Part I. [Financial Information](index=2&type=section&id=Part%20I.%20Financial%20Information) [Financial Statements](index=2&type=section&id=Item%201.%20Financial%20Statements) Q3 FY2019 financial statements show decreased assets and equity, a net loss, and negative operating cash flow [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) Total assets and stockholders' equity decreased as of March 2, 2019, primarily due to reduced cash and cash equivalents Consolidated Balance Sheet Highlights (in thousands) | Account | March 2, 2019 (Unaudited) | June 2, 2018 (Audited) | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $33,869 | $60,465 | | Inventories, net | $53,094 | $50,720 | | Investments - current | $15,500 | $0 | | Total current assets | $128,930 | $137,824 | | Total assets | $158,048 | $166,329 | | **Liabilities & Equity** | | | | Accounts payable | $14,052 | $19,603 | | Total current liabilities | $25,344 | $29,946 | | Total liabilities | $26,573 | $31,148 | | Total stockholders' equity | $131,475 | $135,181 | [Unaudited Consolidated Statements of Comprehensive (Loss) Income](index=4&type=section&id=Unaudited%20Consolidated%20Statements%20of%20Comprehensive%20(Loss)%20Income) Q3 and nine-month FY2019 results show a net loss, reversing prior-year income due to decreased sales and lower gross margins Q3 FY2019 vs Q3 FY2018 (in thousands) | Metric | Q3 2019 | Q3 2018 | | :--- | :--- | :--- | | Net sales | $39,018 | $41,645 | | Gross profit | $12,299 | $14,067 | | Operating (loss) income | ($798) | $967 | | Net (loss) income | ($1,078) | $527 | | Diluted EPS (Common) | ($0.08) | $0.04 | Nine Months FY2019 vs Nine Months FY2018 (in thousands) | Metric | Nine Months 2019 | Nine Months 2018 | | :--- | :--- | :--- | | Net sales | $124,489 | $117,722 | | Gross profit | $39,223 | $39,589 | | Operating (loss) income | ($398) | $1,754 | | Net (loss) income | ($951) | $2,083 | | Diluted EPS (Common) | ($0.07) | $0.17 | [Unaudited Consolidated Statements of Cash Flows](index=5&type=section&id=Unaudited%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash used in operating activities increased to $5.2 million, driven by net loss and working capital changes, alongside significant investment purchases Cash Flow Summary - Nine Months Ended (in thousands) | Activity | March 2, 2019 | March 3, 2018 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($5,227) | ($292) | | Net cash (used in) provided by investing activities | ($18,666) | $4,898 | | Net cash used in financing activities | ($2,086) | ($2,240) | | **(Decrease) increase in cash and cash equivalents** | **($26,596)** | **$4,555** | [Unaudited Consolidated Statement of Stockholders' Equity](index=6&type=section&id=Unaudited%20Consolidated%20Statement%20of%20Stockholders'%20Equity) Stockholders' equity decreased by $3.7 million, primarily due to a net loss, dividend payments, and foreign currency translation losses - Stockholders' equity declined by **$3.7 million** over the nine-month period, from **$135.2 million** to **$131.5 million**[15](index=15&type=chunk) - Key drivers of the equity decrease were the net loss of **$951 thousand** and cash dividends paid of **$2.3 million**[15](index=15&type=chunk) [Notes to Unaudited Consolidated Financial Statements](index=7&type=section&id=Notes%20to%20Unaudited%20Consolidated%20Financial%20Statements) Notes detail business segments, accounting policies, revenue recognition, goodwill status, and ongoing litigation - The company operates in three segments: Power and Microwave Technologies Group (PMT), Canvys (customized displays), and Healthcare (replacement parts for diagnostic imaging)[18](index=18&type=chunk)[19](index=19&type=chunk)[20](index=20&type=chunk) - The company adopted the new revenue recognition standard (ASU 2014-09) on June 3, 2018, using the modified retrospective method, which did not have a material impact on the consolidated financial statements[30](index=30&type=chunk) - Goodwill of **$6.3 million** is entirely related to the IMES reporting unit within the Healthcare segment. While IMES is experiencing lower than forecasted results, no impairment has been recorded, with the annual assessment to be completed in Q4[52](index=52&type=chunk)[54](index=54&type=chunk) - The company is involved in a patent infringement lawsuit filed by Varex Imaging Corporation regarding the ALTA750 TM product. Richardson believes the lawsuit is without merit and a loss is not probable or estimable[89](index=89&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=18&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q3 sales decline, nine-month sales growth, gross margin compression, shift to operating loss, and sufficient but reduced liquidity [Results of Operations](index=20&type=section&id=MD%26A_Results_of_Operations) Q3 FY19 net sales declined, nine-month sales grew, gross margin compressed, and the company reported operating and net losses Net Sales by Segment - Q3 FY19 vs Q3 FY18 (in thousands) | Segment | Q3 2019 | Q3 2018 | % Change | | :--- | :--- | :--- | :--- | | PMT | $29,725 | $31,869 | -6.7% | | Canvys | $6,954 | $7,585 | -8.3% | | Healthcare | $2,339 | $2,191 | 6.8% | | **Total** | **$39,018** | **$41,645** | **-6.3%** | Net Sales by Segment - Nine Months FY19 vs FY18 (in thousands) | Segment | Nine Months 2019 | Nine Months 2018 | % Change | | :--- | :--- | :--- | :--- | | PMT | $96,822 | $91,056 | 6.3% | | Canvys | $20,625 | $20,057 | 2.8% | | Healthcare | $7,042 | $6,609 | 6.6% | | **Total** | **$124,489** | **$117,722** | **5.7%** | - The decrease in Q3 PMT sales was due to a slowdown in wafer fab markets, while the increase in nine-month PMT sales was driven by growth with new technology partners for 5G infrastructure[106](index=106&type=chunk)[107](index=107&type=chunk) - Consolidated gross margin fell to **31.5%** in Q3 FY19 from **33.8%** in Q3 FY18, primarily due to unfavorable product mix, higher costs in Healthcare for tube development, and comparison to positive manufacturing variances in the prior year[109](index=109&type=chunk) - SG&A expenses were flat at **$13.1 million** for Q3 FY19 compared to Q3 FY18, as higher legal and severance costs were offset by lower incentive compensation[117](index=117&type=chunk) [Liquidity, Financial Position and Capital Resources](index=23&type=section&id=MD%26A_Liquidity_Financial_Position_and_Capital_Resources) Liquidity decreased to $49.4 million, with significant cash used in operations, investing, and financing, though management deems it sufficient - Total cash and investments were **$49.4 million** at March 2, 2019, consisting of **$33.9 million** in cash and **$15.5 million** in short-term CD investments[127](index=127&type=chunk) - Cash used in operating activities of **$5.2 million** was primarily due to the net loss and a **$5.4 million** decrease in accounts payable and a **$3.3 million** increase in inventory[131](index=131&type=chunk) - Investing activities used **$18.7 million**, which included **$17.8 million** for purchases of investments (CDs) and **$3.2 million** in capital expenditures[134](index=134&type=chunk) - The company repatriated **$8.2 million** from foreign entities in Japan, Korea, Germany, and France during the first nine months of fiscal 2019[127](index=127&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=23&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is foreign currency exchange, managed through normal operations without derivative instruments - The primary financial risk is identified as foreign currency exchange[139](index=139&type=chunk) - The company does not utilize derivative instruments to manage its foreign currency exposure[120](index=120&type=chunk) [Controls and Procedures](index=24&type=section&id=Item%204.%20Controls%20and%20Procedures) Disclosure controls and procedures were effective as of March 2, 2019, with no material changes to internal controls during Q3 FY2019 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 2, 2019[142](index=142&type=chunk) - No material changes to the company's internal control over financial reporting occurred during the third quarter of fiscal 2019[143](index=143&type=chunk) Part II. [Other Information](index=25&type=section&id=Part%20II.%20Other%20Information) [Legal Proceedings](index=25&type=section&id=Item%201.%20Legal%20Proceedings) The company is defending a patent infringement lawsuit by Varex Imaging Corporation, believing the claim is without merit - Varex Imaging Corporation filed a patent infringement lawsuit against Richardson Electronics regarding its ALTA750™ product[145](index=145&type=chunk) - Richardson believes the lawsuit lacks merit and considers a loss neither probable nor estimable at this time[145](index=145&type=chunk) [Risk Factors](index=25&type=section&id=Item%201A.%20Risk%20Factors) No material changes to risk factors were reported since the last Annual Report on Form 10-K - No material changes to risk factors were reported since the last Annual Report on Form 10-K[146](index=146&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=25&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This item is listed in the table of contents, but no specific information is provided in the report body [Other Information](index=25&type=section&id=Item%205.%20Other%20Information) A press release was issued on April 9, 2019, reporting Q3 FY2019 financial results and declaring a cash dividend - A press release was issued on April 9, 2019, reporting Q3 FY2019 results and declaring a cash dividend[147](index=147&type=chunk) [Exhibits](index=26&type=section&id=Item%206.%20Exhibits) The report includes key exhibits such as CEO/CFO certifications, the Q3 FY2019 press release, and XBRL financial statements - Key exhibits filed include Sarbanes-Oxley certifications, a press release, and XBRL data[150](index=150&type=chunk)

Richardson Electronics, Ltd. (NASDAQ:RELL) Q3 2019 Earnings Conference Call April 10, 2019 10:00 AM ET CompanyParticipants Edward Richardson - Chairman, CEO & President Robert Ben - EVP, CFO, CAO & Corporate Secretary Wendy Diddell - EVP & COO Gregory Peloquin - EVP, Power & Microwave Technologies Group Jens Ruppert - EVP &GM, Canvys Conference Call Participants Eric Landry - BML Capital Management Mark Zinski - 21st Century Equity Research Howard Brous - Wunderlich Securities George Melas - MKH Management ...

Financial Data and Key Metrics Changes - Net sales for Q2 FY2019 were $41.3 million, a 5.7% increase from $39.1 million in Q2 FY2018 [11] - Gross margin decreased to 31.4% from 34.2% in the same quarter last year, primarily due to product mix and manufacturing variances [12] - Operating loss of $0.5 million reported for Q2 FY2019, compared to operating income of $0.8 million in Q2 FY2018 [15] - Overall net loss of $0.3 million for Q2 FY2019, compared to net income of $1.7 million in Q2 FY2018 [20] - For the first six months of FY2019, net sales were $85.5 million, a 12.3% increase from $76.1 million in the same period last year [20] Business Line Data and Key Metrics Changes - PMT sales increased to $32.3 million in Q2 FY2019 from $30.0 million in Q2 FY2018, reflecting a 7.5% growth [31] - Healthcare sales rose to $2.5 million in Q2 FY2019, up 7.6% from $2.3 million in Q2 FY2018, driven by strong CT tube sales [47] - Canvys sales were $6.5 million in Q2 FY2019, a decrease of 3.1% compared to the same period last year, but year-to-date sales are nearly 10% above the first half of FY2018 [62] Market Data and Key Metrics Changes - PMT experienced growth in key markets such as 5G wireless infrastructure, SATCOM, and defense communications [35] - Canvys received new orders from both medical and non-medical OEM customers, indicating strong demand in North America and Europe [65] Company Strategy and Development Direction - The company is focused on proving the quality of its ALTA750 CT tube to gain market share from OEMs [73] - P3 agreements are being utilized to alleviate customer concerns regarding alternative parts [50] - The company is exploring additional acquisitions and partnerships in the healthcare market to expand internationally [60] Management's Comments on Operating Environment and Future Outlook - Management acknowledged challenges in the semiconductor wafer fab market but noted strong growth from new technology partners [82] - The company is optimistic about continued growth in PMT and Canvys, despite some headwinds in the semiconductor market [42][72] - Management highlighted the importance of training and support for customers transitioning from OEM services [74] Other Important Information - Cash and investments at the end of Q2 FY2019 were $53.2 million, down from $59.3 million at the end of Q2 FY2018 [28] - The board approved a share repurchase program allowing for the repurchase of up to $9 million in common stock [76] Q&A Session Summary Question: What are the largest drivers of the slowing growth rate? - Management indicated that the semiconductor wafer fab market has been the slowest growth area, but new technology partnerships have helped maintain overall growth [81][82] Question: Is there any impact from the U.S.-China trade situation? - Management reported no significant impact from tariffs, describing the situation as more of an administrative challenge rather than a business slowdown [114] Question: What is the outlook for free cash flow? - Management indicated that free cash flow usage for the year might be slightly higher than previously guided, estimating a negative cash flow of $4 million to $4.5 million in the second half [99] Question: How is the 5G rollout progressing in different regions? - Management noted that China is ahead in implementing 5G infrastructure compared to North America, with expectations for significant growth in the second half of 2019 [101][102]

[Part I. Financial Information](index=3&type=section&id=Part%20I.%20Financial%20Information) [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section provides unaudited consolidated financial statements, including balance sheets, income, cash flows, and equity, with detailed notes [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) | Metric | December 1, 2018 (in thousands) | June 2, 2018 (in thousands) | | :--------------------------------- | :------------------------------ | :-------------------------- | | Cash and cash equivalents | $47,859 | $60,465 | | Investments - current | $5,300 | — | | Total current assets | $131,250 | $137,824 | | Total assets | $160,443 | $166,329 | | Total current liabilities | $26,650 | $29,946 | | Total liabilities | $27,852 | $31,148 | | Total stockholders' equity | $132,591 | $135,181 | [Unaudited Consolidated Statements of Comprehensive (Loss) Income](index=4&type=section&id=Unaudited%20Consolidated%20Statements%20of%20Comprehensive%20(Loss)%20Income) | Metric (in thousands) | Three Months Ended Dec 1, 2018 | Three Months Ended Dec 2, 2017 | Six Months Ended Dec 1, 2018 | Six Months Ended Dec 2, 2017 | | :-------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Net sales | $41,314 | $39,082 | $85,471 | $76,077 | | Gross profit | $12,971 | $13,374 | $26,924 | $25,522 | | Operating (loss) income | $(454) | $772 | $400 | $787 | | Net (loss) income | $(304) | $1,668 | $127 | $1,556 | | Comprehensive (loss) income | $(1,345) | $1,946 | $(1,654) | $3,941 | | EPS Metric (per share) | Three Months Ended Dec 1, 2018 | Three Months Ended Dec 2, 2017 | Six Months Ended Dec 1, 2018 | Six Months Ended Dec 2, 2017 | | :--------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Net (loss) income per Common share - Basic | $(0.02) | $0.13 | $0.01 | $0.12 | | Net (loss) income per Class B common share - Basic | $(0.02) | $0.12 | $0.01 | $0.11 | | Dividends per common share | $0.060 | $0.060 | $0.120 | $0.120 | | Dividends per Class B common share | $0.054 | $0.054 | $0.108 | $0.108 | [Unaudited Consolidated Statements of Cash Flows](index=5&type=section&id=Unaudited%20Consolidated%20Statements%20of%20Cash%20Flows) | Cash Flow Activity (in thousands) | Three Months Ended Dec 1, 2018 | Three Months Ended Dec 2, 2017 | Six Months Ended Dec 1, 2018 | Six Months Ended Dec 2, 2017 | | :-------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Net cash provided by (used in) operating activities | $881 | $194 | $(2,749) | $(2,263) | | Net cash (used in) provided by investing activities | $(4,120) | $(1,488) | $(7,492) | $1,770 | | Net cash used in financing activities | $(759) | $(763) | $(1,331) | $(1,521) | | Decrease in cash and cash equivalents | $(4,619) | $(1,976) | $(12,606) | $(874) | | Cash and cash equivalents at end of period | $47,859 | $54,453 | $47,859 | $54,453 | [Unaudited Consolidated Statement of Stockholders' Equity](index=6&type=section&id=Unaudited%20Consolidated%20Statement%20of%20Stockholders'%20Equity) | Stockholders' Equity (in thousands) | June 2, 2018 | December 1, 2018 | | :---------------------------------- | :----------- | :--------------- | | Balance | $135,181 | $132,591 | | Net income | — | $127 | | Foreign currency translation | — | $(1,781) | | Share-based compensation | — | $395 | | Common stock options exercised | — | $203 | | Dividends paid | — | $(1,534) | [Notes to Unaudited Consolidated Financial Statements](index=7&type=section&id=Notes%20to%20Unaudited%20Consolidated%20Financial%20Statements) [1. Description of the Company](index=7&type=section&id=1.%20DESCRIPTION%20OF%20THE%20COMPANY) - **Richardson Electronics, Ltd.** is a global provider of engineered solutions, power grid and microwave tubes, power conversion and RF/microwave components, high value flat panel detector solutions, replacement parts, and customized display solutions[18](index=18&type=chunk) - The company serves diverse markets including alternative energy, healthcare, aviation, broadcast, communications, industrial, marine, medical, military, scientific, and semiconductor[18](index=18&type=chunk) - It operates through three reportable segments: **Power and Microwave Technologies Group (PMT)**, **Canvys** (customized display solutions), and **Healthcare** (replacement parts for diagnostic imaging equipment)[19](index=19&type=chunk)[20](index=20&type=chunk)[21](index=21&type=chunk) [2. Basis of Presentation](index=7&type=section&id=2.%20BASIS%20OF%20PRESENTATION) - The unaudited consolidated financial statements are prepared in accordance with GAAP for interim financial information and Form 10-Q instructions[23](index=23&type=chunk) - The second quarter of fiscal 2019 and fiscal 2018 both contained **13 weeks**[24](index=24&type=chunk) - The first six months of fiscal 2019 contained **26 weeks**, while fiscal 2018 contained **27 weeks**[24](index=24&type=chunk) [3. Critical Accounting Policies and Estimates](index=8&type=section&id=3.%20CRITICAL%20ACCOUNTING%20POLICIES%20AND%20ESTIMATES) - Inventories are stated at the lower of cost and net realizable value, generally using a **weighted-average cost method**[27](index=27&type=chunk) | Inventory Reserves (in thousands) | December 1, 2018 | June 2, 2018 | | :-------------------------------- | :--------------- | :----------- | | Inventory reserves | $4,300 | $4,000 | - Revenue is recognized upon shipment, when title passes to the customer, when delivery has occurred or services have been rendered, and when collectability is reasonably assured[29](index=29&type=chunk) - The company adopted **ASU 2014-09 (Revenue from Contracts with Customers)** effective **June 3, 2018**, using the **modified retrospective method**, which did not materially impact the timing of revenue recognition or the consolidated financial statements, but added required disclosures[31](index=31&type=chunk) - **Goodwill** is tested for impairment annually and whenever events or circumstances indicate an impairment may have occurred[33](index=33&type=chunk) | Accrued Liabilities (in thousands) | December 1, 2018 | June 2, 2018 | | :--------------------------------- | :--------------- | :----------- | | Compensation and payroll taxes | $2,840 | $3,449 | | Accrued severance | $591 | $454 | | Professional fees | $628 | $527 | | Deferred revenue | $2,112 | $1,888 | | Other accrued expenses | $4,885 | $4,025 | | Total Accrued Liabilities | $11,056 | $10,343 | [4. Revenue Recognition](index=9&type=section&id=4.%20REVENUE%20RECOGNITION) - **Distribution** is the Company's largest revenue stream, with revenue recognized when control of promised goods transfers to customers, typically at the time of title transfer[38](index=38&type=chunk) - Services revenue (repair, installation, training) is recognized when performed and consistently accounts for **less than 5% of total revenues**[40](index=40&type=chunk) | Contract Liabilities (Deferred Revenue) (in thousands) | June 2, 2018 | Additions | Revenue Recognized | December 1, 2018 | | :--------------------------------------------------- | :----------- | :-------- | :----------------- | :--------------- | | Contract liabilities (deferred revenue) | $1,888 | $2,043 | $(1,819) | $2,112 | - The Company maintains a reserve for returns based on historical trends, which is considered immaterial at each balance sheet date[47](index=47&type=chunk)[48](index=48&type=chunk) - Richardson acts as the principal in customized product sales, bearing primary responsibility for fulfilling the contract, inventory risk, and credit risk[50](index=50&type=chunk) [5. Goodwill and Intangible Assets](index=11&type=section&id=5.%20GOODWILL%20AND%20INTANGIBLE%20ASSETS) - The carrying value of **goodwill was $6.3 million** as of **December 1, 2018**, and **June 2, 2018**, entirely related to the **IMES reporting unit** within the **Healthcare segment**[52](index=52&type=chunk) - **Goodwill** is tested for impairment annually and when events or circumstances indicate impairment, with **no impairment identified** during the first six months of fiscal 2019[53](index=53&type=chunk)[54](index=54&type=chunk) | Intangible Assets (in thousands) | December 1, 2018 | June 2, 2018 | | :------------------------------- | :--------------- | :----------- | | Total Gross Amounts | $4,462 | $4,474 | | Total Accumulated Amortization | $1,575 | $1,460 | | Net Intangibles | $2,887 | $3,014 | | Fiscal Year | Amortization Expense (in thousands) | | :---------- | :---------------------------------- | | Remaining 2019 | $123 | | 2020 | $257 | | 2021 | $245 | | 2022 | $252 | | 2023 | $245 | | Thereafter | $1,765 | | Total | $2,887 | - The weighted average number of years of amortization expense remaining for intangible assets is **15.1 years**[57](index=57&type=chunk) [6. Investments](index=12&type=section&id=6.%20INVESTMENTS) - As of **December 1, 2018**, the company had **$5.3 million** invested in **certificate of deposits (CDs)** maturing in less than twelve months, with fair value equal to face value[58](index=58&type=chunk) - As of **June 2, 2018**, the company had **no investments**[58](index=58&type=chunk) [7. Warranties](index=12&type=section&id=7.%20WARRANTIES) - All warranties are considered assurance warranties, typically **one to three years**, assuring goods work as intended[59](index=59&type=chunk) - Estimated warranty costs are recognized as cost of sales at the time of related product sale[60](index=60&type=chunk) | Warranty Reserves (in thousands) | December 1, 2018 | June 2, 2018 | | :------------------------------- | :--------------- | :----------- | | Warranty reserves | $200 | $100 | [8. Lease Obligations, Other Commitments and Contingencies](index=12&type=section&id=8.%20LEASE%20OBLIGATIONS,%20OTHER%20COMMITMENTS%20AND%20CONTINGENCIES) - Rent expense was **$0.9 million** for both the first six months of fiscal 2019 and fiscal 2018[62](index=62&type=chunk) | Fiscal Year | Future Lease Payments (in thousands) | | :---------- | :----------------------------------- | | Remaining 2019 | $850 | | 2020 | $1,263 | | 2021 | $869 | | 2022 | $172 | | 2023 | $34 | | Thereafter | $90 | | Total | $3,278 | - The company expects to adopt **ASU 2016-02 (Leases)** on **June 2, 2019**, which will have a **material effect** on financial statements by recognizing new ROU assets and lease liabilities for operating leases[64](index=64&type=chunk) [9. Income Taxes](index=13&type=section&id=9.%20INCOME%20TAXES) | Income Tax Metric (in thousands) | Six Months Ended Dec 1, 2018 | Six Months Ended Dec 2, 2017 | | :------------------------------- | :--------------------------- | :--------------------------- | | Income tax provision | $400 | $600 | | Effective income tax rate | 77.9% | 90.9% | - The effective income tax rate differs from the federal statutory rate of **21%** due to geographical distribution of income (loss) and movement of the valuation allowance against U.S. state and federal net deferred tax assets[65](index=65&type=chunk) - The company has a deferred tax liability of **$0.3 million** as of **December 1, 2018**, on foreign earnings of **$26.2 million**[71](index=71&type=chunk) | Valuation Allowance (in thousands) | December 1, 2018 | June 2, 2018 | | :--------------------------------- | :--------------- | :----------- | | Valuation allowance against net deferred tax assets | $9,200 | $9,100 | [10. Calculation of Earnings Per Share](index=14&type=section&id=10.%20CALCULATION%20OF%20EARNINGS%20PER%20SHARE) - The company has **Common Stock** and **Class B Common Stock**, with Class B having **10 votes per share** and cash dividends limited to **90% of Common Stock dividends**[74](index=74&type=chunk) - Basic and diluted earnings per share are computed using the **two-class method** as prescribed in ASC 260[75](index=75&type=chunk) | EPS Numerator (in thousands) | Three Months Ended Dec 1, 2018 | Three Months Ended Dec 2, 2017 | Six Months Ended Dec 1, 2018 | Six Months Ended Dec 2, 2017 | | :--------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Net (loss) income from continuing operations | $(304) | $172 | $127 | $60 | | Income from discontinued operations | — | $1,496 | — | $1,496 | | Net (loss) income | $(304) | $1,668 | $127 | $1,556 | | EPS Denominator (in thousands) | Three Months Ended Dec 1, 2018 | Three Months Ended Dec 2, 2017 | Six Months Ended Dec 1, 2018 | Six Months Ended Dec 2, 2017 | | :----------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Common stock weighted average shares – Basic | 10,952 | 10,755 | 10,890 | 10,734 | | Class B common stock weighted average shares – Basic | 2,097 | 2,137 | 2,114 | 2,137 | | Denominator for diluted EPS adjusted for weighted average shares and assumed conversions | 13,049 | 12,926 | 13,167 | 12,901 | [11. Segment Reporting](index=17&type=section&id=11.%20SEGMENT%20REPORTING) - The company has three operating and reportable segments: **Power and Microwave Technologies Group (PMT)**, **Canvys**, and **Healthcare**[78](index=78&type=chunk)[79](index=79&type=chunk)[80](index=80&type=chunk) - The CEO evaluates performance and allocates resources primarily based on the **gross profit** of each segment[81](index=81&type=chunk) | Segment Net Sales (in thousands) | Three Months Ended Dec 1, 2018 | Three Months Ended Dec 2, 2017 | Six Months Ended Dec 1, 2018 | Six Months Ended Dec 2, 2017 | | :------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | PMT | $32,328 | $30,063 | $67,097 | $59,187 | | Canvys | $6,498 | $6,707 | $13,671 | $12,472 | | Healthcare | $2,488 | $2,312 | $4,703 | $4,418 | | Segment Gross Profit (in thousands) | Three Months Ended Dec 1, 2018 | Three Months Ended Dec 2, 2017 | Six Months Ended Dec 1, 2018 | Six Months Ended Dec 2, 2017 | | :---------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | PMT | $10,107 | $10,262 | $21,114 | $19,836 | | Canvys | $2,132 | $2,128 | $4,445 | $3,674 | | Healthcare | $732 | $984 | $1,365 | $2,012 | | Geographic Net Sales (in thousands) | Three Months Ended Dec 1, 2018 | Three Months Ended Dec 2, 2017 | Six Months Ended Dec 1, 2018 | Six Months Ended Dec 2, 2017 | | :---------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | North America | $16,825 | $15,846 | $33,848 | $30,909 | | Asia/Pacific | $8,520 | $7,457 | $18,062 | $14,467 | | Europe | $13,393 | $13,615 | $28,149 | $26,115 | | Latin America | $2,559 | $2,141 | $5,373 | $4,560 | | Other | $17 | $23 | $39 | $26 | | Total | $41,314 | $39,082 | $85,471 | $76,077 | [12. Litigation](index=18&type=section&id=12.%20LITIGATION) - A stockholder derivative complaint filed by Steven H. Busch was **dismissed with prejudice** on **November 14, 2018**, and the case is concluded[85](index=85&type=chunk) - **Varex Imaging Corporation** filed a patent infringement lawsuit on **October 15, 2018**, against Richardson's **ALTA750TM product**, which the company believes is **without merit**[86](index=86&type=chunk) [13. Fair Value Measurements](index=18&type=section&id=13.%20FAIR%20VALUE%20MEASUREMENTS) - The company's investments, consisting of **CDs**, are measured at fair value on a recurring basis, with fair value equal to face value as of **December 1, 2018**[89](index=89&type=chunk) - Fair value measurements are categorized into a three-tier hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (unobservable inputs)[88](index=88&type=chunk) [14. Related Party Transaction](index=19&type=section&id=14.%20RELATED%20PARTY%20TRANSACTION) - The company has a lease agreement for the IMES facility with **LDL, LLC**, a related party in which the Executive Vice President of IMES has an ownership interest[91](index=91&type=chunk) - The lease agreement provides for monthly payments over **five years**, with total future minimum lease payments of **$0.2 million**[91](index=91&type=chunk) - Rental expense related to this lease amounted to **$0.1 million** for the six months ended December 1, 2018, and December 2, 2017[91](index=91&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=20&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses business, financial condition, operating results, segment performance, liquidity, and capital resources [Business Overview](index=20&type=section&id=Business%20Overview) - **Richardson Electronics, Ltd.** is a global provider of engineered solutions, power grid and microwave tubes, power conversion and RF/microwave components, flat panel detector solutions, and customized display solutions[96](index=96&type=chunk) - The company serves diverse markets including alternative energy, healthcare, aviation, broadcast, communications, industrial, marine, medical, military, scientific, and semiconductor[96](index=96&type=chunk) - It operates through three reportable segments: **Power and Microwave Technologies Group (PMT)**, **Canvys** (customized display solutions), and **Healthcare** (replacement parts for diagnostic imaging equipment)[97](index=97&type=chunk)[98](index=98&type=chunk)[99](index=99&type=chunk) [Results of Operations](index=21&type=section&id=Results%20of%20Operations) [Financial Summary – Three Months Ended December 1, 2018](index=21&type=section&id=Financial%20Summary%20%E2%80%93%20Three%20Months%20Ended%20December%201,%202018) - Net sales for **Q2 FY2019 increased 5.7% to $41.3 million** compared to Q2 FY2018[103](index=103&type=chunk) - Gross margin **decreased to 31.4% in Q2 FY2019 from 34.2%** in Q2 FY2018[103](index=103&type=chunk) - Operating loss was **$0.5 million in Q2 FY2019**, a shift from operating income of **$0.8 million in Q2 FY2018**[103](index=103&type=chunk) - Net loss was **$0.3 million in Q2 FY2019**, compared to net income of **$1.7 million in Q2 FY2018** (which included **$1.5 million from discontinued operations**)[103](index=103&type=chunk) [Financial Summary – Six Months Ended December 1, 2018](index=21&type=section&id=Financial%20Summary%20%E2%80%93%20Six%20Months%20Ended%20December%201,%202018) - Net sales for **H1 FY2019 increased 12.3% to $85.5 million** compared to H1 FY2018[103](index=103&type=chunk) - Gross margin **decreased to 31.5% in H1 FY2019 from 33.5%** in H1 FY2018[103](index=103&type=chunk) - Operating income was **$0.4 million in H1 FY2019**, down from **$0.8 million in H1 FY2018**[103](index=103&type=chunk) - Net income was **$0.1 million in H1 FY2019**, compared to net income of **$1.6 million in H1 FY2018** (which included **$1.5 million from discontinued operations**)[103](index=103&type=chunk) [Net Sales and Gross Profit Analysis](index=22&type=section&id=Net%20Sales%20and%20Gross%20Profit%20Analysis) | Segment | Q2 FY19 Net Sales (in thousands) | Q2 FY18 Net Sales (in thousands) | Q2 % Change | H1 FY19 Net Sales (in thousands) | H1 FY18 Net Sales (in thousands) | H1 % Change | | :-------- | :------------------------------- | :------------------------------- | :---------- | :------------------------------- | :------------------------------- | :---------- | | PMT | $32,328 | $30,063 | 7.5% | $67,097 | $59,187 | 13.4% | | Canvys | $6,498 | $6,707 | -3.1% | $13,671 | $12,472 | 9.6% | | Healthcare| $2,488 | $2,312 | 7.6% | $4,703 | $4,418 | 6.5% | | Total | $41,314 | $39,082 | 5.7% | $85,471 | $76,077 | 12.3% | | Segment | Q2 FY19 Gross Profit (in thousands) | Q2 FY19 % of Net Sales | Q2 FY18 Gross Profit (in thousands) | Q2 FY18 % of Net Sales | H1 FY19 Gross Profit (in thousands) | H1 FY19 % of Net Sales | H1 FY18 Gross Profit (in thousands) | H1 FY18 % of Net Sales | | :-------- | :---------------------------------- | :--------------------- | :---------------------------------- | :--------------------- | :---------------------------------- | :--------------------- | :---------------------------------- | :--------------------- | | PMT | $10,107 | 31.3% | $10,262 | 34.1% | $21,114 | 31.5% | $19,836 | 33.5% | | Canvys | $2,132 | 32.8% | $2,128 | 31.7% | $4,445 | 32.5% | $3,674 | 29.5% | | Healthcare| $732 | 29.4% | $984 | 42.6% | $1,365 | 29.0% | $2,012 | 45.5% | | Total | $12,971 | 31.4% | $13,374 | 34.2% | $26,924 | 31.5% | $25,522 | 33.5% | - Consolidated gross margin **decreased** primarily due to unfavorable product mix and manufacturing variances for **PMT** and **Healthcare**, partially offset by favorable product mix and lower costs for **Canvys**[107](index=107&type=chunk)[108](index=108&type=chunk) [Power and Microwave Technologies Group](index=23&type=section&id=Power%20and%20Microwave%20Technologies%20Group) - **PMT net sales increased 7.5% in Q2 FY19 and 13.4% in H1 FY19**, driven by growth in new technology partners (RF and microwave components, power conversion) and market share gains in the RF and microwave tube business[109](index=109&type=chunk)[110](index=110&type=chunk) - **PMT gross margin decreased** due to unfavorable product mix and manufacturing variances[109](index=109&type=chunk)[110](index=110&type=chunk) [Canvys](index=23&type=section&id=Canvys) - **Canvys net sales decreased 3.1% in Q2 FY19** due to several large non-recurring orders in Q2 FY18[111](index=111&type=chunk) - **Canvys net sales increased 9.6% in H1 FY19** due to increased customer demand in North American and European markets[112](index=112&type=chunk) - **Canvys gross margin increased** for both periods due to favorable product mix and lower costs on selected products[111](index=111&type=chunk)[112](index=112&type=chunk) [Healthcare](index=23&type=section&id=Healthcare) - **Healthcare net sales increased 7.6% in Q2 FY19 and 6.5% in H1 FY19**, driven by higher CT tube sales and increasing equipment sales, partially offset by lower parts sales[113](index=113&type=chunk)[114](index=114&type=chunk) - **Healthcare gross margin significantly decreased** for both periods due to an unfavorable product mix and manufacturing variances[113](index=113&type=chunk)[114](index=114&type=chunk) [Selling, General and Administrative Expenses](index=23&type=section&id=Selling,%20General%20and%20Administrative%20Expenses) | SG&A Expenses (in thousands) | Q2 FY19 | Q2 FY18 | H1 FY19 | H1 FY18 | | :--------------------------- | :------ | :------ | :------ | :------ | | SG&A expenses | $13,425 | $12,602 | $26,524 | $24,926 | | SG&A as % of net sales | 32.5% | 32.2% | 31.0% | 32.8% | - The increase in SG&A was due to **$0.3 million of higher legal costs**, **$0.2 million severance expense**, and a **$0.2 million recovery of a bad debt** recorded in the prior year's second quarter[115](index=115&type=chunk) [Other Income/Expense](index=24&type=section&id=Other%20Income/Expense) - Other income/expense was income of **$0.3 million in Q2 FY19** (including **$0.2 million foreign exchange gains** and **$0.1 million investment/interest income**), compared to an expense of **$0.1 million in Q2 FY18** (including **$0.1 million foreign exchange losses**)[118](index=118&type=chunk) - Other income/expense was income of **$0.2 million in H1 FY19** (including **$0.3 million investment/interest income** offset by **$0.1 million foreign exchange losses**), compared to an expense of **$0.1 million in H1 FY18** (including **$0.3 million foreign exchange losses** partially offset by **$0.2 million investment/interest income**)[119](index=119&type=chunk) [Income Tax Provision](index=24&type=section&id=Income%20Tax%20Provision) | Income Tax Metric (in thousands) | H1 FY19 | H1 FY18 | | :------------------------------- | :------ | :------ | | Income tax provision | $449 | $596 | | Effective income tax rate | 77.9% | 90.9% | - The difference in the effective tax rate is due to changes in geographical distribution of income (loss), provision to return true-ups of foreign jurisdictions, and movements of the valuation allowance against U.S. state and federal net deferred tax assets[120](index=120&type=chunk) [Net (Loss)Income and Per Share Data](index=24&type=section&id=Net%20(Loss)Income%20and%20Per%20Share%20Data) | Metric | Q2 FY19 | Q2 FY18 | H1 FY19 | H1 FY18 | | :-------------------------------- | :------ | :------ | :------ | :------ | | Net (loss) income (in thousands) | $(304) | $1,668 | $127 | $1,556 | | Diluted Common Share EPS | $(0.02) | $0.13 | $0.01 | $0.12 | | Diluted Class B Common Share EPS | $(0.02) | $0.12 | $0.01 | $0.11 | - Net income in **Q2 FY18** and **H1 FY18 included $1.5 million from discontinued operations**, which was not present in FY19[122](index=122&type=chunk)[123](index=123&type=chunk) [Liquidity, Financial Position and Capital Resources](index=24&type=section&id=Liquidity,%20Financial%20Position%20and%20Capital%20Resources) - Cash and cash equivalents were **$47.9 million** at **December 1, 2018**, with an additional **$5.3 million** in current investments (**CDs**)[125](index=125&type=chunk) - The company believes existing liquidity sources will provide sufficient resources for known capital requirements and working capital needs for the next twelve months[127](index=127&type=chunk) [Cash Flows from Operating Activities](index=24&type=section&id=Cash%20Flows%20from%20Operating%20Activities) - Operating activities **used $2.7 million of cash during H1 FY19**, compared to **$2.3 million used in H1 FY18**[129](index=129&type=chunk)[130](index=130&type=chunk) - The cash use in **H1 FY19** was primarily due to a **$3.9 million decrease in accounts payable** and a **$1.8 million increase in inventory**[129](index=129&type=chunk) - Inventory increase was driven by growth in supplying replacement systems and parts to the Healthcare market and components for ALTA 750TM CT Tube production[129](index=129&type=chunk) [Cash Flows from Investing Activities](index=25&type=section&id=Cash%20Flows%20from%20Investing%20Activities) - Cash used in investing activities was **$7.5 million during H1 FY19**, a significant change from **$1.8 million provided in H1 FY18**[132](index=132&type=chunk)[133](index=133&type=chunk) - **H1 FY19** investing cash use included **$5.3 million for purchases of investments** and **$2.2 million in capital expenditures**[132](index=132&type=chunk) - Capital expenditures primarily related to Healthcare growth initiatives, building improvements, and IT system investments[132](index=132&type=chunk) [Cash Flows from Financing Activities](index=25&type=section&id=Cash%20Flows%20from%20Financing%20Activities) - Cash used in financing activities was **$1.3 million during H1 FY19**, primarily from **$1.5 million in cash dividends paid**, partially offset by **$0.2 million from common stock issuance**[135](index=135&type=chunk) - Cash used in financing activities was **$1.5 million during H1 FY18**, solely from cash dividends paid[135](index=135&type=chunk) - Future dividend payments are at the discretion of the Board of Directors[136](index=136&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=25&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary financial market risk is foreign currency exchange, managed through normal operations without derivatives - The primary financial risk the company is exposed to is **foreign currency exchange**, due to operations, assets, and liabilities denominated in foreign currencies[137](index=137&type=chunk) - The company manages these risks through normal operating and financing activities and does not currently utilize derivative instruments for foreign currency exposure[118](index=118&type=chunk)[137](index=137&type=chunk) [Item 4. Controls and Procedures](index=26&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls were effective, with no material changes in internal control over financial reporting - Management concluded that the company's **disclosure controls and procedures were effective** as of **December 1, 2018**[140](index=140&type=chunk) - **No material changes in internal control over financial reporting** occurred during the second quarter of fiscal 2019[141](index=141&type=chunk) [Part II. Other Information](index=27&type=section&id=Part%20II.%20Other%20Information) [Item 1. Legal Proceedings](index=27&type=section&id=Item%201.%20Legal%20Proceedings) A stockholder derivative lawsuit was dismissed; a patent infringement lawsuit against ALTA750TM is ongoing - A stockholder derivative complaint filed by Steven H. Busch was **dismissed with prejudice** on **November 14, 2018**, and the case is concluded[143](index=143&type=chunk) - **Varex Imaging Corporation** filed a patent infringement lawsuit on **October 15, 2018**, against Richardson's **ALTA750TM product**[144](index=144&type=chunk) - Richardson believes the Varex lawsuit is **without merit** and a loss is not probable or estimable[144](index=144&type=chunk) [Item 1A. Risk Factors](index=27&type=section&id=Item%201A.%20Risk%20Factors) No material changes to risk factors previously disclosed in the Annual Report on Form 10-K - **No material changes to the risk factors** previously disclosed in the Annual Report on Form 10-K for the year ended June 2, 2018[145](index=145&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=27&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section is a placeholder with no specific information on unregistered equity sales or use of proceeds [Item 5. Other Information](index=27&type=section&id=Item%205.%20Other%20Information) A press release was issued on January 9, 2019, announcing Q2 FY19 results and a cash dividend declaration - A press release was issued on **January 9, 2019**, reporting **Q2 FY19 results** and the **declaration of a cash dividend**[146](index=146&type=chunk) - The press release is furnished as **Exhibit 99.1** to this Form 10-Q[146](index=146&type=chunk) [Item 6. Exhibits](index=28&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with Form 10-Q, including corporate documents, agreements, certifications, and data - Exhibits include corporate documents (**Amended and Restated Certificate of Incorporation**, **By-Laws**), an employment agreement amendment, **Sarbanes-Oxley Act certifications**, a press release, and **XBRL financial information**[149](index=149&type=chunk)[150](index=150&type=chunk) [Signatures](index=29&type=section&id=Signatures) The report was signed by Robert J. Ben, CFO and CAO, for Richardson Electronics, Ltd. on January 10, 2019 - The report was signed by **Robert J. Ben, Chief Financial Officer and Chief Accounting Officer**[153](index=153&type=chunk) - The signing date was **January 10, 2019**[153](index=153&type=chunk)