# Richardson Electronics, LTD.: Form 10-Q for the period ended Aug 30, 2014

- Company: [Richardson Electronics, LTD.](/companies/rell.md) (CIK 355948)
- Form: 10-Q
- Filed: 2014-10-09
- Accepted by EDGAR: Oct 9, 2014, 17:04 ET
- Period: 2014-08-30
- Accession: 0000355948-14-000032
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/355948/000035594814000032/rell_10qxfy2015xq1x08302014.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/355948/000035594814000032/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2014-08-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2014-06-01 to 2014-08-30 | $34.7m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2014-06-01 to 2014-08-30 | $24.0m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2014-06-01 to 2014-08-30 | $10.7m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2014-06-01 to 2014-08-30 | $11.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2014-06-01 to 2014-08-30 | −$533.0k | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2014-06-01 to 2014-08-30 | −$135.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2014-06-01 to 2014-08-30 | −$83.0k | us-gaap:NetIncomeLoss |
| Operating cash flow | 3 months, 2014-06-01 to 2014-08-30 | −$328.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2014-06-01 to 2014-08-30 | $834.0k | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 3 months, 2014-06-01 to 2014-08-30 | $828.0k | us-gaap:PaymentsOfDividends |
| Share repurchases | 3 months, 2014-06-01 to 2014-08-30 | $488.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2014-08-30 | $98.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2014-08-30 | $181.9m | us-gaap:AssetsCurrent |
| Total assets | at 2014-08-30 | $200.9m | us-gaap:Assets |
| Current liabilities | at 2014-08-30 | $20.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2014-08-30 | $28.1m | us-gaap:Liabilities |
| Shareholders' equity | at 2014-08-30 | $172.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 22,493 characters.

*Certain statements in this report may constitute “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. The terms “may,” “should,” “could,” “anticipate,” “believe,” “continues,” “estimate,” “expect,” “intend,” “objective,” “plan,” “potential,” “project” and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. These statements are based on management’s current expectations, intentions or beliefs and are subject to a number of factors, assumptions and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Factors that could cause or contribute to such differences or that might otherwise impact the business include the risk factors set forth in Item 1A, of our Annual Report on Form 10-K filed on July 25, 2014. We undertake no obligation to update any such factor or to publicly announce the results of any revisions to any forward-looking statements contained herein whether as a result of new information, future events or otherwise.*

*In addition, while we do, from time to time, communicate with securities analysts, it is against our policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts, or opinions, such reports are not our responsibility.*

### INTRODUCTION

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to assist the reader in better understanding our business, results of operations, financial condition, changes in financial condition, critical accounting policies and estimates, and significant developments. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes appearing elsewhere in this filing. This section is organized as follows:

- **Business Overview** - a brief synopsis of our Company for the periods ended August 30, 2014, and August 31, 2013
- **Results of Operations –** an analysis and comparison of our consolidated results of operations for the three month periods ended August 30, 2014, and August 31, 2013, as reflected in our consolidated statements of comprehensive income (loss).
- **Liquidity, Financial Position, and Capital Resources –** a discussion of our primary sources and uses of cash for the three month periods ended August 30, 2014, and August 31, 2013, and a discussion of changes in our financial position.

### Business Overview

Richardson Electronics, Ltd. (“we”, “us”, “the Company”, and “our”) is incorporated in the state of Delaware. We are a leading global provider of engineered solutions, power grid and microwave tubes and related components, and customized display solutions, serving customers in the alternative energy, aviation, broadcast, communications, industrial, marine, medical, military, scientific, and semiconductor markets. Our strategy is to provide specialized technical expertise and “engineered solutions” based on our core engineering and manufacturing capabilities. We provide solutions and add value through design-in support, systems integration, prototype design and manufacturing, testing, logistics, and aftermarket technical service and repair.

Our products include electron tubes and related components, microwave generators, subsystems used in semiconductor manufacturing, and visual technology solutions. These products are used to control, switch or amplify electrical power signals, or are used as display devices in a variety of industrial, commercial, medical, and communication applications.

During the first quarter of fiscal 2015, we created a new strategic business unit called Richardson Healthcare (“Healthcare”). As hospitals remain under pressure to reduce costs while serving a much larger customer base, there is a growing demand for independent sources of high value replacement parts for diagnostic imaging. Having access to parts that are tested and in stock enables hospitals to terminate expensive service contracts with the Original Equipment Manufacturers ("OEM") and instead use third party service providers or in house technicians. With our global infrastructure, technical sales team, and experience servicing the healthcare market, we are well positioned to take advantage of this market opportunity. Over time we will expand our position from being the leader in power grid tubes to a key player in the high growth, high profile healthcare industry.

We have three operating segments, which we define as follows:

Electron Device Group (“EDG”) provides engineered solutions and distributes electronic components to customers in alternative energy, aviation, broadcast, communications, industrial, marine, medical, military, scientific, and semiconductor markets. EDG focuses on various applications including broadcast transmission, CO2 laser cutting, diagnostic imaging, dielectric and induction heating, high energy transfer, high voltage switching, plasma, power conversion, radar, and radiation oncology. EDG also offers its customers technical services for both microwave and industrial equipment.

Canvys provides customized display solutions serving the corporate enterprise, financial, industrial, and OEM markets.

Healthcare manufactures, distributes and services high value replacement parts for the healthcare market including hospitals, medical centers, independent service organizations, and multi-vendor service providers. Products include power grid tubes, hydrogen thyratrons, klystrons, magnetrons; Image Systems medical displays and workstations for picture archiving and communication systems ("PACS"); visual solutions for operating rooms/surgical environments; digital radiography solutions including replacement flat panel detectors and upgrades; and additional replacement components currently under development for the diagnostic imaging service market. Through a combination of newly developed products and partnerships, service offerings, and training programs we help our customers improve efficiency and deliver better clinical outcomes while lowering the cost of healthcare delivery.

We currently have operations in the following major geographic regions: North America, Asia/Pacific, Europe, and Latin America.

### RESULTS OF CONTINUING OPERATIONS

### FINANCIAL SUMMARY – THREE MONTHS ENDED AUGUST 30, 2014

- Net sales for the first quarter of fiscal 2015 were $34.7 million, an increase of 1.3%, compared to net sales of $34.3 million during the first quarter of fiscal 2014.
- Gross margin increased to 30.7% during the first quarter of fiscal 2015, compared to 29.8% during the first quarter of fiscal 2014.
- Selling, general, and administrative expenses increased to $11.2 million, or 32.2% of net sales, for the first quarter of fiscal 2015, compared to $10.1 million, or 29.4% of net sales, for the first quarter of fiscal 2014.
- Operating loss during the first quarter of fiscal 2015 was $0.5 million, compared to an operating income of $0.1 million, or 0.4% of net sales, during the first quarter of fiscal 2014.
- Loss from continuing operations during the first quarter of fiscal 2015 was $0.1 million, compared to income from continuing operations of $2.0 million, or $0.14 per diluted common share, during the first quarter of fiscal 2014.
- Net loss during the first quarter of fiscal 2015 was $0.1 million, compared to net income of $2.0 million, or $0.14 per diluted common share, during the first quarter of fiscal 2014.

### Net Sales and Gross Profit Analysis

Net sales by segment and percent change for the first quarter of fiscal 2015 and 2014 were as follows (*in thousands):*

| Net Sales | Q1 FY 2015 | Q1 FY 2014 | % Change |
| --- | ---: | ---: | ---: |
| EDG | $27,438 | $25,479 | 7.7% |
| Canvys | 5,968 | 7,446 | (19.8%) |
| Healthcare | 1,293 | 1,332 | (2.9%) |
| Total | $34,699 | $34,257 | 1.3% |

During the first quarter of fiscal 2015 consolidated net sales increased 1.3% compared to the first quarter of fiscal 2014. Sales for Canvys declined by 19.8%, sales for EDG increased 7.7%, and sales for Healthcare declined 2.9%.

Gross profit by segment and percent of segment net sales for the first quarter of fiscal 2015 and 2014 were as follows (*in thousands):*

| Gross Profit | Q1 FY 2015 |  | Q1 FY 2014 |  |
| --- | ---: | ---: | ---: | ---: |
| EDG | $8,686 | 31.7% | $7,859 | 30.8% |
| Canvys | 1,656 | 27.7% | 1,903 | 25.6% |
| Healthcare | 316 | 24.4% | 430 | 32.3% |
| Total | $10,658 | 30.7% | $10,192 | 29.8% |

Gross profit reflects the distribution and manufacturing product margin less manufacturing variances, inventory obsolescence charges, customer returns, scrap and cycle count adjustments, engineering costs, unabsorbed manufacturing labor and overhead, and other provisions.

Consolidated gross profit was $10.7 million during the first quarter of fiscal 2015, compared to $10.2 million during the first quarter of fiscal 2014. Consolidated gross margin as a percentage of net sales increased to 30.7% during the first quarter of fiscal 2015, from 29.8% during the first quarter of fiscal 2014. The increase was primarily due to the reduction in unabsorbed labor and overhead costs in our LaFox manufacturing facility during the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014.

### Electron Device Group

EDG net sales increased 7.7% to $27.4 million during the first quarter of fiscal 2015, from $25.5 million during the first quarter of fiscal 2014. Net sales of specialty products manufactured in LaFox and sold primarily into the semiconductor capital equipment market increased and net sales of tubes and related consumables in the laser market also increased. These increases were partially offset by decreases in net sales for the industrial heating and aviation markets. Gross margin as a percentage of net sales increased to 31.7% during the first quarter of fiscal 2015, as compared to 30.8% during the first quarter of fiscal 2014 primarily due to reduction in unabsorbed labor and overhead costs in our LaFox manufacturing facility.

### Canvys

Canvys net sales decreased 19.8% to $6.0 million during the first quarter of fiscal 2015, from $7.4 million during the first quarter of fiscal 2014. Sales in our North America and Europe OEM markets decreased due to delays in new program startups and loss of a key customer in the prior year. Gross margin as a percentage of net sales increased to 27.7% during the first quarter of fiscal 2015 as compared to 25.6% during the first quarter of fiscal 2014, due to purchasing efficiencies and better pricing controls.

### Healthcare

Healthcare net sales were $1.3 million during the first quarter of fiscal 2015, a decrease of 2.9% from the first quarter of fiscal 2014. Sales decreased in the PACS display market driven by budget constraints and a difficult capital market for hospitals. Gross margin as a percentage of net sales decreased to 24.4% during the first quarter of fiscal 2015 as compared to 32.3% during the first quarter of fiscal 2015, due to competitive pricing pressure and shifts in product mix.

### Selling, General, and Administrative Expenses

Selling, general, and administrative expenses (“SG&A”) increased to $11.2 during the first quarter of fiscal 2015 from $10.1 million during the first quarter of fiscal 2014. This increase includes $0.5 million related to the company's growth initiatives and $0.5 million related to our new ERP implementation.

### Other Income/Expense

Other income/expense was income of $0.3 million during the first quarter of fiscal 2015, compared to income of $2.3 million during the first quarter of fiscal 2014. Other income/expense during the first quarter of fiscal 2015 included $0.3 million of investment and interest income. Other income/expense during the first quarter of fiscal 2014 included an anti-trust class action lawsuit settlement of $2.1 million and investment income of $0.3 million, partially offset by foreign exchange loss of $0.1 million. Our foreign exchange gains and losses are primarily due to the translation of U.S. dollars held in non-U.S. entities. We currently do not utilize derivative instruments to manage our exposure to foreign currency.

### Income Tax Provision

The effective income tax rate from continuing operations during the first three months of fiscal 2015 was a tax benefit of 61.9%, as compared to a tax provision of 18.5% during the first three months of fiscal 2014. The difference in rate during the first three months of fiscal 2015, as compared to fiscal 2014, reflects the impact of tax benefit on the three month loss for fiscal 2015, as well as relative amount of foreign earnings considered to be permanently reinvested with respect to ASC 740-30, *Income Taxes – Other Considerations or Special Areas*, the deferred tax impact of the change in the statutory tax rate in Japan, and the recording of a prior period tax benefit related to compensation expense. The 61.9% effective rate differs from the federal statutory rate of 34.0% as a result of our geographical distribution of income, apportionment of income to various states, the deferred tax impact of the change in the statutory tax rate in Japan, the recording of a tax benefit related to compensation expense, and our position with respect to ASC 740-30, *Income Taxes – Other Considerations or Special Areas.*

In the normal course of business, we are subject to examination by taxing authorities throughout the world. Generally, years prior to fiscal 2007 are closed for examination under the statute of limitation for U.S. federal, U.S. state and local, or non-U.S. tax jurisdictions. We are also currently under examination in Germany (fiscal 2009 through 2011), Italy (fiscal 2011), and Thailand (fiscal 2008 through 2011). Our most significant foreign tax jurisdictions are Germany and the Netherlands. We have tax years open in Germany beginning in fiscal 2007 and the Netherlands beginning in fiscal 2008.

We have historically determined that certain undistributed earnings of our foreign subsidiaries, to the extent of cash available, will be repatriated to the U.S. Accordingly, we have provided a deferred tax liability totaling $6.8 million as of August 30, 2014, on foreign earnings of $41.6 million. In addtion, as of August 30, 2014, approximately $43.1 million of cumulative positive earnings of some of our foreign subsidiaries are considered permanently reinvested pursuant to ASC 740-30, *Income Taxes-Other Considerations or Special Areas*. Due to various tax attributes that are continuously changing, it is not practicable to determine what, if any, tax liability might exist if such earnings were to be repatriated.

As of August 30, 2014, our consolidated liability for uncertain tax positions, excluding interest and penalties, was less than $0.1 million as compared to no liabilities for uncertain tax positions as of August 31, 2013. We have recorded immaterial penalties and interest relating to uncertain tax positions in the income tax expense line item within the unaudited consolidated statements of income and comprehensive income.

It is not expected that there will be a change in the unrecognized tax benefits within the next 12 months.

### Net Income (Loss) and Per share Data

Net loss during the first quarter of fiscal 2015 was $0.1 million, as compared to net income of $2.0 million during the first quarter of fiscal 2014, or $0.14 per diluted common share and $0.13 per Class B diluted common share.

### LIQUIDITY, FINANCIAL POSITION, AND CAPITAL RESOURCES

Our growth and cash needs have been primarily financed through income from operations. Cash and cash equivalents for the first quarter ended August 30, 2014, were $98.1 million. In addition, CDs and time deposits classified as short-term investments were $26.4 million and long-term investments were $8.8 million, including equity securities of $0.5 million. Cash and investments at August 30, 2014, consisted of $70.5 million in North America, $21.0 million in Europe, $1.2 million in Latin America, and $40.5 million in Asia/Pacific. At May 31, 2014, cash and cash equivalents were $102.8 million. In addition, CDs and time deposits classified as short-term investments were $31.7 million and long-term investments were $1.5 million, including equity securities of $0.5 million. Cash and investments at May 31, 2014, consisted of $71.8 million in North America, $20.5 million in Europe, $0.9 million in Latin America, and $42.8 million in Asia/Pacific.

### Cash Flows from Discontinued Operations

In accordance with ASC 230, *Statement of Cash Flows,* entities are permitted but not required to separately disclose, either in the statement of cash flows or footnotes to the financial statements, cash flows pertaining to discontinued operations. Entities that do not present separate operating cash flow information related to discontinued operations must do so consistently for all periods presented, which may include periods long after the sale or liquidation of the operation.

### Cash Flows from Operating Activities

The cash flow from operating activities primarily resulted from our net income, adjusted for non-cash items, and changes in our operating assets and liabilities.

Operating activities used $0.3 million of cash during the first quarter of fiscal 2015. We had net loss of $0.1 million during the first quarter of fiscal 2015, which included non-cash stock-based compensation expense of $0.1 million associated with the issuance of stock option awards and depreciation and amortization expense of $0.4 million associated with our property and equipment as well as amortization of our intangible assets. Changes in our operating assets and liabilities, net of effects of acquired businesses, used $0.6 million of cash during the first quarter of fiscal 2015, due primarily to the increase in our inventory of $2.1 million, the increase in our accounts receivable of $0.4 million, the decrease in accrued liabilities of $0.7 million, partially offset by a decrease to our income tax receivable of $2.3 million. The increase in our inventory of $2.1 million primarily relates to inventory purchases for new product offerings. The decrease in our income tax receivable of $2.3 million was due to the receipt of an income tax refund.

Operating activities, which include our discontinued operations, used $1.2 million of cash during the first quarter of fiscal 2014. We had net income of $2.0 million during the first quarter of fiscal 2014, which included non-cash stock-based compensation expense of $0.1 million associated with the issuance of stock option awards and depreciation and amortization expense of $0.2 million associated with our property and equipment as well as amortization of our intangible assets. Changes in our operating assets and liabilities, net of effects of acquired businesses, used $3.5 million of cash during the first quarter of fiscal 2014, due primarily to the increase in our inventory of $0.5 million, the decrease in our accounts payable of $2.5 million, the increase in our accounts receivable of $1.2 million, partially offset by a decrease to our prepaid expenses of $0.2 million. The increase in our inventory was due to a increase in purchases related to specific projects within our Canvys business. The decrease in our accounts payable relates primarily to the timing of payment to some of our major vendors. The increase in our receivables of $1.2 million was due primarily to a slight increase in our day sales outstanding caused primarily by a shift in customer mix by geography. The decrease in prepaid expenses of $0.2 million was due primarily to a decrease in VAT prepayments.

### Cash Flows from Investing Activities

The cash flow from investing activities has consisted primarily of purchases and maturities of investments and capital expenditures.

Cash used in investing activities of $2.7 million during the first quarter of fiscal 2015, included proceeds from the maturities of investments of $30.5 million, offset by the purchase of investments of $32.4 million and $0.8 million in capital expenditures. Capital expenditures of $0.8 million relates primarily to our new ERP implementation.

Cash used in investing activities of $1.0 million during the first quarter of fiscal 2014, included proceeds from the maturities of investments of $40.5 million, offset by the purchase of investments of $40.1 million, $1.0 million for the acquisition of WVS, and $0.4 million in capital expenditures.

Our purchases and proceeds from investments consist of time deposits and CDs. Purchasing of future investments may vary from period to period due to interest and foreign currency exchange rates.

### Cash Flows from Financing Activities

The cash flow from financing activities primarily consists of repurchases of common stock and cash dividends paid.

Cash used in financing activities of $1.2 million during the first three months of fiscal 2015, resulted from $0.5 million of cash used to repurchase common stock under our share repurchase authorization and $0.8 million of cash used to pay dividends, offset by $0.2 million of proceeds from the issuance of common stock.

Cash used in financing activities of $7.5 million during the first three months of fiscal 2014, resulted from $6.7 million of cash used to repurchase common stock under our share repurchase authorization and $0.9 million of cash used to pay dividends, offset by $0.1 million of proceeds from the issuance of common stock.

Dividend payments for the first three months of fiscal 2015 were approximately $0.8 million. All future payments of dividends are at the discretion of the Board of Directors. Dividend payments will depend on earnings, capital requirements, operating conditions, and such other factors that the Board may deem relevant.

We believe that the existing sources of liquidity, including current cash, will provide sufficient resources to meet known capital requirements and working capital needs for the fiscal year ending May 30, 2015.

## Market risk

As filed, 849 characters.

### Risk Management and Market Sensitive Financial Instruments

We are exposed to many different market risks with the various industries we serve. The primary financial risk we are exposed to is foreign currency exchange, as certain operations, assets, and liabilities of ours are denominated in foreign currencies. We manage these risks through normal operating and financing activities.

The interpretation and analysis of these disclosures should not be considered in isolation since such variances in exchange rates would likely influence other economic factors. Such factors, which are not readily quantifiable, would likely also affect our operations. Additional disclosure regarding various market risks are set forth in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended May 31, 2014, filed on July 25, 2014.

## Controls and procedures

As filed, 1,610 characters.

(a) Evaluation of Disclosure Controls and Procedures

Management of the Company, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of August 30, 2014.

Disclosure controls and procedures are intended to provide reasonable assurance that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

(b) Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the first quarter of fiscal 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 167 characters.

There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended May 31, 2014, filed on July 25, 2014.

Filed Oct 9, 2014.
Source: SEC EDGAR, the filing index for accession 0000355948-14-000032. Last ingested by Listed: Nov 10, 2026, 23:29 ET. No prices; not investment advice.