# Richardson Electronics, LTD.: Form 10-Q for the period ended Aug 27, 2016

- Company: [Richardson Electronics, LTD.](/companies/rell.md) (CIK 355948)
- Form: 10-Q
- Filed: 2016-10-06
- Accepted by EDGAR: Oct 6, 2016, 15:56 ET
- Period: 2016-08-27
- Accession: 0001387131-16-007204
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/355948/000138713116007204/rell-10q_082716.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/355948/000138713116007204/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-08-27.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-05-29 to 2016-08-27 | $33.4m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2016-05-29 to 2016-08-27 | $23.1m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2016-05-29 to 2016-08-27 | $10.2m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2016-05-29 to 2016-08-27 | $12.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2016-05-29 to 2016-08-27 | −$2.1m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2016-05-29 to 2016-08-27 | $497.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-05-29 to 2016-08-27 | −$2.9m | us-gaap:NetIncomeLoss |
| Diluted shares (weighted) | 3 months, 2016-05-29 to 2016-08-27 | 12,844,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2016-05-29 to 2016-08-27 | −$1.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2016-05-29 to 2016-08-27 | $2.1m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 3 months, 2016-05-29 to 2016-08-27 | $758.0k | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2016-08-27 | $57.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-08-27 | $132.4m | us-gaap:AssetsCurrent |
| Total assets | at 2016-08-27 | $160.6m | us-gaap:Assets |
| Current liabilities | at 2016-08-27 | $20.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2016-08-27 | $22.0m | us-gaap:Liabilities |
| Shareholders' equity | at 2016-08-27 | $138.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 20,517 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 29, 2016. 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 27, 2016, and August 29, 2015.
- **Results of Operations –** an analysis and comparison of our consolidated results of operations for the three month periods ended August 27, 2016, and August 29, 2015, as reflected in our consolidated statements of comprehensive loss.
- **Liquidity, Financial Position, and Capital Resources –** a discussion of our primary sources and uses of cash for the three month periods ended August 27, 2016, and August 29, 2015, and a discussion of changes in our financial position.

### Business Overview

Richardson Electronics, Ltd. is a leading global provider of engineered solutions, power grid and microwave tubes and related consumables; power conversion and RF and microwave components; high value displays, flat panel detector solutions and replacement parts for diagnostic imaging equipment; and customized display solutions. We serve customers in the alternative energy, healthcare, aviation, broadcast, communications, industrial, marine, medical, military, scientific and semiconductor markets. The Company’s strategy is to provide specialized technical expertise and “engineered solutions” based on our core engineering and manufacturing capabilities. The Company provides solutions and adds value through design-in support, systems integration, prototype design and manufacturing, testing, logistics, and aftermarket technical service and repair through its global infrastructure.

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.

We have three operating and reportable segments which we define as follows:

Power and Microwave Technologies Group (“PMT”) combines our core engineered solutions, power grid and microwave tube business with new RF and power technologies. As a manufacturer and authorized distributor, PMT’s 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—all through our existing global infrastructure. PMT’s focus is on products for power, RF and microwave applications for customers in alternative energy, aviation, broadcast, communications, industrial, marine, medical, military, scientific, and semiconductor markets. PMT 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. PMT also offers its customers technical services for both microwave and industrial equipment.

Canvys provides customized display solutions serving the corporate enterprise, financial, healthcare, 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 believe we can help our customers improve efficiency and deliver better clinical outcomes while lowering the cost of healthcare delivery.

We currently have operations in North America, Asia/Pacific, Europe, and Latin America.

### RESULTS OF OPERATIONS

### Financial Summary – Three Months Ended August 27, 2016

- Net sales for the first quarter of fiscal 2017 were $33.4 million, a decrease of 10.0%, compared to net sales of $37.1 million during the first quarter of fiscal 2016.
- Gross margin increased to 30.7% during the first quarter of fiscal 2017, compared to 30.4% during the first quarter of fiscal 2016.
- Selling, general, and administrative expenses were $12.3 million, or 36.9% of net sales, for the first quarter of fiscal 2017, compared to $12.3 million, or 33.1% of net sales, for the first quarter of fiscal 2016.
- Operating loss during the first quarter of fiscal 2017 was $2.1 million, compared to an operating loss of $1.0 million in the first quarter of fiscal 2016.
- Net loss during the first quarter of fiscal 2017 was $2.9 million, compared to net loss of $1.4 million, during the first quarter of fiscal 2016.

### Net Sales and Gross Profit Analysis

Net sales by segment and percent change for the first quarter of fiscal 2017 and 2016 were as follows (*in thousands):*

| Net Sales | Three Months Ended August 27, 2016 | August 29, 2015 | FY17 vs. FY16 % Change |
| --- | ---: | ---: | ---: |
| PMT | $25,381 | $27,195 | -6.7% |
| Canvys | 4,620 | 6,681 | -30.8% |
| Healthcare | 3,372 | 3,195 | 5.5% |
| Total | $33,373 | $37,071 | -10.0% |

During the first quarter of fiscal 2017 consolidated net sales decreased 10.0% compared to the first quarter of fiscal 2016. Sales for PMT decreased 6.7%, sales for Canvys decreased 30.8%, and sales for Healthcare increased 5.5%. The decline sales for both PMT and Canvys were primarily due to declines in overall demand from key original equipment manufacturers. The increase in Richardson Healthcare was due to an increase in demand for diagnostic imaging replacement parts.

Gross profit by segment and percent change for the first quarter of fiscal 2017 and 2016 were as follows (*in thousands):*

| Gross Profit | Three Months Ended August 27, 2016 | % of Net Sales | August 29, 2015 | % of Net Sales |
| --- | ---: | ---: | ---: | ---: |
| PMT | $7,455 | 29.4% | $8,138 | 29.9% |
| Canvys | 1,348 | 29.2% | 1,709 | 25.6% |
| Healthcare | 1,437 | 42.6% | 1,415 | 44.3% |
| Total | $10,240 | 30.7% | $11,262 | 30.4% |

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 decreased to $10.2 million during the first quarter of fiscal 2017, compared to $11.3 million during the first quarter of fiscal 2016. Consolidated gross profit as a percentage of net sales increased to 30.7% during the first quarter of fiscal 2017, from 30.4% during the first quarter of fiscal 2016, primarily due to higher margins in our Canvys business as a result of an improved product and sales mix and higher margins associated with the sale of diagnostic imaging replacement parts in the Healthcare business.

### Power and Microwave Technologies Group

PMT net sales decreased 6.7% to $25.4 million during the first quarter of fiscal 2017, from $27.2 million during the first quarter of fiscal 2016. The decline included sales of Electron devices sold into the marine market, and specialty products manufactured in LaFox which are sold primarily into the semiconductor capital equipment market. The sales decline was partially offset by higher sales of new technology partners in power conversion and RF and microwave component and growth of Electron devices in Laser products and Microwave radar applications. Gross margin as a percentage of net sales decreased to 29.4% during the first quarter of fiscal 2017, as compared to 29.9% during the first quarter of fiscal 2016, due to production shutdown and equipment transfer costs incurred at our Brive, France facility.

### Canvys

Canvys net sales decreased 30.8% to $4.6 million during the first quarter of fiscal 2017, from $6.7 million during the first quarter of fiscal 2016 primarily due to a significant decrease in customer demand in our North America market. Gross margin as a percentage of net sales increased to 29.2% during the first quarter of fiscal 2017 as compared to 25.6% during the first quarter of fiscal 2016, due to product mix and lower inbound freight costs.

### Healthcare

Healthcare net sales increased 5.5% to $3.4 million during the first quarter of fiscal 2017, from $3.2 million during the first quarter of fiscal 2016 primarily due to increased sales of IMES products. Gross margin as a percentage of net sales decreased to 42.6% during the first quarter of fiscal 2017 as compared to 44.3% during the first quarter of fiscal 2016 due to product mix.

### Selling, General, and Administrative Expenses

Selling, general, and administrative expenses (“SG&A”) during the first quarter of fiscal 2017 were flat at $12.3 million to the first quarter of fiscal 2016. Decreases in SG&A of $0.4 million in support functions and $0.1 million in Canvys were offset by an increase of $0.5 million related to additional investments in our Richardson Healthcare segment to support its expected growth.

### Other Income/Expense

Other income/expense was $0.3 million of expense during the first quarter of fiscal 2017, compared to expense of less than $0.1 million during the first quarter of fiscal 2016. Other income/expense during the first quarter of fiscal 2017 included $0.3 million of foreign exchange losses. Other income/expense during the first quarter of fiscal 2016 included $0.2 million of investment and interest income offset by $0.2 million of foreign exchange losses. 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

We recorded an income tax provision of $0.5 million and $0.4 million for the first three months of fiscal 2017 and the first three months of fiscal 2016, respectively. The effective income tax rate during the first three months of fiscal 2017 was a tax provision of (21.1%), as compared to a tax provision of (35.7%) during the first three months of fiscal 2016. The difference in rate during the first three months of fiscal 2017, as compared to the first three months of fiscal 2016, reflects the impact of changes in our geographical distribution of income (loss), the recording of provision to return true-ups of various foreign jurisdictions, and our positions with respect to ASC 740-30, Income Taxes - Other Considerations or Special Areas (“ASC 740-30”). The (21.1%) effective income tax rate differs from the federal statutory rate of 34.0% as a result of our geographical distribution of income (loss), the recording of various provision to return true-ups in foreign jurisdictions, the increase in uncertain tax positions as a result of an income tax audit in France, and the recording of a valuation allowance against the increase in our U.S. state and federal net deferred tax assets.

In the normal course of business, we are subject to examination by taxing authorities throughout the world. Generally, years prior to fiscal 2006 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 France (fiscal 2013 through 2015) and Thailand (fiscal 2008 through 2011). We are under examination in the state of Illinois for fiscal years 2012 and 2013. Our primary foreign tax jurisdictions are Germany and the Netherlands. We have tax years open in Germany beginning in fiscal 2012 and the Netherlands beginning in fiscal 2010.

### Net Loss and Per Share Data

Net loss during the first quarter of fiscal 2017 was $2.9 million, or ($0.23) per diluted common share and ($0.20) per Class B diluted common share, as compared to net loss of $1.4 million during the first quarter of fiscal 2016, or ($0.10) per diluted common share and ($0.10) 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 and cash on hand.

Cash and cash equivalents for the first quarter ended August 27, 2016, were $57.5 million. Investments included CDs and time deposits classified as short-term investments were $6.4 million and long-term investments were $2.4 million, including equity securities of $0.6 million. Cash and investments at August 27, 2016, consisted of $25.6 million in North America, $11.7 million in Europe, $1.0 million in Latin America, and $28.0 million in Asia/Pacific. During the first quarter of fiscal 2017, we completed a cash repatriation of $11.3 million, which included a return of capital and dividend from our Chinese entity to our U.S. parent company.

Cash and cash equivalents were $60.4 million at May 28, 2016. Investments included CD’s and time deposits, classified as short-term investments were $2.3 million and long-term investments were $7.8 million, including equity securities of $0.6 million. Cash and investments at May 28, 2016, consisted of $18.1 million in North America, $12.6 million in Europe, $0.7 million in Latin America, and $39.1 million in Asia/Pacific.

### Cash Flows from Operating Activities

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

Operating activities used $1.7 million of cash during the first quarter of fiscal 2017. We had net loss of $2.9 million during the first quarter of fiscal 2017, 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 $0.7 million associated with our property and equipment as well as amortization of our intangible assets. Changes in our operating assets and liabilities during the first quarter of fiscal 2017, net of foreign currency exchange gains and losses, included decreases in receivables and inventories of $3.6 million and $0.4 million, respectively, offset by decreases in our accounts payable and accrued liabilities of $2.3 million and $1.1 million, respectively. The decrease in receivables of $3.6 million was primarily due to the collection of a large receivable during the first quarter of fiscal 2017 that was invoiced during the fourth quarter of fiscal 2016. The inventory decrease was due to terminating our production at our Brive, France facility during the first quarter of fiscal 2017. Decreases in our accounts payable and liabilities were due to timing of payments for some of our larger vendors and also the result of having shorter payment terms for our Richardson Healthcare vendors.

Operating activities used $6.5 million of cash during the first quarter of fiscal 2016. We had net loss of $1.4 million during the first quarter of fiscal 2016, 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 $0.5 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 and foreign currency exchange gains and losses, was a use of cash of $5.7 million during the first quarter of fiscal 2016, due primarily to the increase in our accounts receivable of $2.5 million, the decrease in our accounts payable of $1.5 million, the increase in inventories of $0.6 million, the increase in prepaid expenses of $0.6 million, and the decrease in accrued liabilities of $0.8 million.

### Cash Flows from Investing Activities

The cash flow from investing activities has consisted primarily of purchases and maturities of investments, capital expenditures, and any business acquisition activity.

Cash used by investing activities of $0.6 million during the first quarter of fiscal 2017, included proceeds from the maturities of investments of $1.5 million, offset by $2.1 million in capital expenditures. Capital expenditures relates primarily to our Healthcare growth initiatives and capital used for our new IT system.

Cash provided by investing activities of $5.2 million during the first quarter of fiscal 2016, included proceeds from the maturities of investments of $18.4 million, offset by the acquisition of IMES of $12.2 million and $1.0 million in capital expenditures. Capital expenditures of $1.0 million relates primarily to our Healthcare growth initiatives.

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 $0.8 million during the first quarter of fiscal 2017, resulted from cash used to pay dividends.

Cash used in financing activities of $4.1 million during the first three months of fiscal 2016, resulted from $3.3 million of cash used to repurchase common stock under our share repurchase authorization and $0.8 million of cash used to pay dividends.

Dividend payments for the first quarter of fiscal 2017 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 through the next twelve months.

## Market risk

As filed, 846 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 28, 2016, filed July 29, 2016.

## 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 27, 2016.

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 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 164 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 28, 2016, filed July 29, 2016.

Filed Oct 6, 2016.
Source: SEC EDGAR, the filing index for accession 0001387131-16-007204. Last ingested by Listed: Nov 2, 2026, 11:55 ET. No prices; not investment advice.