RICHARDSON ELECTRONICS, LTD. - Quarter Report: 2007 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended December 1, 2007

OR

For the transition period from                      To                     

Commission File Number: 0-12906

RICHARDSON ELECTRONICS, LTD.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:(630) 208-2200

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer  ¨            Accelerated Filer  x            Non-Accelerated Filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨  Yes    x  No

As of January 7, 2008, there were outstanding 14,816,914 shares of Common Stock, $0.05 par value and 3,048,258 shares of Class B Common Stock, $0.05 par value, which are convertible into Common Stock of the registrant on a share for share basis.

TABLE OF CONTENTS

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PART I. FINANCIAL INFORMATION

Richardson Electronics, Ltd.

Unaudited Condensed Consolidated Balance Sheets

(In thousands, except per share amounts)

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Richardson Electronics, Ltd.

Unaudited Condensed Consolidated Statements of Operations

and Comprehensive Income (Loss)

(In thousands, except per share amounts)

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Richardson Electronics, Ltd.

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

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RICHARDSON ELECTRONICS, LTD.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS

1. DESCRIPTION OF THE COMPANY

Richardson Electronics, Ltd. (“the Company”) is a global provider of engineered solutions and a global distributor of electronic components to the radio frequency (“RF”), wireless and power conversion, electron device, and display systems markets. Utilizing its core engineering and manufacturing capabilities, the Company is committed to a strategy of providing specialized technical expertise and value-added products, or “engineered solutions,” in response to customers’ needs. These solutions include products which the Company manufactures or modifies and products which are manufactured to its specifications by independent manufacturers under the Company’s own private labels. Additionally, the Company provides solutions and adds value through design-in support, systems integration, prototype design and manufacturing, testing, and logistics for end products of its customers. Design-in support includes component modifications or the identification of lower-cost product alternatives or complementary products.

The Company’s products include RF and microwave components, power semiconductors, electron tubes, microwave generators, and data display monitors. These products are used to control, switch or amplify electrical power signals, or as display devices in a variety of industrial, commercial, and communication applications.

The Company’s sales and marketing, product management, and purchasing functions are organized as follows:

RF, Wireless & Power Division (“RFPD”) serves the global RF and wireless communications market, including infrastructure, and wireless networks, and power conversion market.

Electron Device Group (“EDG”) provides engineered solutions and distributes electronic components to customers in diverse markets including the steel, automotive, textile, plastics, semiconductor manufacturing, and broadcast industries.

Display Systems Group (“DSG”) is a global provider of integrated display products and systems to the public information, financial, point-of-sale, industrial, and healthcare markets.

The Company currently has operations in the following major geographic regions:

2. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Item 10 of Regulation S-K. Accordingly, they do not include all the information and notes required by United States generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the results of interim periods have been made and such adjustments were of a normal and recurring nature. All inter-company transactions and balances have been eliminated. The unaudited condensed consolidated financial statements presented

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herein include the accounts of the Company and our wholly owned subsidiaries. The results of operations and cash flows for the three and six-month periods ended December 1, 2007 are not necessarily indicative of the results that may be expected for the fiscal year ending May 31, 2008.

The June 2, 2007, unaudited condensed consolidated balance sheet has been restated to reflect the decision the Company made in the second quarter of fiscal 2008 to sell its building in Pianopoli, Italy. The net book value of the Company’s building in Pianopoli, Italy is classified as assets held for sale on the Company’s unaudited condensed consolidated balance sheet as of December 1, 2007, and June 2, 2007. See Note 3 “Discontinued Operations / Assets Held for Sale” to our unaudited condensed consolidated financial statements for further discussion of this matter.

As used in this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” or the Company refer to Richardson Electronics, Ltd. and our wholly owned subsidiaries.

The Company’s fiscal quarter ends on the Saturday nearest the end of the quarter ending month. The first six months of fiscal 2008 and 2007 contain 26 weeks.

The financial information contained in this report should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended June 2, 2007.

3. DISCONTINUED OPERATIONS / ASSETS HELD FOR SALE

Discontinued Operations Held for Sale:

On May 31, 2007, the Company completed the sale of the Security Systems Division/Burtek Systems (“SSD/Burtek”) to Honeywell International Incorporated (“Honeywell”). The Company presents SSD/Burtek as a discontinued operation in accordance with the criteria of Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”), and prior period results and disclosures have been restated to reflect this reporting.

The agreement documenting the sale of SSD/Burtek to Honeywell contemplated a post-closing working capital-based purchase price adjustment. During the second quarter of fiscal 2008, the Company received notification from Honeywell seeking a purchase price adjustment in the amount of $6.4 million. The Company is in the process of assessing the accuracy and validity of Honeywell’s request, but has not yet completed this process and accordingly cannot assess how much, if any, of this amount will be paid to Honeywell. Should the Company ultimately pay Honeywell all or a significant portion of this amount, it could have a material adverse impact on results of the Company’s discontinued operations and cash flows.

Net sales, gross profit, interest expense, income tax provision, and income (loss) from discontinued operations for the three and six-month periods ended December 1, 2007, and December 2, 2006, are presented in the following table (in thousands):

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The net sales, gross profit, and income from discontinued operations for the second quarter and first six months of fiscal 2008 represent the operations of the Company’s Colombia location which were included in the SSD/Burtek sale agreement with Honeywell, but were not included as part of the May 31, 2007, closing. In the first quarter of fiscal 2008, the Company and Honeywell mutually agreed that Honeywell would not purchase the SSD/Burtek Colombia business, and that the Company would wind down the SSD/Burtek Colombia business in exchange for a payment equal to a portion of the value of the SSD/Burtek business in Colombia on May 31, 2007, and reimbursement of related employee severance expenses. The Company expects to cease operations of the SSD/Burtek business in Colombia during the third quarter of fiscal 2008. Results of the operation of the SSD/Burtek business in Colombia are included in discontinued operations in accordance with SFAS No. 144. The second quarter and first six months of fiscal 2007 results represent all the operations that were included as part of the SSD/Burtek agreement. In accordance with Emerging Issues Task Force (“EITF”) Issue No. 87-24, Allocation of Interest to Discontinued Operations (“EITF 87-24”), the Company has allocated interest expense of $1.4 million and $2.7 million to discontinued operations for the second quarter and first six months of fiscal 2007, respectively, due to the requirement under the Company’s multi-currency revolving credit agreement (“credit agreement”) to pay the proceeds from the sale of a business to the parties in the credit agreement.

Assets and liabilities classified as discontinued operations held for sale on our unaudited condensed consolidated balance sheet as of December 1, 2007, and June 2, 2007, include the following (in thousands):

Assets Held for Sale:

In July 2006, we decided to sell our interests in property located in Rio De Janeiro, Brazil, which has a book value of $0.7 million. During the first quarter of fiscal 2008, the Company received an offer to purchase our interests in the property for 2.0 million Brazilian Reais, which is equivalent to approximately $1.1 million, and received a security deposit of 0.6 million Brazilian Reais. Upon closing of the sale, the Company will receive additional proceeds of 0.4 million Brazilian Reais in cash and a note receivable of 1.0 million Brazilian Reais which is payable in ten monthly installments of 0.1 million Brazilian Reais, commencing one month after closing. The closing of this transaction is expected to occur during the third quarter of fiscal 2008, however, the Company cannot give any assurance as to the actual timing or successful completion of the transaction.

In October 2007, we decided to sell our building in Pianopoli, Italy, which has a net book value of $0.5 million. The Company expects the completion of this sale to occur during the third quarter of fiscal 2008. The Company cannot give any assurance as to the actual timing or successful completion of the transaction.

In accordance with SFAS No. 144, we have classified the net assets related to both buildings as assets held for sale on our unaudited condensed consolidated balance sheet as of December 1, 2007, and June 2, 2007.

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4. INVESTMENT IN MARKETABLE EQUITY SECURITIES

The Company’s investments are primarily equity securities, all of which are classified as available-for-sale and are carried at their fair value based on the quoted market prices. The fair value of the Company’s equity securities, which are included in other non-current assets, was $0.6 million as of December 1, 2007, and $1.0 million as of June 2, 2007. Proceeds from the sale of the securities was $0 and $0.2 million during the second quarter and first six months of fiscal 2008, respectively, and $3.6 million and $3.7 million during the same periods of fiscal 2007. During the second quarter of fiscal 2007, the Company retained $3.5 million of proceeds from the sale of securities. In prior periods all proceeds from the sale of securities were reinvested. Gross realized gains on those sales were immaterial during the second quarter and first six months of fiscal 2008, respectively, and $0.7 million and $0.7 million for the same periods of fiscal 2007. Gross realized losses on security sales were immaterial for the second quarter and first six months of fiscal 2008 and fiscal 2007. Net unrealized holding losses of $0.1 million and $0.4 million for the second quarter and first six months of fiscal 2008, respectively, and net unrealized holding gains of $0.2 million and $0.1 million for the second quarter and first six months of fiscal 2007, respectively, have been included in accumulated comprehensive income for fiscal 2008 and 2007.

The following table is the disclosure under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, for the investment in marketable equity securities with fair values less than cost basis (in thousands):

5. GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the carrying amount of goodwill during the six months ended December 1, 2007, by reportable segment were as follows (in thousands):

During the fourth quarter of each fiscal year, the Company’s goodwill balances are reviewed for impairment through the application of a fair-value-based test, using the third quarter as the measurement date. The results of the test as of March 3, 2007, indicated no goodwill impairment, as, for all reporting units, our estimated reporting unit fair value exceeded the carrying value of the reporting unit. Our estimate of fair value for each of our reporting units was based primarily on projected future operating results and cash flows and other assumptions.

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Intangible assets subject to amortization were as follows (in thousands):

Deferred financing costs decreased during the first six months of fiscal 2008 primarily due to the write-off of previously capitalized deferred financing costs of $0.6 million related to the extinguishment of the Company’s existing credit agreement as a result of the Company entering into a new $40.0 million credit agreement (“new credit agreement”) on July 27, 2007. The write-off of $0.6 million was recorded as interest expense during the first quarter of fiscal 2008. The remaining amounts of deferred financing costs as of December 1, 2007, are associated with the Company’s 7 ³/4% convertible senior subordinated notes (“7 ³/4% notes”) and the Company’s 8% convertible senior subordinated notes (“8% notes”).

Amortization expense for the three and six-months ended December 1, 2007, and December 2, 2006, was as follows (in thousands):

The amortization expense associated with the intangible assets subject to amortization is expected to be $0.3 million in fiscal 2008, and $0.2 million for fiscal years 2009, 2010, and 2011. Amortization expense for fiscal year 2012 is expected to be approximately $0.1 million. The weighted average number of years of amortization expense remaining is 3.73.

6. RESTRUCTURING CHARGES

The Company implemented a global restructuring plan during fiscal 2007 (“2007 Restructuring Plan”). The 2007 Restructuring Plan was designed to decrease the number of warehouses and streamline processes throughout the organization. During fiscal 2007, the Company centralized inventory distribution in Europe, restructured its Latin American operations, and reduced its total workforce, including the elimination of certain layers of management.

As a result of the Company’s 2007 Restructuring Plan, restructuring charges of $2.2 million were recorded in selling, general, and administrative expenses (“SG&A”) during fiscal 2007. During the first six months of fiscal 2008, severance costs of $1.2 million were paid out. The remaining balance payable as of December 1, 2007, has been included in accrued liabilities.

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As of December 1, 2007, the amounts associated with the activity related to the 2007 Restructuring Plan were as follows (in thousands):

7. WARRANTIES

The Company offers warranties for specific products it manufactures. The Company also provides extended warranties for some products it sells that lengthen the period of coverage specified in the manufacturer’s original warranty. Warranty terms generally range from one to three years.

The Company estimates the cost to perform under its warranty obligation and recognizes this estimated cost at the time of the related product sale. The Company records expense related to its warranty obligations as cost of sales in its unaudited condensed consolidated statements of operations. Each quarter, the Company assesses actual warranty costs incurred on a product-by-product basis and compares the warranty costs to its estimated warranty obligation. The estimates with respect to new products are based generally on knowledge of the products, are extrapolated to reflect the extended warranty period, and are refined each quarter as better information with respect to warranty experience becomes known.

Warranty reserves are established for costs that are expected to be incurred after the sale and delivery of products under warranty. The warranty reserves are determined based on known product failures, historical experience, and other currently available evidence.

Changes in the warranty reserve for the first six months of fiscal 2008 were as follows (in thousands):

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8. DEBT

Long-term debt for the periods ended December 1, 2007, and June 2, 2007, was as follows (in thousands):

As of December 1, 2007, the Company maintained $55.7 million in long-term debt, in the form of two series of convertible notes. The Company entered into the new credit agreement on July 27, 2007, which includes a Euro subfacility of $15.0 million and a Singapore subfacility of $5.0 million. This new credit agreement expires in July 2010 and bears interest at applicable LIBOR, SIBOR, or prime rates plus a margin varying with certain quarterly borrowings under the new credit agreement. This new credit agreement is secured by a lien on the Company’s assets and also contains a financial covenant requiring the Company to maintain a leverage ratio of less than 2.0 to 1.0. Pursuant to an amendment to the new credit agreement entered into on November 29, 2007, the required leverage ratio was increased to 3.0 to 1.0 for the fiscal quarters ended December 1, 2007, and ending March 1, 2008. The commitment fee related to the new credit agreement is 0.25% per annum payable quarterly on the average daily unused portion of the aggregate commitment. At December 1, 2007, there were no amounts outstanding under the new credit agreement. Outstanding letters of credit were approximately $0.4 million, and the unused line was $39.6 million.

The new credit agreement consists of the following facilities as of December 1, 2007 (in thousands):

Interest expense increased to $1.6 million and $4.2 million for the second quarter and first six months of fiscal 2008, respectively, as compared with $1.4 million and $3.0 million during the second quarter and first six months of fiscal 2007, respectively. The components of interest expense from continuing operations are shown in the following table (in thousands):

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Interest expense incurred on the credit agreement during the second quarter and first six months of fiscal 2008 related primarily to borrowings to support working capital investments. During the first quarter of fiscal 2008, the Company wrote off $0.6 million of deferred financing costs due to the extinguishment of the credit agreement on July 27, 2007.

9. INCOME TAXES

The effective income tax rate for the second quarter of fiscal 2008 was a provision of 214.8% as compared with a provision of 13.6% for the second quarter of fiscal 2007. The difference between the effective tax rates as compared to the U.S. federal statutory rate of 34% primarily results from the Company’s geographical distribution of taxable income or losses and valuation allowances related to net operating losses. For the second quarter of fiscal 2008, the tax benefit related to net operating losses was limited by a net increase in valuation allowances of $1.7 million.

In the normal course of business, the Company is subject to examination by taxing authorities throughout the world. The Company is no longer subject to either U.S. federal, state, or local tax examinations by tax authorities for years prior to fiscal year 2004. With few exceptions, the Company is no longer subject to non-U.S. income tax examinations by tax authorities for years prior to fiscal year 2002. The Company’s primary foreign tax jurisdictions are the United Kingdom, Germany, Singapore, and the Netherlands. The company has tax years open beginning in fiscal year 2002 in Germany, the Netherlands, and Singapore; in the U.S. beginning in fiscal year 2004; and in the United Kingdom beginning in fiscal year 2005.

Effective June 3, 2007, the Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109, Accounting for Income Taxes (“FIN 48”). The application of FIN 48 would have resulted in an increase in retained earnings of $1.6 million, except that the increase was fully offset by the application of a valuation allowance against net operating losses. In addition, the Company reclassified $7.0 million of income tax liabilities from current liabilities to non-current liabilities as the Company does not anticipate settling the liabilities within the next twelve months.

At June 3, 2007, the Company’s worldwide liability for uncertain tax positions was $6.5 million, excluding interest and penalties. Unrecognized tax benefits of $2.6 million would affect the Company’s effective tax rate if recognized. There were no significant changes in components of the liability in the six months ending December 1, 2007.

The Company records penalties and interest relating to uncertain tax positions in the income tax expense line item within the unaudited condensed consolidated statements of operations. At June 3, 2007, approximately $0.8 million was included in the liability for uncertain tax positions for the possible payment of interest and penalties. There were no significant changes to penalties and interest relating to uncertain tax positions in the six months ending December 1, 2007.

It is reasonably possible that there will be a change in the unrecognized tax benefits in the range of $0 to approximately $1.4 million due to the expiration of various statutes of limitations within the next 12 months.

10. CALCULATION OF EARNINGS PER SHARE

The Company has authorized 30,000 shares of common stock, 10,000 shares of Class B common stock, and 5,000 shares of preferred stock. The Class B common stock has ten votes per share. The Class B common stock has transferability restrictions; however, it may be converted into common stock on a share-for-share basis at any time. With respect to dividends and distributions, shares of common stock and Class B common stock rank equally and have the same rights, except that Class B common stock cash dividends are limited to 90% of the amount of common stock cash dividends.

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According to the EITF Issue No. 03-6, Participating Securities and the Two-Class Method under FASB Statement No. 128 (“EITF No. 03-6”), the Company’s Class B common stock is considered a participating security requiring the use of the two-class method for the computation of basic and diluted earnings per share. The two-class computation method for each period reflects the cash dividends paid per share for each class of stock, plus the amount of allocated undistributed earnings per share computed using the participation percentage which reflects the dividend rights of each class of stock. Basic and diluted earnings per share were computed using the two-class method as prescribed in EITF No. 03-6. The shares of Class B common stock are considered to be participating convertible securities since the shares of Class B common stock are convertible on a share-for-share basis into shares of common stock and may participate in dividends with common stock according to a predetermined formula which is 90% of the amount of common stock cash dividends.

Diluted earnings per share is calculated by dividing net income, adjusted for interest savings, net of tax, on assumed conversion of convertible debentures and notes, by the actual shares outstanding and share equivalents that would arise from the exercise of stock options, certain restricted stock awards, and the assumed conversion of convertible debentures and notes when dilutive. For the second quarter and first six months of fiscal 2008 and 2007, the assumed conversion and the effect of the interest savings of the Company’s 7 ³/4% notes and 8% notes were excluded because their inclusion would have been anti-dilutive.

The per share amounts presented in the unaudited condensed consolidated statements of operations are based on the following amounts (in thousands, except per share amounts):