RICHARDSON ELECTRONICS, LTD. (RELL) FY 2026 MD&A

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 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:

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Business Overview

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Results of Operations - an analysis and comparison of our consolidated results of operations for the fiscal years ended May 30, 2026, May 31, 2025 and June 1, 2024, as reflected in our Consolidated Statements of Comprehensive Income.

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Liquidity, Financial Position and Capital Resources - a discussion of our primary sources and uses of cash for the fiscal years ended May 30, 2026, May 31, 2025 and June 1, 2024, and a discussion of changes in our financial position.

Business Overview

Richardson Electronics, Ltd. (the "Company," "we," "our") is a leading global manufacturer of engineered solutions, green energy products, power grid and microwave tubes, and related consumables; power conversion and RF and microwave components including green energy solutions; tubes for diagnostic imaging equipment; and customized display solutions. More than 55% of our products are manufactured in LaFox, Illinois, Marlborough, Massachusetts, or Donaueschingen, Germany, or by one of our manufacturing partners throughout the world. All our partners manufacture to our strict specifications and per our supplier code of conduct. We serve customers in the alternative energy, healthcare, aviation, broadcast, communications, industrial, marine, medical, military, scientific, and semiconductor markets. The Company’s strategy is to provide specialized technical expertise and “engineered solutions” based on our core engineering and manufacturing capabilities. The Company provides solutions and adds value through design-in support, systems integration, prototype design and manufacturing, testing, logistics, and aftermarket technical service and repair through its global infrastructure.

Some of the Company's products are manufactured in foreign countries and imported into the United States. Accordingly, the Company’s operations are subject to tariffs and other trade protection measures. The current U.S. administration has instituted certain changes, and may make additional changes, in trade policies that include the negotiation or termination of trade agreements, higher tariffs on imports into the U.S., and other measures affecting trade between the U.S. and other countries from which the Company imports. Due in part to these measures, some countries are changing their trade policies relating to goods imported from the U.S. These global trade disruptions and geopolitical tensions, together with any related downturns in the global economy, could dampen customer demand, increase market volatility, and impact currency exchange rates, all which could materially and adversely affect the Company’s financial performance.

The extent to which of these changes in trade policies may impact our business will depend on various factors, including (i) when trade measures are implemented, (ii) the ultimate amount, scope, nature, and duration of tariffs and other trade measures, and (iii) the extent to which the Company can mitigate impacts and pass on any increased costs associated with these changes. In addition, the impact of trade disruptions on general economic conditions and demand for electronic components is difficult to predict.

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Our results for fiscal 2026 were not materially impacted by the changes in trade policies implemented by the U.S. However, it is possible that further tariffs may be imposed on imports of our products, including by other countries, or that our business will be impacted by changing trade relations among countries. Management continues to work with its suppliers as well as its customers to mitigate the impact of the tariffs on our customers’ markets. However, if the Company is unable to successfully pass through the additional cost of these tariffs, or if the higher prices reduce demand for the Company's products, it will have a negative effect on the Company's sales and gross margins.

The Company reports its financial performance based on the operating and reportable segments defined as follows:

Power and Microwave Technologies ("PMT") combines our core engineered solutions capabilities, power grid and microwave tube business with new disruptive RF, Wireless and Power technologies. As a designer, manufacturer, technology partner and authorized distributor, PMT’s strategy is to provide specialized technical expertise and engineered solutions based on our core engineering and manufacturing capabilities on a global basis. We provide solutions and add value through design-in support, systems integration, prototype design and manufacturing, testing, logistics and aftermarket technical service and repair - all through our existing global infrastructure. PMT’s focus is on products for power, RF and microwave applications for customers in 5G, aviation, broadcast, communications, industrial, marine, medical, military, scientific and semiconductor markets. PMT 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. PMT also offers its customers technical services for both microwave and industrial equipment. After the sale of certain assets to DirectMed, the Company continues to repair certain CT tubes and sells them exclusively to DirectMed pursuant to a supply agreement.

Green Energy Solutions ("GES") combines our key technology partners and engineered solutions capabilities to design and manufacture innovative products for the fast-growing energy storage market and power management applications. As a designer, manufacturer, technology partner and authorized distributor, GES’s strategy is to provide specialized technical expertise and engineered solutions using our core design engineering and manufacturing capabilities on a global basis. We provide solutions and add value through design-in support, systems integration, prototype design and manufacturing, testing, logistics and aftermarket technical service and repair - all through our existing global infrastructure. GES’s focus is on products for numerous green energy applications such as wind, solar, hydrogen and Electric Vehicles, and other power management applications that support green solutions such as synthetic diamond manufacturing.

Canvys provides customized display solutions serving the corporate enterprise, financial, healthcare, industrial and medical original equipment manufacturers markets. Our engineers design, manufacture, source and support a full spectrum of solutions to match the needs of our customers. We offer long-term availability and proven custom display solutions that include touch screens, protective panels, custom enclosures, All-In-One computers, specialized cabinet finishes, application specific software packages and certification services. Our volume commitments are lower than 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 display and touch solutions and customized computing platforms.

We currently operate within the following major geographic regions: North America, Asia/Pacific, Europe and Latin America.

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Results of Operations

Overview - Fiscal Year Ended May 30, 2026

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Fiscal 2026 and fiscal 2025 each contained 52 weeks.

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Net sales during fiscal 2026 were $228.6 million, up 9.4%, compared to net sales of $208.9 million during fiscal 2025.

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Gross margin was 31.2% of net sales during fiscal 2026, compared to 31.0% of net sales during fiscal 2025.

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Selling, general and administrative expenses were $65.7 million, or 28.8% of net sales, during fiscal 2026, compared to $62.2 million, or 29.8% of net sales, during fiscal 2025.

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Operating income during fiscal 2026 was $6.5 million, compared to an operating loss of $2.5 million during fiscal 2025.

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Other income during fiscal 2026 was $1.0 million, compared to other income of $0.9 million during fiscal 2025.

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Net income during fiscal 2026 was $6.4 million, compared to a net loss of $1.1 million during fiscal 2025.

Net Sales and Gross Profit Analysis

Net sales by segment and percentage change for fiscal 2026, fiscal 2025 and fiscal 2024 were as follows (in thousands):

During fiscal 2026, consolidated net sales increased by 9.4% compared to fiscal 2025. Sales for PMT increased by 9.1%, GES sales increased by 7.3%, and Canvys sales increased by 12.4%. The increase in PMT was due to strong growth in RF and Wireless Components and Semiconductor Wafer Fab market. The increase in GES was due to an increase in new customers, new power management products, and increased market share for current products. The increase in Canvys was primarily due to higher sales in the North American markets.

During fiscal 2025, consolidated net sales increased by 6.3% compared to fiscal 2024. Sales for PMT increased by 4.4%, GES sales increased by 23.6%, and Canvys sales increased by 2.2%. The increase in PMT was mainly due to increased sales of engineered solutions for the semi-wafer fabrication products and increases in RF and Wireless Components. The increase in GES was mainly due to increased market share, new products and new customer development for power management products focused on numerous green energy applications. The increase in Canvys was attributable to higher sales in the North American markets.

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Gross profit by segment and percentage of segment net sales for fiscal 2026, fiscal 2025 and fiscal 2024 were as follows (in thousands):

Gross profit reflects the distribution and manufacturing product margin less manufacturing variances, inventory obsolescence charges, customer returns, scrap and cycle count adjustments, engineering costs and other provisions.

Consolidated gross profit was $71.3 million during fiscal 2026, compared to $64.8 million during fiscal 2025. Consolidated gross margin as a percentage of net sales was 31.2% for fiscal 2026, compared to the 31.0% during fiscal 2025, primarily due to a favorable product mix for PMT, and unfavorable product mix for GES and Canvys.

Consolidated gross profit was $64.8 million during fiscal 2025, compared to $60.0 million during fiscal 2024. Consolidated gross margin as a percentage of net sales was 31.0% for fiscal 2025, compared to the 30.5% during fiscal 2024, primarily due to favorable product mix partially offset by manufacturing under absorption for PMT, favorable product mix of increased Engineered Solution products for GES, and unfavorable product mix and higher freight costs for Canvys. Gross margin during fiscal 2025 included expense related to inventory provisions of $0.5 million for PMT and $0.1 million for Canvys.

Power and Microwave Technologies

Net sales for PMT increased 9.1% to $160.5 million during fiscal 2026 from $147.1 million during fiscal 2025. The increase was due to strong growth in RF and Wireless Components and Semiconductor Wafer Fab market. Gross margin as a percentage of net sales increased to 31.2% during fiscal 2026 as compared to 30.5% during fiscal 2025, due to favorable product mix.

Net sales for PMT increased 4.4% to $147.1 million during fiscal 2025 from $140.8 million during fiscal 2024. The increase was due primarily to increased sales of engineered solutions for the semiconductor wafer fabrication market and increases in RF and Wireless components. Gross margin as a percentage of net sales increased to 30.5% during fiscal 2025 as compared to 30.1% during fiscal 2024, primarily due to favorable product mix partially offset by manufacturing under absorption.

Green Energy Solutions

Net sales for GES increased 7.3% to $30.8 million during fiscal 2026 from $28.7 million during fiscal 2025. The increase in GES was due to increase in new customers, new power management products, and increased market share for current products. Gross margin as a percentage of net sales decreased to 30.3% during fiscal 2026 as compared to 31.4% during fiscal 2025, primarily due to unfavorable product mix.

Net sales for GES increased 23.6% to $28.7 million during fiscal 2025 from $23.2 million during fiscal 2024. The increase in GES was mainly due to increased market share, new products and new customer development for power management products focused on numerous green energy applications. Gross margin as a percentage of net sales increased to 31.4% during fiscal 2025 as compared to 28.4% during fiscal 2024, primarily due to favorable product mix of increased Engineered Solution products.

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Canvys

Net sales for Canvys increased 12.4% to $37.3 million during fiscal 2026, from $33.1 million during fiscal 2025 primarily due to higher sales in the North American markets. Gross margin as a percentage of net sales decreased to 32.0% during fiscal 2026 as compared to 32.9% during fiscal 2025 due to unfavorable product mix.

Net sales for Canvys increased 2.2% to $33.1 million during fiscal 2025, from $32.4 million during fiscal 2024 due to higher sales in the North American markets. Gross margin as a percentage of net sales decreased to 32.9% during fiscal 2025 as compared to 33.8% during fiscal 2024 due to product mix and higher freight costs.

Sales by Geographic Area

We sell our products to customers in diversified industries and perform periodic credit evaluations of our customers’ financial condition. Terms are generally 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.

Our sales are aggregated by the following geographic regions: North America; Asia/Pacific; Europe; Latin America; and Other. The net sales by geographic area and percentage change for fiscal 2026, fiscal 2025 and fiscal 2024 were as follows (in thousands):

(1)
Primarily includes net sales not allocated to a specific geographical region.

Gross Profit by Geographic Area

Gross profit by geographic area and percentage of geographic net sales for fiscal 2026, fiscal 2025 and fiscal 2024 were as follows (in thousands):

(1)
Primarily includes net sales not allocated to a specific geographical region, unabsorbed value-add costs and other unallocated expenses.

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Selling, General and Administrative Expenses

Selling, general and administrative expenses (“SG&A”) increased 5.7% during fiscal 2026 to $65.7 million from $62.2 million during fiscal 2025. This increase in SG&A from fiscal 2025 mainly reflected higher salaries and incentives due to sales growth, as well as severance expense, partially offset by lower travel and legal expenses. SG&A as a percentage of sales decreased to 28.8% during fiscal 2026 as compared to 29.8% during fiscal 2025.

Selling, general and administrative expenses (“SG&A”) increased 4.4% during fiscal 2025 to $62.2 million from $59.5 million during fiscal 2024. This increase in SG&A from fiscal 2024 mainly reflected higher incentives due to sales growth, partially offset by lower Research and Development ("R&D") expenses. SG&A as a percentage of sales decreased to 29.8% during fiscal 2025 as compared to 30.3% during fiscal 2024.

Loss on Disposal of Healthcare Assets and Related Charges

A substantial portion of Healthcare assets were sold to DirectMed on January 24, 2025 that resulted in a total loss of $5.1 million for fiscal 2025. The loss on assets sold to DirectMed totaled $3.2 million and the Company recorded an impairment charge of $1.9 million for inventories, net and property, plant and equipment, net. In future periods, Healthcare financial results are no longer a standalone segment, they have been consolidated into the PMT segment.

During fiscal 2026, the Company entered into an arrangement to sell certain Healthcare assets retained by the Company following the Healthcare asset sale in January 2025, resulting in a gain on disposal of $0.8 million.

The cumulative loss recorded in fiscal 2025 and fiscal 2026 for the disposal of Healthcare assets and related charges totaled $4.2 million. Refer to Note 10, Disposal of Healthcare Assets and Related Charges, in Part II, Item 8 for more details.

Other Income/Expense

Other income was $1.0 million during fiscal 2026, compared to other income of $0.9 million during fiscal 2025. Fiscal 2026 had $0.5 million of investment income compared to $0.4 million in fiscal 2025. Our foreign exchange gains and losses are primarily due to the translation of U.S. dollars held in non-U.S. entities. The foreign exchange loss reported for fiscal 2026 totaled $0.5 million compared to a gain of $0.5 million for fiscal 2025. We currently do not utilize derivative instruments to manage our exposure to foreign currency. Other income for fiscal 2026 also included a non-recurring gain of $0.9 million.

Income Tax Provision (Benefit)

Our income tax provision (benefit) during fiscal 2026, fiscal 2025 and fiscal 2024 was $1.1 million, ($0.4) million and $0.1 million, respectively. The effective income tax rates during fiscal 2026, fiscal 2025 and fiscal 2024 were 14.6%, 25.4%, and 61.4%, respectively. The difference between the effective income tax rates as compared to the U.S. federal statutory rate of 21.0% during fiscal 2026, fiscal 2025 and fiscal 2024 reflects changes in the geographical distribution of income (loss) and the impact of valuation allowance changes related to the realizability of our U.S. state net operating loss deferred tax assets.

As of May 30, 2026, net deferred tax assets related to domestic state net operating loss ("NOL") carryforwards amounted to approximately $1.8 million and $1.9 million as of May 31, 2025. Net deferred tax assets related to foreign NOL carryforwards were $0.3 million as of May 30, 2026 and $0.1 million as of May 31, 2025 with various or indefinite expiration dates. During the fourth quarter of fiscal 2026, we decreased the valuation allowance on the state net operating losses by $0.5 million resulting in a total valuation allowance against state net operating losses of $1.2 million.

We have historically determined that undistributed earnings of our foreign subsidiaries, to the extent of cash available, will be repatriated to the U.S. The deferred tax liabilities on the outside basis difference is now primarily withholding tax on future dividend distributions. There was no deferred tax liability related to undistributed earnings of our foreign subsidiaries in fiscal 2026 and fiscal 2025.

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Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to support a more likely than not assertion that its deferred tax assets will be realized. A significant component of objective evidence evaluated was the cumulative income or loss incurred in each jurisdiction over the three-year period ended May 30, 2026. We considered other positive evidence in determining the need for a valuation allowance in the U.S. including the subpart F and GILTI inclusions of our foreign earnings, the changes in our business performance in recent years and the utilization of federal NOLs. The weight of this positive evidence is sufficient to outweigh other negative evidence in evaluating our need for a valuation allowance in the U.S. federal jurisdiction. As a result of the positive evidence outweighing the negative evidence for the year ended May 30, 2026, no additional valuation allowance on the U.S. federal deferred tax items was recorded. As of May 30, 2026, we recorded a $0.5 million valuation allowance decrease on state NOLs as there was more positive evidence supporting the Company’s ability to utilize the state NOLs, including higher book income in fiscal 2026 and fiscal 2027 projections.

As of May 30, 2026, a valuation allowance of $2.8 million was recorded, representing the portion of the deferred tax asset that management does not believe is more likely than not to be realized. The valuation allowance as of May 31, 2025 was $2.8 million. The valuation allowance relates to state NOLs ($1.2 million) and deferred tax assets in foreign jurisdictions where historical taxable losses have been incurred ($1.6 million). The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are 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.

In the normal course of business, we are subject to examination by taxing authorities throughout the world. Years prior to fiscal 2016 are closed for examination under the statute of limitation for U.S. federal and U.S. state. In The Netherlands, years prior to fiscal 2021 are closed for examination. We are under examination in Germany for fiscal years 2019 to 2022. The Company is under audit in Illinois for fiscal 2022 and fiscal 2023. We have no other current open audits in the U.S.

The Company recorded $0.4 million related to uncertain tax positions as of May 30, 2026 as compared to $0.3 million as of May 31, 2025 and $0.1 million as of June 1, 2024. We record interest related to uncertain tax positions in the income tax expense line item within the Consolidated Statements of Comprehensive Income. The Company recognizes interest accrued related to unrecognized tax benefits and penalties in operating expenses. We have recorded a liability of less than $0.1 million for interest as of May 30, 2026, May 31, 2025 and June 1, 2024.

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Liquidity, Financial Position and Capital Resources

Our operations and cash needs have been primarily financed through income from operations and cash on hand.

Cash and cash equivalents were $31.8 million at May 30, 2026. Cash and cash equivalents by geographic area at May 30, 2026 consisted of $11.7 million in North America, $11.4 million in Europe, $1.0 million in Latin America and $7.7 million in Asia/Pacific. Although the Tax Cuts and Jobs Act generally eliminated federal income tax on future cash repatriation to the United States, cash repatriation may be subject to state and local taxes, withholding or similar taxes. See Note 8, Income Taxes, from the notes to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information.

Cash and cash equivalents were $35.9 million at May 31, 2025. Cash and cash equivalents by geographic area at May 31, 2025 consisted of $19.5 million in North America, $7.7 million in Europe, $0.9 million in Latin America and $7.8 million in Asia/Pacific. The January 24, 2025 sale of certain Healthcare assets to DirectMed generated $8.0 million of cash. No cash was repatriated to the United States in fiscal 2025.

Based on past performance and current expectations, we believe that the existing sources of liquidity, including current cash, will provide sufficient resources to meet known capital requirements and working capital needs through the next twelve months. Additionally, while our future capital requirements will depend on many factors, including, but not limited to, the economy and the outlook for growth in our markets, we believe our existing sources of liquidity as well as our ability to generate operating cash flows will satisfy our future obligations and cash requirements.

On October 7, 2025, the Company executed a three-year extension to the Credit Agreement through the Second Amendment to the Credit Agreement with a maximum borrowing limit of $20 million. The terms of the new agreement are similar to the previous Credit Agreement. See Note 6, Revolving Credit Facility, included in the notes to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10K for further information. The Revolving Credit Facility is guaranteed by the Company's domestic subsidiaries. Proceeds of the borrowings under the Revolving Credit Facility, if any, are expected to be used for working capital and general corporate purposes of the Company and its subsidiaries. There were no drawings or repayments under the Revolving Credit Facility as of May 30, 2026 and through the report release date. No amounts were outstanding under the Revolving Credit Facility as of May 30, 2026, and through the report release date.

Cash Flows from Operating Activities

Cash flow from operating activities primarily resulted from our net income (loss) adjusted for non-cash items and changes in our operating assets and liabilities.

Operating activities provided $0.8 million of cash during fiscal 2026. We had $6.4 million net income, a $0.8 million gain on the disposal of Healthcare assets and related charges and a $1.1 million decrease in deferred income tax assets during fiscal 2026. Other cash provided during fiscal 2026 included non-cash share-based compensation expense of $1.6 million associated with the issuance of stock option awards and restricted stock awards, $0.5 million of inventory provisions and $3.8 million from depreciation and amortization expense associated with our property and equipment as well as amortization of our intangible assets. Changes in our operating assets and liabilities used cash of $11.2 million during fiscal 2026, mainly due to an increase in receivables of $8.9 million, a decrease in inventories of $0.7 million, an increase of $2.3 million in prepaid expenses, and a $0.7 million net decrease in accounts payable and accrued liabilities. Increase in receivables due to increase in sales.

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Operating activities provided $10.6 million of cash during fiscal 2025. We had $1.1 million net loss, a $5.1 million loss on the disposal of Healthcare assets, a $1.0 million unrealized foreign exchange gain and a $3.3 million increase in deferred income tax assets during fiscal 2025. Other cash provided during fiscal 2025 included non-cash share-based compensation expense of $1.5 million associated with the issuance of stock option awards and restricted stock awards, $0.6 million of inventory provisions and $4.0 million from depreciation and amortization expense associated with our property and equipment as well as amortization of our intangible assets. Changes in our operating assets and liabilities provided cash of $4.8 million during fiscal 2025, mainly due to a decrease in receivables of $0.1 million, a decrease in inventories of $0.2 million and a $4.3 million net increase in accounts payable and accrued liabilities The increase in accounts payable and accrued liabilities was due to higher year-end accruals and timing.

Cash Flows from Investing Activities

Cash flow from investing activities consisted primarily of proceeds from the disposal of Healthcare assets and capital expenditures.

Cash used by investing activities of $3.1 million during fiscal 2026 was due to $4.4 million in capital expenditures partially offset by $1.3 million proceeds from the sale of Healthcare assets and related charges. Capital expenditures were primarily related to our IT system and LaFox manufacturing and facilities. LaFox manufacturing primarily supports the PMT and GES segments.

Cash provided by investing activities of $4.0 million during fiscal 2025 was due to $6.8 million from the proceeds from the sale of Healthcare assets and related charges partially offset by $2.8 million of capital expenditures. The capital expenditures were primarily related to our LaFox manufacturing business and facility improvements as well as IT systems.

Our purchases and proceeds from investments consisted 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

Cash flow from financing activities primarily consisted of cash dividends paid.

Cash used in financing activities of $2.5 million during fiscal 2026 resulted primarily from the $3.4 million used to pay dividends to stockholders with a $0.9 million offset for the proceeds from stock option exercises.

Cash used in financing activities of $3.2 million during fiscal 2025 resulted primarily from the $3.4 million used to pay dividends to stockholders with a $0.3 million offset for the proceeds from stock option exercises.

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 are presented in the table below as of May 30, 2026 (in thousands):

(1)
Lease obligations are related to certain warehouse and office facilities and vehicles under non-cancelable operating leases.

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Critical Accounting Estimates

The preparation of financial statements in conformity with United States Generally Accepted Accounting Principles (“US GAAP”) and pursuant to the rules and regulations of the SEC, we make assumptions, judgments and estimates that affect the reported amounts of assets, liabilities, revenue and expenses and the related disclosures of contingent assets and liabilities. Our assumptions, judgments and estimates are based on historical experience and various other factors deemed relevant. Actual results could be materially different from those estimates under different assumptions or conditions. We evaluate our assumptions, judgments and estimates on a regular basis. We also discuss our critical accounting estimates with the Audit Committee of the Board of Directors.

We believe the assumptions, judgments and estimates involved for the following have the greatest potential impact on our consolidated financial statements:

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Inventories, net

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Income Taxes

Inventories, net

Our consolidated inventories are stated at the lower of cost and net realizable value, generally using a weighted-average cost method. Our net inventories include finished goods, raw materials and work-in-progress.

We do not anticipate any material risks or uncertainties related to possible future inventory write-downs. Provisions for obsolete or slow-moving inventories are recorded based upon regular analysis of stock rotation privileges, obsolescence, the exiting of certain markets and assumptions about future demand and market conditions. If future demand changes in an industry or market conditions differ from management’s estimates, additional provisions may be necessary.

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.

New Accounting Pronouncements

A summary of the New Accounting Pronouncements is provided in Note 3, Significant Accounting Policies and Disclosures, of the notes to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.

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