<Table of Contents>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended
February 28, 2001
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
For the transition period ended
to
Commission file number
0-12906
RICHARDSON ELECTRONICS, LTD.
Delaware
36-2096643
(I.R.S. Employer Identification No.)
40W267 Keslinger Road, PO Box 393, LaFox, Illinois 60147
(Address of principal executive offices and zip code)
(630) 208-2200
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sec-
tions 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.
Yes
X
No
As of April 11, 2001, there were outstanding 10,154,636 shares of Common Stock, $.05 par value,
and 3,231,562 shares of Class B Common Stock, $.05 par value, which are convertible into Common
Stock on a share-for-share basis.
This Quarterly Report on Form 10-Q contains 17 pages. An exhibit index is at page 17.
(1)
Richardson Electronics, Ltd. and Subsidiaries
Form 10-Q
For the Three- and Nine-Month Periods
Ended February 28, 2001 and February 29, 2000
INDEX
Page
PART I - FINANCIAL INFORMATION
Consolidated Condensed Balance Sheets
3
Consolidated Condensed Income Statements
4
Consolidated Condensed Statements of Cash Flows
5
Notes to Consolidated Condensed Financial Statements
6
Management's Discussion and Analysis of Results
of Operations and Financial Condition
11
PART II - OTHER INFORMATION
17
(2)
(in thousands)
February 28
May 31
2001
2000
(Unaudited)
ASSETS
Current assets:
Cash and equivalents
$ 15,882
$ 11,832
Receivables, less allowance of $3,141 and $2,991
97,199
77,821
Inventories
151,180
119,224
Other
16,419
13,346
Total current assets
280,680
222,223
Property, plant and equipment
70,114
64,091
Less accumulated depreciation
(42,207)
(38,240)
Property, plant and equipment, net
27,907
25,851
Other assets
22,167
16,851
Total assets
$ 330,754
$ 264,925
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$ 35,042
$ 30,882
Accrued expenses
16,619
14,452
Notes payable and current portion of long-term debt
409
2,619
Total current liabilities
52,070
47,953
Long-term debt, less current portion
159,568
117,643
Deferred income taxes and other noncurrent liabilities
10,328
5,336
Stockholders' equity:
Common stock, $.05 par value; issued 11,906 at
595
583
Class B common stock, convertible, $.05 par value; issued
3,232 at February 28, 2001 and at May 31, 2000
162
Additional paid-in capital
88,374
84,514
Common stock in treasury, at cost; 1,752 shares at
February 28, 2001 and 1,915 at May 31, 2000
(10,328)
(11,045)
Retained earnings
46,667
34,184
Foreign currency translation adjustment
(16,682)
(14,405)
Total stockholders' equity
108,788
93,993
Total liabilities and stockholders' equity
See notes to consolidated condensed financial statements.
(3)
(unaudited) (in thousands, except per share amounts)
Three Months
Nine Months
Net sales
$ 125,472
$ 98,874
$ 376,657
$ 292,016
Cost of products sold
93,123
73,094
278,514
214,007
Gross margin
32,349
25,780
98,143
78,009
Selling, general and administrative
expenses
23,271
20,369
69,295
59,998
Operating income
9,078
5,411
28,848
18,011
Other (income) expense:
Interest expense
2,903
2,202
8,027
6,644
Investment income
(124)
(248)
(232)
(665)
Other, net
87
(131)
109
(66)
2,866
1,823
7,904
5,913
Income before income taxes
6,212
3,588
20,944
12,098
Income taxes
2,040
1,060
6,900
3,600
Net income
$ 4,172
$ 2,528
$ 14,044
$ 8,498
Net income per share - basic:
Net income per share
$ .31
$ .20
$ 1.05
$ .67
Average shares outstanding
13,372
12,680
13,312
12,650
Net income per share - diluted:
$ .29
$ .95
17,591
12,848
17,583
12,764
Dividends per common share
$ .04
$ .12
Comprehensive income:
Foreign currency translation
869
(1,153)
(2,277)
(1,541)
Comprehensive income
$ 5,041
$ 1,375
$ 11,767
$ 6,957
(4)
(unaudited) (in thousands)
Operating Activities:
Non-cash charges to income:
Depreciation
4,344
3,459
Amortization of intangibles and financing costs
634
557
Deferred income taxes
(53)
1,328
Contribution to employee stock ownership plan
1,310
-
Total non-cash charges
6,235
5,344
Changes in working capital, net of effects of
currency translation and business acquisitions:
Accounts receivable
(16,031)
(10,200)
(31,324)
(7,154)
Other current assets
(2,801)
(161)
1,884
10,730
Other liabilities
1,636
1,924
Net changes in working capital
(46,636)
(4,861)
Net cash (used in) provided by
operating activities
(26,357)
8,981
Financing Activities:
Proceeds from borrowings
53,881
7,077
Payments on debt
(13,084)
(6,618)
Proceeds from stock issuance
3,278
461
Cash dividends
(1,561)
(1,459)
Net cash provided by (used in)
financing activities
42,514
(539)
Investing Activities:
Capital expenditures
(6,329)
(5,140)
Business acquisitions
(7,166)
(920)
Investments, notes receivable and other
1,388
(1,056)
Net cash used in investing activities
(12,107)
(7,116)
Increase in cash and equivalents
4,050
1,326
Cash and equivalents at beginning of year
11,832
12,569
Cash and equivalents at end of period
$ 13,895
(5)
Three- and Nine-Month Periods
Ended February 28, 2001 and February 29 , 2000
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, 2000.
The Statements are presented for the third quarter and first nine months of fiscal 2001 (periods ended February 28, 2001) compared to third quarter and first nine months of fiscal 2000 (periods ended February 29, 2000). The Company accounts for its results of operations on a 52/53 week period ending on the Saturday nearest May 31 each year. Results for the first nine months include 39 weeks in fiscal 2001 and 40 weeks in fiscal 2000. Results for the third quarter include 13 weeks in both years.
Note B -- Income Taxes
The income tax provisions for the nine-month periods ended February 28, 2001 and February 29, 2000 are based on the estimated annual effective tax rates of 33% and 30%, respectively. The effective rate is less than the U.S. federal statutory rate of 34% due to U.S. foreign sales corporation tax benefits and utilization of previously unrecognized foreign net operating loss carryforwards, partially offset by state income taxes. The effective tax rate in fiscal 2001 is higher than in fiscal 2000 because the U.S. Federal statutory rate increases from 34% to 35% on pretax income levels above $10 million and, additionally, tax benefits become proportionately less as pre-tax income increases.
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. Out-of-the-money (exercise price higher than market price) stock options are excluded from the calculation because they are anti-dilutive.
(6)
The Company's 8 1/4% and 7 1/4% convertible debentures are excluded from the calculation in fiscal 2000 as assumed conversion would be anti-dilutive. The per share amounts presented in the Consolidated Condensed Income Statement are based on the following amounts:
Third Quarter
FY 2001
FY 2000
Numerator for basic EPS:
Denominator for basic EPS:
Beginning shares outstanding
13,378
12,674
12,987
12,623
Additional shares issued
7
329
27
Restricted shares cancelled
(13)
Numerator for diluted EPS:
Interest savings, net of tax, on
assumed conversion of bonds
865
2,595
Adjusted net income
$ 5,037
$ 16,639
Denominator for diluted EPS:
Effect of dilutive stock options
539
168
591
114
Assumed conversion of bonds
3,680
Note D -- Industry and Market Information
The Company completed the reorganization of its marketing and sales structure into five strategic business units (SBU's) in the fourth quarter of fiscal 2000. Historical data for fiscal 2000 has been restated to conform to the new organizational structure. The new units are: 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 rapidly expanding wireless voice and data telecommunications industry and radio and television broadcast industry. Industrial serves a broad range of customers including the steel, automotive, textile, plastics, semiconductor, marine and avionics industries. Medical serves the medical imaging market, providing system upgrade and integration services in addition to a wide range of diagnostic imaging components. Security provides security systems and related design services with an emphasis on closed circuit television (CCTV). Display provides system integration and custom product solutions for the public information display, financial, point-of-sale and general data display markets.
(7)
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. Inter-segment sales are not significant.
Accounts receivable, inventory, goodwill and certain notes receivable are identified by SBU. Cash, net property and other assets are not identifiable by SBU. Accordingly, depreciation expense and financing costs are not identifiable by SBU. Operating results for the three- and nine-month periods ended February 28, 2001 and February 29, 2000 and identifiable assets as of the end of the respective periods by SBU are summarized in the following tables (in thousands):
Sales
Margin
Contribution
Assets
Wireless
$ 64,450
$ 16,435
$ 11,175
$ 129,904
Industrial
21,230
7,256
5,721
48,144
Medical
9,684
2,084
837
26,369
Security
19,844
4,520
1,643
35,107
Display
10,264
2,425
1,118
22,275
Total
$ 32,720
$ 20,494
$ 261,799
$ 39,593
$ 10,150
$ 6,991
$ 82,494
20,775
7,247
5,715
40,986
9,413
1,869
1,005
26,174
20,550
4,795
1,867
33,799
8,543
2,285
1,206
18,930
$ 26,346
$ 16,784
$ 202,383
(8)
Nine months
$ 185,455
$ 48,437
$ 33,090
67,057
23,434
19,070
29,941
6,580
3,426
62,488
14,429
5,670
31,716
7,494
3,734
$ 100,374
$ 64,990
$ 105,958
$ 28,197
$ 18,579
63,185
22,386
17,360
30,157
5,889
3,217
62,349
14,702
6,132
30,367
8,152
4,822
$ 79,326
$ 50,110
Reconciliations of gross margin, direct operating contribution and assets to the relevant consolidated amounts follow. (Other assets includes miscellaneous receivables, manufacturing inventories and sundry assets.) (in thousands):
FY2001
FY2000
Gross margin - segments total
Manufacturing variances and other costs
(371)
(566)
(2,231)
(1,317)
$ 32,349
$ 25,780
$ 98,143
$ 78,009
Segment profit contribution
Regional selling expenses
(4,107)
(3,504)
(12,378)
(10,276)
Administrative expenses
(6,938)
(7,303)
(21,533)
(20,506)
$ 9,078
$ 5,411
$ 28,848
$ 18,011
Segment assets
15,882
13,895
19,798
9,439
Net property
24,712
5,368
4,974
$ 255,403
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.
(9)
Note E -- Derivative Financial Instruments
The Company is exposed to potential changes in interest rates under its revolving credit agreements. The Company uses interest rate swap agreements to manage its exposure to interest rate changes.
In June 1998, the FASB issued statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by FASB Statements Nos. 137 and 138. The Company is required to adopt this statement on June 1, 2001. The Company does not expect adoption of this statement to have a significant impact on its financial position or results of operations.
(10)
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Results of Operations
Sales and Gross Margin
Net sales for the third quarter of fiscal 2001 were $125.5 million. Sales increased 26.9% over last year's third quarter of $98.9 million. Sales for the nine-month period were $376.7 million, an increase of 29.0%. Sales, percentage change 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).
Gross Margin
%
GM% of
Change
62.8%
$16,435
25.5%
$10,150
25.6%
2.2%
34.2%
34.9%
2.9%
21.5%
19.9%
-3.4%
22.8%
23.3%
20.1%
23.6%
26.7%
Corporate
26.9%
$32,349
25.8%
$25,780
26.1%
$ 85,455
$105,958
75.0%
$48,437
26.6%
6.1%
35.4%
-0.7%
22.0%
19.5%
0.2%
23.1%
4.4%
26.8%
29.0%
Wireless' third quarter sales increased 62.8% from fiscal 2000 levels, based upon increased demand for RF / microwave components to support the expansion of the cellular infrastructure and deliveries under a telematics contract for an original equipment manufacturer. Telematics is a new technology used in automobiles for all types of wireless communications. The sales level for the nine-month period reflects similar trends as the quarter results. The gross margin rate declined slightly to 26.1% from 26.6%, reflecting a large sales contract at a lower margin rate.
Sales growth for Industrial slowed to 2.2% in the third quarter as 41.0% growth in DC power semiconductors and passive components was offset by declines in electron tube sales.
(11)
The gross margin rate declined slightly to 34.2% from 34.9% due to product mix. Sales growth for the nine-month period was 6.1%, reflecting gains in DC power semiconductors and passive components (up 34.0%), silicon rectifiers (up 24.0%) and CW microwave generators (up 11.4%), offset by a 4.9% decline in electron tube sales.
Sales of the Medical SBU in the third quarter increased 2.9% over the prior year as sales of high resolution monitors increased 106%, offset by declines of 18.4% in x-ray tubes and image intensifiers and 41.0% in medical logistics services. Gross margin increased to 21.5% of sales in fiscal 2001 compared to 19.9% in the third quarter of fiscal 2000. The margin improvement reflects better operating efficiencies in tube reloading and lower customer return levels. Certain low-margin sales contracts also affected fiscal 2000 margins. The nine-month results reflect the same sales and margin trends, but gains in monitor sales did not fully offset the decline in other sales.
Security sales declined by 3.4% for the third quarter 2001 from fiscal 2000 levels. Gross margins declined slightly to 22.8% from 23.3%, reflecting competitive pressure. The nine-month sales results were essentially flat, with a trend in gross margins similar to the third quarter.
Third quarter sales for Display increased 20.1% in fiscal 2001 from 2000 levels on strong growth in integrated dispay systems (up 198%) and monitors (up 42.1%), offset by a 24.3% decline in cathode ray tube (CRT) sales. Gross margins declined to 23.6% from 26.7% due to the shift in sales from CRT's to monitors and integrated systems. Sales for the nine-month period were 4.4% above the prior year, as the first half of fiscal 2000 included two contracts which aggregated $4.8 million. Gross margins trends for the nine-month period were similar to the third quarter.
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 to 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).
(12)
North America
$ 77,749
$ 65,034
19.6%
$ 19,808
$ 16,714
25.7%
Europe
25,856
19,030
35.9%
7,111
27.5%
5,426
28.5%
Asia / Pacific
12,631
8,023
57.4%
3,234
2,464
30.7%
Latin America
6,331
4,331
46.2%
1,759
27.8%
1,133
26.2%
2,905
2,456
18.3%
808
609
24.8%
$ 238,370
$ 191,341
24.6%
$ 61,106
$ 49,324
71,078
56,430
26.0%
20,317
28.6%
16,795
29.8%
37,983
23,604
60.9%
10,970
28.9%
7,645
32.4%
19,290
13,931
38.5%
5,316
27.6%
3,866
9,936
6,710
48.1%
2,665
1,696
25.3%
Fiscal 2000 historical data has been restated to conform to the fiscal 2001 reporting classifications.
North American sales growth of 19.6% in the third quarter and 24.6% year-to-date reflect growth in all of the Company's strategic business units except Security, led by demand for Wireless products. European sales gains of 35.9% for the quarter and 26.0% year-to-date are due to Wireless sales growth. Period-to-period sales comparisons in Europe were adversely affected by the decline in the euro relative to the U.S. dollar. The change in exchange rates reduced reported sales for Europe by approximately 10% for year-to-date comparative purposes.
Asia Pacific sales increased by 57.4% in the third quarter and 60.9% year-to-date, primarily benefiting from growth in the sale of Wireless products. Latin American sales grew 46.2% for the quarter and 38.5% year-to-date, benefitting primarily from broadcast equipment sales by the Wireless group and growth in both Security and Medical product sales.
Selling, General, and Administrative Expenses
Selling, general and administrative expenses improved as a percentage of sales, declining to 18.5% in the third quarter of fiscal 2001 from 20.6% in the same period last year, reflecting the strong sales growth and the Company's continued emphasis on its program to maximize operating efficiencies.
Interest and Other Expenses
Interest costs in the first nine months of fiscal 2001 increased 20.8% compared to fiscal 2000 due to increased borrowing levels and higher interest rates on borrowings tied to LIBOR.
Net Results
Net income for the third quarter was $4.2 million, up 65.0% over the prior year. Earnings per share, diluted, was $.29, an increase of 45.0%. Net income for the nine month period was $14.0 million, up 65.3% over the prior year. Earnings per share, diluted, was $.95, an increase of 41.8%. Growth in earnings per share was not equivalent to the gains in net income due to the inclusion of convertible debentures in fiscal 2001. The debentures were not included in the fiscal 2000 calculation of earnings per share because they were anti-dilutive.
Cash used in operations was $26.4 million in the first nine months of fiscal 2001, compared to cash provided by operations of $9.0 million in the prior year period. To fund the 29.0% increase in sales, the Company increased its investment in working capital by $46.6 million in the current year compared to a $4.9 million increase last year. While days sales outstanding were consistent in year-to-year comparisons at 59 days, accounts receivable increased $16.0 million in 2001 and $10.2 million in 2000, reflecting the growth in sales. Inventory turnover remained essentially constant in the first nine months of fiscal 2001. The increase in inventories of $31.3 million in fiscal 2001, primarily for product line expansion, compared to an increase of $7.2 million in 2000. Accounts payable increased by $1.9 million in fiscal 2001, compared to $10.7 million in fiscal 2000.
On July 28, 2000, the Company refinanced its revolving credit facility and Canadian credit agreement with an $85 million multi-currency revolving credit facility. The facility was increased to $105 million in February, 2001. The agreement matures in July 2004 and bears interest at applicable LIBOR rates plus a margin, presently 150 basis points. In addition, the Company entered into certain interest rate swap arrangements for the term of the facility, fixing the interest rate on $33.9 million at an average rate of 8.3%.
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 February 28, 2001.
(14)
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. From January 1, 1999 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 and incorporated by reference 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
(15)
(16)
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, 2000.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(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.
Date
April 11 , 2001
By /S/ William J. Garry
William J. Garry
Senior Vice President and
Chief Financial Officer
(17)