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 November 30, 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, PO Box 393,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 January 12, 1999, there were outstanding 10,760,630 shares of Common
Stock, $.05 par value, and 3,235,346 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 14 pages. An exhibit index is at
page 12.
(1)
Richardson Electronics, Ltd. and Subsidiaries
Form 10-Q
For the Three- and Six-Month Periods Ended November 30, 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 7
PART II - OTHER INFORMATION 12
(2)
Part 1 - Financial Information
Richardson Electronics, Ltd. and Subsidiaries
Consolidated Condensed Balance Sheets
(in thousands)
November 30 May 31
1998 1998
--------- ---------
(Unaudited) (Audited)
ASSETS
- ------
Current assets:
Cash and equivalents $ 7,380 $ 8,031
Receivables, less allowance of $2,107 and $2,230 64,961 63,431
Inventories 104,441 96,443
Other 11,351 9,681
--------- ---------
Total current assets 188,133 177,586
Investments 2,454 2,931
Property, plant and equipment 52,556 49,795
Less accumulated depreciation (33,003) (31,318)
--------- ---------
Property, plant and equipment, net 19,553 18,477
Other assets 14,296 10,706
--------- ---------
Total assets $224,436 $209,700
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 17,584 $ 17,320
Accrued expenses 9,247 10,286
Notes and current portion of debt 676 403
--------- ---------
Total current liabilities 27,507 28,009
Long-term debt, less current portion 97,931 87,427
Deferred income taxes 4,119 2,679
Stockholders' equity:
Common stock, $.05 par value; issued 11,307 at
November 30, 1998 and 11,183 at May 31, 1998 565 561
Class B common stock, convertible, $.05 par
value; issued 3,235 at November 30, 1998
and 3,239 at May 31, 1998 162 162
Additional paid-in capital 81,829 80,606
Common stock in treasury; 548 shares at cost (3,594) --
Retained earnings 21,508 16,842
Foreign currency translation adjustment (5,591) (6,586)
--------- ---------
Total stockholders' equity 94,879 91,585
--------- ---------
Total liabilities and stockholders' equity $224,436 $209,700
========= =========
See notes to consolidated condensed financial statements.
Page 3
Richardson Electronics, Ltd. and Subsidiaries
Consolidated Condensed Income Statements
For the Three- and Six-Month Periods Ended November 30, 1998 and 1997
(in thousands, except per share amounts) (unaudited)
Three Months Ended Six Months Ended
November 30 November 30
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Net sales $ 82,232 $ 78,646 $158,270 $150,246
Cost of products sold 58,970 56,298 113,296 107,260
--------- --------- --------- ---------
Gross margin 23,262 22,348 44,974 42,986
Selling, general and
administrative expenses 17,289 16,706 33,895 32,516
--------- --------- --------- ---------
Operating income 5,973 5,642 11,079 10,470
Other (income) expense:
Interest expense 1,727 2,190 3,402 4,209
Investment income (80) (195) (233) (279)
Other, net (363) (291) (350) 22
--------- --------- --------- ---------
1,284 1,704 2,819 3,952
--------- --------- --------- ---------
Income before income
taxes 4,689 3,938 8,260 6,518
Income taxes 1,410 1,198 2,480 1,970
--------- --------- --------- ---------
Net income $ 3,279 $ 2,740 $ 5,780 $ 4,548
========= ========= ========= =========
Net income per share - basic:
Net income per share $ .23 $ .23 $ .40 $ .38
========= ========= ========= =========
Average shares outstanding 14,089 12,106 14,289 12,045
========= ========= ========= =========
Net income per share - diluted:
Net income per share $ .23 $ .22 $ .40 $ .37
========= ========= ========= =========
Average shares outstanding 14,215 12,575 14,597 12,401
========= ========= ========= =========
Dividends per common share $ .04 $ .04 $ .08 $ .08
========= ========= ========= =========
See notes to consolidated condensed financial statements.
Page 4
Richardson Electronics, Ltd. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
For the Six-Month Periods Ended November 30, 1998 and 1997 (unaudited)
(in thousands)
Six Months Ended
November 30
------------------------
1998 1997
--------- ---------
Operating Activities:
Net income $ 5,780 $ 4,548
Non-cash charges to income:
Depreciation 1,777 1,860
Amortization of intangibles and financing
costs 304 181
Deferred income taxes 1,739 1,403
Contribution to employee stock ownership plan 485 285
--------- ---------
Total non-cash charges 4,305 3,729
--------- ---------
Changes in working capital, net of effects
of currency translation:
Accounts receivable (886) (4,485)
Inventories (7,041) 750
Other current assets (1,822) 254
Accounts payable (434) 5,516
Other liabilities (1,508) 447
--------- ---------
Net changes in working capital (11,691) 2,482
--------- ---------
Net cash (used in)provided by
operating activities (1,606) 10,759
--------- ---------
Financing Activities:
Proceeds from borrowings 12,064 10,531
Payments on debt (757) (13,166)
Proceeds from stock 114 1,436
Purchases of common stock for treasury (3,594) --
Cash dividends (1,115) (941)
--------- ---------
Net cash provided by (used in) financing
activities 6,712 (2,140)
--------- ---------
Investing Activities:
Sales of investments 1,840 1,872
Purchase of investments (1,363) (2,378)
Business acquisitions (893) (6,262)
Capital expenditures (2,233) (2,454)
Other (3,108) (1,027)
--------- ---------
Net cash used in investing activities (5,757) (10,249)
--------- ---------
Increase in cash and equivalents (651) (1,630)
Cash and equivalents at beginning of year 8,031 10,012
--------- ---------
Cash and equivalents at end of period $ 7,380 $ 8,382
========= =========
See notes to consolidated condensed financial statements.
Page 5
Richardson Electronics, Ltd. and Subsidiaries
Notes to Consolidated Condensed Financial Statements
Three- and Six-Month Periods Ended November 30, 1998
(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, 1998.
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 provisions for the three- and six-month periods ended November
30, 1998 and 1997 are based on the estimated annual effective tax rate of 30%.
The effective rate is less than the statutory rate of 34% due to U.S. foreign
sales corporation tax benefits, partially offset by state income taxes.
Note C - Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income", requires the presentation of comprehensive income as follows (in
thousands).
Three Months Ended Six Months Ended
November 30, November 30,
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Net income $ 3,279 $ 2,740 $ 5,780 $ 4,548
Foreign currency translation 2,420 103 995 (1,429)
--------- --------- --------- ---------
Comprehensive income $ 5,699 $ 2,843 $ 6,775 $ 3,119
========= ========= ========= =========
Page 6
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Three- and Six-Month Periods Ended November 30, 1998
(Unaudited)
Results of Operations
Net sales for the second quarter of fiscal 1999 were a record $82.2 million, up
5% from last year's second quarter of $78.6 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
--------------------------- ----------------------------------
%
FY 1999 FY 1998 Change FY 1999 GM% FY 1998 GM%
--------- --------- ---- --------- ----- --------- -----
Second Quarter
EDG $ 32,166 $29,683 8% $ 9,679 30.1% $ 9,245 31.1%
SSC 23,223 22,497 3% 6,457 27.8% 6,365 28.3%
DPG 9,844 7,581 30% 3,263 33.1% 2,621 34.6%
SSD 16,999 18,885 -10% 4,083 24.0% 4,386 23.2%
Corporate - - (220) (269)
--------- --------- --------- ---------
Total $ 82,232 $ 78,646 5% $ 23,262 28.3% $ 22,348 28.4%
========= ========= ========= =========
Six Months
EDG $ 60,794 $ 58,708 4% $ 18,630 30.6% $ 18,467 31.5%
SSC 45,405 43,057 5% 12,594 27.7% 12,527 29.1%
DPG 19,035 15,223 25% 6,285 33.0% 5,068 33.3%
SSD 33,036 33,258 -1% 7,876 23.8% 7,736 23.3%
Corporate - - (411) (812)
--------- --------- --------- ----- --------- -----
Total $158,270 $150,246 5% $ 44,974 28.4% $ 42,986 28.6%
========= ========= ========= =========
EDG second quarter sales increased 8% from fiscal 1998 levels, reflecting a 60%
growth in medical equipment and related services. Gross margins as a percent of
sales decreased to 30.1% in fiscal 1999 from 31.1% in fiscal 1998 due to
changes in product mix, as medical products and services became a larger
proportion of the SBU's sales. Six month results reflect the same trends.
Second quarter sales for SSC increased 3% from fiscal 1998 levels, reflecting
growth in RF and microwave wireless components and interconnect products,
offset by softness in RF power semiconductors and power conversion products.
Gross margins as a percent of sales decreased to 27.8% in fiscal 1999 from
28.3% in
Page 7
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Three- and Six-Month Periods Ended November 30, 1998
(Unaudited)
fiscal 1998 due to changes in product mix and competitive pressures, primarily
for RF products. Six month results reflect the same trends.
Second quarter sales for DPG increased 30% in fiscal 1999 from 1998 levels.
Growth was attributable to new initiatives in both flat-panel and conventional
monitor sales, as well as, related systems integration revenues for medical,
financial services and industrial markets. Gross margins as a percent of sales
decreased to 33.1% in fiscal 1999 from 34.6% in fiscal 1998, reflecting the
shift in product mix. Six-month results reflect the same trends.
SSD's second quarter sales comparisons were affected unfavorably by the
strength of the prior year quarter, which included several large non-recurring
orders. Gross margins as a percent of sales increased from 23.2% in fiscal 1998
to 24.0% in fiscal 1999, reflecting higher margins on acquired product lines.
Sales for the six-month period were down 1% from the prior year as rising sales
in the first quarter were offset by comparison against the unusually strong
second quarter fiscal 1998 results.
On a geographic basis, the Company's North American sales grew 5% in the second
quarter and 9% in the first half. European sales grew 12% in the second quarter
and 8% in the first half. Sales in Asia / Pacific declined at a slower pace in
the second quarter, off 8% from the prior year, compared to 15% for the six-
month comparison. Latin American sales remained soft, off 11% and 9% on quarter
and six-month comparisons, against the prior year. Sales, percentage change
from the prior year, gross margins and gross margin percent of sales by area
are summarized in the following table. Prior year amounts have been re-stated
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, including Eastern Europe and the Middle East. Provisions for
LIFO, manufacturing charges and other costs are included under the caption
"Corporate" (in thousands).
Page 8
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Three- and Six-Month Periods Ended November 30, 1998
(Unaudited)
Sales Gross Margin
--------------------------- ----------------------------------
%
FY 1999 FY 1998 Change FY 1999 GM% FY 1998 GM%
--------- --------- ---- --------- ----- --------- -----
Second Quarter
North America $ 51,515 $ 49,276 5% $ 14,040 27.3% $ 13,735 27.9%
Europe 17,713 15,851 12% 5,557 31.4% 4,913 31.0%
Latin America 4,883 5,467 -11% 1,395 28.6% 1,508 27.6%
Asia/Pacific 5,006 5,448 -8% 1,611 32.2% 1,712 31.4%
Other 3,115 2,604 20% 879 28.2% 749 28.8%
Corporate - - (220) (269)
--------- --------- --------- --------- -----
Total $ 82,232 $ 78,646 5% $ 23,262 28.3% $ 22,348 28.4%
========= ========= ========= =========
Six Months
North America $101,073 $ 92,940 9% $ 27,766 27.5% $ 26,524 28.5%
Europe 32,901 30,577 8% 10,478 31.8% 9,372 30.7%
Latin America 9,246 10,201 -9% 2,600 28.1% 2,816 27.6%
Asia/Pacific 9,607 11,269 -15% 2,957 30.8% 3,522 31.3%
Other 5,443 5,259 3% 1,584 29.1% 1,564 29.7%
Corporate - - (411) (812)
--------- --------- --------- ---------
Total $158,270 $150,246 5% $ 44,974 28.4% $ 42,986 28.6%
========= ========= ========= =========
Selling, general and administrative expenses improved as a percentage of sales,
declining from 21.2% to 21.0% in the second quarter and from 21.6% to 21.4% for
the first half. Interest expense for the first half was reduced by 19% from the
prior year as a result of debt reductions financed by a public offering of the
Company's common stock in the fourth quarter of fiscal 1998. Other income
included foreign exchange gains of $293,000 in the first half of fiscal 1999,
compared to a foreign exchange loss of $144,000 in the prior year.
Net income for the quarter was $3.3 million or $.23 per share, assuming
dilution, compared to $2.7 million or $.22 per share in the prior year. Net
income for the first half was $5.8 million or $.40 per share, assuming
dilution, compared to $4.5 million or $.37 per share.
Liquidity and Capital Resources
Cash used in operations was $1.6 million in the first half of fiscal 1999, com-
pared to cash provided by operations of $10.8 million in the first half last
Page 9
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Three- and Six-Month Periods Ended November 30, 1998
(Unaudited)
year. Although cash provided by net income and non-cash adjustments improved,
the Company increased its investment in working capital by $11.7 million in the
first half of fiscal 1999, compared to a $2.5 million reduction last year.
Accounts receivable increased $886,000 in 1999 and $4.5 million in 1998.
Inventory increased $7.0 million in 1999, primarily for product line expansion,
compared to a reduction of $750,000 in 1998. Accounts payable increased by $5.5
million in fiscal 1998, but were reduced slightly in fiscal 1999.
In the second quarter of fiscal 1999, the Company repurchased 548,000 shares of
its common stock on the open market at an average price of $6.55 per share.
Capital expenditures, business acquisitions, stock repurchases and dividend
payments were funded primarily by cash generated by operations and additional
borrowings. Interest payments for the first half were $3.5 million in fiscal
1999 and $4.1 million in 1998.
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 November 30, 1998.
Cash reserves, investments, funds from operations and credit lines are expected
to be adequate to meet the operational needs and future dividends of the Com-
pany. The policy regarding payment of dividends is reviewed periodically by the
Board of Directors in light of the Company's operating needs and capital struc-
ture.
Impact of Year 2000
The year 2000 issue is the result of computer programs that are written using
two digits rather than four to define the applicable year. The Company's
current computer database correctly stores date stamps that include four digit
years. The Company sets standard configuration guidelines for personal computer
systems used within the Company which are year 2000 compliant. Based on a
recent assessment, the Company anticipates its systems will function properly
with respect to dates in the year 2000 and thereafter.
Future operating results may also be affected by the readiness of the Company's
trading partners to meet year 2000 requirements. The Company is in the process
of surveying its vendors of products with embedded chips or date-sensitive sys-
tems concerning their year 2000 readiness. The use of electronic data inter-
changes by the Company is limited to a few vendors and customers and the
Company does not anticipate significant year 2000 issues relating to interface
systems
Page 10
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Three- and Six-Month Periods Ended November 30, 1998
(Unaudited)
with these parties. The Company has no single customer which accounts for more
than 2% of its sales or vendor which accounts for more than 9% of its
purchases. Based upon the foregoing, the Company believes that its risk of
significant financial impact resulting from the inability of its trading
partners to meet year 2000 requirements is minimal.
Euro Currency Conversion
On January 1, 1999, eleven member states 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 trans-
actions will be processed only in euros. These changes could have significant
impacts on transaction processing costs, pricing policies and foreign currency
exchange risk management.
The Company has verified that its transaction processing systems can accom-
modate the euro currency and dual currency processing requirements without
significant additional costs. While the exact impact on pricing is indeter-
minable, the Company believes that since most of its pricing is based on U.S.
dollar costs, the effect of conversion to the Euro will not be significant.
The Company expects to adopt the euro as the functional currency for each of
its subsidiaries within the European Union. While it is possible that this
change may result in reduced volatility of foreign exchange results and lower
foreign exchange risk management costs, these benefits cannot be quantified at
this time.
Page 11
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, 1998, except that Arius has filed a notice of appeal
with respect to the order of July 14, 1998 denying its motion to penalize the
Company for having made sales to alleged Arius customers subsequent to the date
Arius filed its bankruptcy petition.
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 27 - Financial Data Schedule - page 14.
(b) Reports on Form 8-K - None.
Page 12
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 January 13, 1999 By /s/ William J. Garry
William J. Garry
Senior Vice President and
Chief Financial Officer
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