Richardson Electronics - 10-Q quarterly report FY

Richardson Electronics, Ltd. and Subsidiaries
Form 10-Q
For the Three-Month Period Ended August 31, 2001

INDEX

Richardson Electronics, Ltd. and Subsidiaries
Consolidated Condensed Balance Sheets
(in thousands)

Richardson Electronics, Ltd. and Subsidiaries
Consolidated Condensed Income Statements
For the Three-Month Period Ended August 31, 2001 and 2000
(Unaudited) (in thousands, except per share amounts)

Richardson Electronics, Ltd. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
For the Three-Month Period Ended August 31, 2001 and 2000
(Unaudited) (in thousands)

Richardson Electronics, Ltd. and Subsidiaries
Notes to Consolidated Condensed Financial Statements
Three-Month Period Ended August 31, 2001
(Unaudited)

Note A -- Basis of Presentation
The accompanying unaudited Consolidated Condensed Financial Statements (Statements) have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q. In the opinion of management, all adjustments necessary for a fair presentation of the results of operations for the periods covered have been reflected in the Statements. Certain information and footnotes necessary for a fair presentation of the financial position and results of operations in conformity with generally accepted accounting principles have been omitted in accordance with the aforementioned instructions. It is suggested that the Statements be read in conjunction with the Financial Statements and Notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2001.

Note B -- Income Taxes
The income tax provisions for the three-month periods ended August 31, 2001 and August 31, 2000 are based on the estimated annual effective tax rates of 34% and 32%, respectively. The effective rate is less than the U.S. federal statutory rate of 35% due to U.S. foreign sales corporation tax benefits and foreign taxes at other rates, partially offset by state income taxes.

Note C -- Calculation of Earnings per Share
Basic earnings per share is calculated by dividing net income by the weighted average number of Common and Class B Common shares outstanding. Diluted earnings per share is calculated by dividing net income (adjusted for interest savings, net of tax, on assumed bond conversions) by the actual shares outstanding and share equivalents that would arise from the exercise of stock options and the assumed conversion of convertible bonds when such assumptions have a dilutive effect on the calculation. Out-of-the-money (exercise price higher than market price) stock options are excluded from the calculation because they are anti-dilutive. The Company's 8¼% and 7¼% convertible debentures are excluded from the calculation in fiscal 2002 as assumed conversion would be anti-dilutive. The per share amounts presented in the Consolidated Condensed Income Statement are based on the following amounts (in thousands):

Note D -- Industry and Market Information
The marketing and sales structure of the Company consists of five strategic business units (SBU's): RF & Wireless Communications Group (Wireless), Industrial Power Group (Industrial), Medical Systems Group (Medical), Security Systems Division (Security) and Display Systems Group (Display).

Wireless serves the global RF and wireless communications market and the radio and television broadcast industry, predominately for infrastructure applications.

Industrial serves a broad range of customers including the steel, automotive, textile, plastics, semiconductor, and transportation industries.

Medical serves the medical imaging market, providing system upgrade and integration services in addition to a wide range of diagnostic imaging components.

Display provides custom display solutions and system integration services for the public information, financial, point-of-sale and general data display markets.

Security is a full-line distributor of close circuit television (CCTV), fire, burglary, access control, sound, and communication products and accessories.

SBUs are managed by Vice Presidents and General Managers who report to the President and Chief Operating Officer. The President 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. In North America and Europe, the sales force is organized by SBU and, accordingly, these costs are included in direct expenses. In Latin America, Asia / Pacific and the rest of the world, some of the regional sales force is shared and, accordingly, is not included in direct expenses. Administrative expenses including finance, legal, information technology, human resources, logistics, and facility costs are not allocated to SBU results. Intersegment sales are not significant.

Accounts receivable, inventory, goodwill and certain notes receivable are identified by SBU. Cash, net property, plant and equipment, and other assets are not identifiable by SBU. Accordingly, depreciation, amortization expense other than amortization of goodwill, and financing costs are not identifiable by SBU. Operating results for the three-month periods ended August 31, 2001 and August 31, 2000 and identifiable assets as of the end of the respective periods by SBU are summarized in the following table (in thousands):

A reconciliation of sales, gross margin, direct operating contribution and assets to the relevant consolidated amounts follows. (Other assets include miscellaneous receivables, manufacturing inventories and sundry assets.) (in thousands):

The Company sells its products to companies in a wide range of industries and performs periodic credit evaluations of its customers' financial condition. Terms are generally on open account, payable net 30 days in North America and Latin America, and vary throughout Europe and the Far East. Estimates of credit losses are recorded in the financial statements based on periodic reviews of outstanding accounts.

Sales and Gross Margin
General economic conditions and, in particular, softness in the telecommunications industry effected the comparison of sales and operating results for the first quarter of fiscal 2002 against the prior year. Net sales for the first quarter of fiscal 2002 were $104.7 million compared to last year's first quarter of $121.1 million. Gross margin as a percent of sales in fiscal 2002 were effected by manufacturing variances from lower utilization rates. Sales, percentage changes from the prior year, gross margins and gross margin percent of sales by SBU are summarized in the following table. Gross margins for each SBU include provisions for returns and overstock. Provisions for LIFO, manufacturing charges and other costs are included under the caption "Corporate" (in thousands).

Wireless' first quarter sales decreased 22.1% from fiscal 2001 levels, reflecting lower demand primarily in the North American telecommunications industry. Gross margins as a percent of sales decreased from 26.4% in the prior year's first quarter to 25.2% in fiscal 2002 primarily due to a decline in operating efficiency in the Company's engineering design and assembly facilities. In July 2001, the Company purchased Sangus Holdings AB (Sangus), which serves the Nordic countries of Sweden, Finland, Denmark, and Norway. Current year sales results include sales of $1.7 million recorded by Sangus from the date of acquisition.

Industrial's first quarter sales decreased 16.6% due to general economic conditions and softness in the demand for equipment used in the manufacture of semiconductors. Gross margins declined from 35.5% to 34.1% due to product mix.

Medical's sales decreased 5.7% in fiscal 2002 from the prior year's first quarter. Sales of high-resolution monitors increased 19.3% in the first quarter of fiscal 2002 from fiscal 2001 levels offset by lower sales of x-ray tubes and other diagnostic imaging components and equipment. Gross margins increased to 23.5% of sales in fiscal 2002 compared to 22.3% in the first quarter of fiscal 2001 reflecting improved product margins on high-resolution medical monitors.

Security sales and gross margins in the first quarter of fiscal 2002 were essentially comparable to the prior year.

First quarter sales for Display increased 9.5% in fiscal 2002 from 2001 levels as high-resolution monitors sales increased by 33.6% from the prior year including a $2.2 million sale to a customer in the energy industry. Gross margins as a percent of sales increased to 24.1% in fiscal 2002 from 23.7% in fiscal 2001, reflecting improved margins on monitor sales.

Sales, percentage change from the prior year, gross margins and gross margin percent of sales by geographic area are summarized in the following table. Prior year amounts have been restated to be comparable with the current year's classifications. The caption, "other", includes sales to export distributors and to countries where the Company does not have offices. Provisions for LIFO, manufacturing charges and other costs are included under the caption "Corporate" (in thousands).

North American sales declined 21.6% from the prior year, primarily due to softness in Wireless markets, particularly in the telecommunications industry. Asia Pacific sales increased by 11.6% in the first quarter, primarily benefiting from growth in the sale of Wireless and Display products. Latin American sales increased 9.7% from the prior year's first quarter as a result of sales growth in both Wireless and Security products. Europe sales in the current year were effected by the decline in the euro relative to the U.S. dollar, reducing reported sales for Europe by approximately 6%. Europe sales include sales of Sangus from the date of acquisition, July 1, 2001.

Selling, General, and Administrative Expenses
Selling, general and administrative expenses were $23,542 in the first quarter of fiscal year 2002 compared to $22,650 in the prior year's first quarter. Operating expenses of Sangus, severance costs incurred in the quarter and the full year impact of mid-year fiscal 2001 additions to staff accounted for the increase.

Interest and Other Expenses
Higher interest costs in fiscal 2002 compared to fiscal 2001 are due to increased borrowings primarily to finance business acquisitions during the latter part of fiscal 2001 and the first quarter of fiscal 2002.

Net Results
Net income for the quarter was $51,000 compared to $4.7 million in the prior year.

Liquidity and Capital Resources
Cash provided by operations was $10.1 million in the first quarter of fiscal 2002, compared to cash used in operations of $8.2 million in the prior year period. Accounts receivable decreased $13.8 million in 2002 and increased $7.1 million in 2001. Inventories increased by $663,000 compared to an increase in the prior year first quarter of $9.2 million.

Effective August 31, 2001, the Company increased its multi-currency revolving credit facility agreement to $111.3 million from $105.0 million. The agreement matures in July 2004 and bears interest at applicable LIBOR rates plus a margin, varying with certain financial performance criteria.

The Company's loan agreements contain various financial and operating covenants which set benchmark levels for tangible net worth, debt / tangible net worth ratio and annual debt service coverage. The Company was in compliance with these covenants at August 31, 2001.

Cash reserves, investments, funds from operations and credit lines are expected to be adequate to meet the operational needs and future dividends of the Company. The policy regarding payment of dividends is reviewed periodically by the Board of Directors in light of the Company's operating needs and capital structure.

Euro Currency Conversion
On January 1, 1999, eleven member countries of the European Union began conversion to a common currency, the Euro. Until January 1, 2002, companies operating in Europe must be able to process business transactions either in legacy currencies or in Euros. After January 1, 2002, all transactions will be processed only in Euros.

The Company has modified its transaction processing systems to accommodate the Euro and dual currency processing requirements without significant additional costs. While the exact impact on pricing is indeterminable, the Company believes that since most of its pricing is based on U.S. dollar costs, the effect of conversion to the Euro has not been significant.

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Investors should consider carefully the following risk factors, in addition to the other information included in this quarterly report on Form 10-Q. All statements other than statements of historical facts included in this report are statements that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. The words "expect," "estimate," "anticipate," "predict," "believe" and similar expressions and variations thereof are intended to identify forward-looking statements. Such statements appear in a number of places in this report and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things: (i) trends affecting the Company's financial condition or results of operations; (ii) the Company's financing plans; (iii) the Company's business and growth strategies, including potential acquisitions; and (iv) other plans and objectives for future operations. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those predicted in the forward-looking statements or which may be anticipated from historical results or trends. In addition to the information contained in the Company's other filings with the Securities and Exchange Commission, factors which could affect future performance include, among others, the following:

• Competitive pressures may increase or change through industry consolidation, entry of new competitors, marketing changes or otherwise. There can be no assurance that the Company will be able to continue to compete effectively with existing or potential competitors.
• Technological changes may affect the marketability of inventory on hand.
• General economic or business conditions, domestic and foreign, may be less favorable than expected, resulting in lower sales or lower profit margins than expected.
• Changes in relationships with customers or vendors, the ability to develop new relationships or the business failure of several customers or vendors may affect sales or profitability.
• Political, legislative or regulatory changes may adversely affect the businesses in which the Company operates.
• Changes in securities markets, interest rates or foreign exchange rates may adversely affect the Company's performance or stock price.
• The failure to obtain or retain key executive or technical personnel could affect future performance.
• The Company's growth strategy includes expansion through acquisitions. There can be no assurance that the Company will be able to successfully complete further acquisitions or that past or future acquisitions will not have an adverse impact on the Company's operations.
• The potential future sale of Common Stock shares, possible anti-takeover measures available to the Company, dividend policies, as well as voting control of the Company by Edward J. Richardson, Chairman of the Board and Chief Executive Officer may affect the stock price.
• The continued availability of financing on favorable terms can not be assured.

ITEM 1.LEGAL PROCEEDINGS

No material developments have occurred in the matters reported under the category "Legal Proceedings" in the Registrant's Report on Form 10-K for the fiscal year ended May 31, 2001.

ITEM 2.CHANGES IN SECURITIES

None.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5.OTHER INFORMATION

None.

ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits -

10 (a) Third Amendment to the Revolving Credit Agreement effective August 31, 2001 among various subsidiaries of Richardson Electronics, Ltd., various lending institutions, and Bank One, N.A. London Branch, as Euro Funding Agent and American National Bank and Trust Company of Chicago, as Administrative Agent.

10 (b) Share purchase agreement between Richardson Electronics, Ltd. and the principal officer's and directors of Sangus Holdings AB for the purchase of the Sangus Holdings AB dated July 19, 2001.

(b) Reports on Form 8-K - None

 

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.