Richardson Electronics - 10-Q quarterly report FY

Note D -- 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. All share equivalents are excluded from the calculation in fiscal 2002 as assumed conversion or exercise would be anti-dilutive. The per share amounts presented in the Consolidated Condensed Income Statement are based on the following amounts (in thousands):

Note E -- 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 (See Note B).

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 closed 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. Inter-segment 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- and nine-month periods ended February 28, 2002 and February 28, 2001 and identifiable assets as of the end of the respective periods by SBU are summarized in the following table (in thousands):

The Company sells its products to customers in a wide range of industries and performs periodic credit evaluations of their 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
Net sales for the third quarter of fiscal 2002 were $109.4 million compared to last year's third quarter of $126.3 million. Sales for the nine-month period of fiscal 2002 were $329.6 million compared to the same period the prior year of $379.5 million. Soft economic conditions affected the comparison of sales and operating results for the third quarter and nine months of fiscal 2002 against the prior year. Gross margins as a percent of sales in fiscal 2002 were effected by lower markups on an expanding Wireless customer base primarily in Asia Pacific. 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' third quarter sales decreased 24.1% from fiscal 2002 levels, reflecting lower demand primarily in the North American telecommunications industry and the general state of the economy offset by growth in Asia Pacific and revenues of an acquired business discussed below. Gross margins as a percent of sales decreased from 25.5% in the prior year's third quarter to 22.7% in the third quarter of fiscal 2002 primarily from the contribution of Asia Pacific revenues at lower margins. Asia Pacific growth has been fueled by several key manufacturers transferring responsibility for certain of their customers to the Company. While the initial transfer of business is of lower margin commodity products, the Company expects to build on these relationships and improve margins by increasing the sale of products incorporating engineered solutions. Nine-month results reflect the same sales and gross margin trends as the third quarter. In July 2001, the Company purchased Sangus Holdings AB (Sangus), which serves the Nordic countries of Sweden, Finland, Denmark, and Norway. Third quarter and year-to-date sales results include revenues recorded by Sangus from the date of acquisition of $1.7 million and $7.1 million, respectively.

Industrial's third quarter sales decreased 17.6% from the prior year's third quarter due to general economic conditions and softness in the demand for equipment used in the manufacture of semiconductors. Gross margins declined from 34.2% to 32.3% due to several large volume contracts at lower margins and product mix. Results for the nine-months reflect the same sales and gross margin trends as the third quarter.

Medical's sales decreased 7.6% from the prior year's third quarter due to general economic conditions. Gross margins increased to 22.3% in the third quarter of fiscal 2002 compared to 21.5% in the third quarter of the prior year as margins on medical monitor sales strengthened. On February 22, 2002, the Company completed the sale of the Glassware product line which recorded sales of $3.9 million in the quarter and $11.9 million in the nine months ended February 28, 2002. Medical monitors and associated display products representing the majority of the balance of the Medical business has been integrated with the Display Systems Group subsequent to the sale.

Security's third quarter sales increased 7.6% from the prior year's third quarter because of heighten concerns over security and an acceleration in the conversion from analogue to digital technology. Gross margins as a percent of sales increased from 22.8% in the third quarter of fiscal 2001 to 23.3% in the third quarter of the current fiscal year as higher margin digital technology products represented a larger percentage of sales. Gross margins trends for the nine-month period were similar to the third quarter.

Third quarter sales for Display increased 13.1% in fiscal 2002 from 2001 levels which includes a sale of $2.4 million to a customer of flat panel products. Gross margins as a percent of sales increased to 27.4% in fiscal 2002 from 23.6% in fiscal 2001, reflecting improved margins on monitor sales and the aforementioned sale. Sales and gross margins as a percent of sales in the nine-month period reflect increased sales and gross margin growth in the monitor business compared to the prior year as well as from the aforementioned sale.

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 America sales declined 20.9% in the third quarter from last year's third quarter, primarily due to soft economic conditions. Europe sales declined 13.9% in the third quarter from last year's third quarter, primarily in Wireless partially offset by Sangus revenues post-acquisition. Europe sales include Sangus revenues from the date of acquisition, July 1, 2001. Asia Pacific sales increased by 24.1% in the third quarter while gross margins as a percent of sales declined from 25.6% to 21.4% in the same period; both related to an expanded customer base in Wireless at lower margins. Latin American sales increased 3.5% from the prior year's third quarter as a result of sales growth in both Wireless and Display products. Year-to-date sales and gross margins trends were similar to the third quarter.

Selling, General, and Administrative Expenses

Selling, general and administrative expenses were $23.4 million in the third quarter of fiscal 2002 compared to $23.7 million in the prior year's third quarter. Reduced spending on personnel additions, travel, entertainment, advertising and other discretionary costs, partially offset by operating expenses of Sangus and the full year impact of mid-year fiscal 2001 personnel additions, accounted for the decrease in spending. Nine-month selling, general and administrative expenses are consistent with quarterly trends.

Interest and Other Expenses

Lower interest costs in the third quarter of fiscal 2002 compared to fiscal 2001 are due to lower average borrowing levels associated with reduced working capital requirements, particularly receivables and inventory. For the comparable nine-month periods, higher average borrowings in the current fiscal year compared to the prior year resulted in higher interest costs.

Other expense includes a charge of $4.6 million related to the sale of Glassware which was recorded to provide for the disposition of certain Glassware inventories not included in the sale, as well, as warranty, severance and leasehold costs.

Net Results

Net income for the third quarter of fiscal 2002 was $75,000 before the net charge of $2.9 million related to the sale of the Glassware product line, compared with net income of $4.2 million in the same quarter last year. Excluding the charge, net income for the nine-month period was $1.4 million compared with net income of $14.0 million in the nine-month period last year.

Liquidity and Capital Resources

Cash provided by operations was $16.3 million in the first nine months of fiscal 2002, compared to cash used in operations of $26.4 million in the prior year. Accounts receivable decreased by $11.1 million in the first nine months of fiscal 2002 and increased by $16.0 million in the first nine months of fiscal 2001. In the first nine months of fiscal 2002, inventories decreased by $8.4 million compared to an increase in the same period in the prior year of $31.3 million. Fluctuations in receivables and inventories are primarily a function of sales levels.
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, as amended, contain various financial and operating covenants which set benchmark levels for tangible net worth, debt to tangible net worth ratio and annual debt service coverage. The Company was in compliance with these covenants at February 28, 2002.

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.

New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment testing in accordance with the statements. Other intangible assets will continue to be amortized over their useful lives.

The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal 2003. Application of the non-amortization provisions of the statement is expected to result in an increase in pre-tax income of approximately $500,000 in fiscal 2003. During fiscal 2003, Company management will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets, and accordingly, has not yet determined the impact, if any, such review will have on the earnings and financial position of the Company.

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: