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 August 31, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-12906 RICHARDSON ELECTRONICS, LTD. (Exact name of registrant as specified in its charter) Delaware 36-2096643 (State of incorporation) (I.R.S. Employer Identification No.) 40W267 Keslinger Road, LaFox, Illinois 60147 (Address of principal executive offices and zip code) (630) 208-2200 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 October 8, 1997, there were outstanding 8,841,186 shares of Common Stock, $.05 par value,and 3,243,081 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 18 pages. An exhibit index is at page 11. Page 1 RICHARDSON ELECTRONICS, LTD. AND SUBSIDIARIES FORM 10-Q For the Quarter Ended August 31, 1997 INDEX Page PART I - FINANCIAL INFORMATION Consolidated Condensed Balance Sheets 3 Consolidated Condensed Statements of Income 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 8 PART II - OTHER INFORMATION 11 Page 2 Part 1 - Financial Information Richardson Electronics, Ltd. and Subsidiaries Consolidated Condensed Balance Sheets (in thousands) August 31 May 31 1997 1997 --------- --------- (Unaudited) (Audited) ASSETS Current assets: Cash and equivalents $ 11,341 $ 10,012 Receivables, less allowance of $2,147 and $2,102 54,631 53,333 Inventories 92,466 92,194 Other 10,734 10,497 --------- --------- Total current assets 169,172 166,036 Investments 2,621 2,152 Property, plant and equipment 46,636 45,969 Less accumulated depreciation (28,757) (28,443) --------- --------- Property, plant and equipment 17,879 17,526 Other assets 7,957 6,800 --------- --------- Total assets $197,629 $192,514 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 14,748 $ 12,766 Accrued expenses 12,460 12,449 --------- --------- Total current liabilities 27,208 25,215 Long-term debt, less current portion 109,761 107,275 Deferred income taxes 968 434 Stockholders' equity: Common stock, $.05 par value; issued 8,757 at August 31, 1997 and 8,721 at May 31, 1997 438 437 Class B common stock, convertible, $.05 par value; issued 3,243 at August 31, 1997 and May 31, 1997 162 162 Additional paid-in capital 53,805 53,512 Retained earnings 10,422 9,082 Foreign currency translation adjustment (5,135) (3,603) --------- --------- Total stockholders' equity 59,692 59,590 --------- --------- Total liabilities and stockholders $197,629 $192,514 ========= ========= See notes to consolidated condensed financial statements. Page 3 Richardson Electronics, Ltd. and Subsidiaries Consolidated Condensed Statements of Income (in thousands, except per share amounts) Three Months Ended August 31 ------------------------- 1997 1996 --------- --------- (Unaudited) Net sales $ 71,600 $ 57,544 Cost of products sold 50,962 40,761 --------- --------- Gross margin 20,638 16,783 Selling, general and administrative expenses 15,810 13,334 --------- --------- Operating income 4,828 3,449 Other (income) expense: Interest expense 2,019 1,769 Investment income (84) (65) Other, net 313 (148) --------- --------- 2,248 1,556 --------- --------- Income before income taxes 2,580 1,893 Income taxes 772 600 --------- --------- Net income $ 1,808 $ 1,293 ========= ========= Net income per share $ 0.15 $ 0.11 ========= ========= Average shares outstanding 12,228 12,209 ========= ========= Dividends per common share $ 0.04 $ 0.04 ========= ========= See notes to consolidated condensed financial statements. Page 4 Richardson Electronics, Ltd. and Subsidiaries Consolidated Condensed Statements of Cash Flows (in thousands)(unaudited) Three Months Ended August 31 ------------------------ 1997 1996 --------- --------- Operating Activities: Net income $ 1,808 $ 1,293 Non-cash charges to income: Depreciation 656 617 Amortization of intangibles and financing costs 120 120 Deferred income taxes 470 402 Contribution to employee stock ownership plan 285 800 --------- --------- Total non-cash charges 1,531 1,939 --------- --------- Changes in working capital, net of effects of currency translation: Accounts receivable 527 2,930 Inventories 883 (1,999) Other current assets 760 (1,335) Accounts payable 1,896 (2,344) Other liabilities (169) (488) --------- --------- Net changes in working capital 3,897 (3,236) --------- --------- Net cash provided by (used in) operating activities 7,236 (4) --------- --------- Financing Activities: Proceeds from borrowings 6,486 3,582 Payments on debt (4,000) -- Cash dividends (467) (463) --------- --------- Net cash provided by financing activities 2,019 3,119 --------- --------- Investing Activities: Sales of investments 890 1,498 Purchase of investments (1,085) (1,483) Business acquisitions (6,262) -- Capital expenditures (907) (1,351) Other (562) 100 --------- --------- Net cash used in investing activities (7,926) (1,236) --------- --------- Increase in cash and equivalents 1,329 1,879 Cash and equivalents at beginning of year 10,012 6,784 --------- --------- Cash and equivalents at end of period $ 11,341 $ 8,663 ========= ========= See notes to consolidated condensed financial statements. Page 5 Richardson Electronics, Ltd. and Subsidiaries Notes to Consolidated Condensed Financial Statements First Quarter Ended August 31, 1997 (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 year ended May 31, 1997. The marketing and sales operations of the Company are organized in four strategic business units (SBUs): Electronic Device Group (EDG), Solid State and Components (SSC), Display Products Group (DPG) and Security Systems Division (SSD). References hereinafter are to the acronyms noted parenthetically. Note B -- Income Taxes The income tax provision for the three-month period ended August 31, 1997 is based on the estimated effective tax rate of 30% for fiscal 1998. The effect of expected state income taxes is offset by the utilization of foreign net operating loss carryforwards and by U.S. foreign sales corporation tax benefits. The income tax provision for the three-month period ended August 31, 1996 was based on the estimated effective tax rate of 32% for fiscal 1997. The effect of expected state income taxes in 1997 was offset by U.S. foreign sales corporation tax benefits. Page 6 Richardson Electronics, Ltd. and Subsidiaries Notes to Consolidated Condensed Financial Statements First Quarter Ended August 31, 1997 (unaudited) Note C - Security Service International, Inc. Acquisition Effective August 14, 1997, the Company acquired the assets and liabilities of Security Service International, Inc. (SSI), a Canadian distributor of security systems with annual sales of $20.0 million. The acquisition was accounted for by the purchase method, and accordingly, the results of operations of SSI since the date of acquisition have been included in the Consolidated Condensed Statement of Income. Note D - Earnings per Share The Financial Accounting Standards Board issued SFAS No. 128, Earnings per Share, which establishes new guidelines for the calculation and presentation of earnings per share data, but prohibits use of the new guidelines prior to December 15, 1997. The purpose of the new rule is to make reporting in the United States consistent with international practices. Under SFAS 128, net income per share as currently reported will be replaced by two disclosures: basic earnings per share, which excludes all common stock equivalents, and diluted earnings per share, which includes all dilutive common stock equivalents. Earnings per share for the first quarter of fiscal 1998 using these guidelines do not differ from amounts presented in the accompanying Consolidated Condensed Statements of Income. Page 7 Management's Discussion and Analysis of Results of Operations and Financial Condition First Quarter Ended August 31, 1997 Results of Operations Net sales for the first quarter of fiscal 1998 were $71.6 million, up 24% from last year's first quarter of $57.5 million. 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). Sales Gross Margin ----------------------- --------------------------------- 1998 1997 % 1998 GM% 1997 GM% -------- -------- ---- -------- ----- -------- ----- EDG $29,025 $27,401 6% $ 9,222 31.8% $ 7,970 29.1% SSC 20,560 15,383 34% 6,162 30.0% 4,758 30.9% DPG 7,642 7,584 1% 2,447 32.0% 2,703 35.6% SSD 14,373 7,176 100% 3,350 23.3% 1,464 20.4% Corporate -- -- (543) (112) -------- --------- -------- -------- Total $71,600 $57,544 24% $20,638 28.8% $16,783 29.2% ======== ======== ======== ======== Sales growth was led by SSD and SSC. SSD doubled its sales to $14.4 million and SSC realized a 34% gain in sales to $20.6 million. Both business units benefited from strategic acquisitions made following the end of last year's first quarter. Without the contribution from these acquisitions, growth was 22% and 19% for SSD and SSC, respectively. EDG's sales increased 6%, primarily in the medical x-ray imaging replacement market. Gross margin as a percent of sales for EDG improved from 29.1% to 31.8%, reflecting pricing policy changes, product mix, and tube reloading efficiencies. Gross margins for SSD improved from 20.4% to 23.3%, primarily due to the acquisition of Burtek Systems Inc. in the third quarter of fiscal 1997. Gross margins for DPG declined from 35.6% to 32.0% due to competitive pressures in the industry. Page 8 Management's Discussion and Analysis of Results of Operations and Financial Condition First Quarter Ended August 31, 1997 On a geographic basis, the Company achieved sales growth of 31% in North America, 15% in Europe, and 16% in the Rest of World area. Excluding the effect of the aforementioned acquisitions, North America achieved internally generated sales growth of 11%. Sales, percentage change from the prior year, gross margins and gross margin percent of sales by area are summarized in the following table. Provisions for LIFO, manufacturing charges and other costs are included under the caption "Corporate" (in thousands). Sales Gross Margin ----------------------- --------------------------------- 1998 1997 % 1998 GM% 1997 GM% -------- -------- ---- -------- ----- -------- ----- North America $43,664 $33,291 31% $12,789 29.3% $ 9,599 28.8% Europe 15,708 13,679 15% 4,782 30.4% 4,329 31.6% Rest of World 12,228 10,574 16% 3,610 29.5% 2,967 28.1% Corporate -- (543) (112) -------- -------- -------- -------- Total $71,600 $57,544 24% $20,638 28.8% $16,783 29.2% ======== ======== ======== ======== Overall gross margins for the first quarter were 28.8%, compared to 29.2% in the prior year. Gross margin comparisons were most significantly affected by changes in product mix, particularly SSD's larger contribution to total sales. Non-operating expenses increased by $692,000 as a result of higher interest expense and foreign exchange losses. The interest expense increase of $249,000 reflects higher borrowing levels due to business acquisitions. Foreign exchange losses were $340,000, compared to a gain of $87,000 in the prior year. The exchange losses were primarily due to a decline in the value of several European currencies relative to the English pound sterling, and, to a lesser extent, the devaluation of several Southeast Asian currencies. Net income for the quarter was $1.8 million or $.15 per share, compared to $1.3 million or $.11 per share in the prior year. Page 9 Management's Discussion and Analysis of Results of Operations and Financial Condition First Quarter Ended August 31, 1997 Liquidity and Capital Resources Cash provided by operations, was $7.2 million in the first quarter of fiscal 1998, contrasted to the first quarter last year when operating cash flow was break-even. Working capital changes provided $4.0 million in the first quarter of 1998, compared to cash usage of $3.2 million last year. Accounts payable increased $1.9 million in 1998 and declined $2.3 million in 1997, reflecting the timing of inventory purchases. Business acquisitions, capital expenditures and dividend payments were funded primarily by cash generated by operations and additional borrowings. Interest payments for the first quarter were $3.2 million in fiscal 1998 and $3.0 million in 1997. 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, 1997. In August 1997, the Company acquired substantially all of the assets of SSI, a Canadian distributor of security products. To complete the acquisition of SSI, the Company's Canadian subsidiary amended its revolving credit and term loan agreement from $6 million to $12.4 million. In addition, certain of the current agreements contain restrictions relating to the purchase by the Company of treasury stock or the payment of cash dividends. At August 31, 1997, $19.9 million was available for such transactions. 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. 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. Page 10 PART II - OTHER INFORMATION 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, 1997. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) At the Annual Meeting of Stockholders held October 7, 1997, the following directors were elected. Number of Affirmative Withheld Name Votes Authority ---------------------- ------------ --------- Edward. J. Richardson 40,351,185 151,475 Scott Hodes 40,345,685 156,975 Samuel Rubinovitz 40,343,545 159,115 Arnold R. Allen 40,338,283 164,377 Kenneth J. Douglas 40,343,465 159,195 Jacques Bouyer 40,345,043 157,617 William J. Garry 40,347,185 155,475 Harold L. Purkey 40,347,185 155,475 Ad Ketelaars 40,346,763 155,897 Bruce W. Johnson 40,343,885 158,775 ITEM 5. OTHER INFORMATION None. Page 11 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 10 - Second Amending Agreement made as of August 22, 1997 between Burtek Systems Inc. as Borrower and First Chicago NBD Bank, Canada as Lender and Richardson Electronics, Ltd. as Guarantor. page 13 Exhibit 27 - Financial Data Schedule page 18 . (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. RICHARDSON ELECTRONICS, LTD. Date October 14 , 1997 By _/s/ William J. Garry William J. Garry Vice President and Chief Financial Officer Page 12