# Richardson Electronics, LTD.: Form 10-Q for the period ended Aug 31, 2019

- Company: [Richardson Electronics, LTD.](/companies/rell.md) (CIK 355948)
- Form: 10-Q
- Filed: 2019-10-10
- Accepted by EDGAR: Oct 10, 2019, 13:57 ET
- Period: 2019-08-31
- Accession: 0001564590-19-036765
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/355948/000156459019036765/rell-10q_20190831.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/355948/000156459019036765/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-08-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-06-02 to 2019-08-31 | $40.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2019-06-02 to 2019-08-31 | $27.7m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2019-06-02 to 2019-08-31 | $13.0m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2019-06-02 to 2019-08-31 | $12.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2019-06-02 to 2019-08-31 | $103.0k | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2019-06-02 to 2019-08-31 | $177.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-06-02 to 2019-08-31 | $157.0k | us-gaap:NetIncomeLoss |
| Diluted shares (weighted) | 3 months, 2019-06-02 to 2019-08-31 | 13,087,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2019-06-02 to 2019-08-31 | −$2.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2019-06-02 to 2019-08-31 | $339.0k | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 3 months, 2019-06-02 to 2019-08-31 | $775.0k | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2019-08-31 | $46.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-08-31 | $125.0m | us-gaap:AssetsCurrent |
| Total assets | at 2019-08-31 | $151.0m | us-gaap:Assets |
| Current liabilities | at 2019-08-31 | $24.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2019-08-31 | $28.4m | us-gaap:Liabilities |
| Shareholders' equity | at 2019-08-31 | $122.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 20,228 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 August 5, 2019. 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 31, 2019 and September 1, 2018.
- **Results of Operations –** an analysis and comparison of our consolidated results of operations for the three month periods ended August 31, 2019 and September 1, 2018, 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 31, 2019 and September 1, 2018, 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 capabilities, power grid and microwave tube business with new RF, Wireless and disruptive power technologies. As a manufacturer, technology partner and authorized distributor, PMT’s strategy is to provide specialized technical expertise and engineered solutions based on our core engineering and manufacturing capabilities on a global basis. 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 5G, 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 markets. Our engineers design, manufacture, source and support a full spectrum of solutions to match the needs of our customers. We offer long term availability and proven custom display solutions that include touch screens, protective panels, custom enclosures, all-in-ones, specialized cabinet finishes and application specific software packages and certification services. Our volume commitments are lower than the large display manufacturers, making us the ideal choice for companies with very specific design requirements. We partner with both private label manufacturing companies and leading branded hardware vendors to offer the highest quality display and touch solutions and customized computing platforms.

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 for CT and MRI systems; replacement CT and MRI tubes; CT service training; MRI coils, cold heads and RF amplifiers; hydrogen thyratrons, klystrons, magnetrons; flat panel detector upgrades; and additional replacement solutions 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 August 31, 2019

- The first three months of fiscal 2020 and fiscal 2019 each contained 13 weeks.
- Net sales during the first quarter of fiscal 2020 were $40.7 million, a decrease of 7.9%, compared to net sales of $44.2 million during the first quarter of fiscal 2019.
- Gross margin increased to 31.9% during the first quarter of fiscal 2020 compared to 31.6% during the first quarter of fiscal 2019.
- Selling, general and administrative expenses were $12.8 million, or 31.6% of net sales, during the first quarter of fiscal 2020 compared to $13.1 million, or 29.7% of net sales, during the first quarter of fiscal 2019.
- Operating income during the first quarter of fiscal 2020 was $0.1 million compared to an operating income of $0.9 million during the first quarter of fiscal 2019.
- Net income during the first quarter of fiscal 2020 was $0.2 million compared to net income of $0.4 million during the first quarter of fiscal 2019.

### Net Sales and Gross Profit Analysis

Net sales by segment and percent change during the first quarter of fiscal 2020 and fiscal 2019 were as follows (*in thousands):*

| Net Sales | Three Months Ended August 31, 2019 | September 1, 2018 | FY20 vs. FY19 % Change |
| --- | ---: | ---: | ---: |
| PMT | $30,567 | $34,769 | -12.1% |
| Canvys | 7,277 | 7,173 | 1.4% |
| Healthcare | 2,809 | 2,215 | 26.8% |
| Total | $40,653 | $44,157 | -7.9% |

During the first quarter of fiscal 2020, consolidated net sales decreased 7.9% compared to the first quarter of fiscal 2019. Sales for PMT decreased 12.1%, sales for Canvys increased 1.4% and sales for Healthcare increased 26.8%. The decrease in PMT was mainly due to a continued slowdown in the wafer fab equipment market, slightly offset by growth from our power conversion and RF and microwave components. The increase in Canvys was due to increased customer demand in its North American market. The increase in Healthcare was due to higher CT tube and parts sales.

Gross profit by segment and percent of net sales for the first quarter of fiscal 2020 and fiscal 2019 were as follows (*in thousands):*

| Gross Profit | Three Months Ended August 31, 2019 | % of Net Sales | September 1, 2018 | % of Net Sales |
| --- | ---: | ---: | ---: | ---: |
| PMT | $9,679 | 31.7% | $11,007 | 31.7% |
| Canvys | 2,321 | 31.9% | 2,313 | 32.2% |
| Healthcare | 951 | 33.9% | 633 | 28.6% |
| Total | $12,951 | 31.9% | $13,953 | 31.6% |

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

Consolidated gross profit decreased to $13.0 million during the first quarter of fiscal 2020 compared to $14.0 million during the first quarter of fiscal 2019. Consolidated gross margin as a percentage of net sales increased to 31.9% during the first quarter of fiscal 2020 from 31.6% during the first quarter of fiscal 2019, primarily due to favorable product mix and manufacturing over absorption for Healthcare somewhat offset by unfavorable product mix and unfavorable foreign exchange rates for Canvys.

### Power and Microwave Technologies Group

PMT net sales decreased 12.1% to $30.6 million during the first quarter of fiscal 2020 from $34.8 million during the first quarter of fiscal 2019. The decrease was mainly due to a decline in the wafer fab equipment market, slightly offset by growth from our power conversion and RF and microwave components. Gross margin as a percentage of net sales was 31.7% during the first quarter of fiscal 2020, the same as 31.7% during the first quarter of fiscal 2019.

### Canvys

Canvys net sales increased 1.4% to $7.3 million during the first quarter of fiscal 2020 from $7.2 million during the first quarter of fiscal 2019 due to increased customer demand in its North American market. Gross margin as a percentage of net sales decreased to 31.9% during the first quarter of fiscal 2020 as compared to 32.2% during the first quarter of fiscal 2019, due to unfavorable product mix and foreign exchange.

### Healthcare

Healthcare net sales increased 26.8% to $2.8 million during the first quarter of fiscal 2020 from $2.2 million during the first quarter of fiscal 2019 due to higher CT tube and parts sales. Gross margin as a percentage of net sales increased to 33.9% during the first quarter of fiscal 2020 as compared to 28.6% during the first quarter of fiscal 2019 due to favorable product mix and manufacturing over absorption.

### Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased to $12.8 million during the first quarter of fiscal 2020 from $13.1 million in the first quarter of fiscal 2019, primarily due to lower employee benefits, IT and bad debt expenses.

### Other Income/Expense

Other income/expense was income of $0.2 million during the first quarter of fiscal 2020, compared to expense of $0.2 million during the first quarter of fiscal 2019. Other income/expense during the first quarter of fiscal 2020 included $0.1 million of investment/interest income and $0.1 million of foreign exchange gains. Other income/expense during the first quarter of fiscal 2019 included $0.3 million of foreign exchange losses and $0.1 million of investment/interest income. 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 $0.2 million and $0.3 million for the first three months of fiscal 2020 and the first three months of fiscal 2019, respectively. The effective income tax rate during the first three months of fiscal 2020 was a tax provision of 53.0% as compared to a tax provision of 38.6% during the first three months of fiscal 2019. The difference in rate during the first three months of fiscal 2020 as compared to the first three months of fiscal 2019 reflects changes in our geographical distribution of income (loss). The 53.0% effective income tax rate differs from the federal statutory rate of 21% as a result of our geographical distribution of income (loss) and the movement of the valuation allowance against 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 2009 are closed for examination under the statute of limitation for U.S. federal, U.S. state and local or non-U.S. tax jurisdictions. Our primary foreign tax jurisdictions are Germany and the Netherlands. We have tax years open in Germany beginning in fiscal 2015 and the Netherlands beginning in fiscal 2012.

### Net Income Per Share Data

Net income during the first quarter of fiscal 2020 was $0.2 million or $0.01 per diluted common share and $0.01 per Class B diluted common share as compared to net income of $0.4 million during the first quarter of fiscal 2019 or $0.03 per diluted common share and $0.03 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 $46.5 million at August 31, 2019. Cash at August 31, 2019 consisted of $24.5 million in North America, $14.6 million in Europe, $0.8 million in Latin America and $6.6 million in Asia/Pacific.

Cash, cash equivalents and investments were $50.0 million at June 1, 2019. Cash, cash equivalents and investments at June 1, 2019, consisted of $21.5 million in North America, $17.8 million in Europe, $0.9 million in Latin America and $9.8 million in Asia/Pacific. We repatriated $2.3 million total cash from our entities in Japan and Korea in fiscal 2019 and $5.9 million total cash from our entities in Germany and France in fiscal 2019. Although the Tax Cuts and Jobs Act generally eliminated federal income tax on future cash repatriation to the United States, cash repatriation may be subject to state and local taxes, withholding or similar taxes. See Note 9 “Income Taxes” of the notes to our consolidated financial statements in Part II, Item 8 of our Form 10-K for the year ended June 1, 2019, filed with the SEC on August 5, 2019, for further information.

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 net income adjusted for non-cash items and changes in our operating assets and liabilities.

Operating activities used $2.1 million of cash during the first three months of fiscal 2020. We had net income of $0.2 million during the first three months of fiscal 2020, which included non-cash stock-based compensation expense of $0.2 million associated with the issuance of stock option and restricted stock awards, $0.2 million for inventory reserve provisions and depreciation and amortization expense of $0.8 million associated with our property and equipment as well as amortization of our intangible assets. Changes in our operating assets and liabilities resulted in a use of cash of $3.3 million during the first three months of fiscal 2020, net of foreign currency exchange gains and losses, included a decrease of $4.0 million in accounts payable, an increase in inventory of $1.4 million, a decrease in accrued liabilities of $0.9 million partially offset by a decrease in accounts receivable of $2.2 million and a decrease of $0.6 million in prepaid expenses and other assets. The decrease in our accounts payable was due to timing of payments for some of our larger vendors for both inventory and services. The majority of the inventory increase was to support the continued growth of our RF and Power Technologies group.

Operating activities used $3.6 million of cash during the first three months of fiscal 2019. We had net income of $0.4 million during the first three months of fiscal 2019, which included non-cash stock-based compensation expense of $0.2 million associated with the issuance of stock option and restricted stock awards, $0.2 million for inventory reserve provisions and depreciation and amortization expense of $0.8 million associated with our property and equipment as well as amortization of our intangible assets. Changes in our operating assets and liabilities resulted in a use of cash of $5.3 million during the first three months of fiscal 2019, net of foreign currency exchange gains and losses, included a decrease of $5.4 million in accounts payable and an increase in accounts receivable of $0.2 million, partially offset by an increase in accrued liabilities of $0.2 million. The decrease in our accounts payable was due to timing of payments for some of our larger vendors for both inventory and services.

### Cash Flows from Investing Activities

The cash flow provided by and used in investing activities consisted primarily of proceeds from the maturities of investments and capital expenditures.

Cash provided by investing activities of $7.7 million during the first three months of fiscal 2020 included proceeds from the maturities of investments of $8.0 million partially offset by $0.3 million in capital expenditures. Capital expenditures related primarily to capital used for our IT system and LaFox manufacturing business.

Cash used in investing activities of $3.4 million during the first three months of fiscal 2019 included $2.3 million from purchases of investments and $1.1 million in capital expenditures. Capital expenditures related primarily to our Healthcare growth initiatives, a new air conditioner unit for the building and capital used for our IT system.

Our purchases of investments consisted of 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 used in financing activities consisted primarily of cash dividends paid.

Cash used in financing activities of $0.8 million during the first three months of fiscal 2020 resulted from cash used to pay dividends.

Cash used in financing activities of $0.6 million during the first three months of fiscal 2019 resulted from $0.8 million of cash used to pay dividends partially offset by $0.2 million of proceeds from the issuance of common stock from stock option exercises.

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, 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 June 1, 2019, filed August 5, 2019.

## Controls and procedures

As filed, 1,609 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 31, 2019.

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 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 165 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 June 1, 2019, filed August 5, 2019.

Filed Oct 10, 2019.
Source: SEC EDGAR, the filing index for accession 0001564590-19-036765. Last ingested by Listed: Nov 2, 2026, 11:55 ET. No prices; not investment advice.