# Richardson Electronics, LTD.: Form 10-Q for the period ended Sep 2, 2017

- Company: [Richardson Electronics, LTD.](/companies/rell.md) (CIK 355948)
- Form: 10-Q
- Filed: 2017-10-12
- Accepted by EDGAR: Oct 12, 2017, 15:57 ET
- Period: 2017-09-02
- Accession: 0001387131-17-005033
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/355948/000138713117005033/rell-10q_090217.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/355948/000138713117005033/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-09-02.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Cost of revenue | 3 months, 2017-05-28 to 2017-09-02 | $24.8m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2017-05-28 to 2017-09-02 | $12.1m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2017-05-28 to 2017-09-02 | $12.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2017-05-28 to 2017-09-02 | $15.0k | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2017-05-28 to 2017-09-02 | $64.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-05-28 to 2017-09-02 | −$112.0k | us-gaap:NetIncomeLoss |
| Diluted shares (weighted) | 3 months, 2017-05-28 to 2017-09-02 | 12,849,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2017-05-28 to 2017-09-02 | −$2.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2017-05-28 to 2017-09-02 | $1.0m | us-gaap:PaymentsToAcquireProductiveAssets |
| Cash and equivalents | at 2017-09-02 | $56.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-09-02 | $127.6m | us-gaap:AssetsCurrent |
| Total assets | at 2017-09-02 | $157.1m | us-gaap:Assets |
| Current liabilities | at 2017-09-02 | $22.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2017-09-02 | $23.5m | us-gaap:Liabilities |
| Shareholders' equity | at 2017-09-02 | $133.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 22,433 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 31, 2017. 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 September 2, 2017 and August 27, 2016.
- **Results of Operations –** an analysis and comparison of our consolidated results of operations for the three month periods ended September 2, 2017 and August 27, 2016, 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 September 2, 2017 and August 27, 2016, 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 flat panel detector solutions, replacement parts, tubes and service training 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 medical original equipment manufacturers (“OEM”) markets.

Healthcare manufactures, refurbishes and distributes high value replacement parts for the healthcare market including hospitals, medical centers, asset management companies, independent service organizations, and multi-vendor service providers. Products include Diagnostic Imaging replacement parts including CT and MRI tubes, hydrogen thyratrons, klystrons, magnetrons; 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 the following major geographic regions: North America, Asia/Pacific, Europe, and Latin America.

### RESULTS OF OPERATIONS

### Financial Summary – Three Months Ended September 2, 2017

- The first three months of fiscal 2018 and 2017 contained 14 and 13 weeks, respectively.
- Net sales for the first quarter of fiscal 2018 were $37.0 million, an increase of 10.9%, compared to net sales of $33.4 million during the first quarter of fiscal 2017.
- Gross margin increased to 32.8% during the first quarter of fiscal 2018, compared to 30.7% during the first quarter of fiscal 2017.
- Selling, general, and administrative expenses were $12.3 million, or 33.3% of net sales, for the first quarter of fiscal 2018, compared to $12.3 million, or 36.9% of net sales, for the first quarter of fiscal 2017.
- Operating income during the first quarter of fiscal 2018 was less than $0.1 million, compared to an operating loss of $2.1 million in the first quarter of fiscal 2017.
- Net loss during the first quarter of fiscal 2018 was $0.1 million, compared to net loss of $2.9 million, during the first quarter of fiscal 2017.

### Net Sales and Gross Profit Analysis

Net sales by segment and percent change for the first quarter of fiscal 2018 and 2017 were as follows (*in thousands):*

| Net Sales | Three Months Ended September 2, 2017 | August 27, 2016 | FY18 vs. FY17 % Change |
| --- | ---: | ---: | ---: |
| PMT | $29,124 | $25,381 | 14.7% |
| Canvys | 5,765 | 4,620 | 24.8% |
| Healthcare | 2,106 | 3,372 | -37.5% |
| Total | $36,995 | $33,373 | 10.9% |

During the first quarter of fiscal 2018 consolidated net sales increased 10.9% compared to the first quarter of fiscal 2017. Sales for PMT increased 14.7%, sales for Canvys increased 24.8% and sales for Healthcare decreased 37.5%. The sales increase for PMT was primarily due to increases in market share and for Canvys was due to overall demand from key original equipment manufacturers. The decrease in Healthcare was due to the sale of the PACS display business at the end of fiscal 2017, which accounted for $1.4 million in sales in the first quarter of fiscal 2017.

Gross profit by segment and percent of net sales for the first quarter of fiscal 2018 and 2017 were as follows (*in thousands):*

| Gross Profit | Three Months Ended September 2, 2017 | % of Net Sales | August 27, 2016 | % of Net Sales |
| --- | ---: | ---: | ---: | ---: |
| PMT | $9,574 | 32.9% | $7,455 | 29.4% |
| Canvys | 1,546 | 26.8% | 1,348 | 29.2% |
| Healthcare | 1,028 | 48.8% | 1,437 | 42.6% |
| Total | $12,148 | 32.8% | $10,240 | 30.7% |

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 increased to $12.1 million during the first quarter of fiscal 2018, compared to $10.2 million during the first quarter of fiscal 2017. Consolidated gross profit as a percentage of net sales increased to 32.8% during the first quarter of fiscal 2018, from 30.7% during the first quarter of fiscal 2017, primarily due to continued growth and market share gains for products with large engineering content that carry higher gross margins and the sale of PACS displays which had a lower margin.

### Power and Microwave Technologies Group

PMT net sales increased 14.7% to $29.1 million during the first quarter of fiscal 2018, from $25.4 million during the first quarter of fiscal 2017. The increase included market share gains of Electron devices sold into the industrial and marine markets, growth of Electron devices in Laser products, increased sales of engineered solution products developed in LaFox which are sold primarily into the semiconductor capital equipment market and increased sales of new technology partners in power conversion and RF and microwave components. Gross margin as a percentage of net sales increased to 32.9% during the first quarter of fiscal 2018, as compared to 29.4% during the first quarter of fiscal 2017 due to continued growth and market share gains for products with large engineering content that carry higher gross margins.

### Canvys

Canvys net sales increased 24.8% to $5.8 million during the first quarter of fiscal 2018, from $4.6 million during the first quarter of fiscal 2017 due to a significant increase in customer demand in both our North American and European markets. Gross margin as a percentage of net sales decreased to 26.8% during the first quarter of fiscal 2018 as compared to 29.2% during the first quarter of fiscal 2017 due to product mix, higher inbound freight costs and increased lower margin engineering billings.

### Healthcare

Healthcare net sales decreased 37.5% to $2.1 million during the first quarter of fiscal 2018, from $3.4 million during the first quarter of fiscal 2017, due to the sale of the PACS display business at the end of fiscal 2017, partially offset by an increase in the sales of CT tubes and equipment. Gross margin as a percentage of net sales increased to 48.8% during the first quarter of fiscal 2018 as compared to 42.6% during the first quarter of fiscal 2017 due to the sale of the PACS display business, which generated lower margins.

### Selling, General, and Administrative Expenses

Selling, general and administrative expenses (“SG&A”) during the first quarter of fiscal 2018 were flat at $12.3 million compared to the first quarter of fiscal 2017.

### Other Income/Expense

Other income/expense was $0.1 million of expense during the first quarter of fiscal 2018, compared to expense of $0.3 million during the first quarter of fiscal 2017. Other income/expense during the first quarter of fiscal 2018 included $0.2 million of foreign exchange losses. Other income/expense during the first quarter of fiscal 2017 included $0.3 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 $0.1 million and $0.5 million for the first three months of fiscal 2018 and the first three months of fiscal 2017, respectively. The effective income tax rate during the first three months of fiscal 2018 was a tax provision of (133.3%), as compared to a tax provision of (21.1%) during the first three months of fiscal 2017. The difference in rate during the first three months of fiscal 2018, as compared to the first three months of fiscal 2017, reflects the change in the overall loss realized through the first quarter in each respective period, 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 (133.3%) effective income tax rate differs from the federal statutory rate of 34.0% as a result of our geographical distribution of income (loss) 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 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 currently under examination in Germany (fiscal 2011 through 2014) and Thailand (fiscal 2008 through 2011). We are also under examination in the state of Illinois for fiscal years 2014 and 2015. Our primary foreign tax jurisdictions are Germany and the Netherlands. We have tax years open in Germany beginning in fiscal 2011 and the Netherlands beginning in fiscal 2011.

Recently Issued Accounting Standards

In March 2016, the FASB issued ASU No. 2016-09, “*Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”,* a new accounting standard update intended to simplify several aspects of the accounting for share-based payment transactions including: income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. Specifically, the update requires that excess tax benefits and tax deficiencies (the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes) be recognized as income tax expense or benefit in the consolidated statements of comprehensive income (loss), introducing a new element of volatility to the provision for income taxes. This update is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted. The Company adopted the ASU on May 28, 2017. Effective with the adoption of the ASU all share-based awards continue to be accounted for as equity awards, excess tax benefits recognized on stock-based compensation expense are reflected in the consolidated statements of comprehensive income (loss) as a component of the provision for income taxes on a prospective basis, excess tax benefits recognized on stock-based compensation expense are classified as an operating activity in the consolidated statements of cash flows on a prospective basis and the Company has elected to continue to estimate expected forfeitures over the course of a vesting period. The adoption of the ASU had no impact on the retained earnings, other components of equity or net assets as of the beginning of the period of adoption.

### Net Loss and Per Share Data

Net loss during the first quarter of fiscal 2018 was $0.1 million, or ($0.01) per diluted common share and ($0.01) per Class B diluted common share, as compared to net loss of $2.9 million during the first quarter of fiscal 2017, or ($0.23) per diluted common share and ($0.20) per Class B diluted common share.

### LIQUIDITY, FINANCIAL POSITION AND CAPITAL RESOURCES

Our operations and cash needs have been primarily financed through income from operations and cash on hand.

Cash and cash equivalents were $56.4 million at September 2, 2017. Investments included CDs and time deposits classified as short-term investments were $2.4 million and long-term investments were $2.5 million, including equity securities of $0.6 million. Cash and investments at September 2, 2017, consisted of $13.3 million in North America, $16.5 million in Europe, $1.2 million in Latin America and $30.4 million in Asia/Pacific.

Cash and cash equivalents were $55.4 million at May 27, 2017. Investments included CD’s 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 May 27, 2017, consisted of $16.3 million in North America, $15.5 million in Europe, $1.5 million in Latin America and $30.9 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.

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.

### 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 $2.5 million of cash during the first quarter of fiscal 2018. We had net loss of $0.1 million during the first quarter of fiscal 2018, 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 2018, net of foreign currency exchange gains and losses, included a decrease in accounts payable and an increase in inventories of $2.8 million and $2.6 million, respectively, somewhat offset by a decrease in accounts receivable and an increase in accrued liabilities of $2.0 million and $0.7 million, respectively. The decrease in our accounts payable was due to timing of payments for some of our larger vendors for both inventory and services. The inventory increase was due to the ongoing growth of our RF and power technologies business, increase in the semiconductor capital equipment market and growth in supplying replacement parts to the Healthcare market. The decrease in receivables was primarily due to the collection of fiscal 2017 receivables during the first quarter of fiscal 2018.

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 Healthcare vendors.

### Cash Flows from Investing Activities

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

Cash provided by investing activities of $3.3 million during the first quarter of fiscal 2018, included proceeds from the maturities of investments of $4.0 million, somewhat offset by $1.0 million in capital expenditures. Capital expenditures relates primarily to our Healthcare growth initiatives and capital used for our IT system.

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 relate primarily to our Healthcare growth initiatives and capital used for our new IT system.

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 consists of cash dividends paid.

Cash used in financing activities of $0.8 million during the first quarter of fiscal 2018, resulted from cash used to pay dividends.

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

Dividend payments for the first quarter of fiscal 2018 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.

## Market risk

As filed, 845 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 27, 2017, filed July 31, 2017.

## Controls and procedures

As filed, 1,611 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 September 2, 2017.

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 2018 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 27, 2017, filed July 31, 2017.

Filed Oct 12, 2017.
Source: SEC EDGAR, the filing index for accession 0001387131-17-005033. Last ingested by Listed: Nov 2, 2026, 11:55 ET. No prices; not investment advice.