Richardson Electronics(RELL) - 2024 Q4 - Annual Report

Part I Business The company is a global manufacturer and distributor of engineered solutions, operating through four segments with a significant international sales presence - The company is a global manufacturer of engineered solutions, serving markets such as alternative energy, healthcare, aviation, broadcast, communications, industrial, marine, medical, military, scientific, and semiconductor[8] - The business is organized into four reportable segments: Power and Microwave Technologies (PMT), Green Energy Solutions (GES), Canvys (customized display solutions), and Healthcare (diagnostic imaging replacement parts)[16][21][22][24] - International sales constituted approximately 60% of total sales in fiscal year 2024[27] - As of June 1, 2024, the company employed 442 individuals, with 299 in the United States and 143 internationally[29] - In fiscal 2024, no single customer accounted for more than 10% of consolidated net sales; in fiscal 2023, one customer in the PMT segment accounted for 12%[28] Risk Factors The company faces diverse business, international, financial, legal, and ownership risks, including significant control by the Chairman and CEO Business and Operational Risks Key operational risks include failure to meet sales targets, inventory obsolescence, competitive pressures, and reliance on key vendors and IT systems - The company faces risks of not achieving sales growth and margin targets, which is challenging due to its complex global infrastructure and fixed cost structure[36] - There is a risk of significant inventory obsolescence charges due to the rapid evolution of technology and changing end-user demand[37] - The company is dependent on a limited number of manufacturers for its products; in fiscal 2024, two suppliers each accounted for 11% of the total cost of sales[39] - The business relies heavily on information technology systems, which are subject to threats of cyber attacks and security breaches that could materially adversely affect operations[41][42] Risks Related to International Operations Significant international business exposes the company to risks from currency fluctuations, political instability, and trade tariffs on imported goods - The company's business is subject to risks associated with international operations, including currency fluctuations, political instability, and trade protection measures[56] - Certain products manufactured in China and imported into the U.S. are subject to tariffs, which could negatively impact sales and gross margins[58] Financial Risks Financial risks include potential impairment of intangible assets and restrictive covenants from any future indebtedness under its credit facility - The company's intangible assets could become impaired, leading to a write-off that would reduce net income[59] - Future indebtedness under the credit facility could limit operational and financial flexibility due to restrictive covenants[60] Legal and Regulatory Risks The company is subject to legal and regulatory risks including costly intellectual property claims and compliance with data privacy and export control laws - The company may be subject to intellectual property claims, which can be costly to defend and could result in damage payments[61][62] - Compliance with numerous data privacy laws, such as GDPR and CCPA, may incur substantial operational costs[64][66] - International sales are subject to trade and export control laws, and violations could lead to severe sanctions and fines[67][68] Ownership Risks A primary ownership risk is the concentration of voting power, with the Chairman and CEO controlling a majority of stockholder votes - As of July 26, 2024, Chairman and CEO Edward J. Richardson beneficially owned approximately 61% of the company's voting power, allowing him to control the outcome of stockholder votes[71] General Risk Factors General risks include the failure to attract and retain key personnel and maintain effective internal controls over financial reporting - The company's success is highly dependent on retaining key management personnel, particularly Chairman and CEO Edward J. Richardson[72] - Failure to maintain effective internal controls could lead to an inability to produce reliable financial reports or prevent fraud[74][75] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None[79] Cybersecurity The company manages cybersecurity risk through a program aligned with the NIST framework, with oversight from the Audit Committee - The company's cybersecurity risk management program is based on the U.S. National Institute of Standards and Technology (NIST) Cyber Security Framework[81] - The Board of Directors has delegated oversight of cybersecurity risks to the Audit Committee, while day-to-day management is led by the CFO[85][86] - The company states that no cybersecurity threats have materially affected its business strategy, results of operations, or financial condition[84] Properties The company owns its corporate headquarters in Illinois and leases 25 other facilities globally for its various business operations Company Facilities Overview | Location | Leased/Owned | Use | Segment | | :--- | :--- | :--- | :--- | | LaFox, Illinois | Owned | Corporate/Sales/Distribution/Manufacturing | PMT/Canvys/Healthcare | | Marlborough, Massachusetts | Leased | Sales/Distribution/Manufacturing | Canvys | | Fort Mill, South Carolina | Leased | Sales/Distribution/Testing/Repair | Healthcare | | Donaueschingen, Germany | Leased | Sales/Distribution/Manufacturing | Canvys | | Amsterdam, Netherlands | Leased | Sales/Distribution/Manufacturing | PMT/Healthcare | Legal Proceedings The company reports that there are no material pending legal proceedings - None[87] Mine Safety Disclosure This section is not applicable to the company's operations - Not applicable[88] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on NASDAQ as 'RELL', and it paid approximately $3.4 million in dividends during fiscal 2024 - The quarterly dividend was $0.06 per common share and $0.054 per Class B common share during fiscal 2024, with total annual dividend payments of approximately $3.4 million[89] - There were no share repurchases or sales of unregistered equity securities in fiscal 2024[89] - The company's common stock is traded on the NASDAQ Global Select Market under the symbol 'RELL'[90] Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2024 saw a significant decline in net sales and income, driven by weakness in the PMT and GES segments, though liquidity remains solid Results of Operations Fiscal 2024 net sales decreased by 25.2% to $196.5 million, leading to a sharp drop in operating and net income Fiscal 2024 vs. Fiscal 2023 Performance | Metric | Fiscal 2024 | Fiscal 2023 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $196.5M | $262.7M | -25.2% | | Gross Margin | 30.5% | 31.9% | -1.4 p.p. | | Operating Income | $0.3M | $25.0M | -98.8% | | Net Income | $0.1M | $22.3M | -99.5% | Net Sales by Segment (in thousands) | Segment | FY 2024 | FY 2023 | % Change | | :--- | :--- | :--- | :--- | | PMT | $128,697 | $164,299 | (21.7%) | | GES | $23,233 | $47,596 | (51.2%) | | Canvys | $32,444 | $39,331 | (17.5%) | | Healthcare | $12,086 | $11,432 | 5.7% | | Total | $196,460 | $262,658 | (25.2%) | Gross Profit by Segment (in thousands) | Segment | FY 2024 | FY 2023 | % of Sales (FY24) | % of Sales (FY23) | | :--- | :--- | :--- | :--- | :--- | | PMT | $38,717 | $54,089 | 30.1% | 32.9% | | GES | $6,607 | $13,719 | 28.4% | 28.8% | | Canvys | $10,973 | $12,375 | 33.8% | 31.5% | | Healthcare | $3,669 | $3,506 | 30.4% | 30.7% | | Total | $59,966 | $83,689 | 30.5% | 31.9% | - SG&A expenses increased slightly to $59.5 million in fiscal 2024 from $58.7 million in fiscal 2023, mainly due to higher R&D expenses[116] Liquidity, Financial Position and Capital Resources The company maintains a strong liquidity position with $24.3 million in cash, no outstanding debt, and positive operating cash flow for the year - Cash and cash equivalents stood at $24.3 million as of June 1, 2024, compared to $25.0 million at May 27, 2023[123][124] - The company has a $30 million senior, secured revolving credit facility with PNC Bank, with no amounts outstanding as of the end of fiscal 2024[125] Cash Flow Summary (in millions) | Cash Flow Activity | Fiscal 2024 | Fiscal 2023 | | :--- | :--- | :--- | | From Operating Activities | $6.5 | ($8.2) | | From Investing Activities | ($4.0) | ($2.2) | | From Financing Activities | ($2.9) | $0.4 | Critical Accounting Estimates Management identifies key accounting estimates including credit loss allowances, revenue recognition, inventory valuation, and income tax accounting - The company's critical accounting estimates include: - Allowance for Credit Losses - Revenue Recognition - Inventories, net - Intangible and Long-Lived Assets - Income Taxes[134] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is foreign currency exposure from its international operations, which is currently not hedged - The primary financial risk is foreign currency exchange exposure due to operations, assets, and liabilities denominated in foreign currencies, which is not hedged[142][143] - A hypothetical 10% unfavorable change in the U.S. dollar against foreign currencies would have lowered fiscal 2024 net sales by an estimated $10.8 million[144] Financial Statements and Supplementary Data This section contains the audited consolidated financial statements, which received an unqualified opinion from the independent auditor - The independent auditor, BDO USA, P.C., issued an unqualified opinion, stating the financial statements are presented fairly in all material respects[146] - The auditor identified the 'Estimation of Inventory Reserve - Power and Microwave Technologies ("PMT") Reportable Segment' as a critical audit matter[152][153] Consolidated Balance Sheet Highlights (in thousands) | Account | June 1, 2024 | May 27, 2023 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $24,263 | $24,981 | | Inventories, net | $110,149 | $110,402 | | Total current assets | $161,654 | $168,083 | | Total assets | $192,445 | $198,048 | | Liabilities & Equity | | | | Total current liabilities | $32,031 | $36,589 | | Total liabilities | $34,493 | $38,728 | Consolidated Income Statement Highlights (in thousands) | Account | FY 2024 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | | Net sales | $196,460 | $262,658 | $224,620 | | Gross profit | $59,966 | $83,689 | $71,700 | | Operating income | $348 | $24,983 | $15,957 | | Net income | $61 | $22,333 | $17,927 | | Diluted EPS (Common) | $0.00 | $1.55 | $1.31 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosures The company reports no changes in or disagreements with its accountants on any accounting or financial disclosure matters - None[244] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of June 1, 2024 - Management concluded that the company's disclosure controls and procedures were effective as of June 1, 2024[246] - Management concluded that the company's internal control over financial reporting was effective as of June 1, 2024, which was audited by BDO USA, P.C[247] - There were no changes in internal control over financial reporting during the most recent fiscal quarter that materially affected the company's internal controls[247] Other Information No director or officer adopted, modified, or terminated a Rule 10b5-1 trading arrangement during the most recent fiscal quarter - No director or officer of the Company adopted, modified or terminated a 'Rule 10b5-1 trading arrangement' or a 'non-Rule 10b5-1 trading arrangement' during the most recently completed fiscal quarter[254] Disclosures Regarding Foreign Jurisdictions that Prevent Inspections The company reports that this item is not applicable - None[255] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, officers, and governance is incorporated by reference from the upcoming Proxy Statement - Information is incorporated by reference from the registrant's Proxy Statement for the Annual Meeting of Stockholders scheduled to be held October 8, 2024[257] Executive Compensation Information regarding executive compensation is incorporated by reference from the upcoming Proxy Statement - Information is incorporated by reference from the registrant's Proxy Statement for the Annual Meeting of Stockholders scheduled to be held October 8, 2024[258] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the upcoming Proxy Statement - Information is incorporated by reference from the registrant's Proxy Statement for the Annual Meeting of Stockholders scheduled to be held October 8, 2024[259] Certain Relationships and Related Transactions, and Director Independence Information regarding related transactions and director independence is incorporated by reference from the upcoming Proxy Statement - Information is incorporated by reference from the registrant's Proxy Statement for the Annual Meeting of Stockholders scheduled to be held October 8, 2024[263] Principal Accountant Fees and Services Information regarding accountant fees and services is incorporated by reference from the upcoming Proxy Statement - Information is incorporated by reference from the registrant's Proxy Statement for the Annual Meeting of Stockholders scheduled to be held October 8, 2024[263] Part IV Exhibits and Financial Statement Schedules This section lists the documents filed as part of the Form 10-K, including financial statements and exhibits - This section lists the consolidated financial statements and exhibits filed with the report; all financial statement schedules have been omitted as the required information is included elsewhere or is not applicable[264] Form 10-K Summary The company has not provided a summary for the Form 10-K - None[265]