CEO's Corner

The fiscal year 2007 marks the 60th anniversary of Richardson Electronics. My father, Arthur Richardson, Sr., incorporated Richardson Electronics on May 31, 1947 as a specialized distributor of vacuum tubes. Total sales for the first year of operation were $53,000.

Sixty years later, I am pleased to report that our sales continue to grow year-over-year. Fiscal 2007 sales from our three strategic business units — the RF, Wireless and Power Division (RFPD), the Electron Device Group (EDG) and the Display Systems Group (DSG) — reached $557.3 million, up over 5% from the previous year. Several milestones have all come together on our 60th anniversary:

• RFPD achieved a record fourth quarter with $99.4 million in sales.
• For the first time in our history, EDG exceeded $100 million in sales for the fiscal year; with a gross margin of 33%.
• The Security Systems Division (SSD) was successfully sold to Honeywell for $80 million, allowing the Company to realize a $41.6 million gain.

In fiscal 2007, sales growth was led by RFPD, which had annual sales of $369.9 million — up 10.7% from the previous year. EDG set a new record in sales and earnings, with sales at $101.2 million — up 7.1% from the previous year. DSG experienced customer delays on several very large projects, which resulted in a disappointing sales year of $82.1 million — down 13.6% from the previous year. Sales in all geographic regions grew significantly in fiscal 2007. Sales in Asia/Pacific were up 11.6% over the previous year to $165.2 million. This sales growth was led by China, which ended the year at nearly $59 million — an increase of 36.3%. Sales in Europe of $143.8 million were up 11.3% from fiscal 2006. Sales in North America reached $229.3 million, up 0.6%. Sales in Latin America declined to $17.0 million, as we closed warehouses in Mexico and Columbia and substantially reduced staff in this region.

Although we were disappointed to sell SSD, as it made a major contribution to the growth of Richardson Electronics over many years, we were pleased with the $80 million sale price that allowed the Company to realize a gain of $41.6 million. The transaction was structured as a sale of the stock of our Canadian subsidiary, Burtek Systems Corp., which was held by our Dutch entity, Burtek Systems BV. This structure allowed the Company to realize the $41.6 million gain with a very minimal effective tax rate of 6%. As a result of this transaction, we have reduced our bank debt substantially and put a new credit agreement in place on more competitive terms, which we expect will reduce interest expense. The sale of SSD will also allow us to repay a substantial amount of our intercompany debt, which should eliminate the majority of our foreign exchange gains and losses that have impacted our quarterly performance. The repayment of our bank debt has already improved our balance sheet and reduced our debt to equity ratio from 129% (as of June 3, 2006) to 89% (as of June 2, 2007).

Our global restructuring plan, which was initiated at the beginning of fiscal 2007, is nearing completion and will be finalized in September of fiscal 2008. We have installed a centralized inventory hub system in Amsterdam to support Europe and in LaFox, IL to support the Americas. We also continue to operate satellite warehouses in critical areas such as Brazil and China. We are in the process of installing a centralized inventory hub system in Singapore to support Asia/Pacific. The ultimate result will be the consolidation of nearly 30 global warehouses into three worldwide hubs. We have sold two warehouses, with a gain of nearly $3.9 million, and reduced the overall workforce substantially, with total annual savings estimated at $8.0 million.

The cost to implement the restructuring plan was approximately $6.0 million, with $2.7 million recorded in fiscal 2006 and $3.3 million in fiscal 2007.

The utilization of UPS World Ease^SM allows us to ship from any one of our three hubs to any location in the world in 3-5 days, improving our customer service and reducing freight costs. Localizing purchasing, customer service, and inventory management to service each of the three hubs will result in improved customer service, reduced freight costs, and enhanced inventory management. As a result, material purchased in Euros is stocked in the Amsterdam hub, material purchased in US dollars is stocked in our LaFox hub, and material purchased in Asia is stocked in Singapore.

At the same time, we are in the process of reorganizing our foreign entities as limited risk distributors (LRDs), reducing transfer price exposure and simplifying our income tax structure. These moves will allow us to bring approximately 95% of the incremental profits back to the US, where we can utilize tax loss carry forwards and reduce our tax cost for the future.

We expect to realize the full impact of cost savings from the restructuring, as well as the tax benefits of the LRD structure, in the balance of fiscal 2008.

From a financial perspective, the Company now has its strongest balance sheet in many years. We now have the necessary resources to invest in our Engineered Solutions strategy. The global restructuring plan is nearly complete. Foreign exchange issues have been minimized. The Company’s income tax structure has also been improved dramatically. We look forward to returning the company to record levels of profitability in the very near term.

Thank you for your continued investment in Richardson Electronics.