We may incur an impairment charge on intangible assets if we determine that the fair value of the intangible assets are less than their current carrying values. We evaluate whether events have occurred that indicate all, or a portion, of the carrying amount of intangible assets may no longer be recoverable. If this is the case, an impairment charge to earnings would be necessary.
ITEM 1B. Unresolved Staff Comments
None.

11


ITEM 2. Properties
The Company owns three facilities and leases 29 facilities. We own our corporate facility and largest distribution center, which is located on approximately 100 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 provides value to our customers and suppliers, and limits 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
Brooksville, Florida
 
Leased
 
Sales/Distribution
 
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
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
Meerbusch, Germany
 
Leased
 
Sales/Distribution/Testing
 
EDG
Puchheim, Germany
 
Leased
 
Sales
 
EDG
Mumbai, 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
Dubai, United Arab Emirates
 
Leased
 
Sales/Distribution/Testing/Repair
 
EDG
Hook, United Kingdom
 
Leased
 
Sales/Distribution/Testing/Repair
 
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.

12


ITEM 3. Legal Proceedings
From time to time, we or our subsidiaries are involved in pending judicial proceedings concerning matters arising in the ordinary course of our business. While the outcome of litigation is subject to uncertainties, based on information at the time the financial statements were issued, 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.

13


PART II
ITEM 5. Market for the Registrant’s 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
June 1, 2013
 
 
 
 
 
 
 
 
$
27,308,893

June 2, 2013 - June 29, 2013
95,441

 
$
11.81

 
95,441

 
$
1,127,610

 
$
26,181,283

June 30, 2013 - July 27, 2013
56,429

 
$
11.86

 
56,429

 
$
669,439

 
$
25,511,844

July 28, 2013 - August 31, 2013
426,195

 
$
11.50

 
426,195

 
$
4,902,732

 
$
20,609,112

September 1, 2013 - September 28, 2013
91,499

 
$
11.36

 
91,499

 
$
1,039,257

 
$
19,569,855

September 29, 2013 - October 26, 2013
81,494

 
$
11.45

 
81,494

 
$
933,276

 
$
18,636,579

October 27, 2013 - November 30, 2013
4,518

 
$
11.58

 
4,518

 
$
52,317

 
$
18,584,262

December 1, 2013 - December 28, 2013

 
$

 

 
$

 
$
18,584,262

December 29, 2013 - January 25, 2014

 
$

 

 
$

 
$
18,584,262

January 26, 2014 - March 1, 2014

 
$

 

 
$

 
$
18,584,262

March 2, 2014 - March 29, 2014

 
$

 

 
$

 
$
18,584,262

March 30, 2014 - April 26, 2014

 
$

 

 
$

 
$
18,584,262

April 27, 2014 - May 31, 2014
1,371

 
$
10.01

 
1,371

 
$
13,725

 
$
18,570,537

Dividends
Our quarterly dividend was $0.06 per common share and $0.054 per Class B common share. Annual dividend payments for fiscal 2014 and fiscal 2013 were approximately $3.3 million and $3.6 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.
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 21, 2014, there were approximately 721 stockholders of record for the common stock and approximately 16 stockholders of record for the Class B common stock. The following table sets forth the high and low closing sales price per share of RELL common stock as reported on the NASDAQ for the periods indicated.
High and Low Closing Prices of Common Stock
 
 
 
 
2014
 
2013
Fiscal Quarter
High
 
Low
 
High
 
Low
First
$
12.11

 
$
11.00

 
$
12.71

 
$
11.52

Second
$
11.66

 
$
11.08

 
$
12.39

 
$
10.75

Third
$
12.12

 
$
10.85

 
$
12.44

 
$
11.07

Fourth
$
11.22

 
$
10.01

 
$
12.24

 
$
11.14


14


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 2009, 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.
 
2009
2010
2011
2012
2013
2014
$100
$247
$348
$293
$304
$258
$100
$128
$163
$165
$205
$253
$100
$139
$184
$153
$198
$252


15


ITEM 6. Selected Financial Data
Five-Year Financial Review
This information should be read in conjunction with our consolidated financial statements, accompanying notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein. 
 
Fiscal Year Ended (1)
 
(in thousands , except per share amounts )
 
May 31, 2014
 
June 1, 2013
 
June 2, 2012 (2)
 
May 28, 2011(2)
 
May 29, 2010 (2)
Statements of Income (Loss)
 
 
 
 
 
 
 
 
 
Net sales
$
137,960

 
$
141,066

 
$
157,836

 
$
158,867

 
$
135,372

Continuing Operations
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations before tax
(652
)
 
642

 
7,656

 
$
2,450

 
$
(4,250
)
Income tax provision (benefit)
(307
)
 
160

 
(334
)
 
468

 
(68
)
Income (loss) from continuing operations
$
(345
)
 
$
482

 
$
7,990

 
$
1,982

 
$
(4,182
)
Discontinued Operations
 
 
 
 
 
 
 
 
 
Income (loss) from discontinued operations
(170
)
 
766

 
536

 
$
85,966

 
$
20,277

Net income (loss)
$
(515
)
 
$
1,248

 
$
8,526

 
$
87,948

 
$
16,095

Per Share Data
 
 
 
 
 
 
 
 
 
Net income (loss) per Common share - Basic:
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(0.03
)
 
$
0.03

 
$
0.48

 
$
0.11

 
$
(0.24
)
Income (loss) from discontinued operations
(0.01
)
 
0.05

 
0.03

 
4.87

 
1.16

Total net income (loss) per Common share - Basic:
$
(0.04
)
 
$
0.08

 
$
0.51

 
$
4.98

 
$
0.92

Net income (loss) per Class B common share - Basic:
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(0.02
)
 
$
0.03

 
$
0.43

 
$
0.10

 
$
(0.21
)
Income (loss) from discontinued operations
(0.01
)
 
0.05

 
0.03

 
4.38

 
1.04

Total net income (loss) per Class B common share - Basic:
$
(0.03
)
 
$
0.08

 
$
0.46

 
$
4.48

 
$
0.83

Net income (loss) per Common share - Diluted:
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(0.03
)
 
$
0.03

 
$
0.47

 
$
0.11

 
$
(0.24
)
Income (loss) from discontinued operations
(0.01
)
 
0.05

 
0.03

 
4.72

 
1.16

Total net income (loss) per Common share - Diluted:
$
(0.04
)
 
$
0.08

 
$
0.50

 
$
4.83

 
$
0.92

Net income (loss) per Class B common share - Diluted:
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(0.02
)
 
$
0.03

 
$
0.43

 
$
0.10

 
$
(0.21
)
Income (loss) from discontinued operations
(0.01
)
 
0.05

 
0.03

 
4.32

 
1.04

Total net income (loss) per Class B common share - Diluted:
$
(0.03
)
 
$
0.08

 
$
0.46

 
$
4.42

 
$
0.83

Cash Dividend Data
 
 
 
 
 
 
 
 
 
Dividends per common share
$
0.240

 
$
0.240

 
$
0.200

 
$
0.110

 
$
0.080

Dividends per Class B common share (3)
$
0.220

 
$
0.220

 
$
0.180

 
$
0.099

 
$
0.072

Balance Sheet Data
 
 
 
 
 
 
 
 
 
Total assets
$
203,545

 
$
217,318

 
$
231,423

 
$
314,054

 
$
234,815

Short-term debt

 

 

 

 
19,517

Stockholders’ equity
$
174,845

 
$
185,239

 
$
200,213

 
$
222,047

 
$
129,863


(1)
Our fiscal year ends on the Saturday nearest the end of May. Each of the fiscal years presented contain 52/53 weeks.
(2)
Restated to reflect the sale of RFPD. See Note 4 “Discontinued Operations” of the notes to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.
(3)
The dividend per Class B common share is 90% of the dividend per Class A common share.

16


ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and related notes.
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 consolidated financial statements and the accompanying notes appearing elsewhere in this filing. 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 May 31, 2014June 1, 2013, and June 2, 2012, as reflected in our consolidated statements of comprehensive income (loss).
Liquidity, Financial Position, and Capital Resources - a discussion of our primary sources and uses of cash for the fiscal years ended May 31, 2014June 1, 2013, and June 2, 2012, 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 are used as display devices in a variety of industrial, commercial, medical, and communication applications.
On July 5, 2013, we acquired the assets of WVS-Technology ("WVS") for approximately $1.0 million. WVS, located in Meerbusch, Germany, develops and sells RF and microwave products, power grid tubes, vacuum capacitors, as well as industrial microwave equipment. This acquisition provides us with engineering and sales expertise to help expand our presence in the vacuum capacitor market.
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 broadcast, commercial, industrial, medical, military, and scientific markets. This acquisition provides us with access to additional product lines, vendors, and customers.
On September 5, 2011, we acquired the assets of Powerlink Specialist Electronics Support Limited (“Powerlink”) for approximately $2.3 million. Powerlink, a UK-based technical service company with locations in London and Dubai, services TWT amplifiers and related equipment for the Satellite Communications market throughout Europe and the Middle East.
    
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 customized display solutions serving the corporate enterprise, financial, healthcare, industrial, and medical original equipment manufacturers ("OEM") markets.

17


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 May 31, 2014
Net sales for fiscal 2014 were $138.0 million, down 2.2%, compared to net sales of $141.1 million during fiscal 2013.
Gross margin increased to 29.7% during fiscal 2014, compared to 29.5% during fiscal 2013.
Selling, general, and administrative expenses increased to $43.5 million, or 31.5% of net sales, for fiscal 2014 compared to $41.5 million, or 29.4% of net sales, for fiscal 2013.
Operating loss during fiscal 2014 was $4.2 million, compared to breakeven during fiscal 2013.
Loss from continuing operations during fiscal 2014 was $0.3 million compared to income of $0.5 million, or $0.03 per diluted common share, during fiscal 2013.
Loss from discontinued operations, net of tax, was $0.2 million, during fiscal 2014, compared to income of $0.8 million, or $0.05 per diluted common share, during fiscal 2013.
Net loss during fiscal 2014 was $0.5 million compared to net income of $1.2 million, or $0.08 per diluted common share, during fiscal 2013.
Net Sales and Gross Profit Analysis
Net sales by segment and percent change for fiscal 2014, 2013, and 2012 were as follows (in thousands):
 
Net Sales
FY 2014
 
FY 2013
 
FY 2012
 
FY14 vs. FY13
% Change
 
FY13 vs. FY12
% Change
EDG
$
103,274

 
$
102,593

 
$
112,586

 
0.7
%
 
(8.9
%)
Canvys
34,686

 
38,473

 
45,250

 
(9.8
%)
 
(15.0
%)
Total
$
137,960

 
$
141,066

 
$
157,836

 
(2.2
%)
 
(10.6
%)
During fiscal 2014 consolidated net sales decreased 2.2% compared to fiscal 2013. Sales for Canvys declined by 9.8%, slightly offset by a 0.7% increase in sales for EDG. During fiscal 2013 consolidated net sales decreased 10.6% compared to fiscal 2012. Sales for Canvys declined by 15.0%, and sales for EDG declined 8.9%.
Gross profit by segment and percent of segment net sales for fiscal 2014, 2013, and 2012 were as follows (in thousands):
Gross Profit
FY 2014
 
FY 2013
 
FY 2012
EDG
$
31,610

 
30.6%
 
$
31,431

 
30.6
%
 
$
34,626

 
30.8
%
Canvys
9,404

 
27.1%
 
10,114

 
26.3
%
 
12,155

 
26.9
%
Total
$
41,014

 
29.7%
 
$
41,545

 
29.5
%
 
$
46,781

 
29.6
%
Gross profit reflects the distribution and manufacturing product margin less manufacturing variances, inventory obsolescence charges, customer returns, scrap and cycle count adjustments, engineering costs, unabsorbed manufacturing labor and overhead, and other provisions.
Consolidated gross profit was $41.0 million during fiscal 2014, compared to $41.5 million during fiscal 2013. Consolidated gross margin as a percentage of net sales increased slightly to 29.7% during fiscal 2014, from 29.5% during fiscal 2013. Gross margin during fiscal 2014 included expense related to inventory provisions for EDG and Canvys of $0.6 million and $0.2 million, respectively. Gross margin during fiscal 2013 included expense related to inventory provisions for EDG and Canvys of $0.2 million and $0.2 million, respectively. In addition, gross margin for EDG included $0.5 million and

18


$0.8 million related to unabsorbed manufacturing labor and overhead for continuing operations during fiscal 2014 and 2013, respectively.
Consolidated gross profit was $41.5 million during fiscal 2013, compared to $46.8 million during fiscal 2012. Consolidated gross margin as a percentage of net sales declined slightly to 29.5% during fiscal 2013, from 29.6% during fiscal 2012. Gross margin during fiscal 2013 and fiscal 2012 included expense related to inventory provisions for EDG and Canvys of $0.2 million and $0.2 million, respectively. In addition, gross margin for EDG included $0.8 million and $0.2 million related to unabsorbed manufacturing labor and overhead for continuing operations during fiscal 2013 and 2012, respectively.
Electron Device Group
Net sales for EDG increased 0.7% to $103.3 million during fiscal 2014, from $102.6 million during fiscal 2013. Net sales of tubes grew in the industrial heating, marine, and laser markets but were offset by declines primarily in the broadcast and aviation markets. Gross margin as a percentage of net sales remained flat at 30.6% during fiscal 2014 compared to fiscal 2013.
Net sales for EDG decreased 8.9% to $102.6 million during fiscal 2013, from $112.6 million during fiscal 2012. Net sales of tubes decreased to $80.8 million during fiscal 2013, as compared to $90.1 million during fiscal 2012, due primarily to economic factors and weaker demand, particularly in Europe and China, as well as overall declines in the plastic, wood, and semiconductor fabrication markets. Net sales of continuous wave magnetrons and related assemblies sold primarily into the semi-conductor fabrication market decreased to $9.7 million during fiscal 2013, as compared to $10.1 million during fiscal 2012. Gross margin as a percentage of net sales decreased slightly to 30.6% during fiscal 2013, as compared to 30.8% during fiscal 2012.
Canvys
Net sales for Canvys decreased 9.8% to $34.7 million during fiscal 2014, from $38.5 million during fiscal 2013. Sales were flat in the North America Healthcare segment, up slightly in Europe OEM and down in the North America OEM market as suppliers sold directly to end users. Gross margin as a percentage of net sales increased to 27.1% during fiscal 2014 as compared to 26.3% during fiscal 2013, due to continued margin improvement in Europe and lower inbound freight costs associated with inventory management.
Canvys net sales decreased 15.0% to $38.5 million during fiscal 2013, from $45.3 million during fiscal 2012. Sales were negatively impacted in North America by healthcare reform. Sales in Europe were down due to continuing economic pressures. Gross margin as a percentage of net sales decreased to 26.3% during fiscal 2013 as compared to 26.9% during fiscal 2012, due to lower margin in Europe associated with customer mix and currency exchange.
Sales by Geographic Area
On a geographic basis, our sales are categorized by destination: North America; Europe; Asia/Pacific; Latin America; and Other.
Net sales by geographic area and percent change for fiscal 2014, 2013, and 2012 were as follows (in thousands):
 
Net Sales
FY 2014
 
FY 2013
 
FY 2012
 
FY14 vs. FY13
% Change
 
FY13 vs. FY12
% Change
North America
$
57,137

 
$
62,269

 
$
68,980

 
(8.2
%)
 
(9.7
%)
Asia/Pacific
24,069

 
22,732

 
25,588

 
5.9
%
 
(11.2
%)
Europe
47,610

 
45,663

 
48,998

 
4.3
%
 
(6.8
%)
Latin America
8,936

 
9,447

 
9,870

 
(5.4
%)
 
(4.3
%)
Other
208

 
955

 
4,400

 
(78.2
%)
 
(78.3
%)
Total
$
137,960

 
$
141,066

 
$
157,836

 
(2.2
%)
 
(10.6
%)

19


Gross profit by geographic area and percent of geographic net sales for fiscal 2013, 2012, and 2011 were as follows (in thousands):
 
Gross Profit (Loss)
FY 2014
 
FY 2013
 
FY 2012
North America
$
18,905

 
33.1
%
 
$
20,963

 
33.7
%
 
$
22,380

 
32.4
%
Asia/Pacific
7,849

 
32.6
%
 
7,805

 
34.3
%
 
9,068

 
35.4
%
Europe
15,506

 
32.6
%
 
14,248

 
31.2
%
 
15,107

 
30.8
%
Latin America
3,231

 
36.2
%
 
3,296

 
34.9
%
 
3,712

 
37.6
%
Other
(4,477
)
 
 
 
(4,767
)
 
 
 
(3,486
)
 
 
Total
$
41,014

 
29.7
%
 
$
41,545

 
29.5
%
 
$
46,781

 
29.6
%
We sell our products to customers in diversified industries and perform periodic credit evaluations of our customers’ financial condition. Terms are generally on open account, payable net 30 days in North America, and vary throughout Asia/Pacific, Europe, and Latin America. Estimates of credit losses are recorded in the financial statements based on monthly reviews of outstanding accounts. Other primarily includes net sales not allocated to a specific geographical region, unabsorbed value-add costs, and unallocated freight expenses.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses (“SG&A”) increased during fiscal 2014 to $43.5 million from $41.5 million during fiscal 2013. SG&A as a percentage of sales from continuing operations, increased to 31.5% during fiscal 2014 from 29.4% during fiscal 2013. The increase in SG&A costs of $2.0 million during fiscal 2014, compared to fiscal 2013, includes severance costs of $1.2 million, new system implementation expenses of $0.8 million, expenses related to evaluating potential acquisitions of $1.1 million, and new product development costs of $0.4 million, partially offset by a $1.5 million decrease within EDG, Canvys, and support functions.
SG&A increased during fiscal 2013 to $41.5 million from $40.6 million during fiscal 2012. SG&A as a percentage of sales, from continuing operations, increased to 29.4% during fiscal 2013 from 25.8% during fiscal 2012. SG&A in fiscal 2013 includes a $1.4 million increase for EDG partially offset by a $0.1 million reduction of support function costs and a decrease of SG&A costs for Canvys of $0.9 million. SG&A in fiscal 2013 includes employee-related termination costs of $0.5 million, $0.3 million, and $0.4 million relating to EDG, Canvys, and support functions, respectively, compared to no employee-related terminations costs for fiscal 2012.
Impairment of Goodwill
The results of our goodwill impairment tests as of March 1, 2014, indicated that the balance of goodwill reported, entirely attributed to our EDG reporting unit, was fully impaired. The goodwill impairment test revealed that there was no implied goodwill value as of the measurement date. As a result, we recorded a pre-tax goodwill impairment charge of $1.7 million. Additionally, a $0.6 million tax benefit was recorded related to the goodwill impairment.
The results of our goodwill impairment test as of March 2, 2013, and March 1, 2012, indicated no goodwill impairment as estimated fair value of the EDG reporting unit exceeded the carrying value.
Other Income/Expense
Other income/expense was income of $3.5 million during fiscal 2014, compared to income of $0.6 million during fiscal 2013. Fiscal 2014 included an antitrust class action lawsuit settlement of $2.6 million. The $0.6 million in fiscal 2013 included a foreign exchange loss of $0.8 million. Our foreign exchange gains and losses are primarily due to the translation of U.S. dollars held in non-U.S. entities. We currently do not utilize derivative instruments to manage our exposure to foreign currency. Fiscal 2014 and fiscal 2013 also included $1.0 million and $1.3 million, respectively, of investment income.

Other income was $0.6 million during fiscal 2013, compared to $1.4 million during fiscal 2012. Other income included a foreign exchange loss of $0.8 million, as compared to a foreign exchange gain of less than $0.1 million during fiscal 2012. Our foreign exchange gains and losses are primarily due to the translation of U.S. dollars held in non-U.S. entities. We currently do not utilize derivative instruments to manage our exposure to foreign currency. Fiscal 2013 and fiscal 2012 also included $1.3 million and $1.4 million, respectively, of investment income.


20


Income Tax Provision (Benefit)
Our income tax benefit during fiscal year 2014 was $0.3 million. Our income tax provision for fiscal year 2013 was $0.2 million. During fiscal 2012, we had an income tax benefit of $0.3 million. The effective income tax rates for continuing operations during fiscal 2014, 2013, and 2012, were 47.0%, 24.9%, and (4.4%), respectively. The difference between the effective tax rates as compared to the U.S. federal statutory rate of 34% during 2014, 2013, and 2012 resulted from our geographical distribution of taxable income or losses, return to provision adjustments, the release of income tax reserves for uncertain tax positions, changes in the amount of foreign earnings considered to be permanently reinvested, and changes in valuation allowance. 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 May 31, 2014, we had no domestic federal net operating loss (“NOL”) carryforwards. Domestic state NOL carryforwards amounted to approximately $2.3 million. Foreign NOL carryforwards totaled approximately $1.1 million with various or indefinite expiration dates. We also had no alternative minimum tax credit carryforward or foreign tax credit carryforwards as of May 31, 2014.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant component of objective evidence evaluated was the cumulative income or loss incurred in each jurisdiction over the three-year period ended May 31, 2014. On the basis of this evaluation, as of May 31, 2014, a valuation allowance of $4.1 million has been established to record only the portion of the deferred tax asset that more likely than not will be realized. The valuation allowance relates to deferred tax assets in jurisdictions where historical taxable losses have been incurred, and domestic state NOL carryforwards related to jurisdictions where the utilization of NOLs have been suspended. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased, or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth.
Our future U.S. federal, state, and foreign effective tax rates are expected to be closer to 34.0%, 3.8%, and 27.3%, respectively.
Income taxes paid, including foreign estimated tax payments, were $2.1 million, $1.7 million, and $40.1 million during fiscal 2014, 2013, and 2012, respectively.
We have historically determined that certain undistributed earnings of our foreign subsidiaries, to the extent of cash available, will be repatriated to the U.S. Accordingly, we have provided a deferred tax liability totaling $7.0 million and $6.8 million as of May 31, 2014 and June 1, 2013, respectively, on foreign earnings of $41.3 million. In addition, as of May 31, 2014, $45.4 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. Generally, years prior to fiscal 2005 are closed for examination under the statute of limitation for U.S. federal, state or local, or non-U.S. tax jurisdictions. We are also currently under examination in Germany (fiscal 2009, 2010, and 2011), Italy (fiscal 2011), and Thailand (fiscal 2008 through 2011). Our primary foreign tax jurisdictions are Germany and the Netherlands. We have tax years open in Germany beginning in fiscal 2007 and the Netherlands beginning in fiscal 2008.
Discontinued Operations
During fiscal year 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 ("the Transaction"). 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 the notes to our consolidated financial statements in Part II, Item 8 of this Annual Report on form 10-K.



21


Financial Summary - Discontinued Operations
Summary financial results for fiscal 2014, 2013, and 2012 are presented in the following table (in thousands):
 
 
Fiscal 2014
 
Fiscal 2013
 
Fiscal 2012
Net sales
$
402

 
$
636

 
$
2,984

Gross loss (1)
(330
)
 
(553
)
 
(227
)
Selling, general, and administrative expenses (2)
215

 
714

 
552

Additional (gain)/loss on sale

 
18

 
(266
)
Income tax benefit (3)
(375
)
 
(2,051
)
 
(1,049
)
Income (loss) from discontinued operations, net of tax
(170
)
 
766

 
536

Notes:
(1)
Gross loss for fiscal year 2014, 2013, and 2012 includes unabsorbed manufacturing labor and overhead expenses related to the Manufacturing Agreement with RFPD which ended March 1, 2014.
(2)
Selling, General and Administrative expenses in fiscals 2014, 2013, and 2012 related primarily to professional fees for tax audits resulting from the Transaction.
(3)
The income tax benefits in fiscal years 2014, 2013, and 2012 relates to the reversal of tax reserves.
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.
Assets and liabilities classified as discontinued operations on our consolidated balance sheets as of May 31, 2014, and June 1, 2013, include the following (in thousands):
 
 
May 31, 2014
 
June 1, 2013
Inventories
$
18

 
$
303

Discontinued operations - Assets
$
18

 
$
303

Accrued liabilities - current
$
7

 
$
245

Accrued liabilities - non-current (1)
130

 

Discontinued operations - Liabilities
$
137

 
$
245

 
(1)
Included in accrued liabilities - non-current as of May 31, 2014, is a reserve for an income tax liability due to an ongoing audit.
Liquidity, Financial Position, and Capital Resources
Our growth and cash needs have been primarily financed through income from operations and the proceeds from the sale of RFPD during fiscal 2011.
Cash and cash equivalents were $102.8 million at May 31, 2014. In addition, CD’s and time deposits, classified as short-term investments were $31.7 million and long-term investments were $1.5 million including equity securities of $0.5 million. Cash and investments at May 31, 2014, consisted of $71.8 million in North America, $20.5 million in Europe, $0.9 million in Latin America, and $42.8 million in Asia/Pacific.
Cash and cash equivalents were $102.0 million at June 1, 2013. In addition, CD’s and time deposits classified as short-term investments were $38.9 million and long-term investments were $5.5 million, including equity securities of $0.4 million. Cash and investments at June 1, 2013, consisted of $82.1 million in North America, $22.1 million in Europe, $1.2 million in Latin America, and $41.0 million in Asia/Pacific.

22


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 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 believe we will continue to have sufficient liquidity to fund our future growth strategies for our business in the foreseeable future.
Cash Flows from Operating Activities
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 $4.6 million of cash during fiscal 2014. We had net loss of $0.5 million during fiscal 2014, which included non-cash stock-based compensation expense of $0.8 million associated with the issuance of stock option awards primarily to our directors and officers and depreciation and amortization expense of $1.1 million associated with our 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 $2.6 million of cash during fiscal 2014, due primarily to the decrease in our income tax receivable of $3.5 million, decrease in inventory of $1.5 million, partially offset by a decrease to our accounts payable of $2.1 million. The decrease in our inventory was the result of reduced inventory purchases during fiscal 2014 due to the decline in net sales.
Operating activities, which include our discontinued operations, provided $8.6 million of cash during fiscal 2013. We had net income of $1.2 million during fiscal 2013, which included non-cash stock-based compensation expense of $0.6 million associated with the issuance of stock option awards primarily to our directors and officers and depreciation and amortization expense of $1.1 million associated with our 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 $7.4 million of cash during fiscal 2013, due primarily to the decrease in inventory of $2.5 million, decrease in our accounts receivable of $1.8 million, partially offset by an increase to our prepaid expenses of $0.3 million. The decrease in our inventory was the result of reduced inventory purchases during fiscal 2013 due to the decline in net sales. The decrease in our receivables of $1.8 million was due primarily to the improvement in our day sales outstanding and lower sales volume. The increase in prepaid expenses of $0.3 million was due primarily to the renewal of our liability insurance coverage.
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 fiscal 2014, included proceeds from the maturities of investments of $342.3 million, offset by the purchase of investments of $331.0 million, $1.0 million for the acquisition of WVS, and $2.8 million in capital expenditures, primarily related to a new ERP system implementation.
Cash provided by investing activities during fiscal 2013, included proceeds from the maturities of investments of $154.2 million, offset by the purchase of investments of $82.9 million, $2.6 million for the acquisition of D and C, and $1.6 million in capital expenditures.
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 $11.9 million during fiscal 2014, resulted from $8.7 million of cash used to repurchase common stock and $3.3 million in dividends paid, offset by $0.2 million of proceeds from the issuance of common stock. The repurchase of common stock relates to our share repurchase authorizations. Cash dividends paid of $3.3 million were approved by the Board of Directors on July 23, 2013, October 8, 2013, January 7, 2014, and April 8, 2014.

23


Cash used in financing activities of $18.4 million during fiscal 2013, was due primarily to $15.0 million related to the repurchases of common stock and $3.6 million in cash dividends paid, offset by $0.2 million in proceeds from the issuance of common stock. The repurchase of common stock relates to our share repurchase authorizations. Cash dividends paid of $3.6 million were approved by the Board of Directors on July 23, 2012, October 8, 2012, January 8, 2013, and April 9, 2013.
Dividend payments during fiscal 2014 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.
Contractual Obligations
Contractual obligations by expiration period are presented in the table below as of May 31, 2014 (in thousands):
 
Less than
1 year
 
1 - 3
years
 
3 - 5
years
 
More than
5 years
 
Total
Lease obligations (1)
$
352

 
$
1,770

 
$
171

 
$
331

 
$
2,624

IT services (2)
1,075

 

 

 

 
1,075

Total
$
1,427

 
$
1,770

 
$
171

 
$
331

 
$
3,699

 
(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 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 May 30, 2015.
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, goodwill and other intangible assets, 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 the 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.
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 $0.6 million as of May 31, 2014, and $1.1 million as of 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.
Inventories
Our worldwide inventories are stated at the lower of cost or market, generally using a weighted-average cost method. Our inventories included approximately $30.9 million of finished goods and $3.0 million of raw materials and work-in-progress as of May 31, 2014, as compared to approximately $31.6 million of finished goods and $2.4 million of raw materials and work-in-progress as of June 1, 2013.

24


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 management’s estimates, additional provisions may be necessary.
We recorded provisions to our inventory reserves of $0.8 million, $0.4 million, and $0.4 million during fiscal 2014, 2013, and 2012, respectively, which were included in cost of sales. The provisions were primarily for obsolete and slow moving parts. The parts were written down to estimated realizable value.
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.
During the fourth quarter of each fiscal year, our goodwill balances are reviewed for impairment through the application of a fair-value based test, using the third quarter as the measurement date. In performing our annual review of goodwill balances for impairment, we estimate the fair value of each of our reporting units based on projected future operating results, market approach, and discounted cash flows. Projected future operating results and cash flows used for valuation purposes may reflect considerable improvements relative to historical periods with respect to, among other things, revenue growth and operating margins. Although we believe our projected future operating results and cash flows and related estimates regarding fair values are based on reasonable assumptions, historically, projected operating results and cash flows have not always been achieved. In accordance with ASC 350 “Intangibles - Goodwill 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.
Our goodwill impairment testing follows the two-step process as defined in ASC 350. The first step in the process compares the fair value of the reporting unit to its carrying value. If the carrying value of the reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss to be recognized. In the second step, the fair value of the reporting unit resulting from the first step of the evaluation is allocated to the fair value of all of the assets and liabilities of the reporting unit in order to determine an implied goodwill value. This allocation is similar to the purchase price allocation performed in purchase accounting. If the carrying amount of the goodwill reported exceeds the implied goodwill value, an impairment loss should be recognized in an amount equal to that excess.
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 assets represent the fair value for trade name, customer relationships, and non-compete agreements acquired in connection with the acquisitions of Powerlink during our second quarter of fiscal 2012 and D and C acquired during our second quarter of fiscal 2013. Intangible assets fully relate to our EDG segment.
Long-Lived Assets
We review property and equipment, definite-lived intangible assets, and other long-lived assets for impairment whenever adverse events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable.
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 losses 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.

25


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 8 “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
In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-12, Compensation - Stock Compensation (Topic718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU standardizes the reporting for these awards by requiring that entities treat these performance targets as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. For all entities, ASU 2014-12 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015; early adoption is permitted. We are currently evaluating the impact that the adoption of ASU 2014-11 will have on our financial condition, results of operations and disclosures.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 is principles based guidance that can be applied to all contracts with customers, enhancing comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. The core principle of the guidance is that entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The guidance details the steps entities should apply to achieve the core principle. For public entities, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period; early adoption is not permitted. We are currently evaluating the impact that the adoption of ASU 2014-09 will have on our financial condition, results of operations and disclosures.  

In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU limits discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. In addition, the amendments in this ASU require expanded disclosures for discontinued operations as well as for disposals that do not qualify as discontinued operations. For public entities, ASU 2014-08 is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2014. Early adoption is permitted for disposals that have not been reported in financial statements previously issued. We are currently evaluating the impact that the adoption of ASU 2014-08 will have on our financial condition, results of operations and disclosures.         

We have evaluated and adopted the guidance of the following ASUs issued by the FASB in 2013; adopting these ASUs did not materially impact the presentation of our financial condition, results of operations and disclosures:

ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists issued in July 2013. ASU 2013-11 standardizes the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists; it does not require new recurring disclosures. ASU 2013-11 requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward unless specific criteria exist, in which case the unrecognized tax benefit should be presented as a liability and should not be combined with deferred tax assets  .


26


ASU No. 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity issued in March 2013. ASU 2013-05 provides guidance on releasing cumulative translation adjustments (“CTA”) when an entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity, and also provides guidance on releasing CTA in partial sales of equity method investments and in step acquisitions.

  ASU No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date issued in February 2013. The guidance in ASU 2013-04 requires entities to measure obligations resulting from joint and several liability arrangements, for which the total obligation amount is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount it expects to pay on behalf of its co-obligors. ASU 2013-04 also specifies disclosure requirements.


27


ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Risk Management and Market Sensitive Financial Instruments
We are exposed to many different market risks with the various industries we serve. The primary financial risk we are exposed to is foreign currency exchange, as certain operations, assets, and liabilities of ours are denominated in foreign currencies. We manage these risks through normal operating and financing activities.
The interpretation and analysis of these disclosures should not be considered in isolation since such variances in exchange rates would likely influence other economic factors. Such factors, which are not readily quantifiable, would likely also affect our operations. Additional disclosure regarding various market risks are set forth in Part I, Item 1A, “Risk Factors” of our Annual Report on 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 2014, fiscal 2013, or fiscal 2012.
Had the U.S. dollar changed unfavorably 10% against various foreign currencies, foreign denominated net sales would have been lower by an estimated $13.8 million during fiscal 2014, an estimated $14.1 million during fiscal 2013, and an estimated $15.8 million during fiscal 2012. Total assets would have declined by an estimated $26.8 million as of the fiscal year ended May 31, 2014, and an estimated $26.1 million as of the fiscal year ended June 1, 2013, while the total liabilities would have decreased by an estimated $0.7 million as of the fiscal year ended May 31, 2014, and an estimated $0.9 million as of the fiscal year ended June 1, 2013.
The interpretation and analysis of these disclosures should not be considered in isolation since such variances in exchanges rates would likely influence other economic factors. Such factors, which are not readily quantifiable, would likely also affect our operations.

28


ITEM 8. Financial Statements and Supplementary Data
Richardson Electronics, Ltd.
Audited Consolidated Balance Sheets
(in thousands, except per share amounts)
 
May 31,   2014
 
June 1,   2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
102,752

 
$
102,002

Accounts receivable, less allowance of $581 and $1,092
18,354

 
18,268

Inventories
33,869

 
33,975

Prepaid expenses and other assets
1,089

 
1,155

Deferred income taxes
1,537

 
1,856

Income tax receivable
2,888

 
6,429

Investments - current
31,732

 
38,971

Discontinued operations - assets
18

 
303

Total current assets
192,239

 
202,959

Non-current assets:
 
 
 
Property, plant and equipment, net
7,223

 
5,073

Goodwill

 
1,519

Other Intangibles
843

 
908

Non-current deferred income taxes
1,724

 
1,398

Investments - non-current
1,516

 
5,461

Total non-current assets
11,306

 
14,359

Total assets
$
203,545

 
$
217,318

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
12,337

 
$
14,255

Accrued liabilities
9,220

 
9,566

Discontinued operations - liabilities
7

 
245

Total current liabilities
21,564

 
24,066

Non-current liabilities:
 
 
 
Non-current deferred income tax liability
5,691

 
6,726

Other non-current liabilities
1,315

 
1,287

Discontinued operations - non-current liabilities
130

 

Total non-current liabilities
7,136

 
8,013

Total liabilities
28,700

 
32,079

Commitments and contingencies

 

Stockholders’ equity
 
 
 
Common stock, $0.05 par value; issued 11,835 shares at May 31, 2014, and 12,263 shares at June 1, 2013
592

 
613

Class B common stock, convertible, $0.05 par value; issued 2,191 shares at May 31, 2014, and 2,491 shares at June 1, 2013
110

 
125

Preferred stock, $1.00 par value, no shares issued

 

Additional paid-in-capital
66,141

 
73,979

Common stock in treasury, at cost, 1 share at May 31, 2014, and 9 shares at June 1, 2013
(14
)
 
(105
)
Retained earnings
97,959

 
101,816

Accumulated other comprehensive income
10,057

 
8,811

Total stockholders’ equity
174,845

 
185,239

Total liabilities and stockholders’ equity
$
203,545

 
$
217,318


29


Richardson Electronics, Ltd.
Audited Consolidated Statements of Comprehensive Income (Loss)
(in thousands, except per share amounts)
 
Fiscal Year Ended
 
May 31,   2014
 
June 1,   2013
 
June 2,   2012
Statements of Comprehensive Income (Loss)
 
 
 
 
 
Net sales
$
137,960

 
$
141,066

 
$
157,836

Cost of sales
96,946

 
99,521

 
111,055

Gross profit
41,014

 
41,545

 
46,781

Selling, general, and administrative expenses
43,496

 
41,536

 
40,603

Impairment of goodwill
1,671

 

 

Loss on disposal of assets

 
(2
)
 
(77
)
Operating income (loss)
(4,153
)
 
11

 
6,255

Other (income) expense:
 
 
 
 
 
Investment/interest income
(1,018
)
 
(1,306
)
 
(1,386
)
Foreign exchange (gain) loss
84

 
760

 
(5
)
Proceeds from legal settlement
(2,547
)
 

 

Other, net
(20
)
 
(85
)
 
(10
)
Total other income
(3,501
)
 
(631
)
 
(1,401
)
Income (loss) from continuing operations before income taxes
(652
)
 
642

 
7,656

Income tax provision (benefit)
(307
)
 
160

 
(334
)
Income (loss) from continuing operations
(345
)
 
482

 
7,990

Income (loss) from discontinued operations, net of tax
(170
)
 
766

 
536

Net income (loss)
(515
)
 
1,248

 
8,526

Foreign currency translation gain (loss), net of tax
1,216

 
(1,508
)
 
(4,227
)
Fair value adjustments on investments gain (loss)
30

 
(30
)
 
(40
)
Comprehensive income (loss)
$
731

 
$
(290
)
 
$
4,259

Net income (loss) per Common share - Basic:
 
 
 
 
 
Income (loss) from continuing operations
$
(0.03
)
 
$
0.03

 
$
0.48

Income (loss) from discontinued operations
(0.01
)
 
0.05

 
0.03

Total net income (loss) per Common share - Basic:
$
(0.04
)
 
$
0.08

 
$
0.51

Net income (loss) per Class B common share - Basic:
 
 
 
 
 
Income (loss) from continuing operations
$
(0.02
)
 
$
0.03

 
$
0.43

Income (loss) from discontinued operations
(0.01
)
 
0.05

 
0.03

Total net income (loss) per Class B common share - Basic:
$
(0.03
)
 
$
0.08

 
$
0.46

Net income (loss) per Common share - Diluted:
 
 
 
 
 
Income (loss) from continuing operations
$
(0.03
)
 
$
0.03

 
$
0.47

Income (loss) from discontinued operations
(0.01
)
 
0.05

 
0.03

Total net income (loss) per Common share - Diluted:
$
(0.04
)
 
$
0.08

 
$
0.50

Net income (loss) per Class B common share - Diluted:
 
 
 
 
 
Income (loss) from continuing operations
$
(0.02
)
 
$
0.03

 
$
0.43

Income (loss) from discontinued operations
(0.01
)
 
0.05

 
0.03

Total net income (loss) per Class B common share - Diluted:
$
(0.03
)
 
$
0.08

 
$
0.46

Weighted average number of shares:
 
 
 
 
 
Common shares - Basic
11,915

 
12,448

 
14,025

Class B common shares - Basic
2,250

 
2,790

 
2,941

Common shares - Diluted
11,915

 
15,372

 
17,118

Class B common shares - Diluted
2,250

 
2,790

 
2,941

Dividends per common share
$
0.240

 
$
0.240

 
$
0.200

Dividends per Class B common share
$
0.220

 
$
0.220

 
$
0.180


30


Richardson Electronics, Ltd.
Audited Consolidated Statements of Cash Flows
(in thousands)
 
Fiscal Year Ended
 
May 31,   2014
 
June 1,   2013
 
June 2,   2012
Operating activities:
 
 
 
 
 
Net income (loss)
$
(515
)
 
$
1,248

 
$
8,526

Adjustments to reconcile net income to cash provided by (used in) operating activities:
 
 
 
 
 
Depreciation and amortization
1,094

 
1,057

 
1,112

Gain on sale of investments
(27
)
 
(28
)
 

(Gain) loss on disposal of assets

 
16

 
(77
)
Share-based compensation expense
759

 
619

 
481

Deferred income taxes
(1,005
)
 
145

 
2,855

Impairment of goodwill
1,671

 

 

Change in assets and liabilities, net of effect of acquired businesses:
 
 
 
 
 
Accounts receivable
195

 
1,814

 
4,112

Income tax receivable
3,541

 
143

 
(6,572
)
Inventories
1,517

 
3,097

 
(4,429
)
Prepaid expenses and other assets
96

 
(329
)
 
5,058

Accounts payable
(2,072
)
 
1,482

 
(4,712
)
Accrued liabilities
(723
)
 
960

 
(50,115
)
Long-term income tax liabilities
133

 
(1,918
)
 
(5,205
)
Other
(51
)
 
319

 
243

Net cash provided by (used in) operating activities
4,613

 
8,625

 
(48,723
)
Investing activities:
 
 
 
 
 
Cash consideration paid for acquired businesses
(973
)
 
(2,557
)
 
(2,291
)
Capital expenditures
(2,781
)
 
(1,640
)
 
(218
)
Proceeds from sale of assets

 
4

 
25

Proceeds from maturity of investments
342,279

 
154,228

 
376,633

Purchases of investments
(331,023
)
 
(82,898
)
 
(423,585
)
Proceeds from sales of available-for-sale securities
176

 
188

 
208

Purchases of available-for-sale securities
(176
)
 
(188
)
 
(208
)
Other
98

 
68

 
39

Net cash provided by (used in) investing activities
7,600

 
67,205

 
(49,397
)
Financing activities:
 
 
 
 
 
Repurchase of common stock
(8,739
)
 
(15,024
)
 
(23,991
)
Proceeds from issuance of common stock
190

 
198

 
807

Cash dividends paid
(3,341
)
 
(3,571
)
 
(3,315
)
Other
37

 

 
(75
)
Net cash used in financing activities
(11,853
)
 
(18,397
)
 
(26,574
)
Effect of exchange rate changes on cash and cash equivalents
390

 
676

 
(2,388
)
Increase/ (decrease) in cash and cash equivalents
750

 
58,109

 
(127,082
)
Cash and cash equivalents at beginning of period
102,002

 
43,893

 
170,975

Cash and cash equivalents at end of period
$
102,752

 
$
102,002

 
$
43,893

Supplemental Disclosure of Cash Flow Information:
 
 
 
 
 
Cash paid during the fiscal year for:
 
 
 
 
 
Interest
$

 
$

 
$
1

Income taxes
$
2,094

 
$
1,680

 
$
40,143


31


Richardson Electronics, Ltd.
Audited 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 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
)
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

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income


 

 

 

 
1,248

 

 
1,248

Foreign currency translation


 

 

 

 

 
1,508

 
1,508

Fair value adjustments on investments


 

 

 

 

 
30

 
30

Share-based compensation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-vested restricted stock


 

 
18

 

 

 

 
18

Stock options


 

 
601

 

 

 

 
601

Common stock:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee stock option grant


 

 

 

 

 
 
 

Options Exercised
31


 
2

 
215

 

 

 

 
217

Canceled Shares

(354
)
 

 

 

 

 

 

Converted Class B to Common
200


 

 

 

 

 

 

Repurchase of common stock


 

 

 
(15,024
)
 

 

 
(15,024
)
Treasury stock
(1,196
)
(75
)
 
(64
)
 
(15,072
)
 
15,136

 

 

 

Other
154


 

 

 
(1
)
 

 

 
(1
)
Dividends paid to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common ($0.24 per share)


 

 

 

 
(2,971
)
 

 
(2,971
)
Class B ($0.22 per share)


 

 

 

 
(600
)
 

 
(600
)
Balance June 1, 2013:
12,263

2,491

 
$
738

 
$
73,979

 
$
(105
)
 
$
101,816

 
$
8,811

 
$
185,239

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss


 

 

 

 
(515
)
 

 
(515
)
Foreign currency translation


 

 

 

 

 
1,216

 
1,216

Fair value adjustments on investments


 

 

 

 

 
30