UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] |
| Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended November 29, 2003 | ||
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) |
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Delaware | 36-2096643 | |
(State or other jurisdiction of | (IRS Employer Identification Number) | |
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40W267 Keslinger Road |
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(Address of principal executive offices) | (Zip code) |
(630) 208-2200 |
(Registrant's telephone number, including area code) |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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.
[X] | Yes |
| [ ] | No |
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
[X] | Yes |
| [ ] | No |
As of January 6, 2004, there were outstanding 12,408,435 shares of Common Stock, $.05 par value, inclusive of 1,504,843 shares held in treasury, and 3,196,320 shares of Class B Common Stock, $.05 par value, which are convertible into Common Stock on a share-for-share basis.
1
RICHARDSON ELECTRONICS, LTD.
QUARTERLY FINANCIAL REPORT
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION | ||||
3 | ||||
Condensed Consolidated Balance Sheets as of November 29, 2003 and May 31, 2003 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. Quantitative and Qualitative Disclosures About Market Risks | 15 | |||
15 | ||||
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PART II - OTHER INFORMATION |
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2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RICHARDSON ELECTRONICS, LTD
CONDENSED CONSOLIDATED BALANCE SHEETS
As of | ||||||||||
November 29, | May 31, | |||||||||
(in thousands, except per share amounts) | 2003 | 2003 | ||||||||
(unaudited) | (as restated, | |||||||||
| see Note B) | |||||||||
ASSETS | ||||||||||
Current Assets |
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| Cash and cash equivalents |
| $ | 20,764 |
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| $ | 16,874 |
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| Receivables, less allowance of $3,900 and $3,350 |
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| 93,865 |
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| 85,355 |
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| Inventories |
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| 91,298 |
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| 95,896 |
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| Prepaid expenses |
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| 6,398 |
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| 6,919 |
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| Deferred income taxes, net |
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| 18,765 |
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| 19,401 |
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| Total current assets |
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| 231,090 |
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| 224,445 |
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Property, plant and equipment, net | 30,556 | 31,088 | ||||||||
Goodwill and intangible assets, net |
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| 6,023 |
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| 6,129 |
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Other assets |
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| 3,501 |
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| 3,269 |
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Total assets |
| $ | 271,170 |
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| $ | 264,931 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||
Current Liabilities |
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| Accounts payable |
| $ | 29,572 |
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| $ | 23,660 |
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| Accrued liabilities |
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| 20,861 |
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| 17,421 |
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| Current portion of long-term debt |
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| 54 |
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| 46 |
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| Total current liabilities |
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| 50,487 |
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| 41,127 |
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Long-term debt |
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| 134,784 |
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| 138,396 |
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Deferred income taxes, net |
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| 6,725 |
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| 5,269 |
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Other non-current liabilities |
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| - |
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| 5,049 |
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| Total liabilities |
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| 191,996 |
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| 189,841 |
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Stockholders’ Equity |
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| Common stock ($.05 par value; issued 12,396 shares at November 29, 2003 and 12,258 shares at May 31, 2003) |
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| 620 |
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| 613 | |||
| Class B common stock, convertible ($.05 par value; issued 3,201 shares at November 29, 2003 and 3,207 shares at May 31, 2003) |
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| 160 |
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| 160 | |||
| Preferred stock ($1.00 par value; no shares issued) |
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| - |
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| - |
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| Additional paid-in capital |
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| 93,138 |
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| 91,962 |
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| Common stock in treasury, at cost (1,505 shares at November 29, 2003 and 1,506 shares at May 31, 2003) |
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| (8,920 | ) |
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| (8,922 | ) | |
| Retained earnings |
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| 7,581 |
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| 6,079 |
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| Unearned compensation |
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| (355 | ) |
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| (541 | ) | |
| Accumulated other comprehensive loss |
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| (13,050 | ) |
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| (14,261 | ) | |
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| Total stockholders’ equity |
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| 79,174 |
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| 75,090 |
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Total liabilities and stockholders' equity |
| $ | 271,170 |
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| $ | 264,931 |
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See notes to condensed consolidated financial statements. |
3
RICHARDSON ELECTRONICS, LTD
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE- AND SIX-MONTH PERIODS ENDED NOVEMBER 29, 2003 AND NOVEMBER 30, 2002
Three months ended | Six months ended | ||||||||||||||||
(unaudited, in thousands, except per share amounts) | November 29, | November 30, | November 29, | November 30, | |||||||||||||
(as restated, | (as restated, | ||||||||||||||||
see Note B) | see Note B) | ||||||||||||||||
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Net sales | $ | 128,051 |
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| $ | 118,958 | $ | 247,357 |
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| $ | 227,572 |
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Cost of products sold | 97,109 | 90,045 | 187,300 |
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| 171,505 |
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| Gross margin | 30,942 | 28,913 |
| 60,057 |
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| 56,067 |
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Selling, general and administrative expenses | 25,495 | 24,458 |
| 51,340 |
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| 48,704 |
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| Operating income | 5,447 | 4,455 |
| 8,717 |
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| 7,363 |
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Other (income) expense |
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| Interest expense | 2,558 | 2,528 |
| 5,104 |
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| 5,123 |
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| Other, net | (160 | ) | 179 |
| (112 | ) |
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| 166 | |||||||
Total other (income) expense | 2,398 | 2,707 |
| 4,992 |
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| 5,289 | ||||||||||
| Income before income tax and cumulative effect of accounting change | 3,049 | 1,748 |
| 3,725 |
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| 2,074 |
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Income tax | 844 | 670 |
| 1,128 |
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| 830 | ||||||||||
| Net income before cumulative effect of accounting change | 2,205 | 1,078 |
| 2,597 |
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| 1,244 |
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Cumulative effect of accounting change, net of tax (Note E) | - | - | - |
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| (17,862 | ) | ||||||||||
| Net income (loss) | $ | 2,205 |
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| $ | 1,078 | $ | 2,597 |
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| $ | (16,618 | ) | |||
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Net income (loss) per share - basic: |
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| Net income per share before cumulative effect of accounting change | $ | 0.16 | $ | 0.08 | $ | 0.19 |
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| $ | 0.09 |
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Cumulative effect of accounting change, net of tax (Note E) | - | - | - |
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| (1.30 | ) | ||||||||||
| Net income (loss) per share | $ | 0.16 | $ | 0.08 | $ | 0.19 |
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| $ | (1.21 | ) | |||||
| Average shares outstanding | 13,979 | 13,740 | 13,952 |
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| 13,734 |
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Net income (loss) per share - diluted: |
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| Net income per share before cumulative effect of accounting change | $ | 0.15 | $ | 0.08 | $ | 0.18 |
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| $ | 0.09 |
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Cumulative effect of accounting change, net of tax (Note E) | - | - | - |
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| (1.28 | ) | ||||||||||
| Net income (loss) per share | $ | 0.15 | $ | 0.08 | $ | 0.18 |
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| $ | (1.19 | ) | |||||
| Average shares outstanding | 14,361 | 13,871 | 14,281 |
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| 14,004 |
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Dividends per common share | $ | 0.04 | $ | 0.04 | $ | 0.08 |
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| $ | 0.08 |
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Statement of comprehensive income (loss): |
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| Net income (loss) | $ | 2,205 | $ | 1,078 | $ | 2,597 |
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| $ | (16,618 | ) | |||||
| Foreign currency translation | 3,426 | (1,936 | ) |
| 654 |
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| (1,744 | ) | |||||||
70 | (9 | ) | 212 | (203 | ) | ||||||||||||
| Fair value adjustments - cash flow hedges | 164 | 23 |
| 345 |
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| (253 | ) | ||||||||
| Comprehensive income (loss) | $ | 5,865 | $ | (844 | ) | $ | 3,808 |
| $ | (18,818 | ) | |||||
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See notes to condensed consolidated financial statements. |
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4
RICHARDSON ELECTRONICS, LTD
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED NOVEMBER 29, 2003 AND NOVEMBER 30, 2002
(unaudited, in thousands) | Six months ended |
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| November 29, |
| November 30, |
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(as restated, |
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see Note B) |
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OPERATING ACTIVITIES |
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Net income (loss) | $ | 2,597 |
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| $ | (16,618 | ) |
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Non-cash charges to income (loss): |
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Depreciation |
| 2,684 |
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| 2,764 |
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Amortization of intangibles and financing costs |
| 150 |
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| 153 |
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Deferred income taxes, net |
| 636 |
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| (52 | ) |
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Goodwill impairment charge |
| - |
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| 17,862 |
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Other, net |
| 525 |
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| 646 |
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Total non-cash charges |
| 3,995 |
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| 21,373 |
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Changes in working capital, net of effects of currency translation: |
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Accounts receivable |
| (7,652 | ) |
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| 2,637 |
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Inventories |
| 5,446 |
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| (1,942 | ) |
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Other current assets |
| 553 |
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| (1,469 | ) |
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Accounts payable |
| 6,930 |
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| (9,260 | ) |
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Other liabilities |
| (320 | ) |
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| 1,785 |
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Net changes in working capital |
| 4,957 |
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| (8,249 | ) |
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Net cash provided by (used in) operating activities |
| 11,549 |
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| (3,494 | ) |
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FINANCING ACTIVITIES |
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Proceeds from borrowings |
| 21,678 |
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| 19,841 |
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Payments on debt |
| (26,244 | ) |
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| (16,436 | ) |
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Proceeds from stock issuance |
| 1,002 |
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| 48 |
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Cash dividends |
| (1,097 | ) |
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| (1,611 | ) |
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Net cash (used in) provided by financing activities |
| (4,661 | ) |
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| 1,842 |
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INVESTING ACTIVITIES |
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Capital expenditures |
| (2,520 | ) |
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| (3,224 | ) |
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Earnout payment related to acquisitions |
| (726 | ) |
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| (764 | ) |
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Other |
| - |
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| (230 | ) |
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Net cash used in investing activities |
| (3,246 | ) |
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| (4,218 | ) |
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Effect of exchange rate changes on cash and cash equivalents |
| 248 |
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| 144 |
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Net increase (decrease) in cash and cash equivalents | 3,890 | (5,726 | ) |
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Cash and cash equivalents at beginning of period |
| 16,874 |
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| 15,296 |
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Cash and cash equivalents at end of period | $ | 20,764 |
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| $ | 9,570 |
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| See notes to condensed consolidated financial statements. |
5
RICHARDSON ELECTRONICS, LTD
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note A – Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements (Statements) have been prepared in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America 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 three- and six-month periods ended November 29, 2003 are not necessarily indicative of the results that may be expected for the year ended May 31, 2004.
For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2003. Certain fiscal 2003 balances have been reclassified to conform to the fiscal 2004 presentation.
Note B - Restatement
The Company identified an accounting error that occurred in a foreign subsidiary, which affected previously reported interest expense for the prior seven quarters. The correction of the error, which aggregated to $738, is presented as a restatement of these prior periods. The restatement increases diluted earnings per share to $0.15 for the second quarter of fiscal 2004 versus the $0.11 published in the December 18, 2003 earnings release.
The Company is in the process of filing amended Forms 10-K for fiscal 2002 and 2003 and Form 10-Q for the first quarter of fiscal 2004. A reconciliation of reported net income (loss) to amended net income (loss) including the additional interest expense for the affected quarters is provided in the following table:
FY 2004 | FY 2003 | FY 2002 | ||||||||||||||||||||||||||
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1st Qtr | 4th Qtr | 3rd Qtr | 2nd Qtr | 1st Qtr | 4th Qtr | 3rd Qtr | ||||||||||||||||||||||
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Reported net income (loss) | $ | 506.0 | $ | (11,163.0 | ) | $ | (5.0 | ) | $ | 1,190.0 | $ | (17,578.0 | ) | $ | (9,075.0 | ) | $ | (2,743.0 | ) | |||||||||
Additional interest expense | (113.9 | ) | (107.6 | ) | (96.8 | ) | (112.1 | ) | (118.3 | ) | (108.9 | ) | (80.2 | ) | ||||||||||||||
Amended net income (loss) | $ | 392.1 | $ | (11,270.6 | ) | $ | (101.8 | ) | $ | 1,077.9 | $ | (17,696.3 | ) | $ | (9,183.9 | ) | $ | (2,823.2 | ) | |||||||||
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Reported basic and diluted income (loss) per share | $ | 0.04 | $ | (0.81 | ) | $ | - | $ | 0.09 | $ | (1.28 | ) | $ | (0.66 | ) | $ | (0.20 | ) | ||||||||||
Additional interest expense | (0.01 | ) | (0.01 | ) | (0.01 | ) | (0.01 | ) | (0.01 | ) | (0.01 | ) | (0.01 | ) | ||||||||||||||
Amended basic and diluted net income (loss) per share | $ | 0.03 | $ | (0.82 | ) | $ | (0.01 | ) | $ | 0.08 | $ | (1.29 | ) | $ | (0.67 | ) | $ | (0.21 | ) | |||||||||
Note C - Change in Accounting Principle
At November 29, 2003, the Company’s worldwide inventories were stated at the lower of cost or market using the first-in, first-out (FIFO) method. Effective June 1, 2003, the North American operations, which represent a majority of the Company’s operations and approximately 76% of the Company’s inventories, changed from the last-in, first-out (LIFO) method to the FIFO method. All other inventories were consistently stated at the lower of cost or market using FIFO method. The FIFO method is preferable in the circumstances because it provides a better matching of revenue and expenses in the Company’s business environment. The accounting change was not material to the financial statements for any of the periods presented, and accordingly, no retroactive restatement of prior years’ financial statements was made. Inventories include material, labor and overhead.
Note D – Restructuring Charges
As a result of the Company's fiscal 2003 restructuring initiative, a restructuring charge 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. The following table depicts the amounts associated with the activity related to the restructuring initiative through November 29, 2003:
6
Restructuring | Paid | Unpaid | ||||||||||||||
liability | through | Reversal | balance as of | |||||||||||||
| May 31, 2003 |
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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 E – Goodwill and Other Intangible Assets
Effective June 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. This statement changed the accounting for goodwill and indefinite-lived intangible assets from an amortization approach to an impairment-only approach. As a result of the adoption of SFAS No. 142, the Company recorded a transitional impairment charge during the first quarter of fiscal 2003 of $21,587 ($17,862 net of tax), presented as a cumulative effect of accounting change. This charge related to the Company's segments as follows: RF & Wireless Communications Group (RFWC), $20,456; and Security Systems Division (SSD), $1,131.
The Company periodically reviews the carrying amount of goodwill to determine whether an additional impairment may exist. A fair value approach is used to test goodwill for impairment. An impairment charge is recognized for the amount, if any, by which the carrying amount of the goodwill exceeds its fair value. Management establishes fair values using discounted cash flows. When available and as appropriate, management uses comparative market multiples to corroborate discounted cash flow results. The Company performed its annual impairment test during the fourth quarter of fiscal 2003. The Company did not find any indication that additional impairment existed and, therefore, no additional impairment loss was recorded.
The table below provides changes in the carrying values of goodwill and intangible assets not subject to amortization by reportable segment:
Goodwill and intangible assets not subject to amortization | ||||||||||||||||||||
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RFWC | IPG | SSD | DSG | Total | ||||||||||||||||
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Balance at May 31, 2003 | $ | - | $ | 882 | $ | 1,714 | $ | 2,959 | $ | 5,555 | ||||||||||
Modification of earnout payment | - | - | - | (58 | ) | (58 | ) | |||||||||||||
Foreign currency translation | - | 4 | 99 | - | 103 | |||||||||||||||
Balance at November 29, 2003 | $ | - | $ | 886 | $ | 1,813 | $ | 2,901 | $ | 5,600 | ||||||||||
Intangible assets subject to amortization as of November 29, 2003 and May 31, 2003 are as follows:
November 29, 2003 | May 31, 2003 | |||||||||||||||
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Amount | Amortization | Amount | Amortization | |||||||||||||
Intangible assets subject to amortization: | ||||||||||||||||
Deferred financing costs | $ | 2,193 | $ | 1,793 | $ | 2,191 | $ | 1,647 | ||||||||
Patents and trademarks | 478 | 455 | 478 | 448 | ||||||||||||
Total | $ | 2,671 | $ | 2,248 | $ | 2,669 | $ | 2,095 | ||||||||
Amortization expense for the second quarter and six months is as follows:
Amortization expense for the | ||||||||||||||||
Second Quarter | Six Months | |||||||||||||||
FY 2004 |
| FY 2003 |
| FY 2004 |
| FY 2003 | ||||||||||
Intangible assets subject to amortization: | ||||||||||||||||
Deferred financing costs | $ | 72 | $ | 98 | $ | 144 | $ | 135 | ||||||||
Patents and trademarks | 3 | 3 | 6 | 6 | ||||||||||||
Total | $ | 75 | $ | 101 | $ | 150 | $ | 141 | ||||||||
7
The amortization expense associated with the existing intangible assets subject to amortization is expected to be $299, $180, $75 and $20 in fiscal 2004, 2005, 2006, and 2007, respectively. The weighted average number of years of amortization expense remaining is 1.8.
Note F – 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 reserves are established for costs that are expected to be incurred after the sale and delivery of the products subject to warranty. Such costs are accrued at the time revenue is recognized. The warranty reserves are determined based on known product failures, historical experience, and other currently available evidence. The reserve is included in "Accrued Liabilities" on the Condensed Consolidated Balance Sheets.
Changes in the warranty reserve for the six months ended November 29, 2003 were as follows:
Warranty | |||||
| Reserve | ||||
Balance at May 31, 2003 | $ | 672 | |||
Accruals for products sold | 416 | ||||
Utilization | (58 | ) | |||
Balance at November 29, 2003 | $ | 1,030 | |||
The increase in the warranty accrual represents warranties related to a new product offering by the Company's Display Systems Group beginning in the third quarter of fiscal 2003.
Note G – Income Taxes
The income tax provisions for the six-month periods ended November 29, 2003 and November 30, 2002 are based on the estimated annual effective tax rate of 30.3% and 40.0%, 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, certain non-tax deductible charges, and the Company's foreign sales corporation benefit on export sales, net of state income taxes.
Income tax refund, net of foreign estimated tax payments, was $932 for six months ended November 29, 2003.
Note H – Calculation of Earnings per Share
Basic income (loss) per share is calculated by dividing net income by the weighted average number of Common and Class B Common shares outstanding. Diluted income (loss) per share is calculated by dividing net income (loss) (adjusted for interest savings, net of tax, on assumed conversion of bonds) 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 such assumptions have a dilutive effect on the calculation. The Company’s 8¼% and 7¼% convertible debentures are excluded from the calculation in both fiscal 2004 and 2003, as assumed conversion and effect of interest savings would be anti-dilutive. The per share amounts presented in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) are based on the following amounts:
Second Quarter | Six Months | |||||||||||||||
FY 2004 | FY 2003 | FY 2004 | FY 2003 | |||||||||||||
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Numerator for basic and diluted EPS: | ||||||||||||||||
Net income before cumulative effect of accounting change | $ | 2,205 | $ | 1,078 | $ | 2,597 | $ | 1,244 | ||||||||
Cumulative effect of accounting change | - | - | - | (17,862 | ) | |||||||||||
Net income (loss) | $ | 2,205 | $ | 1,078 | $ | 2,597 | $ | (16,618 | ) | |||||||
Denominator: | ||||||||||||||||
Denominator for basic EPS | ||||||||||||||||
Weighted average common shares outstanding | 13,979 | 13,740 | 13,952 | 13,734 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Unvested restricted stock awards | 33 | 49 | 36 | 51 | ||||||||||||
Dilutive stock options | 349 | 82 | 293 | 219 | ||||||||||||
Shares applicable to diluted income (loss) per common share | 14,361 | 13,871 | 14,281 | 14,004 | ||||||||||||
8
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 three-month period ended November 29, 2003, there were 579 such options. However, some or all of the above mentioned options may be potentially dilutive in the future.
Note I – Stock-Based Compensation
The Company has stock-based compensation plans under which stock options are granted to key managers at the market price on the date of grant. Most of these new grants are fully exercisable after five years and have a ten-year life. Three such grants were issued during the six months ended November 29, 2003.
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 (loss) attributable to common stockholders if the fair value-based method had been applied to all outstanding and unvested awards in each period.
| Second Quarter | Six Months | ||||||||||||||
FY 2004 | FY 2003 | FY 2004 | FY 2003 | |||||||||||||
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Net income (loss), as reported | $ | 2,205 | $ | 1,078 | $ | 2,597 | $ | (16,618 | ) | |||||||
Add: Stock-based compensation expense included in | 59 | 64 | 119 | 122 | ||||||||||||
Deduct: Stock-based compensation expense determined | (263) | (303 | ) | (527 | ) | (601 | ) | |||||||||
Pro-forma net income (loss) | $ | 2,001 | $ | 839 | $ | 2,189 | $ | (17,097 | ) | |||||||
Net income (loss) per share, basic: | ||||||||||||||||
Reported net income (loss) | $ | 0.16 | $ | 0.08 | $ | 0.19 | $ | (1.21 | ) | |||||||
Pro-forma compensation expense, net of taxes | (0.02 | ) | (0.02 | ) | (0.03 | ) | (0.03 | ) | ||||||||
Pro-forma net income (loss) per share | $ | 0.14 | $ | 0.06 | $ | 0.16 | $ | (1.24 | ) | |||||||
Net income (loss) per share, diluted: | ||||||||||||||||
Reported net income (loss) | $ | 0.15 | $ | 0.08 | $ | 0.18 | $ | (1.19 | ) | |||||||
Pro-forma compensation expense, net of taxes | (0.01 | ) | (0.02 | ) | (0.03 | ) | (0.03 | ) | ||||||||
Pro-forma net income (loss) per share | $ | 0.14 | $ | 0.06 | $ | 0.15 | $ | (1.22 | ) | |||||||
Note J – 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).
RFWC serves the voice and data telecommunications market and the broadcast industry predominately for infrastructure applications.
IPG serves a broad range of customers including the steel, automotive, textile, plastics, semiconductor manufacturing, and transportation industries.
SSD provides security systems and related design services which includes such products as closed circuit television (CCTV), fire, burglary, access control, sound and communication products and accessories.
DSG provides system integration and custom display solutions for the public information, financial, point-of-sale, and medical imaging markets.
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:
9
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Second Quarter | ||||||||||||||||||||
FY 2004 | ||||||||||||||||||||
RFWC | $ | 57,705 | $ | 12,846 | $ | 7,039 | $ | 79,162 | $ | - | ||||||||||
IPG | 27,868 | 8,678 | 6,261 | 48,030 | 886 | |||||||||||||||
SSD | 26,109 | 6,664 | 3,767 | 34,439 | 1,813 | |||||||||||||||
DSG | 14,864 | 3,727 | 1,947 | 21,422 | 2,901 | |||||||||||||||
Total | $ | 126,546 | $ | 31,915 | $ | 19,014 | $ | 183,053 | $ | 5,600 | ||||||||||
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FY 2003 | ||||||||||||||||||||
RFWC | $ | 53,762 | $ | 12,031 | $ | 6,381 | $ | 85,503 | $ | - | ||||||||||
IPG | 24,331 | 7,540 | 5,268 | 44,905 | 866 | |||||||||||||||
SSD | 23,989 | 6,013 | 3,500 | 33,454 | 1,138 | |||||||||||||||
DSG | 14,833 | 3,993 | 2,372 | 23,834 | 2,175 | |||||||||||||||
Total | $ | 116,915 | $ | 29,577 | $ | 17,521 | $ | 187,696 | $ | 4,179 | ||||||||||
Six Months | ||||||||||||||||||||
FY 2004 | ||||||||||||||||||||
RFWC | $ | 107,520 | $ | 24,028 | $ | 12,727 | $ | 79,162 | $ | - | ||||||||||
IPG | 53,718 | 16,347 | 11,698 | 48,030 | 886 | |||||||||||||||
SSD | 51,281 | 13,025 | 7,334 | 34,439 | 1,813 | |||||||||||||||
DSG | 30,943 | 7,986 | 4,354 | 21,422 | 2,901 | |||||||||||||||
Total | $ | 243,462 | $ | 61,386 | $ | 36,113 | $ | 183,053 | $ | 5,600 | ||||||||||
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FY 2003 | ||||||||||||||||||||
RFWC | $ | 100,878 | $ | 22,786 | $ | 11,699 | $ | 85,503 | $ | - | ||||||||||
IPG | 47,778 | 15,080 | 10,504 | 44,905 | 866 | |||||||||||||||
SSD | 46,396 | 11,447 | 6,454 | 33,454 | 1,138 | |||||||||||||||
DSG | 28,122 | 7,596 | 4,380 | 23,834 | 2,175 | |||||||||||||||
Total | $ | 223,174 | $ | 56,909 | $ | 33,037 | $ | 187,696 | $ | 4,179 | ||||||||||
Fiscal 2003 data has been reclassified to conform with the current presentation, which includes the reclassification of the broadcast tubes product line from RFWC to the IPG business unit. Fiscal 2003 quarterly sales for the broadcast tubes were $4,685, $4,625, $4,717, and $3,995 for the first, second, third, and fourth quarters, respectively.
A reconciliation of sales, gross margin, direct operating contribution and assets to the relevant consolidated amounts follows. Freight, Medical Glassware business, Logistics business, and miscellaneous sales are included in "Other sales". "Other assets" primarily represent miscellaneous receivables, manufacturing and other inventories, intangible assets subject to amortization and investments.
Second Quarter | Six Months | |||||||||||||||
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Sales - segments total | $ | 126,546 | $ | 116,915 | $ | 243,462 | $ | 223,174 | ||||||||
Other sales | 1,505 | 2,043 | 3,895 | 4,398 | ||||||||||||
Sales | $ | 128,051 | $ | 118,958 | $ | 247,357 | $ | 227,572 | ||||||||
Gross margin - segments total | $ | 31,915 | $ | 29,577 | $ | 61,386 | $ | 56,909 | ||||||||
Gross margin on other sales | (973 | ) | (664 | ) | (1,329 | ) | (842 | ) | ||||||||
Gross margin | $ | 30,942 | $ | 28,913 | $ | 60,057 | $ | 56,067 | ||||||||
Segment profit contribution | $ | 19,014 | $ | 17,521 | $ | 36,113 | $ | 33,037 | ||||||||
Gross margin on other sales | (973 | ) | (664 | ) | (1,329 | ) | (842 | ) | ||||||||
Regional selling expenses | (4,497 | ) | (4,097 | ) | (8,931 | ) | (8,388 | ) | ||||||||
Administrative expenses | (8,097 | ) | (8,305 | ) | (17,136 | ) | (16,444 | ) | ||||||||
Operating income | $ | 5,447 | $ | 4,455 | $ | 8,717 | $ | 7,363 | ||||||||
Segment assets | $ | 183,053 | $ | 187,696 | ||||||||||||
Cash and cash equivalents | 20,764 | 9,570 | ||||||||||||||
Other current assets | 25,162 | 21,945 | ||||||||||||||
Net property | 30,556 | 29,345 | ||||||||||||||
Other assets | 11,635 | 11,348 | ||||||||||||||
Total assets | $ | 271,170 | $ | 259,904 | ||||||||||||
10
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.
Note K – Recently Issued Pronouncements
On December 23, 2003, the FASB issued FASB Statement No. 132 (Revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits. This standard increases the existing GAAP disclosure requirements by requiring more details about pension plan assets, benefit obligations, cash flows, benefit costs and related information. Companies will be required to segregate plan assets by category, such as debt, equity and real estate, and to provide certain expected rates of return and other informational disclosures. Statement 132(R) also requires companies to disclose various elements of pension and postretirement benefit costs in interim-period financial statements for quarters beginning after December 15, 2003. The Company is in the process of reviewing the new disclosure requirements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands, except per share amounts)
Second Quarter Overview
During the quarter ended November 29, 2003, the Company increased sales by 7.6% from a year ago to $128.1 million. Net income was $2.2 million or $0.15 per share. The financial results marked the sixth consecutive quarter of year-over-year sales growth and the fourth consecutive quarter of sales increases across all SBUs. The Company achieved record sales in both Europe and Asia/Pacific while sales in North America and Latin America were slightly down.
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. Historically, sales in the third quarter were, on average, approximately 3% lower sequentially. However, strong second quarter bookings point to a flat third quarter amid increasing signs that technology spending may be increasing.
The Company strengthened its balance sheet during the quarter, reducing inventory by $2.3 million and paying down $2.2 million of debt (offset by foreign currency exchange effects) despite a 7.4% sequential sales growth. Liquidity was further improved during the quarter as cash and equivalents increased $2.6 million driven by $5.1 million positive cash flows from operations. The Company’s selling, general and administrative expenses decreased to 19.9% as a percentage of net sales from 21.7% in the prior quarter and 20.6% a year ago.
During the second quarter, the Company identified an accounting error that occurred in its Swedish subsidiary which affected interest expense previously reported for the prior seven quarters in the aggregate amount of $738. The Company is in the process of filing amended Forms 10-K for fiscal 2003 and 2002 and Form 10-Q for the period ended August 30, 2003, which will increase interest expense reported in those periods (See Note B to Condensed Consolidated Financial Statements).
Results of Operations
Sales and Gross Margins
Consolidated sales for the quarter ended November 29, 2003 increased $9.1 million or 7.6% from the prior year to $128.1 million. For the six-month period, sales were up 8.7% to $247.4 million due to the increased demand across all SBUs and record sales in some geographic regions. Consolidated gross margins decreased 10 basis points (bps) and 30 bps for the second quarter and six months, respectively, primarily due to a mix shift to lower margin component sales.
Sales, percentage changes from the prior year, gross margins and gross margin percent of sales by SBU are summarized in the following table. Freight, Medical Glassware business (sold in fiscal 2002), Logistics business, and miscellaneous costs are included under the caption “Other”.
11
By Business Unit: | ||||||||||||||||||||||||||||
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FY 2004 | FY 2003 | % Change | FY 2004 | % of Sales | FY 2003 | % of Sales | ||||||||||||||||||||||
Second Quarter | ||||||||||||||||||||||||||||
RFWC | $ | 57,705 | $ | 53,762 | 7.3 | % | $ | 12,846 | 22.3 | % | $ | 12,031 | 22.4 | % | ||||||||||||||
IPG | 27,868 | 24,331 | 14.5 | % | 8,678 | 31.1 | % | 7,540 | 31.0 | % | ||||||||||||||||||
SSD | 26,109 | 23,989 | 8.8 | % | 6,664 | 25.5 | % | 6,013 | 25.1 | % | ||||||||||||||||||
DSG | 14,864 | 14,833 | 0.2 | % | 3,727 | 25.1 | % | 3,993 | 26.9 | % | ||||||||||||||||||
Other | 1,505 | 2,043 | (973 | ) | (664 | ) | ||||||||||||||||||||||
Total | $ | 128,051 | $ | 118,958 | 7.6 | % | $ | 30,942 | 24.2 | % | $ | 28,913 | 24.3 | % | ||||||||||||||
Six Months | ||||||||||||||||||||||||||||
RFWC | $ | 107,520 | $ | 100,878 | 6.6 | % | $ | 24,028 | 22.3 | % | $ | 22,786 | 22.6 | % | ||||||||||||||
IPG | 53,718 | 47,778 | 12.4 | % | 16,347 | 30.4 | % | 15,080 | 31.6 | % | ||||||||||||||||||
SSD | 51,281 | 46,396 | 10.5 | % | 13,025 | 25.4 | % | 11,447 | 24.7 | % | ||||||||||||||||||
DSG | 30,943 | 28,122 | 10.0 | % | 7,986 | 25.8 | % | 7,596 | 27.0 | % | ||||||||||||||||||
Other | 3,895 | 4,398 | (1,329 | ) | (842 | ) | ||||||||||||||||||||||
Total | $ | 247,357 | $ | 227,572 | 8.7 | % | $ | 60,057 | 24.3 | % | $ | 56,067 | 24.6 | % | ||||||||||||||
RFWC’s second quarter and six months sales increased 7.3% and 6.6%, respectively, from fiscal 2003 levels, driven by strength in major product lines offset by weakness in some specialty and Broadcast products. For six months, the Network Access, Infrastructure and Passive/Interconnect product lines posted growth of 13.6%, 1.5%, and 5.5% to $36.5 million, $32.4 million, and $18.9 million, respectively, compared to the prior year, associated with wireless and infrastructure demand increases. Gross margins were down 10 bps for the quarter and 30 bps for six months due to higher component sales, particularly in Asia, which carry a lower gross margin than engineered solutions.
IPG sales increased 14.5% and 12.4% for the quarter and six months, respectively, led by strong, broad-based demand. Power components were up 24% to $8.6 million for the quarter and 17% to $15.7 million for six months. The tube businesses increased 10% to $19.3 million for the quarter and 11% to $38.0 million for six months. Margins were essentially flat in the quarter and down 120 bps for six months primarily due to the exchange rate impact on the cost of certain tube products manufactured in Europe.
SSD posted a record quarter, with sales increasing 8.8% and margins increasing 40 bps from a year ago, fueled by continued expansion of the Canadian business and strengthening of the Canadian dollar. For six months, sales were up 10.5% while gross margins increased 70 bps due to the exchange rate impact partially offset by competitive pricing pressure.
DSG growth slowed to 0.2% for the second quarter mainly due to the timing of some custom display projects. Driven by the strong first quarter, six months sales growth was 10% as Medical monitor sales increased by 37.4 % to $12.1 million. High margin legacy CRT products were down 13.2% to $2.6 million for the quarter and 3.3% to $5.3 million for six months, negatively affecting gross margin.
Sales, percentage change from the prior year, gross margins 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” now consists primarily of Freight and Corporate provisions.
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FY 2004 | FY 2003 | % Change | FY 2004 | % of Sales | FY 2003 | % of Sales | ||||||||||||||||||||||
Second Quarter | ||||||||||||||||||||||||||||
North America | $ | 65,702 | $ | 67,898 | -3.2 | % | $ | 17,064 | 26.0 | % | $ | 17,573 | 25.9 | % | ||||||||||||||
Europe | 31,576 | 25,575 | 23.5 | % | 9,009 | 28.5 | % | 7,101 | 27.8 | % | ||||||||||||||||||
Asia/Pacific | 25,160 | 19,701 | 27.7 | % | 5,648 | 22.4 | % | 4,468 | 22.7 | % | ||||||||||||||||||
Latin America | 4,572 | 4,969 | -8.0 | % | 1,118 | 24.5 | % | 1,509 | 30.4 | % | ||||||||||||||||||
Corporate | 1,041 | 815 | (1,897 | ) | (1,738 | ) | ||||||||||||||||||||||
Total | $ | 128,051 | $ | 118,958 | 7.6 | % | $ | 30,942 | 24.2 | % | $ | 28,913 | 24.3 | % | ||||||||||||||
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Six Months | ||||||||||||||||||||||||||||
North America | $ | 131,133 | $ | 129,167 | 1.5 | % | $ | 34,620 | 26.4 | % | $ | 33,987 | 26.3 | % | ||||||||||||||
Europe | 56,942 | 48,932 | 16.4 | % | 16,386 | 28.8 | % | 13,334 | 27.3 | % | ||||||||||||||||||
Asia/Pacific | 47,490 | 37,932 | 25.2 | % | 10,587 | 22.3 | % | 8,803 | 23.2 | % | ||||||||||||||||||
Latin America | 9,677 | 10,036 | -3.6 | % | 2,301 | 23.8 | % | 2,791 | 27.8 | % | ||||||||||||||||||
Corporate | 2,115 | 1,505 | (3,837 | ) | (2,848 | ) | ||||||||||||||||||||||
Total | $ | 247,357 | $ | 227,572 | 8.7 | % | $ | 60,057 | 24.3 | % | $ | 56,067 | 24.6 | % | ||||||||||||||
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12
North America sales decreased 3.2% in the second quarter primarily due to the completion of a large wireless infrastructure project in the prior year. For six months, sales were up slightly as Canada posted 23.2% sales growth to $35.7 million as a result of the strong Canadian dollar and increased demand across all SBUs.
Europe had a record quarter with sales growth of 23.5% from a year ago led by Israel where sales more than doubled to $3.3 million due to a large wireless component sales contract. For six months, sales were up 16.4% as all regions posted increases in sales partially due to the weakening US dollar.
Asia/Pacific achieved record levels with sales increasing by 27.7% in the quarter and 25.2% for six months from fiscal 2003. The Company's six months sales in China increased 74.9% over last year to $9.9 million. The margins in China, however, are among the lowest in the area due to the high level of contract manufacturing and component sales, driving the overall Asia/Pacific gross margin down. The Company's sales in Singapore and Thailand grew 64.4% to $6.7 million while all other regions posted growth in the high single- to low double-digit range.
Latin America sales were down 8.0% in the quarter due to decreasing demand in the Central and Southern regions partially offset by moderate growth in Brazil and Mexico.
Fiscal 2004 gross margins by geographic area experienced significant fluctuations from an increase of 150 bps in Europe to a decrease of 400 bps in Latin America, principally resulting from changes in the sales mix.
Selling, General and Administrative (SG&A) Expenses
For the three- and six-month periods, SG&A expenses increased by $1,037 or 4.2% to $25.5 million and by $2.6 million or 5.4% to $51.3 million, respectively, primarily due to foreign currency translation and increased PeopleSoft implementation costs. SG&A as a percent of sales decreased to 19.9% in the second quarter compared to 20.6% a year ago, as the Company realized savings from the recent restructuring initiative and continued cost controls as well as the reversal of a portion of the restructuring accrual. (See Note D to Condensed Consolidated Financial Statements).
Interest and Other Expenses
For three- and six-month periods, interest expense was relatively flat as both average borrowing levels and the weighted-average interest rate remained essentially the same compared to the prior year. Cash payments for interest were $5,086 for six months ended November 29, 2003.
Other, net include a realized foreign exchange gain of $66 in the second quarter and $424 for six months in fiscal 2004 compared to a realized foreign exchange loss of $212 in the second quarter and $257 for six months in fiscal 2003. Also included in Other expenses are a realized investment gain of $118 in 2004 and $26 in 2003. In 2004, the Company recorded a loss of $229 due to revaluation of fixed assets and other-than-temporary investment impairment loss of $210.
Income Tax Provision
The effective tax rate was 30.3% for the six-month period of fiscal 2004 compared to 40.0% in fiscal 2003. The effective tax rate differs from the statutory rate of 35.0% primarily due to the impact of certain non-tax deductible charges, Company's foreign sales corporation benefits on export sales, state taxes, and the tax impact of non-U.S. operations. As the Company restated fiscal 2003 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 fiscal 2003 and the first half of fiscal 2004.
Future effective tax rates could be adversely affected by earnings being lower than anticipated 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 Results
Net income for the second quarter of fiscal 2004 was $2,205 or $0.15 per share compared to $1,078 or $0.08 per share a year ago as a 7.6% increase in sales was partially offset by 10 bps gross margin deterioration and a 4.2% increase in SG&A expenses. Net income for the first half of fiscal 2004 was $2,597, or $0.18 per share, compared to net income before cumulative effect of accounting change of $1,244, or $0.09 per share, in the first half of the prior year. The cumulative effect of accounting change included in the 2003 net results represents a goodwill and other intangible assets impairment charge in the amount of $17.9 million, net of taxes of $3.7 million. The impairment was recorded as a change in accounting principle in the first quarter of fiscal 2003. (See Note E to the Condensed Consolidated Financial Statements).
13
Liquidity and Capital Resources
Cash and cash equivalents were $20.8 million at November 29, 2003, an increase of $3.9 million from the beginning of the year. During the first six months of fiscal 2004, the Company generated $11.5 million of cash from operating activities. Working capital decreased $5.0 million, largely due to an increase in accounts payable of $6.9 million and decrease in inventory of $5.4 million partially offset by a $7.7 million accounts receivable increase.
Inventory days were approximately 86 in the second quarter of fiscal 2004, compared with 94 days in the first quarter and 97 days at the end of fiscal 2003. Inventory levels and the associated inventory turns reflect the Company's ongoing inventory management efforts. Inventory management remains an area of focus as the Company balances the need to maintain strategic inventory levels to ensure competitive lead times against the risk of inventory obsolescence because of rapidly changing technology and customer requirements.
The Company has a multi-currency revolving credit facility agreement in the amount of $102.0 million that matures in September of 2005 and bears interest at applicable LIBOR rates plus a margin, varying with certain financial performance criteria. At November 29, 2003, the applicable margin was 225 basis points and $39.1 million was available under the total facility. This amount was reduced to $14.1 million due to the borrowing base limitations.
In the six-month period of fiscal 2004, the Company reduced its long-term debt by $3.6 million as $4.6 million was paid down under the multi-currency credit facility. Foreign currency translation increased the debt by $1.3 million, while payments on the interest rate exchange hedges accounted for the balance of the debt reduction. The Company was in compliance with all debt covenants for the period ended November 29, 2003. Quarterly dividends of $0.04 per common share and $0.036 per class B common share in the total amount of $1,097 for six months were offset by $1,002 in proceeds from the exercise of stock options by employees, resulting in net cash used in financing activities of $4.7 million.
The Company spent approximately $2.5 million on capital projects during the first half of fiscal 2004 primarily related to PeopleSoft development costs and ongoing investments in information technology infrastructure. Over the next two quarters, management estimates the capital expenditures to increase as the PeopleSoft implementation progresses. The $726 earnout payment represents a cash outlay associated with the Pixelink acquisition as the business unit achieved certain operating performance criteria.
Special Note Regarding Forward-Looking Statements and Analyst Reports
Investors should consider carefully the following risk factors, in addition to the other information included in this quarterly report on Form 10-Q. All statements other than statements of historical facts included in this report are statements that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. The words "expect," "estimate," "anticipate," "predict," "believe" and similar expressions and variations thereof are intended to identify forward-looking statements. Such statements appear in a number of places in this report and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things: (i) trends affecting the Company's financial condition or results of operations; (ii) the Company's financing plans; (iii) the Company's business and growth strategies, including potential acquisitions; and (iv) other plans and objectives for future operations. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those predicted in the forward-looking statements or which may be anticipated from historical results or trends. In addition to the information contained in the Company’s other filings with the Securities and Exchange Commission, factors that could affect future performance include, among others, the following:
· Competitive pressures may increase or change through industry consolidation, entry of new competitors, marketing changes or otherwise. There can be no assurance that the Company will be able to continue to compete effectively with existing or potential competitors.
· Technological changes may affect the marketability of inventory on hand.
· General economic or business conditions, domestic and foreign, may be less favorable than expected, resulting in lower sales or lower profit margins than expected.
· Changes in relationships with customers or vendors, the ability to develop new relationships or the business failure of several customers or vendors may affect sales or profitability.
· Political, legislative or regulatory changes may adversely affect the businesses in which the Company operates.
· Changes in securities markets, interest rates or foreign exchange rates may adversely affect the Company’s performance or stock price.
· The failure to obtain or retain key executive or technical personnel could affect future performance.
· The Company’s growth strategy includes expansion through acquisitions. There can be no assurance that the Company will be able to successfully complete further acquisitions or that past or future acquisitions will not have an adverse impact on the Company’s operations.
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· The potential future sale of Common Stock shares, possible anti-takeover measures available to the Company, dividend policies, as well as voting control of the Company by Edward J. Richardson, Chairman of the Board and Chief Executive Officer may affect the stock price.
· The continued availability of financing on favorable terms cannot be assured.
The risks included here 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.
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 for the fiscal year ended May 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. At 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.
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 – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS (in thousands)
In fiscal 2003, the Company received notice that two customers of one of its subsidiaries are asserting claims against it in connection with product it sold to them by the subsidiary that the Company acquired pursuant to a distribution agreement with the manufacturer of the product. The claims are based on the product not meeting the specification provided by the manufacturer. The Company has notified the manufacturer and the Company's insurance carrier of these claims. The Company is unable to evaluate the outcome of these claims or the recovery from the manufacturer or insurance carrier as the investigation has not been completed. The Company intends to vigorously defend these claims and prosecute its claims against the manufacturer and insurer if it should have any liability.
The Company is engaged in litigation it has filed, Richardson Electronics, Ltd. v. Signal Technology Corporation, 03 L 002661 (Circuit Court, Cook County, Illinois) and Signal Technology Corporation v. Richardson Electronics, Ltd., C.A. No. 03-0335 (Superior Court Boston, Massachusetts). The Company filed suit in Illinois claiming damages in the amount of approximately $2,000 resulting from Signal's refusal to take delivery of product on six purchase orders it had placed with the Company. Signal has filed a declaratory judgment suit in Massachusetts seeking a ruling that it has no liability to the Company. Signal has not asserted any claim against the Company.
The Company has asserted a claim against a former vendor in the amount of $593 for inventory it sought to return to the vendor pursuant to the terms of a Distribution Agreement between the two parties, that the vendor has refused to accept as of this time.
While the Company has several other litigation matters pending against or filed by it that arose in the ordinary course of business, it is believed that, in the aggregate, they would not have a material adverse effect on the Company.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMSSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits | ||
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31.1 |
| Certification of Edward J. Richardson pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 |
| Certification of Dario Sacomani pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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| Certification of Edward J. Richardson and Dario Sacomani pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
99 |
| Press Release dated January 13, 2004 announcing Richardson to amend previously reported financial statements |
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(b) Reports on form 8-K | ||
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Form 8-K dated 10/23/03 announcing Richardson annual shareholders' meeting and including a copy of the meeting presentation slides. | ||
Form 8-K dated 12/04/03 announcing date of fiscal 2004 second quarter conference call. | ||
Form 8-K dated 12/19/03 reporting Richardson's fiscal 2004 second quarter results. |
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 thereunto duly authorized.
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RICHARDSON ELECTRONICS | ||
| (Registrant) | |
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Date: January 13, 2004 |
| By: /s/ DARIO SACOMANI |
Dario Sacomani |
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