A N N U A L R E P O R T
2 0 0 6
Company at a Glance
Richardson Electronics, Ltd. is a global provider of
engineered solutions, serving the RF and wireless
communications, industrial power conversion, security
and display systems markets. The Company delivers
engineered solutions for its customers’ needs through
product manufacturing, systems integration, prototype
design and manufacture, testing and logistics.
Table of Contents
To Our Stockholders ................................................ 4-5
RF, Wireless & Power Division ..................................... 6
Electron Device Group ................................................ 7
Display Systems Group ................................................ 8
Security Systems Division ............................................ 9
Five-Year Financial Review ......................................... 10
Management’s Discussion and Analysis of Financial
Condition and Results of Operations ................ 11-22
Consolidated Balance Sheets ..................................... 23
Consolidated Statements of Operations ................... 24
Consolidated Statements of Cash Flows ................... 25
Consolidated Statements of Stockholders’ Equity and
Comprehensive Income (Loss)............................... 26
Notes to Consolidated Financial Statements........ 27-41
Report of Independent Registered
Public Accounting Firm ...................................... 42-44
Stockholder Information ............................................ 45
Market Price of Common Stock ................................ 45
Officers & Directors .................................................. 46
3
To Our Stockholders
I am pleased to report that sales in fiscal 2006 were
were $140.9 million, up 13.7% from the previous year.
$637.9 million, up over 10% from the previous year to
Sales in North America were at $319.4 million,
establish a new record for the Company. The Company
up 5.2%. Sales in Latin America improved to
ended its year with a strong fourth quarter as sales
$24.3 million, up 13.9%.
climbed to $171.8 million, a 16.7% increase from the
same period a year earlier and 8.7% higher than any other
quarter in our history. Sales growth was led by the RF,
Wireless & Power Division (RFPD) which had annual
sales of $334.1 million, up 12.8% from the previous year.
The Display Systems Group (DSG) also posted excellent
sales growth at $95.0 million, up 21.7% from the
previous year, which included the acquisition of ACT
Kern in Germany. The Security Systems Division’s (SSD)
annual sales increased to $108.8 million, up 3.1% from
the previous year. The Electron Device Group (EDG)
had annual sales of $94.4 million, up 2.5% from the
previous year. The majority of EDG’s sales come from
our legacy electron tube business. The gross margin for
EDG continues to be the highest in the Company at
32.2% for fiscal 2006. Overall, our gross margin
increased nearly a full point to 24.4% in fiscal 2006 from
23.5% in the previous year.
Sales in all geographic regions grew significantly in
fiscal 2006. Our sales in Asia were $148.0 million, up
18.6% over the previous year. Within Asia, the increase
was led by sales growth in Korea which ended the year
at $43.5 million, up 35.4% from the previous year. Sales
in China continued to improve by finishing the year at
$43.3 million, up 7.2% from the previous year. More
importantly, gross margin from sales in China increased
There is no question that our engineered solutions
strategy is extremely well received both by our customers
and vendor partners alike as our top line growth in all the
markets we serve continues to outpace the industry.
In addition, our gross margin continues to improve as
the percentage of engineered solutions business
increases annually.
We began our international expansion in the early
1980s with the establishment of our first foreign
subsidiary in the United Kingdom. In fiscal 2006, over
62% of our sales came from outside of the United States.
Today, we have 23 foreign operating subsidiaries with 70
sales locations, shipping material from 30 warehouses
around the world in 30 different currencies. Over
the years, this infrastructure has become
increasingly expensive.
In an effort to reduce our global operating costs
related to logistics, selling, general, and administrative
expenses and to better align our operating and tax
structure on a global basis, we have now begun to
implement a global restructuring plan. This plan is
intended to substantially reduce corporate and
administrative expense, decrease the number of
warehouses, and streamline the entire organization with
a goal of substantially increasing profits.
to 21.6% in fiscal 2006 as compared to 18.7% in the
Over the next fiscal year, we will be implementing a
previous year. Sales in Southeast Asia finished the year at
more tax-effective supply chain structure for Europe.
$23.5 million, up 29.3%. Sales in Europe for fiscal 2006
This process will include installing a centralized inventory
4
hub structure in Europe that will be managed by a third
several layers of management. In North America, we
party logistics firm to ultimately service all European
have eliminated layers of sales management, reduced the
inventory for RFPD and EDG. The goal of this change
number of inside sales locations, and reduced the
is to dramatically improve customer service, increase the
number of regions and associated management. We are
focus on sales, optimize inventory management, and
consolidating several of our engineering centers and have
reduce the Company’s logistics expense.
begun to outsource more of our manufacturing.
In Latin America, a significant number of our
The total restructuring plan is estimated to save the
customers are multinational companies based in the
Company $8.5 million on an annual basis. The total
United States that have operations in Mexico and
restructuring and severance costs to implement the plan
Colombia. The sales organization in Mexico and
are estimated to be $6.0 million, of which $2.7 million of
Colombia will be restructured as support offices with all
severance costs were recorded in the fourth quarter of
major customer decisions being handled from the United
States. We will be closing warehouses in Mexico and
fiscal 2006 and the balance will be incurred in fiscal 2007
as the plan is implemented. We expect to realize the full
Colombia and begin to handle all customer shipments
impact of the cost savings from the restructuring plan in
from our warehouses located in the United States. In
fiscal 2008.
addition, our facilities in Brazil will be downsized and the
Brazil warehouse will be used as a central hub for Latin
America. These changes are expected to better align our
revenue with our operating costs. We plan to have the
restructuring in Latin America completed by the end of
the fiscal year.
Thank you for your continued investment in
Richardson Electronics.
Edward J. Richardson
We are also implementing a tax-effective supply chain
Chairman of the Board, Chief Executive Officer
structure for our operations in Asia. This will include
and President
establishing centralized warehouse operations to service
our Asian customers, eliminating weekly consolidated
shipments from the United States to Asia, and beginning
to localize purchasing and inventory control. These
changes are intended to improve customer service and
eliminate costly multiple shipments of material..
In addition, in other areas, we are in the process of
reducing the total workforce by approximately 35
employees which includes eliminating and restructuring
5
RF, Wireless & Power Division
The RF, Wireless & Power Division (RFPD) continues to lead the
wireless communication revolution. With more and more of the
applications in people’s everyday lives going wireless, RFPD has the
products, capabilities and expertise to support the five key growing
markets throughout the world: Infrastructure, Wireless Networks,
Digital Broadcasting, Defense, and Power Conversion.
Combining global design capabilities with local support from over
70 worldwide locations, RFPD has a strong, unique business model:
• Many exclusive partnerships with the top technology developers
in the RF and Wireless Communications industry help make
Richardson the world leader in new product introductions.
• Strategically positioned Design Centers and alliance partners in
Asia, Europe and North America ensure quick response and
real time consultations wherever our customers may be.
• Complete engineering and technical support for design-in
components and custom-engineered solutions help RFPD
customers reduce time to market and lower development costs.
• A worldwide technical sales force provides application support
for new designs and Engineered Solutions products from
prototype to production.
RFPD again gained market share in fiscal 2006, continuing a five-
year trend. Long-term, global, exclusive agreements with leading
component manufacturers and our unique business model led to
increased sales and revenues for Richardson and our suppliers.
In fiscal 2006, RFPD continued to enhance our capabilities
throughout the world. We added several key suppliers (including
Mimix Broadband, TeraVicta Technologies and Radiotronix) and
increased the number of field application engineers. We added
alliance partners where most designs originate. We opened new
offices in China and India to support our fastest growing markets
in Asia Pacific. Sales of Engineered Solutions also continue to
grow, as the demand for niche products from manufacturing
customers remains strong.
Heading into fiscal 2007, RFPD believes strongly that our
growth will continue. We have the highest number of design
registrations in our history. We are actively supporting growing
markets like WiMAX and global implementation of communication
infrastructure to support the continuously growing wireless
subscriber base. With the implementation of 3G Protocol
(called TS-CDMA) throughout China, we are active with a
number of base station suppliers for wireless communication.
RFPD strongly believes that our strategic plan and strategic
investments to enhance our business infrastructure will lead
RFPD to continued profitability and record profits in fiscal 2007.
6
Electron Device Group
The Electron Device Group (EDG) distributes and manufactures
high-power, high-frequency electronic components for the Industrial
Heating, Laser, Semiconductor Equipment and Industrial/Broadcast
MRO markets.
Our primary customers in these markets are leading original
equipment manufacturers (OEMs) and end users (MRO). EDG
leverages its broad engineering and manufacturing expertise; deep
knowledge of high-power, high-frequency applications; and strong
relationships with a diverse, global customer base to deliver unique,
Engineered Solutions.
Our sales engineers work with customers to understand their
unique technology requirements, then partner with leading OEMs to
design components into customers' applications. By reducing time
to market and lowering production costs, our Engineered Solutions
model helps EDG drive growth for both customers and suppliers.
In addition to stocking critical components for niche markets and
providing expert assistance in selecting replacement products and
alternatives, EDG offers customers complete engineering and
manufacturing services, including:
• High-power, high-frequency designs
• Customization of standard products
• System integration
• Retrofitting
• Special testing/matching
In fiscal 2006, EDG launched two major initiatives. In order to
capitalize on its strength in the semiconductor equipment market,
EDG completed a restructuring of its product management and
manufacturing operations. This restructuring positioned Richardson
to further penetrate the OEM and end-user markets through
increased engineering support and new product development. The
second major initiative focused on lowering product acquisition cost
for the broadcast and industrial tube products. EDG has developed a
new market for vacuum tubes that combine low-cost country
manufacturing with state-of-the-art technology and processing.
These initiatives proved to be successful, helping make EDG
Richardson's most profitable division in fiscal 2006. Thanks, in part,
to a strong year for semiconductor OEMs, sales of EDG products
experienced considerable growth. Though a relatively stable market,
EDG was able to capture market share from the competition.
EDG is looking forward to another strong year in fiscal 2007, as
we reap the benefits of our restructuring. We will be evaluating our
strategic alliances with fabricators and developing new products and
services for end user customers. We are confident these strategies
will deliver continued global sales growth and increased market share
for EDG.
7
Display Systems Group
The Display Systems Group (DSG) is a global provider of
integrated display systems and products to the Financial, Industrial,
Healthcare, and Public Information markets. Utilizing our engineering
and manufacturing expertise, DSG offers a wide range of custom
solutions for OEMs, resellers and end-users.
Our in-house design and integration capabilities allow customers to
add a wide range of customized features to liquid crystal display
(LCD), plasma, and cathode ray tube (CRT) monitors, including
Bezels, NEMA Enclosures, Video Controllers, Protective and Privacy
Panels, and Touch Screens.
To meet the needs of our growing, global customer base, DSG
operates Technology Integration Centers in North America and
Europe, along with procurement offices and manufacturing plants
throughout Asia. DSG also offers post sale support and extended
warranty programs with our comprehensive TekLink support services.
Fiscal 2006 was marked by two important acquisitions for DSG :
• A.C.T. Kern GmbH & Co. KG, one of the leading display
technology companies in Europe, gives DSG the technical
resources to expand our display solutions business on a
global basis.
• Image Systems Corp., a specialty supplier of displays, display
controllers and calibration software, solidifies Richardson's
broad portfolio of display-based solutions for the Healthcare
and Industrial markets.
Fiscal 2006 also saw the opening of the new 40,000 sq. ft. Pixelink
building in Marlboro, Massachusetts. This state-of-the-art facility
features clean rooms, an environmental test chamber and Electro-
Static Discharge (ESD) protection throughout the lab, helping
produce high yields and a high quality standard.
Beginning in fiscal 2006, DSG began expanding our unique medical
imaging display solutions beyond Picture Archiving and
Communication System (PACS) applications. We look to continue our
growth in the Healthcare market in fiscal 2007. Our goal is to create
more design-in opportunities for DSG products by strengthening our
relationships with medical technology OEMs.
As display technologies evolve, so do our customers’ imaginations.
DSG is introducing a line of multi-view 3D displays, which allow
viewers to experience realistic 3D without wearing special glasses. We
are also partnering with content suppliers to create a dynamic 3D
retail experience for consumers.
DSG is positioned to be more efficient and more competitive in
fiscal 2007. With the acquisition of key resources, capital investments
to enhance our core capabilities and a strategic focus on key markets,
DSG will continue to lead the way in delivering custom solutions to
the diverse display marketplace.
8
Security Systems Division
The Security Systems Division (SSD) is a global provider of closed
circuit television (CCTV), fire, burglary, access control, sound and
communications products and accessories for the residential, commer-
cial and government markets. SSD products are also utilized in indus-
trial applications, mobile video and traffic management. Our products
are sold in the US, Latin America and Europe under the Richardson
Electronics name and as Burtek Systems in the US and Canada.
SSD specializes in design-in support, offering extensive expertise
in applications requiring digital technology and helping dealers
manage the convergence of security and IT. As a global leader and
provider of engineered solutions, SSD has built a business model
that leverages our people, partnerships and products:
• Our workforce is one of the most highly trained and experienced
in the industry. They not only help integrators qualify their
end-user requirements, but also design customized solutions.
Providing this level of service, technical support and training
has helped position SSD as a market leader with both customers
and vendors.
• Our focus on meeting the product and service demands of
thousands of customers, both domestically and internationally,
allows SSD to provide our global customers with the most
expansive selection of cost-effective engineered solutions within
the security industry. Our customers count on us to stay abreast
of new products and industry trends, and to develop the skills
required to provide them with complete solutions.
• Our suppliers trust SSD to stock an extensive line of name brand
products and to help market them to dealers and integrators. We
partner with more than 100 of the world’s leading CCTV, sound,
fire, burglary and access control vendors. And we also support
our own private label brands: National Electronics™, Capture®,
Elite National Electronics™, and AudioTrak®.
Continued global sales and marketing focus on these private label
brands has enabled SSD’s annual revenues to contribute to Richardson’s
financial success. SSD set the stage for improved sales and profitability
in fiscal 2005, by organizing global marketing and operations teams
under the leadership of Burtek’s senior management team. At the end
of fiscal 2006, SSD further capitalized on Burtek’s strong brand
recognition and positive reputation by re-branding its US branches as
Burtek Systems.
In the coming year, SSD will strengthen our infrastructure, add
new product lines and technological families, and provide value-added
services to our global market. SSD will continue to develop strategic
partnerships with technology companies who offer exclusive relation-
ships and joint venture opportunities. We will also continue to add
outside sales resources focused on building demand for network
solutions. We expect the combination of these activities will move
SSD to the forefront of the market and facilitate continued growth.
9
Five-Year Financial Review
(in thousands, except per share amounts)
This information should be read in conjunction with the
Company’s consolidated financial statements, accompanying
notes and Management’s Discussion and Analysis
of Financial Condition and Results of Operations
included elsewhere herein.
Statement of Operations Data
2006 (2)
2005 (3)
2004 (4)
2003 (5)
2002
Fiscal Year Ended(1)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses (6)
(Gain) loss on disposal of assets(7)
Other expense, net
Income (loss) before income taxes
Income tax (benefit) provision
Income (loss) before cumulative effect
of accounting change
Cumulative effect of accounting change, net of tax(8)
Net income (loss)
Net income (loss) per common share - basic
Before cumulative effect of accounting change
Cumulative effect of accounting change, net of tax
Net income (loss) per common share - basic
Net income (loss) per Class B common share - basic
Before cumulative effect of accounting change
Cumulative effect of accounting change, net of tax
$
$
$
$
Net income (loss) per Class B common share - diluted $
Net income (loss) per common share - diluted
Before cumulative effect of accounting change
Cumulative effect of accounting change, net of tax
Net income (loss) per common share - diluted
Net income (loss) per Class B common share - diluted
Before cumulative effect of accounting change
Cumulative effect of accounting change, net of tax
$
$
$
Net income (loss) per Class B common share - diluted $
$ 637,940
482,171
155,769
139,640
3
10,550
5,576
8,218
$ 578,724
442,730
135,994
129,747
(9,918)
7,582
8,583
24,600
$ 519,823
393,101
126,722
107,968
579
10,258
7,917
2,385
$ 464,381
364,918
99,463
100,613
—
9,700
(10,850)
(1,968)
(2,642)
—
(2,642)
(16,017)
—
$ (16,017) $
5,532
—
5,532
(8,882)
(17,862)
$ (26,744)
(0.15)
—
(0.15)
(0.14)
—
(0.14)
(0.15)
—
(0.15)
(0.14)
—
(0.14)
$
$
$
$
$
$
$
$
$
$
(0.96) $
—
(0.96) $
(0.87) $
—
(0.87) $
(0.96) $
—
(0.96) $
(0.87) $
—
(0.87) $
0.40
—
0.40
0.36
—
0.36
0.38
—
0.38
0.36
—
0.36
0.160
0.144
$
$
0.160
0.144
$
$
$
$
$
$
$
$
$
$
(0.66)
(1.32)
(1.98)
(0.59)
(1.19)
(1.78)
(0.66)
(1.32)
(1.98)
(0.59)
(1.19)
(1.78)
$
$
$
$
$
$
$
$
$
$
443,415
349,914
93,501
98,993
—
13,601
(19,093)
(6,206)
(12,887)
—
(12,887)
(0.97)
—
(0.97)
(0.87)
—
(0.87)
(0.97)
—
(0.97)
(0.87)
—
(0.87)
Dividends per common share
Dividends per Class B common share(9)
Net Sales by Strategic Business Unit (10)
RF, Wireless & Power Division (RFPD)
Electron Device Group (EDG)
Security Systems Division (SSD)
Display Systems Group (DSG)
Medical Glassware (MG)
Corporate(11)
Consolidated
Balance Sheet Data
Cash
Working capital
Property, plant and equipment, net
Total assets
Current maturities of long-term debt
Long-term debt
Stockholders’ equity
$
$
0.160
0.144
2006
$ 334,131
94,443
108,843
95,010
—
5,513
$ 637,940
$
2006
17,010
158,231
32,357
309,299
14,016
112,792
98,240
0.160
0.144
$
$
0.160
0.144
2005
$ 296,334
92,174
105,581
78,078
—
6,557
$ 578,724
2005
$ 24,301
153,840
31,712
283,940
22,305
98,028
97,396
2004
$ 256,270
87,856
101,979
66,452
—
7,266
$ 519,823
2004
$ 16,572
172,593
30,534
281,035
4,027
133,813
86,181
2003
$ 222,599
77,336
92,090
64,191
—
8,165
$ 464,381
2003
$ 16,611
178,525
30,810
267,293
46
138,396
77,606
Fiscal Year Ended
2002
$ 197,103
79,884
85,087
60,697
12,940
7,704
$ 443,415
Fiscal Year Ended
2002
$ 15,189
187,972
29,336
286,783
38
132,218
101,917
(1) Fiscal Year - The Company's fiscal year ends on the Saturday nearest the end of May. Each of the fiscal years presented contains 52/53 weeks. All references herein for the years 2006, 2005, 2004, 2003, and 2002 represent the
(2)
fiscal years ended June 3, 2006, May 28, 2005, May 29, 2004, May 31, 2003, and June 1, 2002, respectively.
In the third quarter of fiscal 2005, the Company recorded a $2.2 million restructuring charge to selling, general and administrative expenses as the Company terminated over 60 employees. In addition, the Company recorded
incremental tax provisions of $16.7 million in fiscal 2005 to increase the valuation allowance related to its deferred tax assets in the United States ($15.9 million) and outside the United States ($0.8 million).
(3) The Company recorded incremental tax provisions of $2.5 million in fiscal 2004 to increase the valuation allowance related to its deferred tax assets outside the United States.
(4)
In the fourth quarter of fiscal 2003, the Company recorded a $16.1 million charge ($10.3 million net of tax) principally related to inventory write-downs and restructuring charges, including a $1.7 million restructuring charge to
selling, general and administrative expenses as the Company eliminated over 70 positions or approximately 6% of its workforce. In addition, the Company recorded incremental tax provisions of $1.6 million to establish a valuation
allowance related to its deferred tax assets outside the United States.
In the third quarter of fiscal 2002, the Company recorded a $4.6 million loss ($2.9 million net of tax) related to the disposition of its medical glassware business. In the fourth quarter of fiscal 2002, the Company recorded a $15.3
million charge ($9.8 million net of tax) primarily related to inventory obsolescence.
(5)
(6) During the fourth quarter of fiscal 2006, the Company recorded employee severance costs of $2.7 million for certain employees whose termination became probable and estimable.
(7)
(8)
In the fourth quarter of fiscal 2005, the Company completed the sale of approximately 205 acres of undeveloped real estate adjoining its headquarters in LaFox, Illinois, resulting in a gain of $9.9 million before taxes.
In the second quarter of fiscal 2003, the Company adopted SFAS No. 142 "Goodwill and Other Intangible Assets" and as a result recorded a cumulative effect of accounting change of $17.9 million ($3.7 million, net of tax) to write
off impaired goodwill. Additionally, effective at the beginning of fiscal 2003, the Company no longer amortizes goodwill. Income (loss) before income taxes included goodwill amortization of $0.6 million in fiscal 2002.
10
(9) The dividend per Class B common share was 90% of the dividend per common share.
(10) Certain amounts in prior periods were reclassified to conform to the fiscal 2006 presentation. The modification includes the reorganization of RFPD (formerly RFWC) and EDG (formerly IPG) in the second quarter of fiscal 2006.
(11) Includes freight billed to customers, other non-specific net sales, and customer cash discounts.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The total restructuring and severance costs to implement
the plan are estimated to be $6.0 million, of which $2.7
million of severance costs were recorded in the fourth
quarter of fiscal 2006 and the balance will be incurred in
fiscal 2007 as the plan is implemented. The Company
expects to realize the full impact of the cost savings from
the restructuring plan in fiscal 2008.
The Company’s marketing, sales, product management,
and purchasing functions are organized as four strategic
business units (SBUs): RF, Wireless & Power Division
(RFPD), Electron Device Group (EDG), 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.
During the second quarter of fiscal 2006, the Company
implemented a reorganization plan encompassing the
Company’s RF & Wireless Communications Group (RFWC)
and Industrial Power Group (IPG) business units. Effective
for the second quarter of fiscal 2006, IPG has been
designated as Electron Device Group (EDG) and RFWC has
been designated as RF, Wireless & Power Division (RFPD).
The reorganization was implemented to increase efficiencies
by integrating IPG’s power conversion sales and product
management into RFWC, improving the geographic sales
coverage and driving sales growth by leveraging RFWC’s
larger sales resources. In addition, the Company believes
that EDG will benefit from an increased focus on the high-
margin tube business with a simplified global sales and
product management structure to work more effectively with
customers and vendors. The data presented has been
reclassified to reflect the reorganization.
Overview
The Company is a global provider of engineered
solutions and a global distributor of electronic components to
the radio frequency (RF), wireless and power conversion,
electron device, security, and display systems markets.
Utilizing its core engineering and manufacturing capabilities,
the Company is committed to a strategy of providing
specialized technical expertise and value-added products, or
“engineered solutions,” in response to customers’ needs.
These solutions consist of products which the Company
manufactures or modifies and products which are
manufactured to its specifications by independent
manufacturers under the Company’s own private labels.
Additionally, the Company provides solutions and adds value
through design-in support, systems integration, prototype
design and manufacturing, testing, and logistics for its
customers’ end products. Design-in support includes
component modifications or the identification of lower-cost
product alternatives or complementary products.
The Company’s products include RF and microwave
components, power semiconductors, electron tubes,
microwave generators, data display monitors, and electronic
security products and systems. These products are used to
control, switch or amplify electrical power or signals, or as
display, recording, or alarm devices in a variety of industrial,
communication, and security applications.
In June 2005, the Company acquired A.C.T. Kern GmbH
& Co. KG (Kern) located in Germany. The cash paid for Kern
was $6.6 million, net of cash acquired. Kern is one of the
leading display technology companies in Europe with
worldwide customers in manufacturing, OEM, medicine,
multimedia, IT trading, system houses, and other industries.
In addition, in October 2005, the Company acquired certain
assets of Image Systems Corporation (Image Systems),
a subsidiary of Communications Systems, Inc. in Hector,
Minnesota, which is a specialty supplier of displays, display
controllers, and calibration software for the healthcare
market. The initial cash outlay for Image Systems was $0.2
million. Both Kern and Image Systems were integrated into
the Display Systems Group.
In an effort to reduce the Company’s global operating
costs related to logistics, selling, general, and administrative
expenses and to better align its operating and tax structure
on a global basis, the Company has now begun to
implement a global restructuring plan. This plan is intended
to substantially reduce corporate and administrative
expense, decrease the number of warehouses, and
streamline the entire organization. Over the next fiscal year,
the Company will be implementing a more tax-effective
supply chain structure for Europe and Asia/Pacific,
restructuring its Latin American operations, and reducing
the total workforce which includes eliminating and
restructuring layers of management.
11
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
RF, Wireless & Power Division
RFPD net sales increased 12.8% in fiscal 2006 to $334.1
million as compared with $296.3 million in fiscal 2005. The
RFPD net sales growth for fiscal 2006 was mainly due to an
increase in sales of the network access and infrastructure
product lines. Network access products sales grew 16.9% to
$123.2 million from $105.3 million last fiscal year, primarily
due to sales growth in Asia/Pacific. Sales of infrastructure
products increased to $80.5 million, 10.7% higher than $72.7
million in fiscal 2005 due to sales growth in the U.S. and
Europe. The net sales growth was the main contributor to the
gross profit increase of 16.9% to $75.8 million for fiscal
2006. RFPD’s gross margin increased to 22.7% in fiscal
2006 from 21.9% in fiscal 2005, primarily due to inventory
write-downs of $1.3 million recorded in the third quarter of
fiscal 2005, and a shift in product mix in fiscal 2006 as a
result of higher sales of engineered solutions. The gross
margin improvement was partially offset by the increase in
Asia/Pacific sales that reduced the overall gross margin due
to lower gross margins in Asia/Pacific than other geographic
regions.
RFPD net sales increased 15.6% in fiscal 2005 to $296.3
million. The sales growth was driven by continued strength in
the network access and passive/interconnect product lines
as net sales grew 22.1% and 18.0% to $105.3 million and
$53.3 million, respectively. The increase in network access
product lines sales in fiscal 2005 was a result of increased
demand for semiconductor products from mobile
infrastructure customers in Asia/Pacific and North America.
The increase in passive/interconnect product lines sales was
due mainly to sales of interconnect products to North
American customers involved with the emergency (E911)
cell phone location system rollout. Net sales in Asia/Pacific
increased 22.9% to $94.2 million in fiscal 2005, driven by
OEM demand in 2.5 generation (2.5G) infrastructure,
broadcasting and semiconductor fabrication equipment
markets. Gross margins in fiscal 2005 decreased 90 basis
points primarily due to inventory write-downs of $1.3 million
recorded in the third quarter of fiscal 2005 when the
Company implemented restructuring actions.
Net Sales and Gross Margin Analysis
In fiscal 2006, consolidated net sales increased 10.2% to
$637.9 million as all four SBUs increased net sales over the
prior year with strong demand for custom display and
wireless products. In addition, effective June 1, 2005, the
Company acquired Kern, a leading display technology
company in Europe. Net sales for Kern, included in DSG and
the Europe region, for fiscal 2006 were $14.1 million. Fiscal
2006 contained 53 weeks as compared to 52 weeks in fiscal
2005. Consolidated net sales in fiscal 2005 increased 11.3%
to $578.7 million due to increased demand across all SBUs.
Net sales by SBU and percent change year-over-year are
presented in the following table (in thousands):
Net Sales
RFPD
EDG
SSD
DSG
Corporate
Total
June 3,
2006
$334,131
94,443
108,843
95,010
5,513
$ 637,940
Fiscal Year Ended
May 29,
2004
FY06 vs 05
% Change
May 28,
2005
FY05 vs 04
% Change
$ 296,334
92,174
105,581
78,078
6,557
$ 578,724
$ 256,270
87,856
101,979
66,452
7,266
$ 519,823
12.8%
2.5%
3.1%
21.7%
(15.9%)
10.2%
15.6%
4.9%
3.5%
17.5%
(9.8%)
11.3%
*NOTE: The fiscal 2005 and fiscal 2004 data has been reclassified to
conform with the fiscal 2006 presentation. The modification includes the
reorganization of RFPD (formerly RFWC) and EDG (formerly IPG) in the
second quarter of fiscal 2006. Corporate consists of freight, other
non-specific net sales, and customer cash discounts.
Gross profit reflects the distribution and manufacturing
product margin less manufacturing variances, customer
returns, scrap and cycle count adjustments, engineering
costs, and other provisions. Gross profit on freight, general
inventory obsolescence provisions, and miscellaneous costs
are included under the caption “Corporate” in fiscal 2004. In
fiscal 2006 and 2005, the Company allocated charges
related to inventory overstock directly to each SBU. Gross
profit by SBU and percent of SBU sales are presented in the
following table (in thousands):
Fiscal Year Ended
Gross
Profit
RFPD
EDG
SSD
DSG
Subtotal
Corporate
Total
June 3, 2006
May 28, 2005
May 29, 2004
$ 75,834
30,438
27,279
24,509
158,060
(2,291)
$ 155,769
22.7% $ 64,853 21.9% $ 58,408 22.8%
27,642 31.5%
32.2%
26,045 25.5%
25.1%
25.8%
17,105 25.7%
139,008 24.3% 129,200 25.2%
25.0%
29,401 31.9%
26,889 25.5%
17,865 22.9%
(3,014)
(2,478)
24.4% $ 135,994 23.5% $126,722 24.4%
*NOTE: The fiscal 2005 and fiscal 2004 data has been reclassified to
conform with the fiscal 2006 presentation. The modification includes the
reorganization of RFPD (formerly RFWC) and EDG (formerly IPG) in the
second quarter of fiscal 2006. Corporate consists of freight, other non-
specific gross profit, and customer cash discounts.
Net sales and gross profit trends are analyzed for each
strategic business unit in the following sections.
12
Electron Device Group
Display Systems Group
DSG net sales increased 21.7% during fiscal 2006 to
$95.0 million as compared with $78.1 million in fiscal 2005.
Net sales for Kern in fiscal 2006 were $14.1 million. The
sales growth for fiscal 2006 was mainly due to the Kern
acquisition and an increase in sales of the custom display
product line which increased 18.4% to $26.9 million as
compared to $22.7 million for fiscal 2005. The sales increase
was partially offset by lower sales in the specialty displays
and cathode ray tube product lines. DSG gross profit
increased 37.2% to $24.5 million during fiscal 2006 from
$17.9 million for fiscal 2005 due mainly to the higher sales
volume. Gross margin increased to 25.8% from 22.9%
during fiscal 2006 and 2005, respectively. The gross margin
improvement was due mainly to an improved product mix
primarily from sales growth in the medical monitor product
lines. In addition, during the second quarter of fiscal 2006,
the Company recorded a reduction in warranty expense of
$0.9 million as a result of a change in estimate due to
favorable warranty experience.
DSG net sales in fiscal 2005 grew 17.5% to $78.1 million
as large orders drove custom display net sales to increase
by 63.7% to $22.0 million. Gross margins in fiscal 2005
decreased 280 basis points primarily due to declining
average selling prices for medical monitors.
EDG net sales increased 2.5% during fiscal 2006 to
$94.4 million from $92.2 million during fiscal 2005.
Semiconductor fabrication sales increased 22.5% during
fiscal 2006 to $17.2 million as compared to $14.0 million in
fiscal 2005 with growth mainly in the U.S. Gross profit for
EDG increased 3.5% to $30.4 million during fiscal 2006 due
to an improved product mix. Gross margin increased to
32.2% from 31.9% for fiscal 2006 and 2005, respectively,
due to a slightly improved product mix primarily as a result of
the increase in semiconductor fabrication equipment sales.
EDG net sales in fiscal 2005 grew 4.9% to $92.2 million
as tube net sales grew 4.3% in fiscal 2005 to $80.8 million.
Fiscal 2005 sales of broadcast tubes were lower than in
fiscal 2004 as many of the large government broadcast
orders are issued on an every other year basis. Gross
margins in fiscal 2005 increased 40 basis points to 31.9%
primarily due to growth of higher margin tube products
partially offset by additional freight expenses of $0.5 million
in fiscal 2005.
Security Systems Division
Net sales for SSD increased 3.1% to $108.8 million in
fiscal 2006 from $105.6 million in fiscal 2005. Net sales of
private label products increased 9.0% to $35.0 million during
fiscal 2006 as compared with $32.1 million during fiscal 2005,
and were partially offset by a slight decrease in distribution
products. Net sales in Canada in fiscal 2006 increased 13.2%
from the prior year; however, net sales in Europe and the
U.S. in fiscal 2006 decreased 18.0% and 9.8%, respectively.
Gross profit and gross margin as a percentage of net sales
remained relatively flat during fiscal 2006 as compared to
fiscal 2005.
Net sales for SSD increased 3.5% in fiscal 2005 to
$105.6 million driven by stronger demand in Canada, partially
offset by weaker demand in the U.S. and Europe. Net sales in
Canada grew 12.9% to $58.5 million, due in part to sales
growth in key national accounts and a strengthened
relationship with a major vendor partner, with net sales in the
U.S. and Europe declining 8.7% and 4.4% to $27.9 million
and $14.2 million, respectively, in fiscal 2005. Gross margins
were 25.5% in both fiscal 2005 and 2004. Inventory
write-downs of $0.3 million recorded in the third quarter of
fiscal 2005 when the Company implemented restructuring
actions and additional freight expenses of $1.0 million were
partially offset by increased growth of higher margin private
label sales.
13
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Sales by Geographic Area
The Company has grown through a balanced emphasis
on investment in both North America and other areas of the
world and currently has 37 facilities in North America, 22 in
Europe, 15 in Asia/Pacific, and 5 in Latin America. On a
geographic basis, the Company primarily categorizes its
sales by destination: North America, Europe, Asia/Pacific,
Latin America, and Corporate. Net sales by geographic area
and percent change year-over-year are presented in the
following table (in thousands):
Net Sales
June 3,
2006
Fiscal Year Ended
May 29
2004
May 28,
2005
North America $ 319,362 $ 303,708 $ 275,491
116,714
Europe
104,068
Asia/Pacific
20,065
Latin America
3,485
Corporate
$ 637,940 $ 578,724 $ 519,823
140,870
148,000
24,336
5,372
123,846
124,799
21,366
5,005
Total
FY06 vs 05
% Change
5.2 %
13.7 %
18.6 %
13.9 %
7.3 %
10.2 %
FY05 vs 04
% Change
10.2 %
6.1 %
19.9 %
6.5 %
43.6 %
11.3 %
*NOTE: The fiscal 2005 and 2004 data has been reclassified to conform
with the fiscal 2006 presentation. Europe includes sales to Middle East and
Africa. Latin America includes sales to Mexico. Corporate consists of
freight and other non-specific sales.
Gross profit by geographic area and percent of
geographic sales are presented in the following table
(in thousands):
Gross Profit
June 3, 2006
May 28, 2005
May 29, 2004
Fiscal Year Ended
North America $ 84,626 26.5% $ 80,262 26.4% $ 71,763 26.0%
32,619 27.9%
Europe
23,304 22.4%
Asia/Pacific
4,860 24.2%
Latin America
150,177 26.2% 132,546 25.7%
(14,183)
38,608 27.4%
35,533 24.0%
6,786 27.9%
165,553 26.2%
34,345 27.7%
29,691 23.8%
5,879 27.5%
(5,824)
(9,784)
$155,769 24.4% $135,994 23.5% $126,722 24.4%
Subtotal
Corporate
Total
*NOTE: The fiscal 2005 and 2004 data has been reclassified to conform
with the fiscal 2006 presentation. Europe includes sales and gross profit to
Middle East and Africa. Latin America includes sales and gross profit to
Mexico. Corporate consists of freight and other non-specific sales and
gross profit.
Net sales in North America increased 5.2% in fiscal 2006
to $319.4 million as compared with $303.7 million in fiscal
2005 with all four SBUs contributing to the growth. A majority
of the sales increase in fiscal 2006 was due to increases in
demand for wireless products in the U.S. and security
systems in Canada. In addition, net sales in Canada
experienced an overall gain of 12.2% to $85.7 million in
fiscal 2006 versus $76.4 million in the prior fiscal year.
An increase in net sales of higher margin products in the
security, display and semiconductor fabrication markets
resulted in gross margin improvement in North America to
26.5% for fiscal 2006 as compared with 26.4% in fiscal 2005.
Net sales in North America increased 10.2% to $303.7
million in fiscal 2005 led by strong display systems and
wireless demand in the U.S. and continued growth in security
systems sales in Canada. Gross margins in North America
improved 40 basis points in fiscal 2005 due to expanding
margins in Canada for security systems and wireless sales.
14
Net sales in Europe grew 13.7% in fiscal 2006 to $140.9
million from $123.8 million in fiscal 2005 due to the
incremental display systems products sales from the Kern
acquisition and growth in wireless demand mainly in Israel,
Spain and Germany. This increase was partially offset by
lower sales of security systems and electron device
products. Gross margin in Europe in fiscal 2006 decreased
to 27.4% from 27.7% in fiscal 2006 and 2005, respectively,
primarily due to lower gross margins on wireless products as
compared to security systems and electron device products.
Net sales in Europe increased 6.1% to $123.8 million in
fiscal 2005 driven by continued wireless demand growth,
particularly in the United Kingdom, France, and Israel.
Gross margins in Europe decreased 20 basis points in fiscal
2005 due to a decline in high margin cathode ray tube sales
in DSG.
The Company experienced its eighth consecutive year of
double-digit growth in Asia/Pacific as net sales increased
18.6% to $148.0 million in fiscal 2006 led by continued
strong demand for wireless products in the cellular
infrastructure, semiconductor fabrication, and broadcasting
markets. Net sales in Korea increased 35.4% to $43.5 million
mainly due to higher demand for network access products.
Growth in broadcast product sales improved sales in
Singapore by 29.3% to $23.5 million. In addition, China
experienced an increase in network access and power
components contributing to a 7.2% sales improvement to
$43.3 million. Gross margins increased in all strategic
business units in Asia/Pacific for fiscal 2006, as compared
with last fiscal year due mainly to shifts in product mix
focused on exclusive franchises, design registration
programs, and the reduction of lower margin programs.
In fiscal 2005 net sales in Asia/Pacific grew 19.9% to
$124.8 million led by China’s on-going demand growth. Net
sales in China increased 60% in fiscal 2005 to $40.4 million,
primarily due to OEM demand in the 2.5G infrastructure,
avionics, and broadcasting markets. In fiscal 2005, the
Company’s gross margins in Asia/Pacific improved 140
basis points due to expanding margins for wireless sales,
particularly in Korea, partially offset by the large sales growth
in China at lower margins.
Net sales in Latin America improved 13.9% to $24.3
million in fiscal 2006 as compared with $21.4 million in fiscal
2005. The net sales growth was mainly driven by an increase
in sales of security products/systems integration and
refocusing the EDG sales team after the realignment. Gross
margin in Latin America increased to 27.9% in fiscal 2006
versus 27.5% in fiscal 2005 primarily due to higher gross
margins from security systems and electron device products.
Net sales in Latin America grew 6.5% in fiscal 2005 to
$21.4 million as all four strategic business units increased
sales. Gross margins in Latin America improved 330 basis
points in fiscal 2005 as margins recovered for security
systems and industrial power sales.
Selling, General and Administrative Expenses
SG&A expenses increased 7.6% to $139.6 million in
fiscal 2006 as compared with $129.7 million in fiscal 2005.
The increase in SG&A expenses was primarily due to the
acquisition of Kern and severance expense. The Company
recorded severance expense of $4.0 million during fiscal
2006. During the third quarter of fiscal 2005, the Company
recorded a restructuring charge, including severance and
lease termination costs, of $2.2 million. Total SG&A
expenses in fiscal 2006 decreased to 21.9% of net sales
compared with 22.4% in fiscal 2005.
SG&A expenses increased 20.2% in fiscal 2005 to
$129.7 million from $108.0 million in fiscal 2004. The
Company implemented restructuring actions at the end of
the third quarter of fiscal 2005, which included changes in
management and a reduction in workforce, to accelerate the
alignment of operations with the Company’s engineered
solutions strategy and improve operating efficiency.
Terminations affected over 60 employees across various
business functions, operating units and geographic regions.
Increases in expenses included $2.2 million of restructuring
costs, $8.5 million of payroll-related expenses, $2.4 million
of audit, tax, and Sarbanes-Oxley compliance fees, and
incremental expenses related to bad debt, facility costs, and
travel. The increase in payroll-related expenses, facility
costs, and travel were mainly attributable to supporting the
growth in sales.
(Gain) Loss on Disposal of Assets
On May 26, 2005, the Company completed the sale of
approximately 205 acres of undeveloped real estate
adjoining its headquarters in LaFox, Illinois. The sale
resulted in a gain of $9.9 million, before taxes, and was
recorded in gain on disposal of assets in the Consolidated
Statements of Operations in fiscal 2005.
Other (Income) and Expense
In fiscal 2006, other (income) expense increased to an
expense of $10.6 million from an expense of $7.6 million in
fiscal 2005. Other (income) expense included a foreign
exchange loss of $0.7 million during fiscal 2006 and a
foreign exchange gain of $0.9 million in fiscal 2005. The
foreign exchange variance for fiscal 2006 was due to the
strengthening of the U.S. dollar, primarily related to
receivables due from foreign subsidiaries to the U.S. parent
company and denominated in foreign currencies. Interest
expense increased to $9.8 million in fiscal 2006 from $8.9
million in fiscal 2005 as a result of higher average balances
on the Company’s multi-currency revolving credit agreement
(credit agreement) and an increase in interest rates. The
weighted average interest rate increased to 7.42% in fiscal
2006 from 6.38% in fiscal 2005.
Interest expense decreased to $8.9 million in fiscal 2005
from fiscal 2004 as a result of payments made to reduce
debt from the proceeds received from an equity offering
made in the first quarter of fiscal 2005 and elimination of a
fixed rate swap, offset by interest on incremental borrowings
to fund working capital requirements. The weighted average
interest rate was 6.38% and 5.98% for fiscal 2005 and 2004,
respectively. Fiscal 2005 included a foreign exchange gain of
$0.9 million and investment income of $0.4 million compared
to a foreign exchange loss of $0.4 million and investment
income of $0.2 million in fiscal 2004.
Income Tax Provision
The effective income tax rates for fiscal 2006 and 2005
were 147.4% and 286.6%, respectively. The difference
between the effective tax rates as compared to the U.S.
federal statutory rate of 34% primarily results from the
Company’s geographical distribution of taxable income or
losses and valuation allowances related to net operating
losses. For fiscal 2006, the tax benefit related to net
operating losses was limited by the requirement for a
valuation allowance of $7.2 million, which increased the
effective income tax rate by 129.9%. For fiscal 2005, the tax
benefit related to net operating losses was limited by the
requirement for a valuation allowance of $16.7 million,
which increased the effective income tax rate by 194.0%.
In addition, deferred tax liabilities related to unrepatriated
earnings previously considered permanently reinvested
also increased the effective income tax rate in fiscal 2005
by 57.3%.
At June 3, 2006, domestic net operating loss
carryforwards (NOL) amount to approximately $21.3 million.
These NOLs expire between 2024 and 2026. Foreign net
operating loss carryforwards total approximately $14.5
million with various or indefinite expiration dates. During
fiscal 2005, due to changes in the level of certainty regarding
realization, a valuation allowance of approximately $15.9
million was established to offset certain domestic deferred
tax assets, primarily inventory valuation, and domestic net
operating loss carryforwards. In addition, the Company
recorded an additional valuation allowance of approximately
$0.8 million relating to deferred tax assets from certain
foreign subsidiaries. In fiscal 2006, the Company
re-evaluated the realization of certain deferred tax assets,
resulting in an additional valuation allowance of $2.2 million.
The Company believes that in order to reverse the recorded
valuation allowance in any subsidiary, the Company would
likely need to have positive cumulative earnings in that
subsidiary for the three-year period preceding the year of the
reversal. The Company also has an alternative minimum tax
credit carryforward at June 3, 2006, in the amount of $1.2
million that has an indefinite carryforward period.
15
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Income Tax Provision (cont’d)
Income taxes paid, including foreign estimated tax
payments, were $6.3 million, $3.3 million, and $1.7 million in
fiscal 2006, 2005, and 2004, respectively.
At the end of fiscal 2004, all of the cumulative positive
earnings of the Company’s foreign subsidiaries, amounting
to $35.1 million, were considered permanently reinvested
pursuant to APB No. 23, Accounting for Income Taxes-
Special Areas. As such, U.S. taxes were not provided on
these amounts. In fiscal 2005, because of a strategic
decision, the Company determined that approximately $12.9
million of one of its foreign subsidiaries’ earnings could no
longer be considered permanently reinvested as those
earnings may be distributed in future years. Based on
management’s potential future plans regarding this
subsidiary, it was determined that these earnings would no
longer meet the specific requirements for permanent
reinvestment under APB No. 23. Upon distribution of those
earnings in the form of dividends or otherwise, the Company
would be subject to both U.S. income tax and foreign
withholding taxes. As such, the Company established a
deferred tax liability of approximately $4.9 million during
fiscal 2005. The Company revised its estimate of the
deferred tax liability of $4.9 million at June 3, 2006 based on
changes in management’s potential future plans for this
subsidiary during fiscal 2006. In fiscal 2006, the Company
revised its strategy and as of June 3, 2006 again and
concluded that the undistributed earnings of this subsidiary
were considered permanently reinvested outside the United
States. The reversal of the $4.9 million deferred tax liability in
fiscal 2006 resulted in an additional valuation allowance in
the same amount and, therefore, did not effect the fiscal
2006 tax provision. Cumulative positive earnings of the
Company’s foreign subsidiaries were still considered
permanently reinvested pursuant to APB No. 23 and
amounted to $64.2 million at June 3, 2006. Due to various
tax attributes that are continually changing, it is not possible
to determine what, if any, tax liability might exist if such
earnings were to be repatriated.
In May 2005, the Company was informed by one of its
foreign subsidiaries that its records may not be adequate to
support the taxable revenues and deductions included within
tax returns previously filed for the tax years 2003 and 2004.
At this time, the Company has not received notification from
any tax authority regarding this matter. The Company has
increased its income tax reserve for this potential exposure.
During fiscal 2005, the Canadian taxing authority
proposed an income tax assessment for fiscal 1998 through
fiscal 2002. The Company appealed the income tax
assessment; however, the Company paid the entire tax
liability in fiscal 2005 to the Canadian taxing authority to
avoid additional interest and penalties if the Company’s
16
appeal was denied. The payment was recorded as an
increase to income tax provision in fiscal 2005. In May 2006,
the appeal was settled in the Company’s favor. The
Company will receive a refund of approximately $1.0 million,
which was recorded as a reduction to income tax provision
during the fourth quarter of fiscal 2006.
On October 22, 2004, the President signed the American
Jobs Creation Act of 2004 (the Act). The Act provides a
deduction for income from qualified domestic production
activities, which will be phased in from 2005 through 2010. In
return, the Act also provides for a two-year phase out ending
December 31, 2006 of the existing extraterritorial income
exclusion (ETI) for foreign sales that was viewed to be
inconsistent with the international trade protocols by the
European Union. The Company did not receive a tax benefit
from the current ETI exclusion in fiscal 2006. When this
benefit is fully phased out, it will have no impact on the rate.
Another provision of the Act creates a temporary
incentive for U.S. corporations to repatriate accumulated
income earned abroad by providing an 85% dividends-
received deduction for certain dividends from controlled
foreign corporations. The calculation of the deduction is
subject to a number of limitations. This provision of the Act
has no material impact on the operations of the Company for
fiscal 2006 and is expected to have no material impact on
the operations of the Company for fiscal 2007, as the
Company does not intend at this time to repatriate earnings
to the U.S. from foreign countries.
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 U.S.
and foreign tax authorities and regularly assesses the
likelihood of adverse outcomes resulting from these
examinations to determine the adequacy of the provision for
income taxes.
Net Income and Per Share Data
In fiscal 2006, the Company reported a net loss of $2.6
million, or $0.15 per diluted common share and $0.14 per
diluted Class B common share as compared with a net loss
of $16.0 million, or $0.96 per diluted common share and
$0.87 per diluted Class B common share in fiscal 2005. In
fiscal 2004, the Company reported net income of $5.5
million, or $0.38 per diluted common share and $0.36 per
diluted Class B common share.
Liquidity and Capital Resources
The Company has financed its growth and cash needs
largely through income from operations, borrowings under
the revolving credit facilities, an equity offering, issuance of
convertible senior subordinated notes, and sale of assets.
Liquidity provided by operating activities is reduced by
working capital requirements, debt service, capital
expenditures, dividends, and business acquisitions.
Liquidity is increased by proceeds from borrowings and
dispositions of businesses and assets.
Cash and cash equivalents was $17.0 million at June 3,
2006 as compared to $24.3 million at May 28, 2005. Cash
provided by operating activities was $5.5 million in fiscal
2006 as compared to cash utilized by operating activities of
$2.0 million in fiscal 2005. The increase in cash provided by
operating activities in fiscal 2006 was mainly due to the
increase in payables partially offset by increases in
inventories and accounts receivable. Receivables increased
due to an approximate 13% increase in sales volume during
the last two months of fiscal 2006 as compared to fiscal
2005, while inventories increased due to the Kern and Image
Systems acquisitions and increased levels of inventory in
anticipation of future increases in sales. The increase in
payables was primarily the result of the increased levels of
inventory. The cash utilization in fiscal 2005 was mainly due
to the increase in inventories related to the Company’s
stocking levels required for new exclusive supplier
agreements.
Net cash used in investing activities of $12.7 million for
fiscal 2006 was mainly the result of the Kern acquisition,
effective June 1, 2005, located in Donaueschingen in
southern Germany. The cash outlay for Kern was $6.6
million, net of cash acquired. In addition, effective
October 1, 2005, the Company acquired certain assets of
Image Systems, a subsidiary of Communications Systems,
Inc. in Hector, Minnesota. The initial cash outlay for Image
Systems was $0.2 million. In addition, the Company spent
$6.2 million on capital projects during fiscal 2006 primarily
related to facility and information technology projects. Net
cash provided by investing activities of $3.0 million in fiscal
2005 was mainly the result of the sale of approximately 205
acres of undeveloped real estate adjoining the Company’s
headquarters in La Fox, Illinois for $10.9 million, which was
used to reduce debt. This was offset partially by the $7.0
million spent on capital projects during fiscal 2005,
primarily related to implementing PeopleSoft purchasing and
inventory modules, facility improvements at the Company’s
headquarters, disaster recovery equipment, and
Sarbanes-Oxley remediation software and hardware.
Net cash used in financing activities was $0.6 million in
fiscal 2006. Net cash provided by financing activities was
$6.3 million in fiscal 2005. During the first quarter of fiscal
2005, the Company had an equity offering for three million
shares of common stock that contributed $27.8 million in net
proceeds that was used to reduce debt and fund working
capital requirements.
On November 21, 2005, the Company sold $25.0 million
in aggregate principal amount of 8% convertible senior
subordinated notes due 2011 (8% notes) pursuant to an
indenture dated November 21, 2005. The 8% notes bear
interest at a rate of 8% per annum, however the Company is
paying an additional 1% as a result of failing to register the
8% notes by March 21, 2006. Interest is due on June 15 and
December 15 of each year. The 8% notes are convertible at
the option of the holder, at any time on or prior to maturity,
into shares of the Company’s common stock at a price equal
to $10.31 per share, subject to adjustment in certain
circumstances. In addition, the Company may elect to
automatically convert the 8% notes into shares of common
stock if the trading price of the common stock exceeds 150%
of the conversion price of the 8% notes for at least 20 trading
days during any 30 trading day period subject to a payment
of three years of interest if the Company elects to convert the
8% notes prior to December 20, 2008.
The indenture provides that on or after December 20,
2008, the Company has the option of redeeming the 8%
notes, in whole or in part, for cash, at a redemption price
equal to 100% of the principal amount of the 8% notes to be
redeemed, plus accrued and unpaid interest, if any, to, but
excluding, the redemption date. Holders may require the
Company to repurchase all or a portion of their 8% notes for
cash upon a change-of-control event, as described in the
indenture, at a repurchase price equal to 100% of the
principal amount of the 8% notes to be repurchased, plus
accrued and unpaid interest, if any, to, but excluding the
repurchase date. The 8% notes are unsecured and
subordinate to the Company’s existing and future senior
debt. The 8% notes rank on parity with the Company’s
existing 7¾% convertible senior subordinated notes
(7¾% notes).
The Company maintains $14.0 million of the 8% notes in
current portion of long-term debt at June 3, 2006. This
current classification is due to the Company entering into two
separate agreements in August 2006 with certain holders of
its 8% notes to purchase $14.0 million of the 8% notes. As
the 8% notes are subordinate to the Company’s existing
credit agreement, the Company received a waiver from its
lending group to permit the purchase. The purchases will be
financed through additional borrowings under the Company’s
credit agreement. In the first quarter of fiscal 2007, the
Company will record early extinguishment expenses of
approximately $2.7 million.
17
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Liquidity and Capital Resources (cont’d)
In February 2005, the Company issued $44.7 million of
7¾% notes due 2011 in exchange for $22.2 million of its
7¼% convertible debentures (7¼% debentures) due
December 2006 and $22.5 million of its 8¼% convertible
senior debentures (8¼% debentures) due June 2006.
The 7¾% notes are convertible at the holder’s option, at any
time on or prior to maturity, into shares of the Company’s
common stock at a price equal to $18.00 per share, subject
to adjustments in certain circumstances. On or after
December 19, 2006, the Company may elect to automatically
convert the 7¾% notes into shares of common stock if the
trading prices of the common stock exceeds 125% of the
conversion price of the 7¾% notes for at least twenty trading
days during any thirty trading day period ending within five
trading days prior to the date of the automatic conversion
notice. Subsequent to the exchange, the Company had
outstanding $4.8 million of 7¼% debentures due December
2006, $17.5 million of 8¼% debentures due June 2006, and
$44.7 million of 7¾% notes.
In October 2004, the Company renewed its credit
agreement with the current lending group in the amount of
approximately $109.0 million (the size of the credit line varies
based on fluctuations in foreign currency exchange rates).
The credit agreement expires in October 2009, and the
outstanding balance at that time will become due. At June 3,
2006, $57.1 million was outstanding on the credit agreement.
The new credit agreement is principally secured by the
Company’s trade receivables and inventory. The credit
agreement bears interest at applicable LIBOR rates plus a
margin, varying with certain financial performance criteria. At
June 3, 2006, the applicable margin was 225 basis points.
Outstanding letters of credit were $1.7 million at June 3,
2006, leaving an unused line of $53.0 million under the total
credit agreement; however, this amount was reduced to $7.5
million due to maximum permitted leverage ratios. The
commitment fee related to the agreement is 0.25% per
annum payable quarterly on the average daily unused portion
of the aggregate commitment. The Company’s credit
agreement consists of the following facilities as of
June 3, 2006:
US Facility
Canada Facility
Sweden Facility
UK Facility
Euro Facility
Japan Facility
Total
Capacity
$ 70,000
15,418
8,898
8,393
6,404
2,665
$ 111,778
Amount
Outstanding
Weighted Average
Interest Rate
$ 45,700
5,136
—
4,476
—
1,777
$ 57,089
7.21 %
6.00 %
—
6.93 %
—
1.85 %
6.92 %
*NOTE: Due to maximum permitted leverage ratios, the amount of the
unused line cannot be calculated on a facility-by-facility basis.
At March 4, 2006, the Company was not in compliance
with credit agreement covenants with respect to the leverage
ratio, fixed charge coverage ratio, and tangible net worth
covenants. On August 4, 2006, the Company received a
waiver from its lending group for the defaults and executed
an amendment to the credit agreement. In addition, the
amendment also (i) permitted the purchase of $14.0 million
of the 8% notes; (ii) adjusted the minimum required fixed
charge coverage ratio for the first quarter of fiscal 2007; (iii)
adjusted the minimum tangible net worth requirement; (iv)
permitted certain sales transactions contemplated by the
Company; (v) eliminated the Company’s Sweden Facility; (vi)
reduced the Company’s Canada Facility by approximately
$5.4 million; (vii) changed the definition of “Adjusted
Earnings Before Interest, Taxes, Depreciation, and
Amortization (EBITDA)” for covenant purposes; and (viii)
provided that the Company maintain excess availability on
the borrowing base of not less than $20.0 million until the
Company filed its Form 10-Q for the quarter ended
March 4, 2006, at which time the Company will maintain
excess availability of the borrowing base of not less than
$10.0 million.
At September 3, 2005, the Company was not in
compliance with credit agreement covenants with respect to
the tangible net worth covenant due solely to the additional
goodwill recorded as a result of the Kern acquisition. On
October 12, 2005, the Company received a waiver from its
lending group for the default and executed an amendment to
the credit agreement. The amendment changed the
minimum tangible net worth requirement to adjust for the
goodwill associated with the Kern acquisition.
At May 28, 2005, the Company was not in compliance
with its credit agreement covenants with respect to the fixed
charge coverage ratio. On August 24, 2005, the Company
received a waiver from its lending group for the default and
executed an amendment to the credit agreement. The
amendment changed the maximum permitted leverage ratios
and the minimum required fixed charge coverage ratios for
each of the first three quarters of fiscal 2006 to provide the
Company additional flexibility for these periods. In addition,
the amendment provided that the Company will maintain
excess availability on the borrowing base of not less than
$23 million until June 30, 2006 if a default or event of default
does not exist on or before this date. The applicable margin
pricing was increased by 25 basis points. In addition, the
amendment extended the Company’s requirement to
refinance the remaining $22.3 million aggregate principal
amount of the 7¼% debentures and the 8¼% debentures
from February 28, 2006 to June 10, 2006.
18
As more fully described in Note B to the Notes to
Consolidated Financial Statements in the Company’s Annual
Report on Form 10-K/A (Amendment No. 2) for the fiscal
year ended May 28, 2005, as a result of errors discovered by
the Company, the consolidated financial statements for fiscal
2005, 2004, and 2003 have been amended and restated to
correct these errors. As a result, the Company would not
have been in compliance with its tangible net worth covenant
for the third quarter of fiscal 2005 and its leverage ratio and
tangible net worth covenants as of the end of fiscal 2005.
On August 4, 2006, the Company received a waiver from its
lending group for defaults arising from the restatement and
executed an amendment to the credit agreement.
Annual dividend payments for fiscal 2006 amounted to
$2.7 million. The Company’s policy regarding payment of
dividends is reviewed periodically by the Board of Directors
in light of the Company’s operating needs and capital
structure. Over the last 19 years, the Company has been in a
position to regularly pay a quarterly dividend of $0.04 per
common share and $0.036 per Class B common share.
The Company currently expects to continue paying dividends
at this historical rate in fiscal 2007.
See further for “Risk Management and Market Sensitive
Financial Instruments” for information regarding the effect on
net income of market changes in interest rates.
Contractual Obligations
Contractual obligations by expiration period as of June 3,
2006 are presented in the table below (in thousands):
Convertible notes(1)
Convertible notes - interest(1)
Floating-rate multi-currency
revolving credit agreement(2)
Floating-rate multi-currency
revolving credit agreement -
interest(2)
Purchase obligations(3)
Lease obligations(4)
Other
Total
Payments Due by Period
Total
$ 69,683
24,068
Less than
1 Year
$ 14,000
4,783
1 - 3
Years
$ —
8,686
57,089
—
—
13,170
137,883
18,673
36
$ 320,602
3,951
137,883
6,263
16
$ 166,896
7,902
—
6,166
20
$ 22,774
Convertible notes(1)
Convertible notes - interest(1)
Floating-rate multi-currency
revolving credit agreement(2)
Floating-rate multi-currency
revolving credit agreement - interest(2)
Purchase obligations(3)
Lease obligations(4)
Other
Total
Payments Due by Period
3 - 5
Years
$
—
8,686
More than
5 Years
$ 55,683
1,913
57,089
—
1,317
—
2,850
—
$ 69,942
—
—
3,394
—
$ 60,990
(1) Convertible notes consist of the 7¾% notes, with principal of $44.7
million due December 2011, and 8% notes, with principal of $25.0
million due June 2011. Payments of $14.0 million of 8% notes are
included in amounts due less than one year.
(2) The credit agreement expires in October 2009 and bears interest at
applicable LIBOR rates plus a 225 basis point margin. Interest in the
table above is calculated using 6.92% interest rate and $57.1 million
principal amount as of June 3, 2006 for all periods presented.
(3) The Company has outstanding purchase obligations with vendors at
the end of fiscal 2006 to meet operational requirements as part of the
normal course of business.
(4) Lease obligations are related to certain warehouse and office facilities
and office equipment under non-cancelable operating leases.
The Company believes that the existing sources of
liquidity, including current cash, as well as cash provided by
operating activities, supplemented as necessary with funds
available under credit arrangements, will provide sufficient
resources to meet known capital requirements and working
capital needs for the fiscal year ended June 2, 2007.
19
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Critical Accounting Policies and Estimates
The Company’s consolidated financial statements have
been prepared in accordance with U.S. generally accepted
accounting principles. The preparation of these financial
statements requires the Company to make significant
estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, and expenses and related
disclosure of contingent assets and liabilities. On an ongoing
basis, the Company evaluates its estimates, including those
related to allowances for doubtful accounts, inventories,
intangible assets, income taxes, and contingencies and
litigation. The Company bases its estimates on historical
experience and on various other assumptions that are
believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may
differ from these estimates under different assumptions
or conditions.
The policies discussed below are considered by
management to be critical to understanding the Company’s
financial position and results of operations. Their application
involves more significant judgments and estimates in
preparation of the Company’s consolidated financial
statements. For all of these policies, management cautions
that future events rarely develop exactly as forecast, and the
best estimates routinely require adjustment.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of
its customers to make required payments. The estimates are
influenced by the following considerations: continuing credit
evaluation of customers’ financial conditions; aging of
receivables, individually and in the aggregate; large number
of customers which are widely dispersed across geographic
areas; collectability and delinquency history by geographic
area; and the fact that no single customer accounts for 10%
or more of net sales. Material changes in one or more of
these considerations may require adjustments to the
allowance affecting net income and net carrying value of
accounts receivable. At June 3, 2006, the allowance for
doubtful accounts was $2.1 million as compared to $1.9
million at May 28, 2005.
Impairment of Investments
The Company holds a portfolio of investment securities
and periodically assesses its recoverability. In the event of a
decline in fair value of an investment, the judgment is made
whether the decline is other-than-temporary. Management’s
assessment as to the nature of a decline is largely based on
the duration of that market decline, financial health of and
specific prospects for the issuer, and the Company’s cash
requirements and intent to hold the investment. If an
investment is impaired and the decline in market value is
considered to be other-than-temporary, an appropriate write-
down is recorded. The Company recognized investment
impairment in fiscal 2006, 2005, and 2004 of $93, $49, and
$226, respectively.
Inventories
The Company carries all its inventories at the lower of
cost or market using the first-in, first-out (FIFO) method.
Inventories include material, labor, and overhead associated
with such inventories. Substantially all inventories represent
finished goods held for sale.
Provisions for obsolete or slow moving inventories are
recorded based upon regular analysis of stock rotation,
obsolescence, and assumptions about future demand and
market conditions. If future demands, change in the industry,
or market conditions differ from management’s estimates,
additional provisions may be necessary.
The Company recorded inventory obsolescence and
overstock provisions of $1.8 million, $4.2 million, and $2.2
million in fiscal 2006, 2005, and 2004, respectively, which
was included in cost of sales. The provisions were principally
for obsolete and slow moving parts. The parts were written
down to estimated realizable value.
Beginning in fiscal 2004, the Company implemented new
policies and procedures to strengthen its inventory
management process while continuing to invest in system
technology to further enhance its inventory management
tools. These policy and procedure changes included
increased approval authorization levels for inventory
purchases, quarterly quantitative and qualitative inventory
aging analysis and review, changes in the budgeting process
to establish targets and metrics that relate to its return on
assets rather than only a revenue and profit expectation, and
realignment of incentive programs in accordance with these
targets and metrics. The Company is committed to inventory
management as an ongoing process as the business
evolves and technology changes.
Long-Lived and Intangible Assets
The Company periodically evaluates the recoverability
of the carrying amounts of its long-lived assets, including
software, property, plant and equipment. The Company
assesses in accordance with Statement of Financial
Accounting Standard (SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the possibility
of long-lived assets being impaired when events trigger
the likelihood.
Impairment is assessed when the undiscounted
expected cash flows derived from an asset are less than its
carrying amount. If impairment exists, the carrying value of
the impaired asset is written down and impairment loss is
20
recorded in operating results. In assessing the potential
impairment of the Company’s goodwill and other intangible
assets, management makes significant estimates and
assumptions regarding the discounted future cash flows to
determine the fair value of the respective assets on an
annual basis. These estimates and their related assumptions
include, but are not limited to, projected future operating
results, industry and economy trends, market discount rates,
indirect expense allocations, and tax rates. If these estimates
or assumptions change in the future as a result of changes
in strategy, Company profitability, or market conditions,
among other factors, this could adversely affect future
goodwill and other intangible assets valuations and result in
impairment charges.
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
assets from an amortization approach to an impairment-only
approach. The Company performs its impairment test as of
the third quarter of each fiscal year. The Company did not
find any indication that an impairment existed and, therefore,
no impairment loss was recorded in fiscal 2006.
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.
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 sales in its Consolidated
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 new products are based generally
on knowledge of the products 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.
Income Taxes
The Company recognizes deferred tax assets and
liabilities based on the differences between financial
statement carrying amounts and the tax bases of assets and
liabilities. The Company regularly reviews its deferred tax
assets for recoverability and establishes a valuation
allowance based on a number of factors, including both
positive and negative evidence, in determining the need for a
valuation allowance. Those factors include historical taxable
income or loss, projected future taxable income or loss, the
expected timing of the reversals of existing temporary
differences, and the implementation of tax planning
strategies. In circumstances where the Company or any of its
affiliates has incurred three years of cumulative losses which
constitute significant negative evidence, positive evidence of
equal or greater significance is needed by the Company at a
minimum to overcome that negative evidence before a tax
benefit is recognized for deductible temporary differences
and loss carryforwards. In evaluating the positive evidence
available, expectations as to future taxable income would
rarely be sufficient to overcome the negative evidence of
recent cumulative losses, even if supported by detailed
forecasts and projections. In order to reverse the recorded
valuation allowance, the Company would likely need to have
positive cumulative earnings for the three-year period
preceding the year of the reversal. Therefore, the Company’s
projections as to future earnings would not be used as an
indicator in analyzing whether a valuation allowance
established in a prior year can be removed or reduced.
At June 3, 2006 and May 28, 2005, the Company’s
deferred tax assets related to tax carryforwards were $13.6
million and $15.1 million, respectively. The tax carryforwards
are comprised of net operating loss carryforwards and other
tax credit carryovers. A majority of the net operating losses
and other tax credits can be carried forward for 20 years.
The Company has recorded valuation allowances for the
majority of its federal deferred tax assets and loss
carryforwards, and for tax loss carryforwards of certain
non-U.S. subsidiaries. The Company believes that the
deferred tax assets for the remaining tax carryforwards are
considered more likely than not to be realizable based on
estimates of future taxable income and the implementation
of tax planning strategies.
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards
Board (FASB) revised SFAS No. 123, Accounting for Stock-
Based Compensation. This Statement establishes standards
for the accounting for transactions in which an entity ex-
changes its equity instruments for goods or services. It also
addresses transactions in which an entity incurs liabilities in
exchange for goods or services that are based on the fair
value of the entity’s equity instruments or that may be settled
by the issuance of those equity instruments. This statement
focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment
transactions. SFAS No. 123(R) is effective at the beginning
of the next fiscal year that begins after June 15, 2005, or the
Company’s fiscal year 2007. The Company is evaluating
the impact of the adoption of SFAS No.123(R) on the
financial statements.
21
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
New Accounting Pronouncements (cont’d)
In June 2006, the FASB issued FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109 (FIN 48). FIN 48
clarifies the accounting for uncertainty in income taxes
recognized in accordance with SFAS No. 109, Accounting for
Income Taxes and prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition.
FIN 48 will become effective for the Company beginning in
fiscal 2008. The Company is currently evaluating the impact
of the adoption of FIN 48 on the financial statements.
Safe Harbor Statement Under the Private
Securities Litigation Reform Act of 1995
Except for the historical information contained herein, the
matters discussed in this Annual Report on Form 10-K 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 informa-
tion 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 annual report on Form
10-K. 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 “may,” “will,” “should,”
“could,” “expect,” “plan,” “intend,” “estimate,” “anticipate,”
“predict,” “believe,” “potential,” “continue,” 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 financ-
ing plans; (iii) the Company’s business and growth strate-
gies, including potential acquisitions; and (iv) other plans and
objectives for future operations. Any such forward-looking
statements are not guarantees of future performance and
involve risks and uncertainties and actual results may differ
materially from those predicted in the forward-looking
statements or which may be anticipated from historical
results or trends.
Quantitative and Qualitative Disclosures
about Market Risk
Risk Management and Market Sensitive
Financial Instruments
The Company’s foreign denominated assets and liabili-
ties are cash, accounts receivable, inventory, accounts
payable, and intercompany receivables and payables,
primarily in Canada, member countries of the European
Union, Asia/Pacific and, to a lesser extent, Latin America.
The Company monitors its foreign exchange exposures and
has entered into forward contracts to hedge significant
transactions; however, this activity is infrequent. The
Company did not enter into any forward contracts in fiscal
2006 or 2005. Other tools that may be used to manage
foreign exchange exposures include the use of currency
clauses in sales contracts and the use of local debt to offset
asset exposures.
As discussed above, the Company’s debt financing, in
part, varies with market rates exposing the Company to the
market risk from changes in interest rates. Certain opera-
tions, assets, and liabilities are denominated in foreign
currencies subjecting the Company to foreign currency
exchange risk. In order to provide the user of these financial
statements guidance regarding the magnitude of these risks,
the Securities and Exchange Commission requires the
Company to provide certain quantitative disclosures based
upon hypothetical assumptions. Specifically, these disclo-
sures require the calculation of the effect of a 10% increase
in market interest rates and a uniform 10% strengthening of
the U.S. dollar against foreign currencies on the reported net
earnings and financial position of the Company.
Under these assumptions, additional interest expense,
tax effected, would have increased the net loss by $0.2
million in both fiscal 2006 and fiscal 2005. These amounts
were determined by considering the impact of the hypotheti-
cal 10% interest rate increase on the Company’s variable
rate outstanding borrowings.
Had the U.S. dollar strengthened 10% against various
foreign currencies, sales would have been lower by an
estimated $25.3 million in fiscal 2006 and $22.5 million in
fiscal 2005. Total assets would have declined by an esti-
mated $12.8 million and $10.6 million in fiscal 2006 and
fiscal 2005, respectively, while the total liabilities would have
decreased by an estimated $3.5 million and $4.2 million in
fiscal 2006 and fiscal 2005, respectively.
The interpretation and analysis of these disclosures
should not be considered in isolation since such variances
in interest rates and exchange rates would likely influence
other economic factors. Such factors, which are not
readily quantifiable, would likely also affect the
Company’s operations.
22
June 3, 2006
May 28, 2005
Consolidated Balance Sheets
(in thousands)
Assets
Current assets:
Cash and cash equivalents
Receivables, less allowance of $2,142 and $1,934
Inventories
Prepaid expenses
Deferred income taxes
Total current assets
Other assets:
Property, plant and equipment, net
Goodwill
Other intangible assets, net
Non-current deferred income taxes
Assets held for sale
Other assets
Total other assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued liabilities
Current portion of long-term debt
Total current liabilities
Non-current liabilities:
Long-term debt, less current portion
Non-current deferred liabilities
Non-current liabilities
Total non-current liabilities
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.05 par value; issued 15,663 shares
at June 3, 2006 and 15,597 shares at May 28, 2005
Class B common stock, convertible, $0.05 par value; issued 3,093
shares at June 3, 2006 and 3,120 shares at May 28, 2005
Preferred stock, $1.00 par value, no shares issued
Additional paid-in capital
Common stock in treasury, at cost, 1,261 shares at
June 3, 2006 and 1,332 shares at May 28, 2005
Accumulated deficit
Accumulated other comprehensive income (loss)
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
$ 17,010
115,733
117,320
3,739
1,527
255,329
32,357
13,068
2,413
1,300
1,018
3,814
53,970
$309,299
$ 52,494
30,588
14,016
97,098
112,792
—
1,169
113,961
211,059
—
783
155
—
119,149
(7,473)
(19,048)
4,674
98,240
$309,299
$ 24,301
106,152
101,555
3,380
4,911
240,299
31,712
6,149
1,045
—
—
4,735
43,641
$283,940
$ 40,392
23,762
22,305
86,459
98,028
656
1,401
100,085
186,544
—
780
156
—
121,591
(7,894)
(16,406)
(831)
97,396
$283,940
23
Consolidated Statements of Operations
(in thousands, except per share amounts)
Net sales
Cost of sales
Gross profit
Fiscal Year Ended
June 3,
2006
May 28,
2005
May 29,
2004
$ 637,940
$ 578,724
$ 519,823
482,171
155,769
442,730
135,994
393,101
126,722
Selling, general, and administrative expenses
139,640
129,747
107,968
(Gain) loss on disposal of assets
Operating income
3
16,126
(9,918)
579
16,165
18,175
Other (income) expense:
Interest expense
Investment income
Foreign exchange (gain) loss
Other, net
Total other expense
9,809
(411)
724
428
10,550
8,947
10,257
(388)
(926)
(51)
(227)
363
(135)
7,582
10,258
Income before income taxes
Income tax provision
5,576
8,218
8,583
24,600
7,917
2,385
Net income (loss)
$ (2,642)
$ (16,017)
$ 5,532
Net income (loss) per share - basic:
Common stock
$ (0.15)
$ (0.96)
$ 0.40
Common stock average shares outstanding
14,315
13,822
10,872
Class B common stock
Class B common stock average
shares outstanding
$ (0.14)
$ (0.87)
$ 0.36
3,093
3,120
3,168
Net income (loss) per share - diluted:
Common stock
$ (0.15)
$ (0.96)
$ 0.38
Common stock average shares outstanding
14,315
13,822
14,418
Class B common stock
Class B common stock average
shares outstanding
$ (0.14)
$ (0.87)
$ 0.36
3,093
3,120
3,168
Dividends per common share
Dividends per Class B common share
$
$
0.160
0.144
$
$
0.160
0.144
$ 0.160
$ 0.144
See notes to consolidated financial statements.
24
Consolidated Statements of Cash Flows
(in thousands)
Operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization
(Gain) loss on disposal of assets
Deferred income taxes
Receivables
Inventories
Accounts payable and accrued liabilities
Other liabilities
Other
Net cash provided by (used in) operating activities
Investing activities:
Capital expenditures
Proceeds from sale of assets
Business acquisitions, net of cash acquired
Proceeds from sales of available-for-sale securities
Purchases of available-for-sale securities
Net cash provided by (used in) investing activities
Financing activities:
Proceeds from borrowings
Payments on debt
Proceeds from issuance of common stock
Cash dividends
Other
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental Disclosures of Cash Flow Information:
Cash paid during the fiscal year for:
Interest
Income taxes
See notes to consolidated financial statements.
June 3,
2006
May 28,
2005
Fiscal Year Ended
May 29,
2004
$ (2,642)
$ (16,017)
$
5,532
6,240
3
1,462
(5,417)
(10,420)
15,910
(267)
588
5,457
(6,211)
278
(6,800)
2,317
(2,317)
(12,733)
252,997
(249,853)
710
(2,736)
(1,711)
(593)
578
(7,291)
24,301
$ 17,010
5,298
(9,918)
18,281
2,303
(9,618)
1,037
1,156
5,465
(2,013)
(6,975)
10,925
(971)
3,042
(3,042)
2,979
113,229
(131,624)
29,729
(2,719)
(2,364)
6,251
512
7,729
16,572
$ 24,301
4,989
579
1,325
(18,215 )
5,603
8,782
4,737
(771 )
12,561
(5,468 )
40
(6,196 )
3,946
(3,946 )
(11,624 )
52,105
(53,416 )
1,656
(2,206 )
—
(1,861 )
885
(39 )
16,611
$ 16,572
$
$
9,026
6,305
$ 9,131
$ 3,272
$ 10,404
$ 1,656
25
Consolidated Statements of Stockholders’ Equity and
Comprehensive Income (Loss)
Shares Issued
Class B
Common
Common
Par
Value
Additional
Paid-In
Capital
Treasury
Stock
12,256
3,207
$ 773
$ 91,421
$ (8,922)
Retained
Earnings/
Accumulated
Deficit
$ (1,676)
Accumulated
Other
Comprehensive
Income (Loss)
Total
(in thousands except
per share amounts)
Comprehensive
Income (Loss)
Balance May 31, 2003
Comprehensive income:
Net income
Recognition of unearned
compensation
Currency translation, net of
income tax effect
Fair value adjustments
on investment, net of
income tax effect
Cash flow hedges, net of
income tax effect
Comprehensive income
$ 5,532
—
1,314
329
732
$ 7,907
Common stock issued
Conversion of Class B
shares to common stock
Dividends paid to:
Common ($0.04 per share)
Class B ($0.036 per share)
Balance May 29, 2004
Comprehensive income (loss):
$ (16,017)
—
597
121
66
$ (15,233)
Net loss
Recognition of unearned
compensation
Currency translation, net of
income tax effect
Fair value adjustments
on investment, net of
income tax effect
Cash flow hedges, net of
income tax effect
Comprehensive loss
Common stock issued
Conversion of Class B
shares to common stock
Dividends paid to:
Common ($0.04 per share)
Class B ($0.036 per share)
Balance May 28, 2005
Comprehensive income (loss):
Net loss
$ (2,642)
—
5,289
216
—
$ 2,863
Recognition of unearned
compensation
Currency translation, net of
income tax effect
Fair value adjustments
on investment, net of
income tax effect
Cash flow hedges, net of
income tax effect
Comprehensive income
Common stock issued
Conversion of Class B
shares to common stock
Dividends paid to:
Common ($0.04 per share)
Class B ($0.036 per share)
Balance June 3, 2006
26
—
—
—
—
—
229
39
—
—
12,524
—
—
—
—
—
3,025
—
—
—
—
—
—
(39)
—
—
3,168
—
—
—
—
—
—
48
(48)
—
—
15,597
—
—
3,120
—
—
—
—
—
39
27
—
—
15,663
—
—
—
—
—
—
(27)
—
—
3,093
—
—
—
—
—
11
—
—
—
784
—
—
—
—
—
—
288
—
—
—
2,168
—
—
—
93,877
—
242
—
—
—
152
28,153
—
—
—
936
—
—
—
—
—
2
—
—
(568)
(113)
121,591
—
(17)
—
—
—
311
—
—
—
—
—
—
407
—
—
—
(8,515)
—
—
—
—
—
621
—
—
—
(7,894)
—
—
—
—
—
421
—
5,532
—
—
—
—
—
—
(1,747)
(459)
1,650
(16,017)
—
—
—
—
—
—
(1,699)
(340)
(16,406)
(2,642)
—
—
—
—
—
—
$ (3,990)
$ 77,606
—
—
5,532
288
1,314
1,314
329
732
—
—
—
—
(1,615)
—
—
597
121
66
—
—
—
—
(831)
—
—
329
732
2,586
—
(1,747)
(459)
86,181
(16,017)
242
597
121
66
28,926
—
(2,267)
(453)
97,396
(2,642)
(17)
5,289
5,289
216
—
—
—
216
—
734
—
—
—
$ 938
(2,289)
(447)
$ 119,149
—
—
$ (7,473)
—
—
$ (19,048)
—
—
$ 4,674
(2,289)
(447)
$ 98,240
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
Inventories: The Company’s worldwide inventories are stated at
the lower of cost or market using the first-in, first-out (FIFO) method.
Inventories include material, labor, and overhead associated with such
inventories. Substantially all inventories represent finished goods held
for sale.
Property, Plant and Equipment: Property, plant and equipment are
stated at cost. Improvements and replacements are capitalized while
expenditures for maintenance and repairs are charged to expense as
incurred. Provisions for depreciation are computed principally using the
straight-line method over the estimated useful life of the asset.
Depreciation expense was $5,882, $4,982, and $4,657 in fiscal 2006,
2005, and 2004, respectively. Property, plant and equipment consist
of the following:
June 3, 2006
May 28, 2005
Land and improvements
Buildings and improvements
Computer and communications equipment
Machinery and other equipment
$
Accumulated depreciation
Property, plant and equipment, net
$
1,307
20,153
29,648
19,978
71,086
(38,729)
32,357
$
1,347
18,966
27,024
18,396
65,733
(34,021)
$ 31,712
Supplemental disclosure information of the estimated
useful life of the asset:
Land and improvements
Buildings and improvements
Computer and communications equipment
Machinery and other equipment
10 years
10 - 30 years
3 - 10 years
3 - 10 years
The Company is in the application development stage of
implementing certain modules of enterprise resource management
software (PeopleSoft). In accordance with Accounting Standards
Executive Committee (AcSEC) Statement of Position 98-1, Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use,
the Company capitalizes all direct costs associated with the application
development of this software including software acquisition costs,
consulting costs, and internal payroll costs. The Statement requires these
costs to be depreciated once the application development stage is
complete. The unamortized balance of the aforementioned capitalized
costs, included within computer and communications equipment, is
$5,022 and $5,036 at June 3, 2006 and May 28, 2005, respectively.
Note A — Significant Accounting Policies
Principles of Consolidation: Fiscal Year - Richardson Electronics,
Ltd. (the “Company”) fiscal year ends on the Saturday nearest the end of
May. Fiscal year 2006 contains 53 weeks while fiscal years 2005 and
2004 contain 52 weeks. All references herein for the years 2006, 2005,
and 2004 represent the fiscal years ended June 3, 2006, May 28, 2005,
and May 29, 2004, respectively.
The consolidated financial statements include the Company and its
subsidiaries. Significant intercompany transactions and accounts have
been eliminated.
Use of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires the
Company’s management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Values of Financial Instruments: The fair values of financial
instruments are determined based on quoted market prices and market
interest rates as of the end of the reporting period. The Company’s
financial instruments include accounts receivable, accounts payable,
accrued liabilities, and long-term debt. The fair values of these financial
instruments were, with the exception of long-term debt as disclosed in
Note G, not materially different from their carrying or contract values at
June 3, 2006 and May 28, 2005.
Cash Equivalents: The Company considers short-term, highly liquid
investments that are readily convertible to known amounts of cash, and
so near their maturity that they present insignificant risk of changes in
value because of changes in interest rates, and that have maturity of
three months or less, when purchased, to be cash equivalents. The
carrying amounts reported in the balance sheet for cash and cash
equivalents approximate the fair market values of these assets.
Allowance for doubtful accounts: The Company maintains
allowances for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. The estimates are
influenced by the following considerations: continuing credit evaluation of
customers’ financial conditions; aging of receivables, individually and in
the aggregate; large number of customers which are widely dispersed
across geographic areas; collectability and delinquency history by
geographic area; and the fact that no single customer accounts for 10%
or more of net sales. Material changes in one or more of these consider-
ations may require adjustments to the allowance affecting net income
and net carrying value of accounts receivable. At June 3, 2006, the
allowance for doubtful accounts was $2,142 as compared to $1,934 at
May 28, 2005.
27
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
Other Assets: Other assets consist of the following:
Investments
Notes receivable
Other deferred charges, net
Other assets
June 3, 2006 May 28, 2005
$ 3,781
—
33
$ 3,814
$ 3,445
955
335
$ 4,735
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 $2,317, $3,042, and $3,946 during fiscal 2006, 2005, and
2004, respectively, all of which were consequently reinvested. The cost of
the equity securities sold were based on a specific identification method.
Gross realized gains on those sales were $299, $372, and $366 in fiscal
2006, 2005, and 2004, respectively. Gross realized losses on those sales
were $141, $102, and $59 in fiscal 2006, 2005, and 2004, respectively.
Net unrealized holding gains of $216, $121, and $329, have been
included in accumulated comprehensive income (loss) for fiscal 2006,
2005, and 2004, respectively.
The following table is the disclosure under Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Invest-
ments in Debt and Equity Securities, for the investment in marketable
equity securities with fair values less than cost basis:
Marketable Security Holding Length
Less than
12 months
More than
12 months
Total
Description
of Securities
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
June 3, 2006
Common Stock $
May 28, 2005
Common Stock $ 2,044 $ 33
623 $ 34
$ 158
$
17
$
781
$ 51
$ — $ — $ 2,044
$ 33
Goodwill and Other Intangible Assets: In accordance with
SFAS No. 142, Goodwill and Other Intangible Assets, which requires that
goodwill and intangible assets deemed to have indefinite lives are not
amortized but are subject to annual impairment testing. Intangible assets
with finite lives are amortized over their estimated useful lives on a
straight line basis.
Management reviews the valuation of goodwill and intangible assets
not subject to amortization at least annually, or more frequently, if events
or circumstances indicate that goodwill might be impaired. The Company
utilizes the comparison of reporting units’ fair value derived by discounted
cash flow analysis and their book value as an indicator of potential
impairment. The application of SFAS No. 142 and the annual impairment
test are discussed in Note B.
Accrued Liabilities: Accrued liabilities consist of the following:
Compensation and payroll taxes
Interest
Income taxes
Warranty reserve
Professional fees
Other accrued expenses
Accrued liabilities
28
June 3, 2006 May 28, 2005
$ 12,238
2,900
7,986
836
1,884
4,744
$ 30,588
$ 9,543
2,117
8,340
1,439
1,172
1,151
$ 23,762
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.
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 sales in its Consolidated Statements 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 new products are based generally on knowledge of the
products, 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 fiscal 2006 and 2005 were
as follows:
Balance at May 29, 2004
Accruals for products sold
Utilization
Balance at May 28, 2005
Accruals for products sold
Utilization
Change in estimate
Balance at June 3, 2006
Warranty
Reserve
$ 802
958
(321)
1,439
932
(589)
(946)
$ 836
During the second quarter of fiscal 2003, the Display Systems Group
provided a three-year warranty on some of its products. As the extended
warranty on the first products sold under the warranty program expired
during the second quarter of fiscal 2006, along with additional warranty
experience available during the first six months of fiscal 2006, the
Company revised its estimate of the warranty reserve to reflect the actual
warranty experience to date. As a result, a change in estimate of $946
was recorded during the second quarter of fiscal 2006.
Non-Current Liabilities: Non-current liabilities of $1,169 at June 3,
2006 and $1,401 at May 28, 2005 represent the pension obligations for
qualified Korea and Italy employees.
Foreign Currency Translation: Foreign currency balances are
translated into U.S. dollars at end-of-period rates. Revenues and
expenses are translated at the current rate on the date of the transaction.
Gains and losses resulting from foreign currency transactions are
included in income. Foreign currency transactions reflected in operations
was a loss of $724 in fiscal 2006, a gain of $926 in fiscal 2005, and a loss
of $363 in fiscal 2004. Gains and losses resulting from translation of
foreign subsidiary financial statements are credited or charged directly to
accumulated other comprehensive income (loss), a component of
stockholders’ equity.
Revenue Recognition: The Company’s product sales are recog-
nized as revenue upon shipment, when title passes to the customer,
delivery has occurred or services have been rendered, and collectibility is
reasonably assured. The Company’s terms are generally FOB shipping
point and sales are recorded net of discounts and returns based on the
Company’s historical experience. The Company’s products are often
manufactured to meet the specific design needs of its customers’
applications. Its engineers work closely with customers in ensuring that
the product the Company seeks to provide them will meet their needs,
but its customers are under no obligation to compensate the Company
for designing the products it sells; the Company retains the rights to
its designs.
Shipping and Handling Fees and Costs: Shipping and handling
costs billed to customers are reported as revenue and the related costs
are reported as cost of sales.
Income Taxes: The Company recognizes deferred tax assets and
liabilities based on the differences between financial statement carrying
amounts and the tax bases of assets and liabilities. The Company
regularly reviews its deferred tax assets for recoverability and establishes
a valuation allowance based on a number of factors, including both
positive and negative evidence, in determining the need for a valuation
allowance. Those factors include historical taxable income or loss,
projected future taxable income or loss, the expected timing of the
reversals of existing temporary differences, and the implementation of tax
planning strategies. In circumstances where the Company or any of its
affiliates has incurred three years of cumulative losses which constitute
significant negative evidence, positive evidence of equal or greater
significance is needed by the Company at a minimum to overcome that
negative evidence before a tax benefit is recognized for deductible
temporary differences and loss carryforwards. In evaluating the positive
evidence available, expectations as to future taxable income would rarely
be sufficient to overcome the negative evidence of recent cumulative
losses, even if supported by detailed forecasts and projections. In order to
reverse the recorded valuation allowance, the Company would likely need
to have positive cumulative earnings for the three-year period preceding
the year of the reversal. Therefore, the Company’s projections as to future
earnings would not be used as an indicator in analyzing whether a
valuation allowance established in a prior year can be removed
or reduced.
Stock-Based Compensation: The Company accounts for its stock
option plans in accordance with APB No. 25, Accounting for Stock Issued
to Employees, and related interpretations. As such, compensation
expense would be recorded on the date of grant only if the current market
price of the underlying stock exceeded the exercise price. However, the
exercise price of all grants under the Company’s option plans has been
equal to the fair market value on the date of grant. SFAS No. 123,
Accounting for Stock-Based Compensation, requires estimation of the fair
value of options granted to employees. Had the Company’s option plans
and stock purchase plan been treated as compensatory under the
provisions of SFAS No. 123, the Company’s net income (loss) and net
income (loss) per share would have been affected as follows (see Note K
to Consolidated Financial Statements for underlying assumptions):
Fiscal Year Ended
June 3,
2006
$ (2,642)
May 28,
2005
$ ($16,017) $
May 29,
2004
5,532
Net income (loss), as reported:
Add: Stock-based compensation expense
included in reported net income (loss),
net of taxes
7
425
282
Deduct: Stock-based compensation
expense determined under fair
value-based method for all awards,
net of taxes
Pro-forma net income (loss)
(964)
$ (3,599)
(1,834)
$ (17,426) $
(1,272)
4,542
Net income (loss) per share, as reported:
Common stock - basic
Class B common stock - basic
Common stock - diluted
Class B common stock - diluted
$ (0.15)
$ (0.14)
$ (0.15)
$ (0.14)
Net income (loss) per share, pro forma:
Common stock - basic
Class B common stock - basic
Common stock - diluted
Class B common stock - diluted
$ (0.21)
$ (0.19)
$ (0.21)
$ (0.19)
$
$
$
$
$
$
$
$
(0.96) $
(0.87) $
(0.96) $
(0.87) $
0.40
0.36
0.38
0.36
(1.05)
(0.95)
(1.05)
(0.95)
$ 0.33
$ 0.30
$ 0.32
$ 0.29
29
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
Fiscal Year Ended
June 3,
2006
May 28,
2005
May 29,
2004
Numerator for basic and diluted EPS:
Net income (loss)
Less dividends:
Common stock
Class B common stock
Undistributed earnings (losses)
Common stock undistributed
$ (2,642) $ (16,017)
$
5,532
2,289
447
2,267
453
$ (5,378) $ (18,737)
1,747
459
3,326
$
earnings (losses)
$ (4,502) $ (15,573)
$
2,635
Class B common stock undistributed
earnings (losses) - basic
(876)
(3,164)
691
Total undistributed earnings (losses) -
common stock and Class B
common stock - basic
Common stock undistributed
$ (5,378) $ (18,737)
$
3,326
earnings (losses)
$ (4,502) $ (15,573)
$
2,653
Class B common stock undistributed
earnings (losses) - diluted
(876)
Total undistributed earnings (losses) - Class B
(3,164)
673
common stock - diluted
$ (5,378) $ (18,737)
$
3,326
Denominator for basic and diluted EPS:
Denominator for basic EPS:
Common stock weighted
average shares
14,315
13,822
10,872
Class B common stock weighted average
shares, and shares under if-converted
method for diluted earnings per share 3,093
3,120
3,168
Effect of dilutive securities:
Unvested restricted stock awards
Dilutive stock options
Denominator for diluted EPS adjusted
—
—
—
—
33
345
weighted average shares and
assumed conversions
17,408
16,942
14,418
Net income (loss) per common share - basic:
Common share
Class B common share
(0.15) $
(0.14) $
$
$
Net income (loss) per common share - diluted:
Common share
Class B common share
(0.15) $
(0.14) $
$
$
(0.96)
(0.87)
(0.96)
(0.87)
$
$
$
$
0.40
0.36
0.38
0.36
Common stock options that were
anti-dilutive and not included in
dilutive earnings per common share
1,852
1,701
1,155
Earnings per Share: The Company has authorized 30,000 shares of
common stock, 10,000 shares of Class B common stock, and 5,000
shares of preferred stock. The Class B common stock has ten votes per
share. The Class B common stock has transferability restrictions;
however, it may be converted into common stock on a share-for-share
basis at any time. With respect to dividends and distributions, shares of
common stock and Class B common stock rank equally and have the
same rights, except that Class B common stock cash dividends are
limited to 90% of the amount of common stock cash dividends.
According to the EITF Issue No. 03-6, “Participating Securities and
the Two-Class Method under FASB Statement No. 128,” the Company’s
Class B common stock is considered a participating security requiring the
use of the two-class method for the computation of basic and diluted
earnings per share. The two-class computation method for each period
reflects the cash dividends paid per share for each class of stock, plus the
amount of allocated undistributed earnings per share computed using the
participation percentage which reflects the dividend rights of each class of
stock. Basic and diluted earnings per share reflect the application of EITF
Issue No. 03-6 and was computed using the two-class method. The
shares of Class B common stock are considered to be participating
convertible securities since the shares of Class B common stock are
convertible on a share-for-share basis into shares of common stock
and may participate in dividends with common stock according
to a predetermined formula (90% of the amount of common stock
cash dividends).
Diluted earnings per share is calculated by dividing net income,
adjusted for interest savings, net of tax, on assumed conversion of
convertible debentures and notes, 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 convert-
ible debentures and notes when dilutive. For the fiscal year ended June 3,
2006, the assumed conversion and the effect of the interest savings of the
Company’s 7¾% convertible senior subordinated notes (7¾% notes) and
8% convertible senior subordinated notes (8% notes) were excluded
because their inclusion would have been anti-dilutive. For the fiscal year
ended May 28, 2005, the assumed conversion and the effect of the
interest savings of the Company’s 7¼% convertible debentures (7¼%
debentures), 8¼% convertible senior subordinated debentures (8¼%
debentures) and 7¾% notes were excluded because their inclusion would
have been anti-dilutive. For the fiscal year ended May 29, 2004, the
assumed conversion and the effect of the interest savings of the
Company’s 7¼% debentures and 8¼% debentures were excluded
because their inclusion would have been anti-dilutive. The per share
amounts presented in the Consolidated Statements of Operations are
based on the following amounts:
30
Derivatives and Hedging Activities: The Company accounts for
The table below provides changes in carrying value of goodwill by
derivative financial instruments in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This
standard requires the Company to recognize all derivatives on the
balance sheet at fair value. Derivative value changes are recorded in
income for any contracts not classified as qualifying hedging instruments.
For derivatives qualifying as cash flow hedge instruments, the effective
portion of the derivative fair value change must be recorded through other
comprehensive income, a component of stockholders’ equity.
New Accounting Pronouncement: In December 2004, the
Financial Accounting Standards Board (FASB) revised SFAS No. 123,
Accounting for Stock-Based Compensation. This statement establishes
standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity’s equity instruments
or that may be settled by the issuance of those equity instruments. This
statement focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment transactions.
SFAS No. 123(R) is effective at the beginning of the next fiscal year that
begins after June 15, 2005, or the Company’s fiscal year 2007. The
Company is evaluating the impact of the adoption of SFAS No.123(R) on
the financial statements.
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an Interpretation of FASB
Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncer-
tainty in income taxes recognized in accordance with SFAS No. 109,
Accounting for Income Taxes and prescribes a recognition threshold and
measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 will become effective for the Company beginning in
fiscal 2008. The Company is currently evaluating the impact of the
adoption of FIN 48 on the financial statements.
Note B — Goodwill and Other Intangible Assets
The Company performs an annual goodwill impairment assessment
using a two-step, fair-value based test. The first step compares the fair value
of the reporting unit to its carrying amount. If the carrying amount of the
reporting unit exceeds its fair value, the second step is performed. The
second step compares the carrying amount of the goodwill to the estimated
fair value of the goodwill. If the fair value of goodwill is less than the carrying
amount, an impairment loss is reported. The Company determined that the
following components qualified as reporting units: RF, Wireless & Power
Division (RFPD), Electron Device Group (EDG), Display Systems Group
(DSG), Burtek and Security Systems Division (SSD) excluding Burtek. The
Company used a discounted cash flow valuation (income approach) to
determine the fair value of each of the reporting units. Sales, net income, and
Earnings Before Interest, Taxes, Depreciation, and Amoritization (EBITDA)
multiples (market approaches) were used as a check against the impairment
implications derived under the income approach.
The Company performed its annual impairment test as of the third
quarter of fiscal 2006. The Company did not find any indication that an
impairment existed and, therefore, no impairment loss was recorded as a
result of completing the annual impairment test.
reportable segment which includes RFPD, EDG, SSD, and DSG:
Reportable Segments
RFPD
EDG
SSD
DSG
Total
Goodwill
Balance at May 29, 2004
Additions
Foreign currency translation
Balance at May 28, 2005
Additions
Foreign currency translation
Balance at June 3, 2006
$ — $
244
1
245
—
7
$ 252 $
—
—
5 95
1,577
876 $1,482 $ 3,420 $ 5,778
270
101
6,149
6,501
418
893 $1,812 $10,111 $13,068
26
—
3,446
— 6,501
235 164
881
—
12
The addition to goodwill in fiscal 2006 represents the acquisition of
A.C.T. Kern GmbH & Co. KG (Kern) located in Germany, effective June 1,
2005. The cash outlay for Kern was $6,550, net of cash acquired. Kern is
one of the leading display technology companies in Europe with worldwide
customers in manufacturing, OEM, medicine, multimedia, IT trading, system
houses, and other industries.
The following table provides changes in carrying value of other
intangible assets not subject to amortization:
Other Intangible Assets Not Subject to Amortization
Reportable Segments
RFPD
IPG
SSD
DSG
Total
$ — $
Balance at May 29, 2004
Foreign currency translation —
Balance at May 28, 2005
—
Foreign currency translation —
Balance at June 3, 2006
$ — $
9
—
9
—
9
$ 248
30
278
43
$ 321
$ — $ 257
30
287
43
$ — $ 330
—
—
—
Intangible assets subject to amortization as well as amortization
expense are as follows:
Intangible Assets Subject to Amortization as of
Gross amounts:
Deferred financing costs
Patents and trademarks
Total gross amounts
Accumulated amortization
Deferred financing costs
Patents and trademarks
Total accumulated amortization
June 3,
2006
May 28,
2005
$
$
$
$
4,639
478
5,117
2,559
475
3,034
$
$
$
$
2,968
554
3,522
2,241
523
2,764
Deferred financing costs increased during fiscal 2006 primarily due to
the issuance of the Company’s 7¾% notes and the 8% notes (see Note G).
Amortization of Intangible Assets Subject to Amortization
Deferred financing costs
Patents and trademarks
Total
June 3,
2006
$
$
361
1
362
May 28,
2005
$
$
306
13
319
The amortization expense associated with the intangible assets subject
to amortization is expected to be $454, $454, $453, $365, $305, and $50 in
fiscal 2007, 2008, 2009, 2010, 2011, and 2012, respectively. The weighted
average number of years of amortization expense remaining is 5.43.
31
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
Note C — Assets Held for Sale
On August 4, 2005, the Company entered into a contract to sell
approximately 1.5 acres of real estate and a building located in Geneva,
Illinois for $3,000. The contract is subject to a number of conditions, including
inspections, environmental testing, and other customary conditions. The sale
of the real estate and building is expected to close during the first or second
quarter of fiscal 2007, however, the Company cannot give any assurance as
to the actual timing or successful completion of the transaction.
In July 2006, the Company offered to sell a building located in Brazil for
$858. The sale of the building is expected to close during the next year,
however, the Company cannot give any assurance as to the actual timing or
successful completion of the transaction.
Note D —
Restructuring and Severance Charges
As a result of the Company’s fiscal 2005 restructuring initiative, a
restructuring charge, including severance and lease termination costs of
$2,152, was recorded in selling, general and administrative expenses
(SG&A) in the third quarter of fiscal 2005. During the fourth quarter of fiscal
2005, the employee severance and related costs were adjusted resulting in a
$183 decrease in SG&A due to the difference between estimated severance
costs and the actual payouts. Severance costs of $724 and $1,108 were
paid in fiscal 2006 and 2005, respectively. During fiscal 2006, the employee
severance and related costs were adjusted resulting in a $123 decrease in
SG&A due to the difference between estimated severance costs and actual
payouts. The remaining balance payable in fiscal 2007 has been included in
accrued liabilities. Terminations affected over 60 employees across various
business functions, operating units, and geographic regions.
During the fourth quarter of fiscal 2003, the Company took certain
actions to align its inventory and cost structure to current sales levels amid
continued weakness in the global economy and limited demand visibility.
Terminations affected over 70 employees across various business functions,
operating units, and geographic regions. During the second quarter of fiscal
2004, the Company adjusted employee severance and related costs and
lease termination resulting in a $498 decrease in SG&A due to the difference
between the estimated severance costs and the actual payouts and was
recorded in the quarter ended November 29, 2003. 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.
32
As of June 3, 2006, the following tables depict the amounts associated
with the activity related to restructuring by reportable segments:
Fiscal 2004
Restructuring
Liability
May 31, 2003
Reserve
Recorded
Fiscal 2004
Payments
Fiscal 2004
Adjustment
to Reserve
Fiscal 2004
Restructuring
Liability
May 29, 2004
Employee severance and related costs:
$
343
81
121
38
609
1,192
RFPD
EDG
SSD
DSG
Corporate
Total
Lease termination costs:
SSD
Total
210
$ 1,402
$
289
—
—
—
—
289
$ (632)
(81)
(121)
(38)
(321)
(1,193)
$
—
—
—
—
(288)
(288)
—
$ 289
—
$(1,193)
(210)
$ (498)
$ —
—
—
—
—
—
—
$ —
Fiscal 2005
Restructuring
Liability
May 29, 2004
Reserve
Recorded
Fiscal 2005
Payments
Fiscal 2005
Adjustment
to Reserve
Fiscal 2005
Restructuring
Liability
May 28, 2005
Employee severance and related costs:
$
—
—
—
—
—
—
RFPD
EDG
SSD
DSG
Corporate
Total
Lease termination costs:
SSD
Total
—
—
$
$
909
325
99
416
368
2,117
$ (392)
(142)
(90)
(186)
(298)
(1,108)
$ (199)
—
16
—
—
(183)
35
$ 2,152
—
$(1,108)
—
$ (183)
$
$
318
183
25
230
70
826
35
861
Fiscal 2006
Restructuring
Liability
May 28, 2005
Reserve
Recorded
Fiscal 2006
Payments
Fiscal 2006
Adjustment
to Reserve
Fiscal 2006
Restructuring
Liability
June 3, 2006
Employee severance and related costs:
$
318
183
25
230
70
826
RFPD
EDG
SSD
DSG
Corporate
Total
Lease termination costs:
SSD
Total
35
861
$
$ — $ (289)
(73)
(22)
(227)
(78)
(689)
—
—
—
—
—
$
(29)
(110)
(3)
(3)
22
(123)
—
(35)
$ — $ (724)
—
$ (123)
$ —
—
—
—
14
14
—
14
$
In an effort to reduce the Company’s global operating costs related to
logistics, selling, general, and administrative expenses and to better align its
operating and tax structure on a global basis, the Company has now begun
to implement a global restructuring plan. This plan is intended to substantially
reduce corporate and administrative expense, decrease the number of
warehouses, and streamline the entire organization. Over the next fiscal
year, the Company will be implementing a more tax-effective supply chain
structure for Europe and Asia/Pacific, restructuring its Latin American
operations, and reducing the total workforce which includes eliminating and
restructuring layers of management.
The total restructuring and severance costs to implement the plan are
estimated to be $6,000, of which $2,724 of severance costs were recorded in
the fourth quarter of fiscal 2006 and the balance will be incurred in fiscal
2007 as the plan is implemented. The Company expects to realize the full
impact of the cost savings from the restructuring plan in fiscal 2008.
Note E — Acquisitions
Fiscal 2006: In June 2005, the Company acquired Kern located in
Germany, a leading display technology company in Europe. The cash outlay
for Kern was $6,550, net of cash acquired. Kern has been integrated into
DSG. In addition, on October 1, 2005, the Company acquired certain assets
of Image Systems Corporation (Image Systems), a subsidiary of Communi-
cations Systems, Inc. in Hector, Minnesota, which is a specialty supplier of
displays, display controllers, and calibration software for the healthcare
market. The initial cash outlay for Image Systems was $250. Both Kern and
Image Systems have been integrated into DSG. The acquisitions were not
deemed material under SFAS 141, Business Combinations, to include the
pro-forma effects of the acquisitions.
Fiscal 2005: The aggregate cash outlay in 2005 for business acquisi-
tions was $971. A $545 earn out payment was made in the first quarter of
fiscal 2005 associated with the Pixelink acquisition made in fiscal 1999 as the
business unit achieved certain operating performance criteria. In December
2004, the Company acquired the assets of Evergreen Trading Company, a
distributor of passive components in China. The aggregate acquisition price
was $426, which was paid in cash. Evergreen Trading Company has been
integrated into EDG.
Fiscal 2004: The aggregate cash outlay in 2004 for business acquisi-
tions was $6,196, representing additional consideration paid for certain
business acquisitions made in prior periods due to the acquired businesses
achieving certain targeted operating levels.
Note F — Disposal of Assets
On May 26, 2005, the Company completed the sale of approximately
205 acres of undeveloped real estate adjoining its headquarters in LaFox,
Illinois. The sale resulted in a gain of $9,907 before taxes and was recorded
in gain on disposal of assets in the Consolidated Statements of Operations
in fiscal 2005.
Note G — Debt Financing
Long-term debt consists of the following:
8¼% convertible debentures,
due June 2006
7¼% convertible debentures,
due December 2006
7¾% convertible notes,
due December 2011
8% convertible notes,
due June 2011
Floating-rate multi-currency revolving
credit agreement, due October 2009
(6.92% at June 3, 2006)
Other
Total debt
Less: current portion
Long-term debt
June 3,
2006
May 28,
2005
$
—
—
$ 17,538
4,753
44,683
44,683
25,000
—
57,089
36
126,808
(14,016)
$ 112,792
53,314
45
120,333
(22,305)
$ 98,028
At June 3, 2006, the Company maintained $112,792 in long-term
debt, primarily in the form of the issuance of two series of convertible
notes and a multi-currency revolving credit agreement (credit agreement).
The Company used the net proceeds from the sale of the 8% notes to
repay amounts outstanding under its credit agreement. The Company
redeemed all of the outstanding 8¼% debentures on December 23, 2005
in the amount of $17,538 and redeemed all of the outstanding 7¼%
debentures on December 30, 2005 in the amount of $4,753 by borrowing
amounts under the credit agreement to effect these redemptions. The
Company maintains $14,000 of the 8% notes in current portion of
long-term debt at June 3, 2006. This current classification is due to the
Company entering into two separate agreements in August 2006 with
certain holders of its 8% notes to purchase $14,000 of the 8% notes.
As the 8% notes are subordinate to the Company’s existing credit
agreement, the Company received a waiver from its lending group to
permit the purchase. The purchases will be financed through additional
borrowings under the Company’s credit agreement. In the first quarter of
fiscal 2007, the Company will record early extinguishment expenses of
approximately $2,700.
On November 21, 2005, the Company sold $25,000 in aggregate
principal amount of 8% notes due 2011 pursuant to an indenture dated
November 21, 2005. The 8% notes bear interest at a rate of 8% per
annum, however the Company is paying an additional 1% as a result of
failing to register the 8% notes by March 21, 2006. Interest is due on
June 15 and December 15 of each year. The 8% notes are convertible at
the option of the holder, at any time on or prior to maturity, into shares of
the Company’s common stock at a price equal to $10.31 per share,
subject to adjustment in certain circumstances. In addition, the Company
may elect to automatically convert the 8% notes into shares of common
stock if the trading price of the common stock exceeds 150% of the
conversion price of the 8% notes for at least 20 trading days during any
30 trading day period subject to a payment of three years of interest if the
Company elects to convert the 8% notes prior to December 20, 2008.
The indenture provides that on or after December 20, 2008, the
Company has the option of redeeming the 8% notes, in whole or in part,
for cash, at a redemption price equal to 100% of the principal amount of
the 8% notes to be redeemed, plus accrued and unpaid interest, if any, to,
but excluding, the redemption date. Holders may require the Company to
repurchase all or a portion of their 8% notes for cash upon a change-of-
control event, as described in the indenture, at a repurchase price equal
to 100% of the principal amount of the 8% notes to be repurchased, plus
accrued and unpaid interest, if any, to, but excluding the repurchase date.
The 8% notes are unsecured and subordinate to the Company’s existing
and future senior debt. The 8% notes rank on parity with the Company’s
existing 7¾% notes.
On February 14, 2005, the Company entered into separate ex-
change agreements pursuant to which a small number of holders of the
Company’s existing 7¼% debentures and 8¼% debentures, agreed to
exchange $22,221 in aggregate principal amount of 7¼% debentures and
$22,462 in aggregate principal amount of 8¼% debentures for $44,683
in aggregate principal amount of newly-issued 7¾% notes due
December 2011.
33
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
On February 15, 2005, the Company issued the 7¾% notes pursuant
to an indenture dated February 14, 2005. The 7¾% notes bear interest at
the rate of 7¾% per annum. Interest is due on June 15 and December 15
of each year. The 7¾% notes are convertible at the option of the holder,
at any time on or prior to maturity, into shares of the Company’s common
stock at a price equal to $18.00 per share, subject to adjustment in
certain circumstances. On or after December 19, 2006, the Company
may elect to automatically convert the 7¾% notes into shares of common
stock if the trading price of the common stock exceeds 125% of the
conversion price of the 7¾% notes for at least twenty trading days during
any thirty trading day period ending within five trading days prior to the
automatic conversion notice.
The indenture provides that on or after December 19, 2006, the
Company has the option of redeeming the 7¾% notes, in whole or in part,
for cash, at a redemption price equal to 100% of the principal amount of
the 7¾% notes to be redeemed, plus accrued and unpaid interest, if any,
to, but excluding, the redemption date. However, from December 19,
2006 until December 19, 2007, the 7¾% notes will be redeemable only if
the trading price of the Company’s common stock exceeds 125% of the
conversion price of the 7¾% notes for at least twenty trading days during
any thirty trading day period. Holders may require the Company to
repurchase all or a portion of their 7¾% notes for cash upon a change-of-
control event, as described in the indenture, at a repurchase price equal
to 101% of the principal amount of the 7¾% notes to be repurchased,
plus accrued and unpaid interest, if any, to, but excluding the repurchase
date. The Company may, at its option, pay the change of control purchase
price in cash, shares of its common stock (valued at 97.5% of the market
price), or a combination thereof. The 7¾% notes are unsecured and
subordinated to the Company’s existing and future senior debt. The 7¾%
notes rank on parity with the Company’s 8% notes.
The 7¾% notes were issued through a private offering to qualified
institutional buyers under Section 4(2) of the Securities Act of 1933 and
Rule 506 promulgated thereunder. In connection with the exchange, on
February 15, 2005, the Company also entered into a resale registration
rights agreement with the existing holders who participated in the
exchange offer. Pursuant to the resale registration rights agreement, the
Company filed a registration statement for the resale of the 7¾% notes
and the shares of common stock issuable upon conversion of the 7¾%
notes on May 26, 2005. The Company agreed to keep the shelf registra-
tion statement effective until two years after the latest date on which it
issues 7¾% notes in connection with the exchange, subject to certain
terms and conditions.
In October 2004, the Company renewed its credit agreement with
the current lending group in the amount of approximately $109,000 (the
size of the credit line varies based on fluctuations in foreign currency
exchange rates). The credit agreement expires in October 2009, and the
outstanding balance at that time will become due. At June 3, 2006,
$57,089 was outstanding on the credit agreement. The new credit
agreement is principally secured by the Company’s trade receivables and
inventory. The credit agreement bears interest at applicable LIBOR rates
plus a margin, varying with certain financial performance criteria. At June
3, 2006, the applicable margin was 225 basis points. Outstanding letters
of credit were $1,696 at June 3, 2006, leaving an unused line of $52,993
under the total credit agreement; however, this amount was reduced to
$7,467 due to maximum permitted leverage ratios. The commitment fee
related to the agreement is 0.25% per annum payable quarterly on the
average daily unused portion of the aggregate commitment. The
Company’s credit agreement consists of the following facilities as of
June 3, 2006:
US Facility
Canada Facility
Sweden Facility
UK Facility
Euro Facility
Japan Facility
Total
Capacity
$
70,000
15,418
8,898
8,393
6,404
2,665
$ 111,778
Amount
Outstanding
Weighted Average
Interest Rate
$ 45,700
5,136
—
4,476
—
1,777
$ 57,089
7.21 %
6.00 %
—
6.93 %
—
1.85 %
6.92 %
Note: Due to maximum permitted leverage ratios, the amount of the unused line cannot be calculated
on a facility-by-facility basis.
At March 4, 2006, the Company was not in compliance with credit
agreement covenants with respect to the leverage ratio, fixed charge
coverage ratio and tangible net worth covenants. On August 4, 2006, the
Company received a waiver from its lending group for the defaults and
executed an amendment to the credit agreement. In addition, the
amendment also (i) permitted the purchase of $14,000 of the 8% notes;
(ii) adjusted the minimum required fixed charge coverage ratio for the first
quarter of fiscal 2007; (iii) adjusted the minimum tangible net worth
requirement; (iv) permitted certain sales transactions contemplated by the
Company; (v) eliminated the Company’s Sweden Facility; (vi) reduced the
Company’s Canada Facility by approximately $5,400; (vii) changed the
definition of “Adjusted EBITDA” for covenant purposes; and (viii) provided
that the Company maintain excess availability on the borrowing base of
not less than $20,000 until the Company filed its Form 10-Q for the
quarter ended March 4, 2006, at which time the Company will maintain
excess availability of the borrowing base of not less than $10,000.
At September 3, 2005, the Company was not in compliance with
credit agreement covenants with respect to the tangible net worth
covenant due solely to the additional goodwill recorded as a result of the
Kern acquisition. On October 12, 2005, the Company received a waiver
from its lending group for the default and executed an amendment to the
credit agreement. The amendment changed the minimum tangible net
worth requirement to adjust for the goodwill associated with the
Kern acquisition.
34
The credit agreement and note indentures contain financial
covenants which include benchmark levels for tangible net worth,
borrowing base, senior funded debt to cash flow, and annual debt service
coverage. At May 28, 2005, the Company was not in compliance with its
credit agreement covenants with respect to the fixed charge coverage
ratio. On August 24, 2005, the Company received a waiver from its
lending group for the default and executed an amendment to the credit
agreement. The amendment changed the maximum permitted leverage
ratios and the minimum required fixed charge coverage ratios for each of
the first three quarters of fiscal 2006 to provide the Company additional
flexibility for these periods. The amendment also provided that the
Company would maintain excess availability on the borrowing base of not
less than $23,000 until June 30, 2006 if a default or event of default does
not exist on or before this date. The applicable margin pricing was
increased by 25 basis points. In addition, the amendment extended the
Company’s requirement to refinance the remaining $22,291 aggregate
principal amount of the 7¼% debentures and the 8¼% debentures from
February 28, 2006 to June 10, 2006.
As more fully described in Note B to the Notes to Consolidated
Financial Statements in the Company’s Annual Report on Form 10-K/A
(Amendment No. 2) for the fiscal year ended May 28, 2005, as a result of
errors discovered by the Company, the consolidated financial statements
for fiscal 2005, 2004, and 2003 have been amended and restated to
correct these errors. As a result, the Company would not have been in
compliance with its tangible net worth covenant for the third quarter of
fiscal 2005 and its leverage ratio and tangible net worth covenants as of
the end of fiscal 2005. On August 4, 2006, the Company received a
waiver from its lending group for defaults arising from the restatement and
executed an amendment to the credit agreement.
In the following table, the estimated fair values of the Company’s
7¼% debentures, 8¼% debentures, 7¾% notes, and 8% notes are based
on quoted market prices at the end fiscal year 2006 and 2005.
The fair values of the bank term loans are based on carrying value.
June 3, 2006
May 28, 2005
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
$
— $
— $ 17,538 $ 17,713
—
44,683
25,000
—
36,840
23,841
4,753
44,683
—
4,777
44,460
—
57,089
—
36
126,808
(14,016)
$ 112,792
57,089
—
36
117,806
(13,367)
$104,439
53,314
—
45
120,333
(22,305)
53,314
—
45
120,309
(22,504)
$ 98,028 $ 97,805
8¼% convertible
debentures
7¼% convertible
debentures
7¾% convertible notes
8% convertible notes
Floating-rate
multi-currency revolving
credit agreement
Financial instruments
Other
Total
Less: current portion
Total
The Company’s ability to service its debt and meet its other
obligations as they come due is dependent on its future financial and
operating performance. This performance is subject to various factors,
including factors beyond the Company’s control such as changes in
global and regional economic conditions, changes in its industry or the
end markets for its products, changes in interest or currency exchange
rates, inflation in raw materials, energy and other costs.
Aggregate maturities of debt during the next five years are: $14,016
in fiscal 2007, $16 in fiscal 2008, $4 in fiscal 2009, $57,089 in fiscal 2010,
$0 in fiscal 2011, and $55,683 thereafter. Cash payments for interest were
$9,026, $9,131, $10,404, in fiscal 2006, 2005, and 2004, respectively.
Note H — Derivative Financial Instruments
The Company accounts for derivative financial instruments in
accordance with SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. This standard requires the Company to recognize all
derivatives on the balance sheet at fair value. Derivative value changes
are recorded in income for any contracts not classified as qualifying
hedging instruments. For derivatives qualifying as cash flow hedge
instruments, the effective portion of the derivative fair value change must
be recorded through other comprehensive income, a component of
stockholders’ equity.
The Company entered into various LIBOR-based interest rate swap
arrangements from September 2000 through March 2001 to manage
fluctuations in cash flows resulting from interest rate risk attributable to
changes in the benchmark interest rate of LIBOR. The interest rate swap
changed the variable-rate cash flow exposure on the credit agreement to
fixed-rate cash flows by entering into a receive-variable, pay-fixed interest
rate swap. Under the interest rate swap, the Company received LIBOR-
based variable interest rate payments and made fixed interest rate
payments, thereby creating fixed-rate long-term debt. This swap agree-
ment was accounted for as a qualifying cash flow hedge of the future
variable-rate interest payments in accordance with SFAS No. 133,
whereby changes in the fair market value were reflected as adjustments
to the fair value of the derivative instrument as reflected on the accompa-
nying Consolidated Balance Sheets.
The fair value of the interest rate swap agreement was determined
periodically by obtaining quotations from the financial institution that was
the counterparty to the Company’s swap arrangement. The fair value
represented an estimate of the net amount that the Company would have
received if the agreement was transferred to another party or cancelled as
of the date of the valuation. Changes in the fair value of the interest rate
swap were reported in accumulated other comprehensive income, which
is an element of stockholders’ equity. These amounts were subsequently
reclassified into interest expense as a yield adjustment in the same period
in which the related interest on the floating-rate debt obligations affected
earnings. During the fiscal year ended May 28, 2005, the Company had
interest rate exchange agreements to convert approximately $36.4 million
of floating rate debt to an average fixed rate of 8.7% that expired July
2004. Additional interest expense recorded in the Consolidated State-
ments of Operations related to these agreements was $102 and $1,265 in
fiscal 2005 and 2004, respectively. The Company did not have any
derivative instruments recorded in the consolidated balance sheet at June
3, 2006 and May 28, 2005.
35
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
The provisions for income taxes consist of the following:
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Foreign
Total deferred
Income tax
provision (benefit)
Fiscal Year Ended
June 3,
2006
May 28,
2005
May 29,
2004
$
—
—
5,701
5,701
$ —
151
6,743
6,894
$ —
(209)
1,226
1,017
1,926
198
393
2,517
16,540
1,254
(88)
17,706
(206)
147
1,427
1,368
$ 8,218
$ 24,600
$ 2,385
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company’s deferred tax assets
and liabilities at June 3, 2006 and May 28, 2005 are as follows:
Deferred tax assets:
Intercompany profit in inventory
NOL carryforwards -
foreign and domestic
Inventory valuation
Goodwill
Alternative minimum tax
credit carryforward
Severance reserve
Other
Subtotal
Valuation allowance -
foreign and domestic
Net deferred tax assets
June 3,
2006
May 28,
2005
$
238
$ 1,249
12,431
13,965
1,531
1,189
1,074
1,954
32,382
13,926
12,363
1,918
1,189
—
2,045
32,690
(25,840)
(20,695)
after valuation allowance
6,542
11,995
Deferred tax liabilities:
Accelerated depreciation
Unrepatriated earnings
Other
Subtotal
Net deferred tax assets
$
(3,275)
—
(440)
(3,715)
2,827
(2,822)
(4,918)
—
(7,740)
4,255
$
Supplemental disclosure of deferred tax asset information:
Domestic
Foreign
$ 27,333
5,049
$
$ 26,472
6,218
$
Note I — Lease Obligations,
Other Commitments, and Contingency
The Company leases certain warehouse and office facilities and
office equipment under non-cancelable operating leases. Rent expense
for fiscal 2006, 2005, and 2004 was $5,625, $5,101, and $4,035,
respectively. At June 3, 2006, future lease commitments for minimum
rentals, including common area maintenance charges and property taxes,
are $6,263 in fiscal 2007, $3,598 in fiscal 2008, $2,567 in fiscal 2009,
$1,658 in fiscal 2010, $1,192 in fiscal 2011 and $3,394 thereafter.
Note J — Income Taxes
The components of income (loss) before income taxes are:
United States
Foreign
Income before
income taxes
Fiscal Year Ended
June 3,
2006
$ (9,952)
15,528
May 28,
2005
$ (4,159)
12,742
May 29,
2004
$
(311)
8,228
$
5,576
$ 8,583
$
7,917
The provision for income taxes differs from income taxes computed
at the federal statutory tax rate of 34% in fiscal 2006, 2005, and 2004 as a
result of the following items:
Federal statutory rate
Effect of:
State income taxes, net of
federal tax benefit
Export benefit
Foreign taxes at other rates
Tax refund from foreign
tax appeal
Net increase in valuation
allowance for
deferred tax assets
Unrepatriated earnings
Other
Effective tax rate
Fiscal Year Ended
June 3,
2006
34.0 %
May 28,
2005
34.0 %
May 29,
2004
34.0 %
(6.2)
—
3.8
(17.9)
(1.6)
(2.0)
7.1
—
—
(5.6)
0.9
—
129.9
—
3.8
147.4 %
194.0
57.3
(2.2)
286.6 %
—
—
0.8
30.1 %
The effective income tax rates for fiscal 2006 and 2005 were 147.4%
and 286.6%, respectively. The difference between the effective tax rates
as compared to the U.S. federal statutory rate of 34% primarily results
from the Company’s geographical distribution of taxable income or losses
and valuation allowances related to net operating losses. For fiscal 2006,
the tax benefit related to net operating losses was limited by the require-
ment for a valuation allowance of $7,242, which increased the effective
income tax rate by 129.9%. For fiscal 2005, the tax benefit related to net
operating losses was limited by the requirement for a valuation allowance
of $16,655, which increased the effective income tax rate by 194.0%. In
addition, deferred tax liabilities related to unrepatriated earnings previ-
ously considered permanently reinvested also increased the effective
income tax rate in fiscal 2005 by 57.3%.
36
At June 3, 2006, domestic net operating loss carryforwards (NOL)
amount to approximately $21,345. These NOLs expire between 2024 and
2026. Foreign net operating loss carryforwards total approximately
$14,459 with various or indefinite expiration dates. During fiscal 2005, due
to changes in the level of certainty regarding realization, a valuation
allowance of approximately $15,886 was established to offset certain
domestic deferred tax assets, primarily inventory valuation, and domestic
net operating loss carryforwards. In addition, the Company recorded an
additional valuation allowance of approximately $769 relating to deferred
tax assets relating to certain foreign subsidiaries. In fiscal 2006, the
Company re-evaluated the realization of certain deferred tax assets,
resulting in an additional valuation allowance of $2,227. The Company
believes that in order to reverse the recorded valuation allowance in any
subsidiary, the Company would likely need to have positive cumulative
earnings in that subsidiary for the three-year period preceding the year of
the reversal. The Company also has an alternative minimum tax credit
carryforward at June 3, 2006, in the amount of $1,189 that has an
indefinite carryforward period.
Income taxes paid, including foreign estimated tax payments, were
$6,305, $3,272, and $1,656 in fiscal 2006, 2005, and 2004, respectively.
At the end of fiscal 2004, all of the cumulative positive earnings of the
Company’s foreign subsidiaries, amounting to $35.1 million, were
considered permanently reinvested pursuant to APB No. 23, Accounting
for Income Taxes-Special Areas. As such, U.S. taxes were not provided
on these amounts. In fiscal 2005, because of a strategic decision, the
Company determined that approximately $12.9 million of one of its foreign
subsidiaries’ earnings could no longer be considered permanently
reinvested as those earnings may be distributed in future years. Based on
management’s potential future plans regarding this subsidiary, it was
determined that these earnings would no longer meet the specific
requirements for permanent reinvestment under APB No. 23. Upon
distribution of those earnings in the form of dividends or otherwise, the
Company would be subject to both U.S. income tax and foreign withhold-
ing taxes. As such, the Company established a deferred tax liability of
approximately $4.9 million during fiscal 2005. The Company revised its
estimate of the deferred tax liability of $4.9 million at June 3, 2006 based
on changes in management’s potential future plans for this subsidiary
during fiscal 2006. In fiscal 2006, the Company revised its strategy and as
of June 3, 2006 again and concluded that the undistributed earnings of
this subsidiary were considered permanently reinvested outside the
United States. The reversal of the $4.9 million deferred tax liability in fiscal
2006 resulted in an additional valuation allowance in the same amount
and, therefore, did not effect the fiscal 2006 tax provision. Cumulative
positive earnings of the Company’s foreign subsidiaries were still
considered permanently reinvested pursuant to APB No. 23 and
amounted to $64.2 million at June 3, 2006. Due to various tax attributes
that are continually changing, it is not possible to determine what, if any,
tax liability might exist if such earnings were to
be repatriated.
In May 2005, the Company was informed by one of its foreign
subsidiaries that its records may not be adequate to support the taxable
revenues and deductions included within tax returns previously filed for
the tax years 2003 and 2004. At this time, the Company has not received
notification from any tax authority regarding this matter. The Company
has increased its income tax reserve for this potential exposure.
During fiscal 2005, the Canadian taxing authority proposed an
income tax assessment for fiscal 1998 through fiscal 2002. The Company
appealed the income tax assessment; however, the Company paid the
entire tax liability in fiscal 2005 to the Canadian taxing authority to avoid
additional interest and penalties if the Company’s appeal was denied. The
payment was recorded as an increase to income tax provision in fiscal
2005. In May 2006, the appeal was settled in the Company’s favor. The
Company will receive a refund of approximately $1,000, which was
recorded as a reduction to income tax provision during the fourth quarter
of fiscal 2006.
On October 22, 2004, the President signed the American Jobs
Creation Act of 2004 (the Act). The Act provides a deduction for income
from qualified domestic production activities, which will be phased in from
2005 through 2010. In return, the Act also provides for a two-year phase
out ending December 31, 2006 of the existing extraterritorial income
exclusion (ETI) for foreign sales that was viewed to be inconsistent with
the international trade protocols by the European Union. The Company
did not receive a tax benefit from the current ETI exclusion in fiscal 2006.
When this benefit is fully phased out, it will have no impact on the rate.
Another provision of the Act creates a temporary incentive for U.S.
corporations to repatriate accumulated income earned abroad by
providing an 85% dividends-received deduction for certain dividends from
controlled foreign corporations. The calculation of the deduction is subject
to a number of limitations. This provision of the Act has no material impact
on the operations of the Company for fiscal 2006 and is expected to have
no material impact on the operations of the Company for fiscal 2007, as
the Company does not intend at this time to repatriate earnings to the
U.S. from foreign countries.
Note K — Stockholders’ Equity
The Company has authorized 30,000 shares of common stock,
10,000 shares of Class B common stock, and 5,000 shares of preferred
stock. The Class B common stock has ten votes per share. The Class B
common stock has transferability restrictions; however, it may be
converted into common stock on a share-for-share basis at any time. With
respect to dividends and distributions, shares of common stock and Class
B common stock rank equally and have the same rights, except that
Class B common stock is limited to 90% of the amount of common stock
cash dividends.
Total common stock issued and outstanding, excluding Class B
common stock at June 3, 2006, was 14,402 shares, net of treasury
shares of 1,261. An additional 10,626 shares of common stock have been
reserved for the potential conversion of the convertible notes and Class B
common stock and for future issuance under the Employee Stock
Purchase Plan and Employee and Non-Employee Director Stock
Option Plan.
The Employee Stock Purchase Plan (ESPP) provides substantially
all employees an opportunity to purchase common stock of the Company
at 85% of the stock price at the beginning or the end of the year, which-
ever is lower. At June 3, 2006, the plan had 132 shares reserved for
future issuance.
37
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
The following table summarizes information about stock options
outstanding at June 3, 2006:
Exercise
Price Range
$ 5.38 to $ 7.50
$ 7.75 to $ 9.00
$11.00 to $13.81
Total
Outstanding
Shares Price
$ 6.98
549
$ 8.16
762
541
$13.12
1,852
Life
3.8
7.2
4.1
Exercisable
Shares Price
Life
$ 6.97 3.6
$ 8.26 3.5
$13.29 3.7
484
245
501
1,230
A summary of restricted stock award transactions was as follows:
Unvested at May 31, 2003
Granted
Vested
Cancelled
Unvested at May 29, 2004
Granted
Vested
Cancelled
Unvested at May 28, 2005
Granted
Vested
Cancelled
Unvested at June 3, 2006
Shares
59
10
(31)
(7)
31
18
(29)
(7)
13
3
(12)
—
4
Compensation effects arising from issuing stock awards were $7,
$425, and $403 in fiscal 2006, 2005, and 2004, and have been charged
against income and recorded as additional paid-in capital in the
Consolidated Balance Sheets.
Note L — Employee Retirement Plans
The Company’s domestic employee retirement plans consist of a
profit sharing plan and a stock ownership plan (ESOP). Annual
contributions in cash or Company stock are made at the discretion of
the Board of Directors. In addition, the profit sharing plan has a 401(k)
provision whereby the Company matches 50% of employee contributions
up to 4% of base pay. Charges to expense for discretionary and matching
contributions to these plans were $723, $729, and $1,274 for fiscal 2006,
2005, and 2004, respectively. Such amounts included contributions in
stock of $290 for 2004, based on the stock price at the date contributed.
Shares are included in the calculation of earnings per share and divi-
dends are paid to the ESOP from the date the shares are contributed.
Foreign employees are covered by a variety of government
mandated programs.
Note K — Stockholders’ Equity (cont’d)
The Employees’ 2001 Incentive Compensation Plan authorizes the
issuance of up to 900 shares as incentive stock options, non-qualified
stock options, or stock awards. Under this plan and predecessor plans,
2,015 shares are reserved for future issuance. The Plan authorizes the
granting of incentive stock options at the fair market value at the date of
grant. Generally, these options become exercisable over staggered
periods and expire up to ten years from the date of grant.
On June 16, 2005, the Board of Directors of the Company adopted
the 2006 Stock Option Plan for Non-Employee Directors which authorizes
the issuance of up to 400 shares as non-qualified stock options. Under
this plan, 400 shares of common stock have been reserved for future
issuances relating to stock options exercisable based on the passage of
time. Each option is exercisable over a period of time from its date of
grant at the market value on the grant date and expires after 10 years.
This plan replaces the 1996 Stock Option Plan for Non-Employee
Directors which was terminated on June 16, 2005.
The Company applies APB No. 25 and related interpretations in
accounting for its option plans and, accordingly, has not recorded
compensation expense for such plans. SFAS No. 123 requires the
calculation of the fair value of each option granted. This fair value is
estimated on the date of grant using the Black-Scholes option-pricing
model with the assumptions indicated below (see Note A - Stock-Based
Compensation):
Risk-free interest rate
Volatility
Average expected life (years)
Annual dividend rate
Weighted average fair value
per option
Fair value of ESPP per share
Fair value of options granted
June 3,
2006
5.0%
43%
5.1
0.16
3.14
1.06
$
$
$
during the year
$ 1,210
Fiscal Year Ended
May 28,
2005
3.8%
47%
5.0
0.16
May 29,
2004
3.6%
47%
4.9
$ 0.16
3.28
1.41
$ 4.57
$ 1.32
946
$ 103
$
$
$
$
A summary of the share activity and weighted average exercise
prices for the Company’s option plans is as follows:
Outstanding
At May 31, 2003
Granted
Exercised
Cancelled
At May 29, 2004
Shares
1,738
23
(229)
(77)
1,455
Granted
Exercised
Cancelled
At May 28, 2005
313
(24)
(43)
1,701
Granted
436
Exercised
(41)
(244)
Cancelled
At June 3, 2006 1,852
Price
$ 9.29
11.16
7.19
10.23
$ 9.58
7.75
6.96
4.05
$ 9.46
8.14
7.22
8.86
$ 9.26
Exercisable
Shares
1,111
Price
$ 9.08
1,045
$ 9.58
1,240
$ 9.69
1,230
$ 9.80
38
Note M — Segment and Geographic Information
During the second quarter of fiscal 2006, the Company implemented
a reorganization plan encompassing the Company’s RF & Wireless
Communications Group (RFWC) and Industrial Power Group (IPG)
business units. Effective for the second quarter of fiscal 2006, IPG has
been designated as Electron Device Group (EDG) and RFWC has been
designated as RF, Wireless & Power Division (RFPD). The reorganization
was implemented to increase efficiencies by integrating IPG’s power
conversion sales and product management into RFWC, improving the
geographic sales coverage and driving sales growth by leveraging
RFWC’s larger sales resources. In addition, the Company believes that
EDG will benefit from an increased focus on the high-margin tube
business with a simplified global sales and product management structure
to work more effectively with customers and vendors. The data presented
has been reclassified to reflect the reorganization.
The following disclosures are made in accordance with the SFAS No.
131, Disclosures about Segments of an Enterprise and Related
Information. The Company’s strategic business units (SBUs) in fiscal
2006 are: RFPD, EDG, SSD, and DSG.
RFPD serves the voice and data telecommunications market and the
radio and television broadcast industry predominately for infrastructure
applications, as well as the industrial power conversion market.
EDG serves a broad range of customers including the steel,
automotive, textile, plastics, semiconductor manufacturing, and
broadcast industries.
SSD provides security systems and related design services which
includes such products as closed circuit television, 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 Chief Executive Officer (CEO). The CEO 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, and goodwill 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:
Net Sales
$ 334,131
94,443
108,843
95,010
$ 632,427
$ 296,334
92,174
105,581
78,078
$ 572,167
$ 256,270
87,856
101,979
66,452
$ 512,557
Gross
Profit
Direct
Operating
Contribution
Assets
$
75,834
30,438
27,279
24,509
$ 158,060
$ 47,194
19,644
7,872
9,156
$ 83,866
$ 116,102
42,878
36,071
37,568
$ 232,619
$
64,853
29,401
26,889
17,865
$ 139,008
$ 34,225
17,682
9,153
7,793
$ 68,853
$ 98,592
44,110
34,457
25,064
$ 202,223
$
58,408
27,642
26,045
17,105
$ 129,200
$ 33,142
18,137
10,501
9,228
$ 71,008
$ 101,731
34,126
33,257
23,358
$ 192,472
Fiscal 2006
RFPD
EDG
SSD
DSG
Total
Fiscal 2005
RFPD
EDG
SSD
DSG
Total
Fiscal 2004
RFPD
EDG
SSD
DSG
Total
A reconciliation of net sales, gross profit, operating income, and
assets to the relevant consolidated amounts is as follows. Other assets
not identified include miscellaneous receivables, manufacturing
inventories, and other assets.
Fiscal Year Ended
June 3,
2006
$ 632,427
5,513
$ 637,940
May 28,
2005
$ 572,167
6,557
$ 578,724
May 29,
2004
$ 512,557
7,266
$ 519,823
$ 158,060
$ 139,008
$ 129,200
(2,291)
$ 155,769
(3,014)
$ 135,994
(2,478)
$ 126,722
$ 83,866
$
68,853
$ 71,008
Segment net sales
Corporate
Net sales
Segment gross profit
Manufacturing variances
and other costs
Gross profit
Segment contribution
Manufacturing variances
and other costs
Regional selling expenses
Administrative expenses
Gain (loss) on disposal of assets
Operating income
(2,291)
(19,231)
(46,215)
(3)
$ 16,126
(3,014)
(19,065)
(40,527)
9,918
$ 16,165
(2,478)
(18,109)
(31,667)
( 579)
$ 18,175
Segment assets
Cash and cash equivalents
Other current assets
Net property
Other assets
Total assets
$ 232,619
17,010
19,098
32,357
8,215
$ 309,299
$ 202,223
24,301
20,211
31,712
5,493
$ 283,940
$ 192,472
16,572
20,170
30,534
21,287
$ 281,035
39
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
Geographic net sales information is primarily grouped by customer
The Company sells its products to companies in diversified industries
destination into five areas: North America, Europe, Asia/Pacific, Latin
America, and Corporate. Europe includes sales to the Middle East and
Africa. Net sales to Mexico are included as part of Latin America.
Corporate consists of freight and non-area specific sales.
Net sales, gross profit, operating income, and long-lived assets (net
property and other assets, excluding investments, other intangible assets
and non-current deferred income taxes) are presented in the table below.
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 state-
ments based on periodic reviews of outstanding accounts, and actual
losses have been consistently within management’s estimates.
Note N — Litigation
Fiscal Year Ended
June 3,
2006
May 28,
2005
May 29,
2004
Net Sales
United States
Canada
North America
Europe
Asia/Pacific
Latin America
Corporate
Total
Gross Profit
United States
Canada
North America
Europe
Asia/Pacific
Latin America
Corporate
Total
Operating Income
United States
Canada
North America
Europe
Asia/Pacific
Latin America
Corporate
Total
Long-Lived Assets
United States
Canada
North America
Europe
Asia/Pacific
Latin America
Total
$ 233,682
85,680
319,362
140,870
148,000
24,336
5,372
$ 637,940
$ 60,509
24,117
84,626
38,608
35,533
6,786
(9,784)
$ 155,769
$ 29,285
11,016
40,301
11,134
20,629
1,080
(57,018)
$ 16,126
$ 26,208
2,062
28,270
2,559
1,468
1,078
$ 33,375
$ 227,341
76,367
303,708
123,846
124,799
21,366
5,005
$ 578,724
$ 57,988
22,274
80,262
34,345
29,691
5,879
(14,183)
$ 135,994
$ 26,546
10,790
37,336
7,814
17,028
280
(46,293)
$ 16,165
$ 26,913
776
27,689
2,593
1,120
1,265
$ 32,667
$ 205,810
69,681
275,491
116,714
104,068
20,065
3,485
$ 519,823
$ 52,782
18,981
71,763
32,619
23,304
4,860
(5,824)
$ 126,722
$ 25,722
8,795
34,517
11,109
12,838
(156)
(40,133)
$ 18,175
$ 26,071
806
26,877
2,765
593
1,036
$ 31,271
Historically, the Company has not tracked capital expenditures and
depreciation by SBU as the majority of the spending relates to Corporate
projects. In fiscal 2006, capital expenditures primarily related to the
implementation of various modules and upgrades of PeopleSoft and
facility improvements.
The Company is involved in several pending judicial proceedings
concerning matters arising in the ordinary course of its business. While
the outcome of litigation is subject to uncertainties, based on currently
available information, the Company believes that, in the aggregate, the
results of these proceedings will not have a material adverse effect on its
financial condition.
Note O — Valuation and Qualifying Accounts
The following table presents the valuation and qualifying account
activity for the fiscal years ended June 3, 2006, May 28, 2005, and
May 29, 2004:
Description
Balance at
beginning
of period
Charged
to
expenses
Balance
at end
of period
Deductions
Year ended June 3, 2006:
Allowance for
doubtful accounts $ 1,934 $ 1,326 (1)
$ 1,118 (2) $
2,142
Inventory overstock
reserve
Deferred tax
$ 28,492 $ 1,765 (3)
$5,000 (7) $ 25,257
asset valuation
Warranty reserves
$ 20,695 $
$ 1,439 $
5,145
932
$ — $ 25,840
$1,535 (6) $
836
Year ended May 28, 2005:
Allowance for
doubtful accounts $ 2,516 $ 894 (1)
$1,476 (2) $
1,934
Inventory overstock
reserve
Deferred tax
$ 26,617 $ 4,225 (3)
$2,350 (7) $ 28,492
asset valuation
Warranty reserves
$ 4,040 $ 16,655 (4)
$ 802 $ 958
$ — $ 20,695
1,439
$ 321
$
Year ended May 29, 2004:
Allowance for
doubtful accounts $ 3,350 $
(409)(1)
$ 425 (2) $
2,516
Inventory overstock
reserve
Deferred tax
$ 34,015 $ 2,168 (3)
$9,566 (5) $ 26,617
asset valuation
Warranty reserves
$ 1,586 $ 2,454
$ 672 $ 459
$
$ 329
— $
$
4,040
802
(1) Charges to bad debt expense.
(2) Uncollectible amounts written off, net of recoveries and foreign currency translation.
(3) Charges to cost of sales.
(4) Tax provisions recorded to increase the valuation allowance related to deferred tax
assets in the U.S. ($15.9 million) and outside the U.S. ($0.8 million).
(5) Inventory disposed of during the period ($3.6 million), LIFO reversal ($4.0 million), and
reclassification to LCM ($2.0 million).
(6) A change in estimate of $0.9 million was recorded during the second quarter
of fiscal 2006.
(7) Inventory disposed of during the period.
40
Note P — Selected Quarterly Financial Data
(Unaudited)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Fiscal 2006:
Net sales
Gross profit
Net income (loss)
Net income (loss) per share - basic:
$158,145
38,532
1,820
$
$155,837
39,506
$ 293
$152,128
37,089
$171,830
40,642
$ (1,146) $ (3,609)
- Common stock
- Class B
$ 0.11
common stock
$
0.10
Net income (loss) per share - diluted:
- Common stock
- Class B
common stock
$
$
0.10
0.10
$
$
$
$
0.02
$ (0.07) $ (0.21)
0.02
$
(0.06) $ (0.19)
0.02
$
(0.07) $ (0.21)
0.02
$ (0.06) $ (0.19)
Fiscal 2005:
$138,447
Net sales
33,855
Gross profit
Net income (loss)
904
Net income (loss) per share - basic:
0.06
$
$
- Common stock
- Class B
common stock
$
0.05
Net income (loss) per share - diluted:
- Common stock
- Class B
common stock
$
$
0.06
0.05
$151,274
35,862
3,290
$
$141,700
33,666
$147,303
32,611
$ (22,687) $ 2,476
$
$
$
$
0.19
0.17
$
$
(1.34) $
0.15
(1.20) $
0.13
0.19
$ (1.34) $
0.14
0.17
$ (1.20) $
0.13
(1) In the third quarter of fiscal 2005, the Company recorded a $2.2 million
restructuring charge to selling, general and administrative expenses as
the Company terminated over 60 employees. In addition, the Company
recorded incremental tax provisions of $16.7 million in fiscal 2005 to
increase the valuation allowance related to the Company’s deferred tax
assets in the U.S. ($15.9 million) and outside the U.S. ($0.8 million).
(2) In the fourth quarter of fiscal 2006, the Company recorded severance
costs of $2.7 million to selling, general and administrative expenses for
certain employees whose termination costs became probable
and estimable. In the fourth quarter, the Company re-evaluated the
realization of certain deferred tax assets, resulting in an additional
valuation allowance of $2.2 million.
41
Report of Independent Registered Public Accounting Firm
Report of Independent Registered
Public Accounting Firm
The Board of Directors and Stockholders
Richardson Electronics, Ltd.:
We have audited the accompanying consolidated balance
sheet of Richardson Electronics, Ltd. as of June 3, 2006, and
the related consolidated statements of operations,
stockholders’ equity and comprehensive income (loss), and
cash flows for the year then ended. These financial
statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with the standards of
the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Richardson Electronics, Ltd. at June 3,
2006, and the consolidated results of its operations and its
cash flows for the year then ended, in conformity with U.S.
generally accepted accounting principles.
We also have audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United
States), the effectiveness of Richardson Electronics, Ltd.’s
internal control over financial reporting as of June 3, 2006,
based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report
dated August 22, 2006, expressed an unqualified opinion on
management’s assessment of internal control over financial
reporting and an adverse opinion on the effectiveness of
internal control over financial reporting.
Ernst & Young LLP
Chicago, Illinois
August 22, 2006
42
Report of Independent Registered Public Accounting Firm
Report of Independent Registered
Public Accounting Firm
The Board of Directors and Stockholders
Richardson Electronics, Ltd.:
We have audited the accompanying consolidated balance
sheets of Richardson Electronics, Ltd. and subsidiaries as of
May 28, 2005, and the related consolidated statements of
operations, stockholders’ equity and comprehensive income
(loss), and cash flows for each of the years in the two-year
period ended May 28, 2005. These consolidated financial
statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards
of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Richardson Electronics, Ltd. and subsidiaries as
of May 28, 2005, and the results of their operations and their
cash flows for each of the years in the two-year period
ended May 28, 2005, in conformity with U.S. generally
accepted accounting principles.
KPMG LLP
Chicago, Illinois
August 26, 2005, except for Stock-Based Compensation
and Earnings Per Share sections of Note A to the
consolidated financial statements, as to which the date is
February 1, 2006, and Note G and the geographic and
long-lived asset information included in Note M to the
consolidated financial statements, as to which date is
August 30, 2006
43
Report of Independent Registered Public Accounting Firm
Report of Independent Registered
Public Accounting Firm
The Board of Directors and Stockholders
Richardson Electronics, Ltd.:
We have audited management’s assessment, included in the
accompanying Management’s Report on Internal control over
Financial Reporting (Item 9A.(b)), that Richardson
Electronics, Ltd. (the Company) did not maintain effective
internal control over financial reporting as of June 3, 2006,
because of the effect of a material weakness related to
deferred tax asset valuation allowances, based on criteria
established in Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Richardson
Electronics, Ltd.’s management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an
opinion on management’s assessment and an opinion on the
effectiveness of the Company’s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of
the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was
maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial
reporting, evaluating management’s assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we
considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.
A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit
preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in
accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in
conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
A material weakness is a control deficiency, or
combination of control deficiencies, that results in more
than a remote likelihood that a material misstatement of
the annual or interim financial statements will not be
prevented or detected. The following material weakness
has been identified and included in management’s
assessment as of June 3, 2006.
The Company did not effectively perform an evaluation
of the reasonableness of assumptions with respect to
the realizability of deferred tax assets.
The Company did not have appropriate controls in
place to determine that valuation allowances provided
for deferred tax assets were determined in
accordance with income tax accounting standards.
This control deficiency resulted in material errors in
the deferred tax asset valuation allowances which
required adjustment to the Company’s financial
statements for fiscal 2006 and the third quarter of
2006 and restatement of the Company’s financial
statements for fiscal 2005, for the third quarter of 2005
and for the first and second quarters of fiscal 2006.
This material weakness was considered in determining the
nature, timing, and extent of audit tests applied in our audit
of the June 3, 2006 financial statements, and this report
does not affect our report dated August 22, 2006 on those
financial statements.
In our opinion, management’s assessment that
Richardson Electronics, Ltd. did not maintain effective
internal control over financial reporting as of June 3, 2006,
is fairly stated, in all material respects, based on the
COSO criteria. Also, in our opinion, because of the effect
of the material weakness described above on the
achievement of the objectives of the control criteria,
Richardson Electronics, Ltd. has not maintained effective
internal control over financial reporting as of June 3, 2006,
based on the COSO criteria.
44
Ernst & Young LLP
Chicago, Illinois
August 22, 2006
Stockholder Information
Market Price of Common Stock
The Company’s common stock is traded on The NASDAQ Global Market
under the trading symbol “RELL.” There is no established public trading
market for the Company’s Class B common stock. As of August 28, 2006,
there were approximately 899 stockholders of record for their common stock
and approximately 18 stockholders of record for their Class B common stock.
The following table sets forth, for the periods indicated, the high and low bid
prices per share of “RELL” common stock as reported on The NASDAQ
Global Market.
2006
2005
Fiscal Quarters
First
Second
Third
Fourth
High
$ 9.38
8.50
9.05
9.40
Low
$ 6.55
6.78
6.89
6.24
High
$ 11.96
11.30
11.76
11.49
Low
$ 7.53
7.50
9.70
7.46
Annual dividend payments for fiscal 2006 amounted to $2.7 million. All
future payments of dividends are at the discretion of the board of directors
and will depend on earnings, capital requirements, operating conditions, and
such other factors that the board of directors may deem relevant. In each of
the last 19 years, the Company has paid a quarterly dividend of $0.04 per
common share and $0.036 per class B common share. The Company
currently expects to continue paying dividends at this historical rate in
fiscal 2007.
Corporate Office
Richardson Electronics, Ltd.
40W267 Keslinger Road • P.O. Box 393
LaFox, Illinois 60147-0393
(630) 208-2200
Internet: www.rell.com/investor.asp • E-mail: info@rell.com
Annual Meeting
We encourage stockholders to attend the annual meeting
scheduled for Tuesday, October 17, 2006, at 3:15 PM
at the Company’s corporate office. Further details are
available in your proxy materials.
Independent Auditors
Ernst & Young LLP
233 South Wacker Drive
Chicago, IL 60606
Transfer Agent and Registrar
LaSalle Bank
135 South LaSalle Street
Chicago, IL 60603
Equity Research Reports
21st Century Equity Research
Craig-Hallum Capital Group
Form 10-K and Other Information
A copy of the Company’s Annual Report on Form 10-K, filed
with the Securities and Exchange Commission, and the
Corporate Code of Conduct are available without charge
upon request. All inquiries should be addressed to the
Investor Relations Department, Richardson Electronics,
Ltd., 40W267 Keslinger Road, P.O. Box 393, LaFox, Illinois
60147-0393. Press releases and other information can be
found on the Internet at the Company’s home page at
http://www.rell.com/investor.asp
45
Officers and Directors
Corporate Officers
Edward J. Richardson
Chairman of the Board, Chief Executive Officer
and President
Larry Blaney
Executive Vice President and General Manager,
Display Systems Group
Board of Directors
Edward J. Richardson (1, 5)
Arnold R. Allen (5)
Management Consultant
Jacques Bouyer (3,4,5)
Retired Chief Executive Officer and
Chairman of the Board of Philips Components - France
Pierluigi Calderone
Vice President and Director, European Operations
Scott Hodes (3, 5)
David J. DeNeve
Senior Vice President and Chief Financial Officer
Bruce W. Johnson (1,5)
Partner, Law Firm of Bryan Cave LLP
Wendy S. Diddell
Executive Vice President and General Manager,
Security Systems Division
Retired President and Chief Operating Officer,
Richardson Electronics, Ltd.
Ad Ketelaars (5)
Chief Executive Officer, NEC Philips Unified Solutions
David J. Gilmartin
Vice President, General Counsel and Secretary
John R. Peterson (2,5)
Managing Director, Cleary Gull Inc.
Joseph C. Grill
Senior Vice President, Human Resources
Harold L. Purkey (2, 5)
Murray J. Kennedy
Executive Vice President and General Manager,
Electron Device Group
Brad R. Knechtel
Vice President, Supply Chain Management
Kathleen M. McNally
Senior Vice President, Marketing Operations and
Customer Support
Gregory J. Peloquin
Executive Vice President and General Manager,
RF, Wireless & Power Division
William G. Seils
Of Counsel and Assistant Secretary
Retired Managing Director, First Union Securities, Inc.
and Director, Reptron Electronics, Inc.
Samuel Rubinovitz (1,2,3,4,5)
Management Consultant, Director, LTX Corporation,
and Director, Kronos Corporation
(1) Executive Committee
(2) Audit Committee
(3) Compensation Committee
(4) Stock Option Committee
(5) Strategic Planning Committee
46