-----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
GQN/MP8YWUuud9nUiVklVlMy2klu8U40nxnGFmUy0guxN9jxpGGFiUoJGoAMa66H
Y6VQpX+5ie4TzKHJP5h/Tw==
RICHARDSON ELECTRONICS, LTD. (Exact name of registrant as
specified in its charter) Delaware 0-12906 36-2096643 (State or other
jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.) 40W267 Keslinger Road, P.O. Box 393,
LaFox, Illinois 60147-0393 (Address of principal executive
offices) (Zip Code) Registrant's telephone number,
including area code: (630) 208-2200 (Former name or former address,if changed since last report.) INDEX PAGE PART I - FINANCIAL INFORMATION 3 Condensed
Consolidated Balance Sheets as of November 27, 2004 (as restated) and May 29, 2004 3 Condensed
Consolidated Statements of Operations and Comprehensive Income
for the 4 Condensed
Consolidated Statements of Cash Flows for the 5 6 Item 2.
Management’s Discussion and Analysis of Financial Condition and Results
of Operations 12 Item 3.
Quantitative and Qualitative Disclosures About Market Risk 16 16 PART II - OTHER INFORMATION 17 Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds 17 17 17 17 17 18 18 Download FORM 10-Q/A in PDF format EXPLANATORY NOTE (The Amendment No. 3) Richardson Electronics, Ltd. (the "Company") is filing this Amendment No. 3 to its Quarterly Report on Form 10-Q/A for the fiscal quarter ended November 27, 2004, which was filed with the Securities and Exchange Commission (the "SEC") on May 17, 2005 (the "first amendment filing date"), to file new Exhibits 31.1 and 31.2 that conform to the form of certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. This Form 10-Q/A speaks as of the first amendment filing date and has not been updated to reflect events occurring subsequent to the first amendment filing date.
EXPLANATORY NOTE (The Amendment No. 1) The Company filed its Amendment No. 1 to its Quarterly Report on Form 10-Q for the fiscal quarter ended November 27, 2004, originally filed January 21, 2005, to reflect certain adjustments to restate the Company's condensed consolidated financial statements.
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
RICHARDSON ELECTRONICS, LTD As of November 27, May 29, (in thousands, except per share amounts) 2004 2004 (unaudited) ASSETS Current Assets Cash $ 17,328 $ 16,927 Receivables, less allowance of $2,651 and $2,516 115,186 106,130 Inventories, net 106,546 92,297 Prepaid expenses 3,716 3,817 Deferred income taxes, net 12,698 15,922 Total current assets 255,474 235,093 Property, plant and equipment, net 33,294 30,589 Goodwill 5,847 5,613 Deferred income taxes, net (non-current) 8,764 6,733 Other assets 5,160 4,917 Total assets $ 308,539 $ 282,945 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities Accounts payable $ 36,754 $ 33,473 Accrued liabilities 21,289 23,224 Current portion of long-term debt 3,796 4,027 Total current liabilities 61,839 60,724 Long-term debt, less current portion 123,584 133,813 Non-current liabilities 461 241 Total liabilities 185,884 194,778 Stockholders’ Equity Common stock ($.05 par value; issued 15,542 shares at 777 626 Class B common stock, convertible ($.05 par value; issued 158 158 Preferred stock ($1.00 par value; no shares issued) - - Additional paid-in capital 122,007 93,877 Common stock in treasury, at cost (1,399 shares at (8,289 ) (8,515 ) Retained earnings 6,900 3,408 Accumulated other comprehensive income (loss) 1,102 (1,387 ) Total stockholders’ equity 122,655 88,167 Total liabilities and stockholders' equity $ 308,539 $ 282,945 See notes to condensed consolidated financial statements. 3
RICHARDSON ELECTRONICS, LTD Three months ended Six months ended (unaudited, in thousands, except per share amounts, as restated (See Note K)) November 27, November 29, November 27, November 29, Net sales $ 151,374 $ 128,051 $ 289,894 $ 247,357 Cost of products sold 114,320 97,109 219,238 187,300 Gross margin 37,054 30,942 70,656 60,057 Selling, general and administrative expenses 32,148 25,495 61,437 51,340 Operating income 4,906 5,447 9,219 8,717 Other expense Interest expense 2,184 2,558 4,441 5,104 Other, net (3,405 (1,686 ) (2,477 900 Total other expense (1,221 872 1,964 6,004 Income before income taxes 6,127 4,575 7,255 2,713 Income taxes 2,082 1,424 2,404 744 Net income $ 4,045 $ 3,151 $ 4,851 $ 1,969 Net income per share - basic: Net income per share $ 0.23 $ 0.23 $ 0.29 $ 0.14 Average shares outstanding 17,284 13,979 16,578 13,952 Net income per share - diluted: Net income per share $ 0.23 $ 0.22 $ 0.29 $ 0.14 Average shares outstanding 17,479 14,361 16,801 14,281 Dividends per common share 0.04 0.04 0.08 0.08 Statement of comprehensive income: Net income $ 4,045 $ 3,151 $ 4,851 $ 1,969 Currency translation
1,225 1,333 1,673 1,210 Fair value adjustment to market appreciation on investment,
(15 ) 43 59 131 Cash flow hedges,
- 102 41 214 Comprehensive income $ 5,255 $ 4,629 $ 6,624 $ 3,524 See notes to condensed consolidated financial statements. 4
RICHARDSON ELECTRONICS, LTD
(unaudited, in thousands, as restated (See Note K)) Six months ended November 27, 2004 November 29, 2003 OPERATING ACTIVITIES Net income $ 4,851 $ 1,969 Adjustments to reconcile net income to net cash
Depreciation 2,368 2,684 Amortization of intangibles and financing costs 172 150 Deferred income taxes 2,654 252 Other non-cash items in net income (2,340 ) 1,537 Receivables (4,245 ) (7,652 ) Inventories (11,359 ) 5,446 Other current assets (353 ) 553 Accounts payable 2,458 6,930 Other liabilities (2,271 ) (320 ) Net cash provided by (used in) operating activities (8,065 ) 11,549 FINANCING ACTIVITIES Proceeds from borrowings 36,500 21,678 Payments on debt (49,793 ) (26,244 ) Net proceeds from stock issuance 27,915 1,002 Cash dividends (1,359 ) (1,097 ) Loan restructuring fees (326 ) - Net cash provided by (used in) financing activities 12,937 (4,661 ) INVESTING ACTIVITIES Capital expenditures (4,697 ) (2,520 ) Earnout payment related to acquisitions (545 ) (726 ) Proceeds from sales of available-for-sale securities 1,134 2,154 Purchases from sales of available-for-sale securities (1,134 ) (2,154 ) Other (301 ) - Net cash used in investing activities (5,543 ) (3,246 ) Effect of exchange rate changes on cash 1,072 248 Net increase in cash 401 3,890 Cash at beginning of period 16,927 16,874 Cash at end of period $ 17,328 $ 20,764 See notes to condensed consolidated financial statements. 5 RICHARDSON ELECTRONICS, LTD
Note A – Basis of Presentation The accompanying unaudited Condensed Consolidated Financial Statements
(Statements) have been prepared in accordance with U.S. generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and notes
required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of
management, all adjustments necessary for a fair presentation of the results of interim periods have been made and such adjustments were of a normal
and recurring nature. The results of operations and cash flows for the six-month period ended November 27, 2004 are not necessarily indicative of
the results that may be expected for the year ended May 28, 2005. Note B - Investment in Marketable Equity Securities The Company’s investments are primarily equity securities, all of which
are classified as available-for-sale and are carried at their fair value based on the quoted market prices. Proceeds from the sale of the
securities were $1,134 and $2,154 during the first six-month periods of fiscal 2005 and 2004, respectively, all of which were subsequently reinvested. Gross
realized gains on those sales were $110 in the first six months of fiscal 2005 and $141 in the first six months of fiscal 2004. Gross realized
losses on those sales were $48 and $29 in the first six-month periods of fiscal 2005 and 2004, respectively. A net unrealized holding gain of $1,182 and a net unrealized holding
loss of $375 have been included in accumulated comprehensive income as of November 27, 2004 and November 29, 2003, respectively. The following table is the
disclosure under SFAS No. 115 for the investment in marketable equity securities: Description of Holding length before proceeds Total Securities Less than 12 months More than 12 months Period ended on Fair Value Unrealized losses Fair Value Unrealized losses Fair Value Unrealized losses November 27, 2004 Common Stock $ 2,780 $ 296 $ 190 $ 34 $ 2,970 $ 330 November 29, 2003 Common Stock $ 2,003 $ 331 $ 280 $ 490 $ 2,283 $ 821 Note C – Restructuring Charges As a result of the Company’s fiscal 2003 restructuring initiative, a restructuring charge, including severance and lease termination costs of $1,730, was recorded in selling, general and
administrative expenses for the year ended May 31, 2003. Severance costs of $328 were paid in fiscal 2003 with the remaining balance payable in fiscal 2004. As of May 29, 2004, the remaining balance was zero. The following table depicts the amounts associated with the activity related to the restructuring initiative
through November 29, 2003: Restructuring Paid Unpaid liability through Reversal balance as of May 31, November 29, of accrual November 29, Employee severance and related costs $ 1,192 $ 843 $ 292 $ 57 Lease termination costs 210 - 210 - Total $ 1,402 $ 843 $ 502 $ 57 The reversal of the employee severance and related costs resulted from the difference between the estimated severance costs and the actual payouts and was recorded in the quarter ended November 29, 2003. All employees originally notified were terminated. The lease termination did not occur as the agreement for the replacement facility was not finalized. The lease termination reversal was recorded in the quarter ended August 30, 2003.
Note D – Goodwill and Other Intangible Assets The Company performed its annual impairment test during the fourth quarter of fiscal 2004. The same methodology was employed in completing the annual impairment test as in applying transitional accounting provisions of SFAS 142. The Company did not find any
indication that impairment existed and, therefore, no impairment loss was recorded as a result of completing the annual impairment test. 6 Goodwill and intangible assets not subject to amortization RFWC IPG SSD DSG Total Balance at May 29, 2004 $ - $ 876 (1) $ 1,739 (1) $ 3,420 $ 6,035 Modification of earnout payment - - - 26 26 Foreign currency translation - 9 264 - 273 Balance at November 27, 2004 $ - $ 885 $ 2,003 $ 3,446 $ 6,334 (1) To reclassify IPG's $9 intangible asset to SSD in order to be consistent with the business segment presentation. November 27, 2004 May 29, 2004 Gross Accumulated Gross Accumulated Amount Amortization Amount Amortization Intangible assets subject to amortization: Deferred financing costs $ 2,524 $ 2,106 $ 2,192 $ 1,935 Patents, trademarks and customer lists 478 468 478 461 Total $ 3,002 $ 2,574 $ 2,670 $ 2,396 Amortization expense for the Second Quarter Six Months FY 2005 FY 2004 FY 2005 FY 2004 Intangible assets subject to amortization: Deferred financing costs $ 129 $ 72 $ 171 $ 144 Patents and trademarks 4 3 7 6 Total $ 133 $ 75 $ 178 $ 150 The amortization expense associated with the existing intangible assets subject to amortization is expected to be $246, $136, $102, $82, $34 and $1, in fiscal 2005, 2006, 2007, 2008, 2009 and 2010, respectively. The
weighted average number of years of amortization expense remaining is 4.43. Note E – Warranties The Company offers warranties for specific products it manufactures. The Company also provides extended warranties for some products it sells that lengthen the period of coverage specified in the manufacturer’s original warranty. Terms
generally range from one to three years. Warranty Reserve Balance at May 29, 2004 $ 802 Accruals for products sold 642 Utilization (300 ) Balance at November 27, 2004 $ 1,144 The increase in the warranty accrual represents warranties related to products under a three year extended warranty offered by the Company’s Display Systems Group beginning in the third quarter of fiscal 2003. Note F – Income Taxes The income tax provisions for the six-month period ended November 27, 2004 and November 29, 2003 were 33.1% and 27.4%, respectively. The difference between the effective tax rate and the U.S. statutory rate of 35% primarily results from the Company’s geographic distribution of taxable income and losses and certain non-tax deductible charges. With respect to the income tax provision for the six month period ending November 27, 2004, there was a reduction of $723 in the Company’s tax reserve from a statutory expiration of foreign NOL utilization position with an offsetting placement of valuation allowances of $624 for two foreign subsidiaries with multiple year losses and an increase in the Company’s tax reserve of $92 for interest on existing reserve positions.
Note G – 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, certain restricted stock awards and the assumed conversion of convertible bonds when dilutive. The Company’s 8¼% and 7¼% convertible debentures are excluded from the calculation in both fiscal 2005 and 2004, as assumed conversion and effect of
interest savings would be anti-dilutive. The per share amounts presented in the Condensed Consolidated Statements of Operations are based on the following amounts: (as restated) Second Quarter Six Months FY 2005 FY 2004 FY 2005 FY 2004 Numerator for basic and diluted EPS: Net income $ 4,045 $ 3,151 $ 4,851 $ 1,969 Denominator: Denominator for basic EPS Weighted average common shares outstanding 17,284 13,979 16,578 13,952 Effect of dilutive securities: Unvested restricted stock awards 15 33 17 36 Dilutive stock options 180 349 206 293 Shares applicable to diluted income per common share 17,479 14,361 16,801 14,281 The effect of potentially dilutive stock options is calculated using the treasury stock method. Certain stock options are excluded from the calculations because the average market price of the
Company’s stock during the period did not exceed the exercise price of those options. For the six-month period ended November 27, 2004, there were 635 such options. However, some or all of the above mentioned options may be potentially dilutive in the
future. Note H – Stock-Based Compensation The Company has stock-based compensation plans under which stock options are granted to key managers at the market price of the common stock on the date of grant. Most of these new grants are fully exercisable after
five years and have a ten-year life. Two stock awards, totalling 7,882 shares, and 213,279 stock options were granted during the six months ended November 27, 2004. Second Quarter Six Months (as restated) FY 2005 FY 2004 FY 2005 FY 2004 Net income, as reported $ 4,045 $ 3,151 $ 4,851 $ 1,969 Add: Stock-based compensation expense included in 51 59 102 119 Deduct: Stock-based compensation expense determined (216 ) (271 ) (431 ) (544 ) Pro-forma net income $ 3,880 $ 2,939 $ 4,522 $ 1,544 Net income per share, basic: Reported net income $ 0.23 $ 0.23 $ 0.29 $ 0.14 Pro-forma compensation expense, net of taxes (0.01 ) (0.02 ) (0.02 ) (0.03 ) Pro-forma net income per share $ 0.22 $ 0.21 $ 0.27 $ 0.11 Net income per share, diluted: Reported net income $ 0.23 $ 0.22 $ 0.29 $ 0.14 Pro-forma compensation expense, net of taxes (0.01 ) (0.02 ) (0.02 ) (0.03 ) Pro-forma net income per share $ 0.22 $ 0.20 $ 0.27 $ 0.11 8 Note I – Segment Information The marketing, sales, product management, and purchasing functions of the Company consist of four strategic business units (SBU’s): RF & Wireless Communications Group (RFWC), Industrial Power
Group (IPG), Security Systems Division (SSD), and Display Systems Group (DSG). Sales Gross Direct Operating Assets Goodwill and Margin Contribution Intangibles Second Quarter As of FY 2005 November 27, 2004 RFWC $ 67,358 $ 15,661 $ 8,392 $ 97,533 $ - IPG 31,304 9,527 6,207 54,282 885 SSD 27,360 7,304 4,323 38,317 2,003 DSG 23,562 5,298 2,792 27,877 3,446 Total $ 149,584 $ 37,790 $ 21,714 $ 218,009 $ 6,334 Second Quarter As of FY 2004 May 29, 2004 RFWC $ 57,705 $ 12,846 $ 7,039 $ 87,097 $ - IPG 27,868 8,678 6,261 50,403 876 SSD 26,109 6,664 3,767 33,257 1,739 DSG 14,864 3,727 1,947 23,358 3,420 Total $ 126,546 $ 31,915 $ 19,014 $ 194,115 $ 6,035 Six Months
FY 2005 RFWC $ 131,785 $ 30,331 $ 16,437 IPG 60,951 18,634 12,447 SSD 53,121 13,802 7,820 DSG 40,542 9,431 4,608 Total $ 286,399 $ 72,198 $ 41,312 Six Months
FY 2004
RFWC $ 107,520 $ 24,028 $ 12,727 IPG 53,718 16,347 11,698 SSD 51,281 13,025 7,334 DSG 30,943 7,986 4,354 Total $ 243,462 $ 61,386 $ 36,113 9 A reconciliation of sales, gross margin, direct operating contribution and assets to the relevant consolidated amounts is as follows. Other assets not identified include miscellaneous receivables, manufacturing inventories and other assets.
Second Quarter Six Months FY 2005 FY 2004 FY 2005 FY 2004 Sales - segments total $ 149,584 $ 126,546 $ 286,399 $ 243,462 Other sales 1,790 1,505 3,495 3,895 Sales $ 151,374 $ 128,051 $ 289,894 $ 247,357 Gross margin - segments total $ 37,790 $ 31,915 $ 72,198 $ 61,386 Gross margin on other sales (736 ) (973 ) (1,542 ) (1,329 ) Gross margin $ 37,054 $ 30,942 $ 70,656 $ 60,057 Segment direct operating contribution $ 21,714 $ 19,014 $ 41,312 $ 36,113 Gross margin on other sales (736 ) (973 ) (1,542 ) (1,329 ) Regional selling expenses (4,880 ) (4,497 ) (9,419 ) (8,931 ) Administrative expenses (11,192 ) (8,097 ) (21,132 ) (17,136 ) Operating income $ 4,906 $ 5,447 $ 9,219 $ 8,717 As of November 27, May 29, 2004 2004 (as restated) $ 218,009 $ 194,115 Cash 17,328 16,927 Other current assets 26,471 30,086 Net property 33,294 30,589 Other assets 13,437 11,228 Total assets $ 308,539 $ 282,945 The Company sells its products to companies in diversified 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 vary throughout Europe, Asia/Pacific and Latin America. Estimates of credit losses are recorded in the financial statements based on periodic reviews of outstanding accounts and actual losses have been consistently within management's
estimates. By Geographic Area: SALES GROSS MARGIN FY 2005 FY 2004 % Change FY 2005 % of Sales FY 2004 % of Sales Second Quarter North America $ 79,833 $ 65,702 21.5 % $ 20,835 26.1 % $ 17,064 26.0 % Europe 33,695 31,576 6.7 % 9,226 27.4 % 9,009 28.5 % Asia/Pacific 31,777 25,160 26.3 % 7,741 24.4 % 5,648 22.4 % Latin America 4,983 4,572 9.0 % 1,432 28.7 % 1,118 24.5 % Corporate 1,086 1,041 (2,180 ) (1,897 ) Total $ 151,374 $ 128,051 18.2 % $ 37,054 24.5 % $ 30,942 24.2 % Six Months North America $ 154,218 $ 131,133 17.6 % $ 39,849 25.8 % $ 34,620 26.4 % Europe 63,224 56,942 11.0 % 17,680 28.0 % 16,386 28.8 % Asia/Pacific 60,566 47,490 27.5 % 14,457 23.9 % 10,587 22.3 % Latin America 9,848 9,677 1.8 % 2,726 27.7 % 2,301 23.8 % Corporate 2,038 2,115 (4,056 ) (3,837 ) Total $ 289,894 $ 247,357 17.2 % $ 70,656 24.4 % $ 60,057 24.3 % Note J – Equity Offering On July 8, 2004, the Company completed an offering of 3,000,000 shares
of its common stock, which resulted in net proceeds to the Company of $27,915 after the offering cost of $1,260. Note K – Restatement Second Quarter Six Months FY 2005 FY 2004 FY 2005 FY 2004 Previously reported net income $ 1,662 $ 2,205 $ 2,910 $ 2,597 Currency Translation Adjustment 2,383 946 1,941 (628 ) Restated net income $ 4,045 $ 3,151 $ 4,851 $ 1,969 Previously reported basic income per share $ 0.10 $ 0.16 $ 0.18 $ 0.19 Currency Translation Adjustment 0.13 0.07 0.11 (0.05 ) Restated basic net income per share $ 0.23 $ 0.23 $ 0.29 $ 0.14 Previously reported diluted income per share $ 0.10 $ 0.15 $ 0.17 $ 0.18 Currency Translation Adjustment 0.13 0.07 0.12 (0.04 ) Restated basic net income per share $ 0.23 $ 0.22 $ 0.29 $ 0.14
RELL FORM 10-Q/A (3) FY05Q2
File:20050519-FY05Q2
FORM 10-Q/A
 
 
FORM 10-Q/A
TABLE OF CONTENTS
Three-Month and Six-Month
Periods Ended November 27, 2004 (as restated) and November 29, 2003 (as restated)
Six-Month
Periods Ended November 27, 2004 (as restated) and November 29, 2003 (as restated)
In connection with the Company's independent registered public accounting firm's review of the Company's Form 10-Q for the third quarter of fiscal 2005, an error in the application of Statement of Financial Accounting Standards No. 52, Foreign Currency Translation, was identified that related to the foreign currency translation on intercompany indebtedness with its subsidiaries. The consolidated financial statements for fiscal 2002 and 2003, the quarters of fiscal 2004, and the condensed consolidated financial statements for the three- and six-month periods ended August 28, 2004 and November 27, 2004 have been restated to correct this error. The restatement increased net income for the first six months of fiscal 2005 from $2,910,000 to $4,851,000, respectively. Balance sheet accounts including deferred tax assets of $6,338,000, other assets of $4,952,000, retained earnings of $10,877,000, and accumulated other comprehensive income (loss) of ($5,509,000), all as previously repor
ted, have been restated to $8,764,000, $5,160,000, $6,900,000, and ($1,102,000), respectively. This Form 10-Q/A contains changes of Item I - Financial Statements, and Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations to reflect this restatement.
This amendment to the original Form 10-Q amends and restates the original Form 10-Q in its entirety, but does not reflect events occurring after the original filing of the Form 10-Q. All information contained in this amendment and the original Form 10-Q is subject to updating and supplementing as provided in the periodic reports filed subsequent to the original filing date with the Securities and Exchange Commission. The filing of this Form 10-Q/A shall not be deemed an admission that the original filing, when made, included any untrue statement of a material fact or omitted to state a material fact necessary to make a statement therein not misleading.
CONDENSED CONSOLIDATED BALANCE SHEETS
as restated
(See Note K)
November 27, 2004 and 12,524 shares at May 29, 2004)
3,158 shares at November 27, 2004 and 3,168 shares at May 29, 2004)
November 27, 2004 and 1,437 shares at May 29, 2004)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED NOVEMBER 27, 2004 AND NOVEMBER 29, 2003
2004
2003
2004
2003
)
)
)
$
$
$
$
net of income tax effect
net of income tax effect
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED NOVEMBER 27, 2004 AND NOVEMBER 29, 2003
provided by (used in) operating activities:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and except where indicated)
For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K/A for the fiscal year ended May 29, 2004. Certain fiscal 2004 balances have been reclassified to
conform to the 2005 presentation. Certain 2005 amounts for previous quarters have been restated (see Note K).
2003
2003
2003
The table below provides changes in the carrying values of goodwill and intangible assets not subject to amortization by reportable segment:
Intangible assets subject to amortization as of November 27, 2004 and May 29, 2004 are as follows:
Amortization expense for the second quarter and six months is as follows:
The Company estimates the cost to perform under its warranty obligation and recognizes this estimated cost at the time of the related product sale. The Company reports this expense as an element of cost of products sold in its statement of operations. Each quarter, the Company assesses actual warranty costs incurred, on a product-by-product basis, as compared to its estimated obligation. The estimates with respect to products under extended warranty are based generally on knowledge of the manufacturers’ experience and are
extrapolated to reflect the extended warranty period, and are refined each quarter as better information with respect to warranty experience becomes known.
Warranty reserves are established for costs that are expected to be incurred after the sale and delivery of products under warranty. The warranty reserves are determined based on known product failures, historical experience, and other currently available evidence.
Changes in the warranty reserve for the three months ended November 27, 2004 were as follows:
The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB interpretation No.
44,Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion 25, issued in March 2000, to account for its stock options. Under this method, compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeds the exercise price. Statement of Financial Accounting Standard ("SFAS") No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans. As allowed by SFAS No.123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No.123. The
following table illustrates the pro-forma effect on net income attributable to common stockholders if the fair value-based method had been applied to all outstanding and unvested awards and option grants in each period.
reported net income, net of tax
under fair value-based method for all awards, net of taxes
RFWC serves the expanding global RF and wireless communications market, including infrastructure and wireless networks, as well as the fiber optics market. The Company’s team of RF and wireless engineers assists customers in designing
circuits, selecting cost effective components, planning reliable and timely supply, prototype testing, and assembly. The group offers its customers and vendors complete engineering and technical support from the design-in of RF and wireless components to the
development of engineered solutions for their system requirements.
IPG serves the industrial market’s need for both vacuum tube and solid-state technologies. The group provides replacement products for systems using electron tubes as well as design and assembly services for new systems employing power
semiconductors. As electronic systems increase in functionality and become more complex, the Company believes the need for intelligent, efficient power management will continue to increase and drive power conversion demand growth.
SSD is a global provider of closed circuit television, fire, burglary, access control, sound, and communication products and accessories for the residential, commercial, and government markets. The division specializes in closed circuit
television design-in support, offering extensive expertise with applications requiring digital technology. SSD products are primarily used for security and access control purposes but are also utilized in industrial applications, mobile video, and traffic
management.
DSG is a global provider of integrated display products and systems to the public information, financial, point-of-sale, and medical imaging markets. The group works with leading hardware vendors to offer the highest quality liquid crystal
display, plasma, cathode ray tube, and customized display monitors. DSG engineers design custom display solutions that include touch screens, protective panels, custom enclosures, specialized finishes, application specific software, and privately branded
products.
Each SBU is directed by a Vice President and General Manager who reports 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.
Accounts receivable, inventory, goodwill, and some intangible assets are identified by SBU. Cash, net property and other assets are not identifiable by SBU. Operating results for each SBU are summarized in the following table:
Segment assets
Sales, percentage change from the prior year, gross margin, and gross margin percent of sales by geographic area are summarized in the following table. Previously reported sales under the caption “Direct Export” and some of the “Corporate” sales were identified by geographic area and reclassified accordingly. The caption “Corporate” consists primarily of Freight and Corporate provisions.
In connection with the Company's independent registered public accounting firm's review of the Company's Form 10-Q, an error was discovered with respect to the accounting treatment of certain foreign exchange gains and losses incurred during fiscal 2001 and 2002. These foreign exchange items related to the acquisition in 2001 of AVIV Electronics by one of the Company's subsidiaries, and the reporting of subsequent intercompany transactions between the subsidiary and parent. The terms of the related acquisition agreement obligated the Company's subsidiary to settle an acquisition-related obligation in U.S. dollars, which is not the subsidiary's functional currency. Related foreign exchange losses incurred by the subsidiary during the period from the inception of the obligation through the date of the parent's assumption of the obligation were accounted for in error as an element of accumulated other comprehensive income, rather than as an element of net income.
The correction of this error amounts to $580 on a cumulative, net of tax basis.
Management and the Company's audit committee, in consultation with the Company's former auditor, have determined that the impact of the correction of the error in either fiscal 2001 or 2002 is not material, and in consultation with its current auditor, have determined that the correction of the error through an adjustment to both retained earnings and accumulated other comprehensive loss as of May 29, 2004 is not material. The Condensed Consolidated Statements of Operations and Comprehensive Income presented herein are not affected by the correction of this error.
In connection with the Company's independent registered public accounting firm's review of the Company's Form 10-Q for the third quarter of fiscal 2005, an error that occurred in the application of Financial Accounting Standards Board Statement No. 52, Foreign Currency Translation, was identified on intercompany indebtedness with its subsidiaries, which affected previously reported foreign currency translation. The consolidated financial statements for fiscal 2002 and 2003, selected quarterly financial data for fiscal 2003 and 2004, and the condensed consolidated financial statements for the three and six-month periods ended August 28, 2004 and November 27, 2004 have been restated to correct this error.
A reconciliation of reported net income to restated net income, including impact of the currency translation adjustment for the second quarter and six months of fiscal 2005 and 2004, is provided in the following table:
November 27, |
Cumulative |
2nd QTR |
November 27, |
|||||||||||||
Deferred tax assets (non-current) |
$ |
6,338 |
|
3,887 |
|
(1,461 |
) |
$ |
8,764 |
|
||||||
Other assets |
$ |
4,952 |
221 |
(13 |
) |
$ |
5,160 |
|||||||||
Retained earnings |
$ |
10,877 |
(6,360 |
) |
2,383 |
$ |
6,900 |
|||||||||
Accumulated other comprehensive income (loss) |
$ |
(5,509 |
) |
10,468 |
(3,857 |
) |
$ |
1,102 |
Note L – Subsequent Events
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands, except per share amounts and except where indicated)
Except for the historical information contained herein, the matters discussed in this quarter report on Form 10-Q are forward-looking statements relating to future events, which involve certain risks and uncertainties. Further, there can be no assurance that the trends reflected in historical information will continue in the future.
Investors should consider carefully the following risk factors, in addition to the other information included and incorporated by reference in this quarter 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 st
rategies, 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 that could affect future performance include, among others, the following:
-
|
The Company has had significant operating and net losses in the past and may have future losses.
|
-
|
The Company maintains a significant investment in inventory and has incurred significant charges for inventory obsolescence and overstock, and may incur similar charges in the future.
|
-
|
If the Company does not maintain effective internal controls over financial reporting, it could be unable to provide timely and reliable financial information.
|
-
|
Because the Company derives a significant portion of its revenue by distributing products designed and manufactured by third parties, it may be unable to anticipate changes in the marketplace and, as a result, could lose market share.
|
-
|
The Company has exposure to economic downturns and operates in cyclical markets.
|
-
|
The Company has significant debt, which could limit its financial resources and ability to compete and may make it more vulnerable to adverse economic events.
|
-
|
The Company’s ability to service its debt and meet its other obligations depends on a number of factors beyond its control.
|
-
|
The Company’s success depends on its executive officers and other key personnel.
|
-
|
The Company’s credit agreement and the indentures for its outstanding debentures impose restrictions with respect to various business matters.
|
-
|
Potential changes in accounting standards regarding stock option plans could limit the desirability of granting stock options, which could harm the Company’s ability to attract and retain employees, and could also negatively impact its results of operations.
|
-
|
The Company faces intense competition in the markets it serves and, if it does not compete effectively, it could significantly harm its operating results.
|
-
|
The Company may not be able to continue to make the acquisitions necessary for it to realize its growth strategy or integrate acquisitions successfully.
|
-
|
If the Company does not continue to reduce its costs, it may not be able to compete effectively in its markets.
|
-
|
The Company’s Industrial Power Group is dependent on a limited number of vendors to supply it with essential products.
|
-
|
Economic, political and other risks associated with international sales and operations could adversely affect the Company’s business.
|
-
|
The Company is exposed to foreign currency risk.
|
-
|
Because the Company generally does not have long-term contracts with its vendors, it may experience shortages of products that could harm its business and customer relationships.
|
-
|
The outbreak of severe acute respiratory syndrome, or SARS, or any other disease epidemic, may adversely affect the Company’s business, financial condition and results of operations.
|
For more discussion of such risks, see "Risk Factors" in the Company’s Form 10-K/A filed with the Securities and Exchange Commission on August 11, 2004.
These risks are not exhaustive. Other sections of this report may include additional factors, which could adversely affect the Company’s business and financial performance. Moreover, the Company operates in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
Investors should also be aware that while the Company does, from time to time, communicate with securities analysts, it is against the Company’s policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of the Company.
12
Richardson Electronics, Ltd. is a global provider of engineered solutions and a distributor of electronic components to the radio frequency, or RF, and wireless communications, industrial power conversion, security, and display systems markets. The marketing, sales, product management and purchasing functions of the Company are organized as four strategic business units "SBUs": RF & Wireless Communications Group "RFWC", Industrial Power Group "IPG", Security Systems Division "SSD", and Display Systems Group "DSG", with operations in the major economic regions of the world: North America, Europe, Asia/Pacific, and Latin America.
In December 2004, Richardson Electronics, Ltd. acquired the assets of a distributor of passive components in China by the name of Evergreen Trading Company. Evergreen Trading Company will be integrated into the strategic business unit IPG. Evergreen is similar to Richardson in that they also emphasize engineered solutions by offering technical services and design assistance. This acquisition is intended to give IPG the infrastructure and selling organization to more aggressively expand its business throughout China.
Also in December 2004, a joint venture was formed with Light Speed Labs that will support the SSD and DSG business units. The joint venture was organized as a Limited Liability Company (LLC) under the name VConex, LLC and is expected to develop distinctive and proprietary security and display solutions which will be exclusively marketed through Richardson Electronics. This venture is expected to provide Richardson with the engineering resources and expertise needed to develop network video technology applications for large national accounts such as retail and hospitality chains for security and display solutions needs.
Sales increased for all four strategic business units and geographic areas for the three- and six-month periods over the prior year. The second quarter of fiscal 2005 was the tenth consecutive quarter of year-over-year sales growth for the Company and marked record quarter sales for the Company. Net income for the quarter was $4,045 or $0.23 per share on a diluted basis as compared to net income of $3,151 or $0.22 per share on a diluted basis a year ago. Net income for the quarter was up from the prior year primarily due to the foreign currency exchange gains after offsetting the increased SG&A, which as a percent of sales was 1.3% higher. Increasing cost of the Sarbanes-Oxley compliance program, the global PeopleSoft supply chain implementation, and legal expenses associated with the joint venture and acquisition (see Note L), limited the ability to leverage higher sales with dilution of SG&A as a percent of sales.
The Company experiences moderate seasonality in its business and typically realizes lower sequential sales in its first and third quarters, reflecting decreased transaction volume in the summer and holiday months. Based on the period from fiscal 1993 to 2004, sales in the third quarter were, on average, approximately 3% lower sequentially. Management believes third quarter sales in fiscal 2005 will be sequentially flat to slightly down from second quarter of fiscal 2005.
Results of Operations
Sales and Gross Margins
Richardson Electronics, Ltd. reached record quarter consolidated sales for the period ended November 27, 2004, with an increase of $23.3 million or 18.2% from the prior year to $151.4 million. Sales increased for all four strategic business units and geographic areas over the prior year, as discussed below and shown in Footnote I to the financial statements. For the six-month period, sales were up 17.2% to $289.9 million. Consolidated gross margin as a percentage of sales increased 30 basis points for the quarter and 10 basis points for the six-month period from the prior year.
Sales, percentage changes from the prior year, gross margins and gross margin percent of sales by SBU are summarized in the following table. Freight, Logistics business, and miscellaneous costs are included under the caption "Other."
By Business Unit: |
||||||||||||||||||||||||||||
SALES |
GROSS MARGIN |
|||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
FY 2005 |
FY 2004 |
% Change |
FY 2005 |
% of Sales |
FY 2004 |
% of Sales |
||||||||||||||||||||||
Second Quarter |
||||||||||||||||||||||||||||
RFWC |
$ |
67,358 |
$ |
57,705 |
16.7 |
% |
$ |
15,661 |
23.3 |
% |
$ |
12,846 |
22.3 |
% |
||||||||||||||
IPG |
31,304 |
27,868 |
12.3 |
% |
9,527 |
30.4 |
% |
8,678 |
31.1 |
% |
||||||||||||||||||
SSD |
27,360 |
26,109 |
4.8 |
% |
7,304 |
26.7 |
% |
6,664 |
25.5 |
% |
||||||||||||||||||
DSG |
23,562 |
14,864 |
58.5 |
% |
5,298 |
22.5 |
% |
3,727 |
25.1 |
% |
||||||||||||||||||
Other |
1,790 |
1,505 |
(736 |
) |
(973 |
) |
||||||||||||||||||||||
Total |
$ |
151,374 |
$ |
128,051 |
18.2 |
% |
$ |
37,054 |
24.5 |
% |
$ |
30,942 |
24.2 |
% |
||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Six Months |
||||||||||||||||||||||||||||
RFWC |
$ |
131,785 |
$ |
107,520 |
22.6 |
% |
$ |
30,331 |
23.0 |
% |
$ |
24,028 |
22.3 |
% |
||||||||||||||
IPG |
60,951 |
53,718 |
13.5 |
% |
18,634 |
30.6 |
% |
16,347 |
30.4 |
% |
||||||||||||||||||
SSD |
53,121 |
51,281 |
3.6 |
% |
13,802 |
26.0 |
% |
13,025 |
25.4 |
% |
||||||||||||||||||
DSG |
40,542 |
30,943 |
31.0 |
% |
9,431 |
23.3 |
% |
7,986 |
25.8 |
% |
||||||||||||||||||
Other |
3,495 |
3,895 |
(1,542 |
) |
(1,329 |
) |
||||||||||||||||||||||
Total |
$ |
289,894 |
$ |
247,357 |
17.2 |
% |
$ |
70,656 |
24.4 |
% |
$ |
60,057 |
24.3 |
% |
||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
RFWC had second quarter and six month sales increases of 16.7% and 22.6%, respectively, from fiscal 2004. For six months, the Passive/Interconnect, Network Access, and Infrastructure product lines posted growth of 49.0%, 25.3%, and 14.3% to $28.2, $49.6, and $37.0 million, respectively. Gross margin as a percentage of sales increased 100 basis points for the quarter and 70 basis points for the six months compared to the prior year as a result of exclusive supplier agreements. The exclusive supplier agreements were a factor as RFWC sales in Asia increased 24.8% to $23.1 million, with gross margin as a percentage of sales increasing 310 basis points for the quarter compared to the prior year.
IPG sales increased 12.3% and 13.5% for the quarter and six months, respectively. The solid state Power Components product lines posted solid gains of 22.6% and 33.3% for the quarter and six months to $10.3 million and $20.7 million, respectively. The tube product lines increased 7.0% and 4.3% to $20.6 million and $39.6 million for the quarter and six months, respectively. IPG gross margins as a percentage of sales decreased 70 basis points to $9.5 million for the quarter due to products purchased from European suppliers in Euros and increased Original Equipment Manufacturer (OEM) sales in China. IPG sales in Asia increased 33.1% to $7.6 million as a result of the OEM sales in China, with gross margin as a percentage of sales decreasing 190 basis points for the quarter compared to the prior year.
SSD achieved record quarter sales with an increase of 4.8% to $27.4 million. Six months sales increased 3.6% to $53.1 million. Private label product lines posted second quarter and six months sales increases of 19.5% and 13.1% to $8.3 million and $15.3 million, respectively. Private label focused efforts in the new digital systems area with emphasis around digital video recorders assisted the growth. Gross margins as a percentage of sales increased 120 and 60 basis points, respectively, for the quarter and six months as a result of increased private label sales. SSD sales in Canada increased 15.9% to $15.5 million with gross margin as a percentage of sales increasing 110 basis points for the quarter compared to the prior year.
DSG also achieved record quarter sales with an increase of 58.5% of sales over prior year period. Six months sales growth was 31.0% as the Medical Monitors product line posted sales growth of 39.4% to $16.8 million and Custom Displays posted sales growth of 75.3% to $10.7 million. DSG's gross margin as a percentage of sales decreased 260 and 250 basis points, respectively, for the quarter and six months. Medical Monitor average selling prices have experienced sharp declines, causing the Company's Medical Monitor gross margin as a percentage of sales to decrease 380 basis points for the quarter. However, unit sales have more than doubled in the second quarter.
Sales, percentage change from the prior year, gross margin, and gross margin percent of sales by geographic area are summarized in the following table. Previously reported sales under the caption "Direct Export" and some of the "Corporate" sales were identified by geographic area and reclassified accordingly. The caption "Corporate" consists primarily of Freight and Corporate provisions.
By Geographic Area: |
|||||||||||||||||||||||||||||
SALES |
GROSS MARGIN |
||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
FY 2005 |
FY 2004 |
% Change |
FY 2005 |
% of Sales |
FY 2004 |
% of Sales |
|||||||||||||||||||||||
Second Quarter |
|||||||||||||||||||||||||||||
North America |
$ |
79,833 |
$ |
65,702 |
21.5 |
% |
$ |
20,835 |
26.1 |
% |
$ |
17,064 |
26.0 |
% |
|||||||||||||||
Europe |
33,695 |
31,576 |
6.7 |
% |
9,226 |
27.4 |
% |
9,009 |
28.5 |
% |
|||||||||||||||||||
Asia/Pacific |
31,777 |
25,160 |
26.3 |
% |
7,741 |
24.4 |
% |
5,648 |
22.4 |
% |
|||||||||||||||||||
Latin America |
4,983 |
4,572 |
9.0 |
% |
1,432 |
28.7 |
% |
1,118 |
24.5 |
% |
|||||||||||||||||||
Corporate |
1,086 |
1,041 |
(2,180 |
) |
(1,897 |
) |
|||||||||||||||||||||||
Total |
$ |
151,374 |
$ |
128,051 |
18.2 |
% |
$ |
37,054 |
24.5 |
% |
$ |
30,942 |
24.2 |
% |
|||||||||||||||
Six Months |
|||||||||||||||||||||||||||||
North America |
$ |
154,218 |
$ |
131,133 |
17.6 |
% |
$ |
39,849 |
25.8 |
% |
$ |
34,620 |
26.4 |
% |
|||||||||||||||
Europe |
63,224 |
56,942 |
11.0 |
% |
17,680 |
28.0 |
% |
16,386 |
28.8 |
% |
|||||||||||||||||||
Asia/Pacific |
60,566 |
47,490 |
27.5 |
% |
14,457 |
23.9 |
% |
10,587 |
22.3 |
% |
|||||||||||||||||||
Latin America |
9,848 |
9,677 |
1.8 |
% |
2,726 |
27.7 |
% |
2,301 |
23.8 |
% |
|||||||||||||||||||
Corporate |
2,038 |
2,115 |
(4,056 |
) |
(3,837 |
) |
|||||||||||||||||||||||
Total |
$ |
289,894 |
$ |
247,357 |
17.2 |
% |
$ |
70,656 |
24.4 |
% |
$ |
60,057 |
24.3 |
% |
|||||||||||||||
14
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses increased by 26.1% and 19.7% to $32.1 million and $61.4 million, respectively, for the three- and six-month periods compared to the same periods last year. Selling, general and administrative expenses as a percentage of sales increased 1.3% and 0.4% to 21.2% of sales for the quarter and six months period, respectively, from the prior year. Compared to the second quarter of fiscal 2004, SG&A increased $6.7 million, which included $3.2 million of payroll and fringes associated with approximately 85 additional personnel, and $777 of incentives for higher sales and margin performance. These payroll related costs include approximately $500 of currency rate impact due to the weakened U.S. dollar. As discussed above, the PeopleSoft implementation, Sarbanes-Oxley compliance program, and legal costs associated with the joint venture and acquisition (see Note L), contributed to the SG&A increase . Costs for global training, network expansion, and system testing for the PeopleSoft worldwide supply chain roll-out, which were incurred during the quarter are expected to decrease as the implementation has been completed. Sarbanes-Oxley compliance program costs should continue through the third quarter as the documentation and testing phases are completed.
Other Expenses
Interest expense decreased 14.6% and 13.0% to $2.2 million and $4.4 million, respectively, for the quarter and six months compared to the previous year as a result of the equity offering and elimination of a fixed rate swap offset by interest on incremental borrowing to fund working capital requirements. Cash payments for interest were $4.3 million for the six-month period ended November 27, 2004. The positive interest expense impact was offset with other, net expenses.
Other, net expenses includes foreign exchange gain of $3,299 for the second quarter and $2,398 for six months in fiscal 2005 compared to a foreign exchange gain of $1,592 in the second quarter and loss of $588 for six months in fiscal 2004. The weakening of the US dollar influenced the significant foreign exchange gains.
An error was identified in the application of Financial Accounting Standards Board Statement No. 52, Foreign Currency Translation, on intercompany indebtedness with its subsidiaries, which affected previously reported foreign currency translation. The financial statements for fiscal 2002 and 2003, selected quarterly financial data for fiscal 2003 and 2004, and the first two quarters of fiscal 2005 have been restated to correct this error (see Note K). The restatement decreased other expense by $2,966 and $1,526 in the three month periods ended November 27, 2004 and November 29, 2003, respectively, decreased other expense by $3,131 in the six-month period ended November 27, 2004, and increased other expense by $1,012 in the six-month period ended November 29, 2003.
Income Tax Provision
The effective tax rate for the six-month period of fiscal 2005 decreased to 33.1% compared to 27.4% from a year ago. The effective tax rate differs from the statutory rate of 35.0% primarily due to the impact of certain non-tax deductible charges, the Company's foreign sales corporation benefits on export sales, state taxes, and the tax impact of non-U.S. operations. As the Company restated its first quarter fiscal 2004 results because of the accounting error in its Swedish subsidiary associated with the interest expense, no adjustment was made to the income tax provision since the Company does not believe it is more likely than not that the benefits of the foreign losses will be realized. As a result, there were significant fluctuations in the income tax rate in the first half of fiscal 2004. With respect to the income tax provision for the six month period ending November 27, 2004, there was a reduction of $723 in the Company’s ta
x reserve
from a statutory expiration of foreign NOL utilization position with an offsetting placement of valuation allowances of $624 for two foreign subsidiaries with multiple year losses and an increase in the Company's tax reserve of $92 for interest on existing reserve positions. The restatement described above served to increase income tax expense by $1,461 and $580 in the three-month periods ended November 27, 2004 and November 29, 2003, respectively, increased income tax expense by $1,190 in the six-month period ended November 27, 2004, and decreased income tax expense by $384 in the six-month period ended November 29, 2003.
Future effective tax rates could be adversely affected by lower than anticipated earnings in countries where the Company has lower statutory rates, changes in the valuation of certain deferred tax assets or liabilities, or changes in tax laws or interpretations thereof. In addition, the Company is subject to the examination of its income tax returns by the Internal Revenue Service and other tax authorities and regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes.
Net Income
Net income for the second quarter of fiscal 2005 was $4,045 or $0.23 per share on a diluted basis as compared to net income of $3,151 or $0.22 per share on a diluted basis a year ago. Net income for the quarter was up from the prior year primarily due to the foreign currency exchange gains after offsetting the increased SG&A, which as a percent of sales was 1.3% higher. Increasing cost of the Sarbanes-Oxley compliance program, the global PeopleSoft supply chain implementation, and legal expenses associated with the joint venture and acquisition (see Note L), limited the ability to leverage higher sales with dilution of SG&A as a percent of sales. Net income for the first half of fiscal 2005 was $4,851 or $0.29 per share on a diluted basis compared to net income of $1,969 or $0.14 per share on a diluted basis in the first half of the prior year.
Liquidity and Capital Resources
Cash was $17.3 million at November 27, 2004, an increase of $401 from the beginning of the fiscal year. During the first six months of fiscal 2005, the Company used $8.1 million of cash in operating activities. Working capital requirements increased $15.8 million for the six months, primarily resulting from an increase of $11.4 million in inventory and $4.2 million in receivables.
Inventory days were approximately 85 in the second quarter of fiscal 2005, compared with 89 days in the first quarter of fiscal 2005 and 77 days at the end of fiscal 2004. Initial stocking packages for exclusive supplier agreements caused inventory to increase during the first quarter of fiscal 2005. The exclusive agreement helped the wireless group increase their gross margin as a percentage of sales by approximately 100 basis points. Days sales outstanding were approximately 58 in the second quarter of 2005 compared with 61 days in the first quarter of 2005 and 52 days at the end of fiscal 2004.
In October 2004, the Company renewed its multi-currency revolving credit agreement with the current lending group in the amount of $109.0 million. The new agreement matures in October 2009 and is principally secured by the Company's trade receivables and inventory. This agreement includes lower interest rate spreads, relaxed leverage and coverage ratios, and increased borrowing base advance rates than the prior agreement while also adding an accordion feature that can increase the credit line by up to an additional $25 million. The facility bears interest at applicable LIBOR rates plus a margin, varying with certain financial performance criteria. At November 27, 2004, the applicable margin was 150 basis points and $56.6 million was outstanding. Of the $52.4 million which was unborrowed under the total facility, $44.5 million was available due to the borrowing base limitations.
The Company was in compliance with all debt covenants as of November 27, 2004. Subsequently, the Company's late filing of its second quarter Form 10-Q (see Note K) resulted in a default of the Company's credit agreement with respect to timely delivery of financial statements and Form 10-Q reports. The Company has received a waiver from its lending group for the default and with the filing of this Form 10-Q and included financial statements has satisfied the conditions of the waiver.
Net cash provided by financing activities was $12.9 million during the first half of fiscal 2005. During the first quarter, the Company had an equity offering for 3 million shares of stock that contributed $27.9 million in proceeds that was used to reduce debt by $13.3 million and fund working capital requirements.
The Company spent approximately $4.7 million on capital projects during first half of fiscal 2005, primarily related to PeopleSoft development costs and ongoing investments in information technology infrastructure. The $545 earn out payment represents a cash outlay associated with the Pixelink acquisition as the business unit achieved certain operating performance criteria.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a description of the Company’s market risks, see “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management and Market Sensitive Financial Instruments” in the Company’s Annual Report on Form 10-K/A for the fiscal year ended May 29, 2004.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Act of 1934, as amended (the “Exchange Act”)) designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Any controls and procedures, no matter how well designed and operated, can provide only a reasonable assurance of achieving the desired control objectives. As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of the Company’s management, including Chairman of the Board and Chief Executive Officer (“CEO”) and Senior Vice President and Chief Financial Officer (“CFO”), of the effectiveness
of the Company’s disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective in providing a reasonable assurance of achieving their objective.
During the fiscal third quarter the Company's independent auditors reported to management and to the audit committee on certain matters involving internal controls that they considered to be material weaknesses. As communicated by the Company's independent auditors, these internal controls related to (i) inappropriate application of certain provisions of Financial Accounting Standards Board Statement No. 52, Foreign Currency Translation, affecting previously issued consolidated financial statements and (ii) the origination and maintenance of contemporaneous documentation of the factual support or key judgments made in connection with the execution of several legal documents that represented important accounting events. The misapplication affected reported currency translation in previously issued consolidated financial statements for fiscal years ending 2002 and 2003, the four quarters of fiscal 2004 and the first two quarters of fiscal 2005.
During fiscal 2005, the Company has made significant progress on remediating the material weaknesses previously described in the Company's Annual Report on Form 10-K/A for the year ended May 29, 2004, including implementation of the following measures:
-
|
The Company developed formal procedures for financial statement variance analysis and balance sheet reconciliations. The monthly closing schedule was formally communicated to all subsidiaries. The procedures were put in place during the second quarter of fiscal 2005 and are currently being tested as part of the Sarbanes-Oxley assessment process this fiscal year.
|
-
|
The Company improved documentation of management review and reconciliation performance through policies, education and re-enforcement, a balance sheet listing of account owners and approvers, and the implementation of Financial Services Manager, Accounting Manager, Corporate Controller and CFO checklists. These measures were put in place during the second and third quarters of fiscal 2005 and will be tested as part of the Sarbanes-Oxley assessment process this fiscal year.
|
-
|
Improvements to the reconciliation process during the migration from local accounting systems to PeopleSoft financials have been made and are expected to continue throughout fiscal 2005 in conjunction with the Company's Sarbanes-Oxely compliance plan.
|
-
|
The Information Systems group is in the process of installing several software packages which the Company believes will remediate the internal control issues regarding change management and system monitoring. These remediation efforts are expected to be completed before the end of fiscal 2005 in conjunction with the Company's Sarbanes-Oxley compliance plan.
|
Except as noted above, there have been no changes in the Company's internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect the Company's internal control over financial reporting.
Part II
|
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS (in thousands, except where indicated)
No material developments have occurred in the matters reported under the category "Legal Proceedings" in the Registrant's Report on Form 10-K/A for the fiscal year ended May 29, 2004, except that (i) the claim of one of the two customers of the Company's German subsidiary who made a claim in fiscal year 2003 in connection with heterojunction field effect transistors was settled on August 17, 2004 without any admission of liability on the part of the Company and without any material consideration from the Company, the settlement amount being paid by the Company's insurance carrier, and the Company was released from any liability with respect to the claim and (ii) Microsemi, against whom the Company has filed a complaint to recover damages in excess of $814 for breach of contract, has filed a complaint in the U.S. District Court, Central District of California, Case No. CV04-6108 GHK (JWJx) claiming trademark infringement and unfair
competition in that the Company referred to the trademark of Microsemi in connection with product of another manufacturer and seeking to enjoin such use and unspecified damages.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company was in compliance with all debt covenants as of November 27, 2004. Subsequently, the Company's late filing of its second quarter Form 10-Q (see Note K) resulted in a default of the Company's credit agreement with respect to timely delivery of financial statements and Form 10-Q reports. The Company has received a waiver from its lending group for the default and with the filing of this Form 10-Q and included financial statements has satisfied the conditions of the waiver.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held October 12, 2004, three proposals were submitted to a vote of the Company's stockholders: (1) the election of directors; (2) the Amendment to 1999 Stock Purchase Plan to increase the number of shares to the Plan by 200,000; (3) the appointment of KPMG LLP as independent auditors for fiscal year ending May 28, 2005. Shareholders present in person or by proxy holding shares representing a total of 41,777,046 votes out of a total 45,818,512 entitled to vote at the meeting were present, which was more than the number of votes necessary to constitute a quorum. The following table sets forth the results of the voting:
Proposal |
Number of |
Withheld |
|||||||||
1. |
|
Election of directors: |
|
|
|
|
|
|
|
|
|
Edward J. Richardson |
37,890,299 |
3,886,747 |
|||||||||
Scott Hodes |
38,573,315 |
3,203,731 |
|||||||||
Samuel Rubinovitz |
40,501,787 |
1,275,259 |
|||||||||
Arnold R. Allen |
38,614,085 |
3,162,961 |
|||||||||
Jacques Bouyer |
40,449,820 |
1,327,226 |
|||||||||
Dario Sacomani |
38,614,785 |
3,162,261 |
|||||||||
Harold L. Purkey |
40,919,648 |
857,398 |
|||||||||
Ad Ketelaars |
38,646,885 |
3,130,161 |
|||||||||
Bruce W. Johnson |
37,895,299 |
3,881,747 |
|||||||||
John R. Peterson |
40,919,448 |
857,598 |
|||||||||
Proposal |
For |
Against |
Abstain |
Not voted |
|||||||
2. |
|
Amendment to 1999 Stock Purchase Plan |
39,534,481 |
|
973,044 |
|
31,437 |
|
1,238,084 |
|
|
3. |
Appointment of KPMG LLP as independent auditors |
41,753,668 |
22,218 |
786 |
374 |
Each of the proposals set forth above received more than the required number of votes for approval and was therefore duly and validly approved by the stockholders.
Not applicable.
See Exhibit Index.
17
SIGNATURES |
|||||
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 hereunto duly authorized. |
|||||
|
|||||
RICHARDSON ELECTRONICS, LTD. |
|||||
|
|||||
Date: |
May 19, 2005 |
|
By: |
/s/ KELLY PHILLIPS |
|
|
Name: |
Kelly Phillips |
|||
|
Title: |
Chief Financial Officer |
|||
(on behalf of the Registrant and |
3(b) |
By‑laws of the Company, as amended, incorporated by reference to Exhibit 3(b) to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 1997. |
|
4(a) |
Restated Certificate of Incorporation of the Company, incorporated by reference to Appendix B to the Proxy Statement / Prospectus dated November 13, 1986, incorporated by reference to the Company’s Registration Statement on Form S‑4, Commission File No. 33‑8696. |
|
10 (af) |
Amended and Restated Revolving Credit Agreement, dated October 29, 2004, by and among the Company, Burtek Systems, Inc., Richardson Electronics Canada, Ltd., Richardson Electronics Limited, RESA, SNC, Richardson Electronique sNC, Richardson Electronics Iberica, S.A., Richardson Electronics GmbH, Richardson Electronics Benelux B.V., Richardson Sweden Holding AB, Richardson Electronics KK, Bank One, NA, London Branch, Bank One, NA, Canada Branch, Bank One, NA, Tokyo Branch and Bank One, NA, incorporated by reference to the Company’s Reports on Form 8-K dated November 1, 2004 and on Form 8-K dated November 5, 2004. |
|
31.1 |
Certification of Edward J. Richardson pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
31.2 |
Certification of Kelly Phillips pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
32 |
||
18
KBR+?M4?W\
M.>ML)\BN"Z%PV##'4NYL\SMYWX+9"*0U%VGK:Q8+;-@*4&F_]VR(%1IW(ER1
M09]0`?Y*2`)LNX@U*?1O"<*AV\PPO(Q6@DZ+WA=7AP_*4\`5BQ2I4-HFOZU.
M/@8)'2?!<^NZP=#;FNY6`D,3!@,5H,+'3>\:H2Q?GHXOSFGX:3B87%Z U%A]%=Z&'T-'H%G4)GT-<$
M!L&6X$4((T@)BP@J0CVABS!(V$GXB'"&<(TP37A*)!+Y1`$QA)A$+"!6$)N)
MO<2MQ`/$X\1+Q+O$61*)9$7R(D60TDDRDH'41=I"VD?ZC'29-$UZ3J:1' ZMX)Y*V`XAH)QZMR7=U,+
M90\'0WRO&"*KH+&?6KMA[PB:)@.B69L^C&\R-$4C]--T-IY=3,=7:#K[Z?KF
M_3B;7L_L^0.OG39EF"T.T#:<9I/WB.+6^7DVAO^;S+*Y/6YK6AN)1@RS5'*G
M]&9Z\6Y\ '1'4W1A=&4\/"]'
M4S$@-S(@,"!2/CX^/@UE;F1O8FH-,3(@,"!O8FH\/"],96YG=&@@,S$V-"]&
M:6QT97(O1FQA=&5$96-O9&4^/G-T \.?J>H9`P;7-1QB"
M7EG$,5@_+A8NKPG([@OX+I 3M&=C
MM@O9F0F.\:.]_J26+'G3G=0A4_H(=QWEK_L+DI@EA_V%/&:Q/N#%IQ:$#'FP
MK&V*(45,AFXQPG]4;W$G:VLEAQYVD]X;*)`)B]^,X^EX/9!G8V\@I5!UW@7J
M0LJ]D;Q^`FDQ YNJC0K.9T_L;*7J#:*:[Z3+S>7/UU\N9K =-F:F7[A4K<_+I?1'IP#:+7B`YO)T=OTNNPLK32:."!>QJ8
MV=,P2VMT9Y=>E=&/D<1JI(7X,WA1H7^+K5*'&.*#M\0[11HUW0-['S5E>.3C
MR).A:Q!5QC5+'8.[6ZC5\"VAER#LV/8OLI-32?=D`XR7N(^*0;H'E.&/PX:.L$$UJ3A2Z3.L4&`\NP>%R4^@%F
MZ5?-+G*,!YK=%26K'W07)A&10'FH2?46'2R!T"=L!6Y6K_W7#0(("'^E)`^E
MUOTK*,V#<7":?FN^7>LR+>85&R'*^8%97^^RJ??,KB8PC$"H<]_%Q`"--W/#
M08&A<5E56%_6+1T2`LD\1>IU&*&`E9#?2R>X$4+Q5G22&W1:KVW3"4$'OOJ[
MZ#1,J@=VGA5/U4[6*,2'P(1'TG`(N*2#VR+R-FG^"9*P%]FU?%%AP'&0%_I<
M&,*H*`KVIU=%'GW[;K7PG0VQ4!VQ:)9>:D4840]Z,[GCHM85JPO*&'LETWMZ
M1)/=0%%S$&CUCG\@%)AS'/%7A=/?(YSK@'=*J&F`@J,?Y!A6**8_*W:65K-E
M54$5#2$&>9(]5ZDA^!H$0BFMVSTWNEIFVY+:D0'E>Z:QX(TCPP/1\16-?@>C
MXZ-CO0#'%>0&AJ%(^C^$CL?9QV62URFR3EV!PL4?LO8[H945U1(%P@:WQ;(&
MF.477;.;M/K2A4"YU#0$D`C?%%?/,9Q2-*UL*8#K;_N.@2.0RDP48>BO?9?<
M3*EED=G^=ET6,STG5[N.>:&9;H1Y"!WF&%@>;D^CUK&=[C1PT_#E.6)C;*.Y
M;1*_']ULSVQXNAIIIHSZ@9GT=B>_[\G(:4BP`/BU7*V`6U?!PLHP_738R,:*?YR?#>EPQ/JPR
M492_N&SBU8(^#3?E9A18!1A'=F2ZB
MITM$&.&=AI9(PM$223B:C&D[EHT1/IV.FM:XWXI@=EL1S.K*M,FF
,>6#X5PP;X>Q
MWX;W:":@TF?O92>_0,;Y,/N,K$D]I5P"`^=&VA`,Q:1YR""?DC;\K-NRF3
M.!W6U8Y)TQ2_=UY)']#ID#G4VZM[+#NT@E*1=F-CD)8WO;88='&B+2F@@Y5I
M>9U.$>9#OYAAEW1:#!IC/CP7ES0*FO6@T17N&O$1:29Y#)2**.@\[\?JOS]B
MS?IL0]D;4A_:ILVK`GN7\U9%V6`WL1V7PKGZZ7IV*1UE/;K84K[*=+80(_*Z
M@A.;9[;9YYP%(4BV<(454HD7K1UN&GY&.HIR=VAM\4,\_COQ8/\_\>B(?T/Q
M$(LO_IQXB!57]%O$PZ3T&\5#0`/C&*]//#@SXS6[^U`>R\)61>,O%V[98UUU
M=^P9X0B94WQA_#H1/G'N:D.X"]6XC0+DO%@ZNE_=?\H_@W?$Y#)1U"':HHOS
M,K86I^>%M"*'"I2*WN90(=G:F$6'XGZJZ9EF9)3(U.M!@*.'I=R?/96(2
M?2)[7!?_QY]#QT$I*;I4[P_[O:TV?R-31X%VGU?-+F_+NG)CC]`!V:32\W&&
M`?CD*+X9ZL&8)*$@*J-\4F:MPZ/S+MB#`8=S/H<#5NH)#F8<>N&FOP-$:>X*
M["^-2\"!F6E,BHL)%I?R?&`*6(RF$ZQ$0JF8]K?*Z]WH56OW+N(TW#?\[M>\
MW)-COCM8DA=_'IK6BTE;D\=\_P4W+_\*2=F4OO8$?V5UM.&AE0?TDD2UD.$,
M_*NL%Z-N7FWSOXC=;NVF]15SLBQ\`%#3F9)A3_)TQH/\),U/=U2^33)T_--;
MGR5RTU[*A@?/VRC7DJL8ED#MU5`NMS'R"K2&*HU$8,&0V10DA>J42*,?J]JE('-'(.58:K()93*D/\Q.&K*JF'Z)'&
M>*7%M,8HLH1>T9A$/-873BHM_4FI%!WS"JJ"P?:B
2Z&4@(]H,C=%K^;18'/&(/O:OB/&9>`N("XS0EQ=Z!1]3WZ4?5-)S9L]+IY
M:K8HSPT#>EL]+S?4.*$-!8CC#ZZ6J^:^^@!!J'G&^D!\:+8L264RT64\[#]N
M?JW7!_B_ZV<3/99YV&2L/\W;;E^OUYLY?0&/H,+;.6401/Y4DW+=U204U(U9
M"RE.C)Z=6RP4JSLN,(\N.2F`QI\=S>`+KH"//Z8L-JA@0[V=R-&M"OGHT6P+
MS%4\39VN-QQ4]G1'S91%]A-@UAR5\.U\CJZSI\#G#:I^1Q1?H0D^`=[@T,-F
MLZ!&*_)4]$@SP+X&X&EOI!$DRVK;5>Y7+0(X_JMZMQ0TU9.'I.NMP&+<0OGK
MG`3K4B>BO;&GS;X8Y`7UKE"1SP\SP5?U*$$!#^L\;'6E8)N[PR/I?I9H7B(V
M*/LS?;2G2[Z@*Q365FGL:+$<;ZQN%I-&4Y4SJ:6B$S^UJ:PNI]K,'/VX_/GV
MJPM8T#'101=-:GVE?93,&4Q,$7&75V3C