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, 1998 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 March 23, 1998 there were outstanding 8,971,591 shares of Common Stock, $.05 par value, and 3,242,240 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 154 pages. An exhibit index is at page 13. Page 1 RICHARDSON ELECTRONICS, LTD. AND SUBSIDIARIES FORM 10-Q For the Three- and Nine- Month Periods Ended February 28, 1998 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 13 (2) Richardson Electronics, Ltd. and Subsidiaries Consolidated Condensed Balance Sheets (in thousands) February 28 May 31 1998 1997 --------- --------- (Unaudited)(Audited) ASSETS - ------- Current assets: Cash and equivalents $ 6,886 $ 10,012 Receivables, less allowance of $1,775 and $2,102 58,786 53,333 Inventories 93,777 92,194 Other 9,998 10,497 --------- --------- Total current assets 169,447 166,036 Investments 2,776 2,152 Property, plant and equipment 48,785 45,969 Less accumulated depreciation (30,645) (28,443) --------- --------- Property, plant and equipment, net 18,140 17,526 Other assets 9,291 6,800 --------- --------- Total assets $199,654 $192,514 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY ----------------------------------- Current liabilities: Accounts payable $ 18,037 $ 12,766 Accrued expenses 10,183 12,449 --------- --------- Total current liabilities 28,220 25,215 Long-term debt 105,623 107,275 Deferred income taxes 1,600 434 Stockholders' equity: Common stock, $.05 par value; issued 8,968 at February 28, 1998 and 8,721 at May 31, 1997 449 437 Class B common stock, convertible, $.05 par value; issued 3,242 at February 28, 1998 and May 31, 1997 162 162 Additional paid-in capital 55,549 53,512 Retained earnings 14,396 9,082 Foreign currency translation adjustment (6,345) (3,603) --------- --------- Total stockholders' equity 64,211 59,590 --------- --------- Total liabilities and stockholders' equity $199,654 $192,514 ========= ========= See notes to consolidated condensed financial statements. (3) Richardson Electronics, Ltd. and Subsidiaries Consolidated Condensed Statements of Income For the Three- and Nine-Month Periods Ended February 28, 1998 and 1997 (unaudited) (in thousands, except per share amounts) Three Months Nine Months ------------------ ------------------- 1998 1997 1998 1997 -------- -------- --------- --------- (Unaudited) (Unaudited) Net sales $73,196 $64,163 $223,442 $183,874 Cost of products sold 52,336 52,992 159,596 137,182 -------- -------- --------- --------- Gross margin 20,860 11,171 63,846 46,692 Selling, general and administrative expenses 16,009 19,123 48,525 46,508 -------- -------- --------- --------- Operating income (loss) 4,851 (7,952) 15,321 184 Other (income) expense: Interest expense 2,009 1,869 6,218 5,588 Investment income (255) (82) (534) (249) Other, net 5 264 27 173 -------- -------- --------- --------- 1,759 2,051 5,711 5,512 -------- -------- --------- --------- Income (loss) before Income taxes and extraordinary item 3,092 (10,003) 9,610 (5,328) Income taxes (benefit) 910 (3,950) 2,880 (2,500) -------- -------- --------- --------- Net income (loss) before extraordinary item 2,182 (6,053) 6,730 (2,828) Extraordinary loss, net of income taxes of $312 - (488) - (488) -------- -------- --------- --------- Net income (loss) $ 2,182 $(6,541) $ 6,730 $ (3,316) ======== ======== ========= ========= Net income (loss) per share - basic: Before extraordinary item $ .18 $ (.51) $ .56 $ (.24) Extraordinary loss, net of income taxes of $312 - (.04) - (.04) -------- -------- --------- --------- Net income (loss) per share $ .18 $ (.55) $ .56 $ (.28) ======== ======== ========= ========= Average shares outstanding 12,198 11,908 12,096 11,886 ======== ======== ========= ========= Net income (loss) per share - diluted: Before extraordinary item $ .17 $ (.51) $ .54 $ (.24) Extraordinary loss, net of income taxes of $312 - (.04) (.04) -------- -------- --------- --------- Net income (loss) per share $ .17 $ (.55) $ .54 $ (.28) ======== ======== ========= ========= Average shares outstanding 12,626 11,908 12,476 11,886 ======== ======== ========= ========= Dividends per common share $ .04 $ .04 $ .12 $ .12 ======== ======== ========= ========= See notes to consolidated condensed financial statements. (4) Richardson Electronics, Ltd. and Subsidiaries Consolidated Condensed Statements of Cash Flows For the Nine-Month Periods Ended February 28, 1998 and 1997 (unaudited) (in thousands) 1998 1997 -------- -------- Operating Activities: Net income (loss) $6,730 $(3,316) Non-cash charges to income: Depreciation 2,606 1,973 Amortization of intangibles and financing costs 366 1,091 Deferred income taxes 1,508 (3,026) Contribution to employee stock ownership plan 285 800 Special charges - 11,000 -------- -------- Total non-cash charges 4,765 11,838 -------- -------- Changes in working capital, net of effects of currency translation and business acquisitions: Accounts receivable (4,758) (3,549) Inventories (862) (922) Other current assets 68 (845) Accounts payable 5,504 (974) Other liabilities (2,460) (600) -------- -------- Net changes in working capital (2,508) (6,890) -------- -------- Net cash provided by operating activities 8,987 1,632 -------- -------- Financing Activities: Proceeds from borrowings 14,531 56,918 Payments on debt (15,943) (40,123) Proceeds from sale of common stock 1,765 218 Cash dividends (1,416) (1,389) Net cash (used in) provided by financing -------- -------- activities (1,063) 15,624 -------- -------- Investing Activities: Sales of investments 3,003 3,141 Purchases of investments (3,432) (3,181) Business acquisitions (6,262) (9,409) Capital expenditures (3,201) (2,947) Other (1,158) (99) -------- -------- Net cash used in investing activities (11,050) (12,495) -------- -------- (Decrease) increase in cash and equivalents (3,126) 4,761 Cash and equivalents at beginning of year 10,012 6,784 -------- -------- Cash and equivalents at end of period $6,886 $11,545 ======== ======== See notes to consolidated condensed financial statements. (5) 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 nine-month period ended February 28, 1998 is based on the estimated annual effective tax rate of 30%. The estimated effective tax rate is lower than the statutory rate of 34% as a result of U.S. foreign sales corporation benefits, partially offset by expected state income taxes. The income tax benefit on pre-tax losses for the nine-month period ended February 28, 1997 is based on the estimated effective tax rate of 47% for fiscal 1997 results. This rate exceeds the statutory rate of 34% due to state income taxes, the utilization of previously unrecognized foreign net operating loss carryforwards, and U.S. foreign sales corporation tax benefits. 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 Operations. (6) Note D - Earnings per Share Net income (loss) per share amounts and average shares outstanding for all periods presented have been computed in accordance with Financial Accounting Standards Board Statement (SFAS) No. 128, Earnings per Share. SFAS No. 128 established new guidelines effective December 1997 for the calculation and presentation of earnings per share (EPS) data. Under SFAS 128, net income per share is reported in two disclosures: basic earnings per share, which excludes all common stock equivalents, and diluted earnings per share, which includes all dilutive common stock equivalents. Net income (loss) per share amounts as previously reported have been restated to comply with SFAS No. 128. The effect of this restatement was not material. The per share amounts presented in the Statement of Operations were based on the following data: Three Months Nine Months ------------------ ----------------- 1998 1997 1998 1997 -------- -------- -------- -------- Numerator for basic and diluted EPS: Net income (loss) before extraordinary item $ 2,182 $(6,053) $ 6,730 $(2,828) Extraordinary loss, net of income taxes - (488) - (488) -------- -------- -------- -------- Net income (loss) $ 2,182 $(6,541) $ 6,730 $(3,316) ======== ======== ======== ======== Denominator for basic EPS: Shares outstanding at beginning of period 12,106 11,898 11,964 11,806 Additional shares for options exercised 92 10 132 80 ------- -------- ------- ------- Weighted average shares outstanding 12,198 11,908 12,096 11,886 ======= ======== ======= ======= Denominator for diluted EPS: Weighted average shares Outstanding 12,198 11,908 12,096 11,886 Effect of dilutive stock Options 428 - 380 - ------- -------- ------- ------- Adjusted average shares outstanding 12,626 11,908 12,476 11,886 ======= ======== ======= ======= Out-of-the-money (exercise price higher than market price) stock options and the Company's 8 1/4% and 7 1/4% convertible debentures were excluded from the calculation because they were anti-dilutive. In-the-money stock options were excluded from the calculation for the fiscal 1997 third quarter and nine-month periods because the Company had a net loss. (7) Results of Operations Net sales for the third quarter of fiscal 1998 were $73.2 million, up 14.1% from last year's third quarter of $64.2 million. Sales for the nine-month period were $223.4 million, a 21.5% increase from $183.9 million in the prior year. Sales gains include the effect of recent acquisitions, which added $5.4 million to the quarter and $21.4 million to the nine-month results. 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 ------------------------- ------------------------------ FY 1998 FY 1997 % FY 1998 GM% FY 1997 GM% -------- -------- ------ -------- ----- -------- ----- Third Quarter (see note) EDG $ 28,115 $ 28,467 -1.2% $ 8,893 31.6% $ 5,998 21.1% SSC 21,427 19,438 10.2% 5,932 27.7% 3,405 17.5% DPG 7,394 6,560 12.7% 2,565 34.7% 561 8.6% SSD 16,260 9,698 67.7% 3,721 22.9% 2,140 22.1% Corporate - - (251) (933) -------- -------- ------ -------- ----- -------- ----- Total $ 73,196 $ 64,163 14.1% $20,860 28.5% $11,171 17.4% ======== ======== ======== ======== Nine Months EDG $ 86,823 $ 84,647 2.6% $27,360 31.5% $22,585 26.7% SSC 64,484 53,201 21.2% 18,459 28.6% 13,835 26.0% DPG 22,617 21,737 4.0% 7,633 33.7% 5,875 27.0% SSD 49,518 24,289 103.9% 11,457 23.1% 5,151 21.2% Corporate - - (1,063) (754) -------- -------- ------ -------- ----- -------- ----- Total $223,442 $183,874 21.5% $63,846 28.6% $46,692 25.4% ======== ======== ======== ======== Note: In the third quarter of fiscal 1997, the Company re-evaluated its reserve estimates for inventory and accounts receivable in light of changed market conditions and provided for severance and other costs associated with a Corporate reorganization. The special charge included in cost of sales was $7.2 million, which reduced gross margin for EDG by $2.8 million, SSC by $2.4 million, DPG by $1.9 million and SSD by $100,000. Sales growth was led by SSD, with gains of 67.7% for the third quarter and 103.9% for the first nine months. SSD's sales growth includes the acquisition of Burtek Systems Inc. in February 1997 and Security Service International, (8) Inc. in August 1997. Without the contribution from these acquisitions, SSD's internally generated sales growth was 12.3% in the third quarter and 26.3% in the nine-month period. Gross margins as a percent of sales in the third quarter and nine-month period were 22.9% and 23.1%, respectively compared to the prior year's third quarter and nine-month period of 23.1% and 21.6%, excluding the special charges for overstock. Margin improvement results from higher margins on proprietary and franchise product lines obtained with the acquisitions of Burtek and SSI. SSC sales increased 10.2% in the third quarter and 21.2% for the nine-month period. SSC gross margin as a percent of sales were 27.7% for the quarter and 28.6% for the nine-month period, down from the prior third quarter and nine- month period gross margin of 30.1% and 30.6%, respectively, excluding the special charges. The margin change is primarily due to product mix and competitive pressures. EDG's sales decreased 1.2% for the third quarter and increased 2.6% for the first nine months. EDG's gross margins as a percent of sales were 31.6% for the quarter and 31.5% for nine-month period which increased compared to the prior third quarter and nine-month period rates of 30.9% and 30.0%, respectively, excluding the special charges. Gross margins improved as a result of changes in pricing policies and higher efficiencies in x-ray tube loading operations. DPG sales increased 12.7% for the quarter and 4.0% for the nine-month period. Gross margins as a percent of sales declined to 34.7 % from 36.8% for the quarter and to 33.7% from 35.6% for the nine-month period, excluding the special charge. The sales gain and margin change both reflect the resumption of sales to a major European customer. Overall gross margins as a percent of sales in the third quarter and nine-month period were 28.5% and 28.6%, respectively compared to 28.6% in the prior year third quarter and 29.3% in the nine-month period, excluding the effect of the special charges. Year-to-date margin comparisons are effected by changes in product mix, as SSD with lower margins, contributed a proportionately greater percentage to total sales. On a geographic basis, the Company achieved sales growth of 27.2% in North America, 18.5% in Europe, and 6.8% in the Rest of World for the nine-month period. Excluding the effect of the aforementioned acquisitions, North America achieved internally generated sales growth of 7.6% for the nine-month period. Economic weakness in the Asia Pacific region during the third quarter of fiscal 1998 resulted in lower sales in that region compared to the same period in the prior year. (9) 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 ------------------------ ---------------------------------- FY 1998 FY 1997 % FY 1998 GM% FY 1997 GM% -------- --------- ---- --------- ----- -------- ----- (see note) North America $ 46,209 $ 39,546 16.8% $12,928 28.0% $ 7,462 18.9% Europe 16,336 13,499 21.0% 5,072 31.0% 2,870 21.3% Rest of World 10,651 11,118 -4.2% 3,111 29.2% 1,772 15.9% Corporate (251) (933) -------- -------- ----- -------- ----- -------- ----- Total $ 73,196 $ 64,163 14.1% $20,860 28.5% $11,171 17.4% ======== ======== ======== ======== North America $139,128 $109,398 27.2% $39,446 28.4% $27,798 25.4% Europe 48,498 40,929 18.5% 14,932 30.8% 11,568 28.3% Rest of World 35,816 33,547 6.8% 10,531 29.4% 8,080 24.1% Corporate (1,063) (754) -------- -------- ---- -------- ----- -------- ----- Total $223,442 $183,874 21.5% $63,846 28.6% $46,692 25.4% ======== ======== ======= ======== Note. The special charge In the third quarter of fiscal 1997 included in cost of sales reduced gross margins for North America by $4.1 million, Europe by $1.7 million and ROW by $1.4 million. North America gross margins as a percent of sales were 28.0% for the quarter and 28.4% for the nine-month period, down from the prior third quarter and nine-month period gross margins of 29.1%, excluding the special charges. Gross margins as a percent of sales for Europe were 31.0% for the quarter and 30.8% for the nine-month period compared to 33.8% in the third quarter of the prior year and 32.4% in the nine-month period in the prior year, excluding the effects of the special charges. Rest of World gross margins as a percent of sales were 29.2% for the quarter and 29.4% for the nine-month period compared to 29.0% in the third quarter of the prior year and 28.4% in the nine-month period in the prior year, excluding the effects of the special charges. The margin comparisons reflect the higher contribution from SSD sales and competitive pressures affecting SSC margins. Selling, general and administrative (S,G&A) expenses for the third quarter decreased to $16,009 compared with $19,123 in the prior year. The prior year (10) third quarter S,G&A included special charges of $3.8 million for accounts receivable provisions, severance and other costs associated with a corporate reorganization. As a percentage of sales, S,G&A was 21.9% for the quarter. S,G&A as a percent of sales decreased to 21.7% for the nine-month period compared to 23.2% in the prior year, excluding the effects of the special charges. Non-operating expenses for the third quarter decreased by $292,000, as gains from investments offset higher interest expense. Higher interest expense reflects increased borrowing levels due to business acquisitions. Investment income was $255,000, compared to $82,000 in the prior year, reflecting realized capital gains. Non-operating expenses for the first nine months increased $199,000, due to higher interest expense. Collectively, special charges effecting net income before extraordinary item in the third quarter of fiscal 1997 amounted to $11.0 million pre-tax or $6.7 million, net of tax, reducing earnings per share by $.56. The Company also recorded an $800,000 extraordinary charge for the write-off of unamortized debt issuance costs attributable to the 7% convertible debentures, which were exchanged for a new issue during the quarter. Net of tax, the charge was $488,000, or $.04 per share. Net income for the third quarter was $2.2 million or $.17 per share (diluted), compared to a net loss of $6.5 million or $.55 per share in the prior year. Net income for the nine-month period was $6.7 million, or $.54 per share, compared to a net loss of $3.3 million, or $.28 per share in the prior year. Liquidity and Capital Resources Cash provided by operations for the nine-month period was $9.0 million in fiscal 1998, compared to $1.6 million in 1997. Working capital increases reduced cash by $2.5 million, compared to $6.9 million last year. Accounts payable increased $5.5 million in 1998 and declined $1.0 million in 1997, reflecting the timing of inventory purchases. Accounts receivable increased $4.8 million in the current year, as a result of higher sales levels. Business acquisitions, capital expenditures and dividend payments were funded primarily by cash generated by operations and increases in borrowings. Interest payments for the nine-month period were $7.5 million in fiscal 1998 and $6.5 million in 1997. (11) In August 1997, the Company acquired substantially all of the assets of SSI, a Canadian distributor of security products. To complete the acquisition, the Company's Canadian subsidiary amended its revolving credit and term loan agreement from $6.0 million to $12.4 million. Effective March 1, 1998, the Company replaced its $35.0 million floating-rate bank term loan with a new $50.0 million floating-rate credit facility maturing March 1, 2001. The Company's Canadian subsidiary revolving credit and term loan agreement was amended to mature on the same date. The Company's loan agreements contain various financial and operating covenants which place restrictions on dividends and 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, 1998. The new floating-rate credit facility contains restrictions relating to the purchase by the Company of treasury stock or the payment of cash dividends. At March 1, 1998, $10.0 million was free of such restrictions. The Company's 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. (12) 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 None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 10(a) - Loan Agreement dated as of March 1, 1998 among Richardson Electronics, Ltd., various lending institutions and American National Bank and Trust Company of Chicago as Agent, establishing a $50,000,000 Credit Facility. Exhibit 10(b) - Amended and Restated Credit Agreement made as of March 1, 1998 between Burtek Systems Inc. as Borrower and First Chicago NBD Bank, Canada as Lender and Richardson Electronics, Ltd. and Guarantor. Exhibit 10(c) - Employment Agreement dated as of January 26, 1998 between the Company and Norman Hilgendorf. (13) Exhibit 10(d) - Employment contract dated May 10, 1993 as amended March 23, 1998 between the Company and Pierluigi Calderone. Exhibit 27 - Financial Data Schedule Financial Data Schedules restated for SFAS 128: Exhibit 27.1 - May 31, 1995 Exhibit 27.2 - May 31, 1996 Exhibit 27.3 - May 31, 1997 Exhibit 27.4 - August 31, 1996 Exhibit 27.5 - August 31, 1997 Exhibit 27.6 - November 30, 1996 Exhibit 27.7 - November 30, 1997 Exhibit 27.8 - February 28, 1997 (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 March 30, 1998 By /s/ William J. Garry Vice President and Chief Financial Officer (14)