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

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 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)

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

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 October 8, 2007, there were outstanding 14,806,914 shares of Common Stock, $0.05 par value, inclusive of 1,122,232 shares held in treasury, 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.

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PART I. FINANCIAL INFORMATION

Richardson Electronics, Ltd.

Condensed Consolidated Balance Sheets

(in thousands, except per share amounts)

See notes to condensed consolidated financial statements.

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Richardson Electronics, Ltd.

Condensed Consolidated Statement of Operations

and Comprehensive Income (Loss)

(Unaudited)(in thousands, except per share amounts)

See notes to condensed consolidated financial statements

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Richardson Electronics, Ltd.

Condensed Consolidated Statements of Cash Flows

(Unaudited)(in thousands)

See notes to condensed consolidated financial statements.

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RICHARDSON ELECTRONICS, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(in thousands, except per share amounts and except where indicated)

Note A – 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. The results of operations and cash flows for the three-month period ended September 1, 2007 are not necessarily indicative of the results that may be expected for the fiscal year ending May 31, 2008.

Richardson Electronics, Ltd.’s (the Company) fiscal quarter ends on the Saturday nearest the end of the quarter ending month. The first quarter of fiscal 2008 and 2007 contain 13 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.

Note B – 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, included in other non-current assets, were $759 at September 1, 2007 and $1,001 at June 2, 2007. Proceeds from the sale of the securities were $157 and $118 during the first quarter of fiscal 2008 and 2007, respectively. Gross realized gains on those sales were $4 and $13 during the first quarter of fiscal 2008 and 2007, respectively. Gross realized losses on security sales for the first quarter of fiscal 2008 and 2007 were $12 and $23, respectively. Net unrealized holding losses of $236 and $1 for the first quarter of fiscal 2008 and 2007, respectively, have been included in accumulated comprehensive income for fiscal 2008 and 2007.

The following table is the disclosure under Statement of Financial Accounting Standards (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:

Note C – Assets Held for Sale

In July 2006, the Company offered to sell a building located in Brazil for $978. During the first quarter of fiscal 2008, the Company received an offer to purchase the building for 2,000 Brazilian Real (equivalent to approximately $1,000), and received a security deposit of 600 Brazilian Real. Upon closing of the sale, the Company will receive additional proceeds of 400 Brazilian Real in cash and a note receivable of 1,000 Brazilian Real which is payable in ten monthly installments of 100 Brazilian Real, commencing one month after closing. The closing of this transaction is expected to occur during fiscal 2008, however, the Company cannot give any assurance as to the actual timing or successful completion of the transaction.

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Note D – Goodwill and Other Intangible Assets

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is tested for impairment at least annually or more frequently if events or circumstances indicate that goodwill might be impaired. The Company performs its annual goodwill impairment assessment as of the end of the third quarter of each fiscal year. The table below provides changes in carrying value of goodwill by reportable segment, which includes RF, Wireless & Power Division (RFPD), Electron Device Group (EDG), and Display Systems Group (DSG):

Intangible assets subject to amortization, as well as amortization expense, are as follows:

Deferred financing costs decreased during the first quarter of fiscal 2008 primarily due to the write-off of previously capitalized deferred financing costs of $643 related to the extinguishment of the Company’s existing multi-currency revolving credit agreement (credit agreement) as a result of the Company entering into a new $40,000 revolving credit agreement (new credit agreement) on July 27, 2007. The write-off of $643 has been classified as interest expense for the three month period ended September 1, 2007.

Amortization expense for the three-month period ended September 1, 2007 and September 2, 2006 was as follows:

The amortization expense associated with the intangible assets subject to amortization is expected to be $257, $209, $209, $209, and $54 in fiscal 2008, 2009, 2010, 2011, and 2012, respectively. The weighted average number of years of amortization expense remaining is 4.00.

Note E – Restructuring Charges

The Company implemented a global restructuring plan during fiscal 2007 (2007 Restructuring Plan). The 2007 Restructuring Plan decreased the number of warehouses and streamlined much of the entire organization which is expected to reduce further corporate and administrative expense. During fiscal 2007, the Company centralized inventory distribution in Europe, restructured its Latin American operations, and reduced its total workforce, including the elimination and restructuring of layers of management.

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As a result of the Company’s 2007 Restructuring Plan, restructuring charges of $2,222 were recorded in selling, general, and administrative expenses (SG&A) during fiscal 2007. Severance costs of $917 were paid during fiscal 2007. During fiscal 2007, the employee severance costs were adjusted $54 decreasing SG&A due to the difference between estimated severance costs and actual payouts. During the first quarter of fiscal 2008, severance costs of $982 were paid. The remaining balance payable as of September 1, 2007 has been included in accrued liabilities. As of September 1, 2007, the following table depicts the amounts associated with the activity related to the 2007 Restructuring Plan by reportable segment:

Note F – 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. 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 reports this expense as an element of cost of sales in its Consolidated Statements of Operations. Each quarter, the Company assesses actual warranty costs incurred, on a product-by-product basis, as compared to its estimated 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 first three months of fiscal 2008 was as follows:

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Note G – Debt

Long-term debt consists of the following:

At September 1, 2007, the Company maintained $59,883 in long-term debt, primarily in the form of two series of convertible notes and a new credit agreement. The Company entered into a new $40,000 credit agreement on July 27, 2007 which includes a Euro subfacility ($15,000) and a Singapore subfacility ($5,000). 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. 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 September 1, 2007, $4,200 was outstanding under the new credit agreement, outstanding letters of credit were $590, and the unused line was $35,210. The new credit agreement consists of the following facilities as of September 1, 2007:

Interest expense increased to $2,676 for the first quarter of fiscal 2008 as compared with $1,610 during the same period of last fiscal year. Interest expense consists of the following components as noted in the following table:

As discussed in Note L, in accordance with Emerging Issues Task Force (EITF) Issue No. 87-24, Allocation of Interest to Discontinued Operations, (EITF 87-24), the Company allocated interest related to the credit agreement to discontinued operations for the first quarter of fiscal 2007. Interest expense incurred on the credit agreement during the first quarter of fiscal 2008 related primarily to working capital associated with continuing operations.

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As discussed in Note D, the Company wrote-off $643 of deferred financing costs during the first quarter of fiscal 2008 due to the extinguishment of the credit agreement on July 27, 2007.

Note H – Income Taxes

The effective income tax rate for the first quarter of fiscal 2008 was a provision of 407.8% as compared with a provision of 94.2% for the first 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 first quarter of fiscal 2008, the tax benefit related to net operating losses was limited by the requirement for a valuation allowance of $620.

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 FY04. With few exceptions, the Company is no longer subject to non-U.S. income tax examinations by tax authorities for years prior to FY02. The Company’s primary foreign tax jurisdictions are the United Kingdom, Germany, Singapore, and the Netherlands. The following table summarizes the open tax years for each major jurisdiction:

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 $1,647, except that the increase was fully offset by the application of a valuation allowance against net operating losses. In addition, the Company reclassified $6,954 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 $6,481, excluding interest and penalties. Unrecognized tax benefits of $2,623 would affect the Company’s effective tax rate if recognized. There were no significant changes in components of the liability in the three months ending September 1, 2007.

The Company records penalties and interest relating to uncertain tax positions in the income tax expense line item within the consolidated statement of operations. At June 3, 2007, approximately $821 was included in the liability for uncertain tax positions for the possible payment of interest and penalties.

It is reasonably possible that there will be a change in the unrecognized tax benefits in the range of $0 to approximately $900 due to the expiration of various statutes of limitations within the next 12 months.

Note I – 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 Issue 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 reflect the application of EITF Issue No. 03-6 and was computed using the two-class method. 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 (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 first quarter of fiscal 2008 and 2007, the assumed conversion and the effect of the interest savings of the Company’s 7 ³/4% convertible senior subordinated notes (7 ³/4% notes) and 8% convertible senior subordinated notes (8% notes) were excluded because their inclusion would have been anti-dilutive. The per share amounts presented in the Consolidated Statements of Operations are based on the following amounts:

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Note J – Stock-Based Compensation

In the first quarter of fiscal 2007, the Company adopted SFAS No. 123 (Revised 2004), Share-Based Payment, (SFAS No. 123(R)), which requires the measurement and recognition of compensation cost at fair value for all share-based payments, including stock options. The Company estimates fair value using the Black-Scholes option-pricing model, which requires assumptions such as expected volatility, risk-free interest rate, expected life, and dividends. Compensation cost is recognized using a graded-vesting schedule over the applicable vesting period, or date on which retirement eligibility is achieved, if shorter (non-substantive vesting period approach). Stock-based compensation totaled approximately $98 and $176 for the first quarter of fiscal 2008 and 2007, respectively.

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Note K – Segment Information

The following disclosures are made in accordance with the SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. The Company’s strategic business units (SBUs) in fiscal 2008 are: RFPD, EDG, and DSG.

RFPD serves the global RF and wireless communications market, including infrastructure, and wireless networks, and power conversion market.

EDG provides engineered solutions and distributes electronic components to customers in diverse markets including the steel, automotive, textile, plastics, semiconductor manufacturing, and broadcast industries.

DSG is a global provider of integrated display products and systems to the public information, financial, point-of-sale, industrial, and healthcare markets.

Each SBU is directed by a Vice President and General Manager who reports to the Chief Executive Officer (CEO). The CEO evaluates performance and allocates resources, in part, based on the direct operating contribution of each SBU. Direct operating contribution is defined as gross margin less product management and direct selling expenses.

On May 31, 2007, the Company completed the sale of the Security Systems Division/Burtek Systems (SSD/Burtek) strategic business unit to Honeywell International Inc. The Company presents SSD/Burtek as a discontinued operation in accordance with the criteria of 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 Company’s Colombia location was included in the SSD/Burtek sale agreement, but was not part of the closing on May 31, 2007. The Company anticipates final closing of the Colombia location to occur during fiscal 2008.

Accounts receivable, inventory, and goodwill are identified by SBU. Cash, net property, and other assets are not identifiable by SBU. Operating results for each SBU are summarized in the following table:

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A reconciliation of net sales, gross profit, operating income, and assets to the relevant consolidated amounts is as follows. Starting in the first quarter of fiscal 2008, the SBU’s operating contribution includes regional selling expenses. Other assets not identified include miscellaneous receivables, manufacturing inventories, and other assets.

Geographic net sales information is primarily grouped by customer destination into five areas: North America, Asia/Pacific, Europe, Latin America, and Corporate. Europe includes sales to the Middle East and Africa. Net sales to Mexico are included as part of Latin America. Corporate consists of freight and sales which are not area specific.

Net sales and gross profit by geographic region are presented in the table below: