Richardson Electronics(RELL) - 2019 Q2 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements This section provides unaudited consolidated financial statements, including balance sheets, income, cash flows, and equity, with detailed notes Consolidated Balance Sheets | 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 | 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 | 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 | 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 1. Description of the Company - 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] - The company serves diverse markets including alternative energy, healthcare, aviation, broadcast, communications, industrial, marine, medical, military, scientific, and semiconductor[18] - 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][20][21] 2. Basis of Presentation - The unaudited consolidated financial statements are prepared in accordance with GAAP for interim financial information and Form 10-Q instructions[23] - The second quarter of fiscal 2019 and fiscal 2018 both contained 13 weeks[24] - The first six months of fiscal 2019 contained 26 weeks, while fiscal 2018 contained 27 weeks[24] 3. Critical Accounting Policies and Estimates - Inventories are stated at the lower of cost and net realizable value, generally using a weighted-average cost method[27] | 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] - 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] - Goodwill is tested for impairment annually and whenever events or circumstances indicate an impairment may have occurred[33] | 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 - 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] - Services revenue (repair, installation, training) is recognized when performed and consistently accounts for less than 5% of total revenues[40] | 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][48] - Richardson acts as the principal in customized product sales, bearing primary responsibility for fulfilling the contract, inventory risk, and credit risk[50] 5. Goodwill and Intangible Assets - 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] - 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][54] | 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] 6. Investments - 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] - As of June 2, 2018, the company had no investments[58] 7. Warranties - All warranties are considered assurance warranties, typically one to three years, assuring goods work as intended[59] - Estimated warranty costs are recognized as cost of sales at the time of related product sale[60] | Warranty Reserves (in thousands) | December 1, 2018 | June 2, 2018 | | :------------------------------- | :--------------- | :----------- | | Warranty reserves | $200 | $100 | 8. Lease Obligations, Other Commitments and Contingencies - Rent expense was $0.9 million for both the first six months of fiscal 2019 and fiscal 2018[62] | 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] 9. Income Taxes | 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] - The company has a deferred tax liability of $0.3 million as of December 1, 2018, on foreign earnings of $26.2 million[71] | 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 - 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] - Basic and diluted earnings per share are computed using the two-class method as prescribed in ASC 260[75] | 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 - The company has three operating and reportable segments: Power and Microwave Technologies Group (PMT), Canvys, and Healthcare[78][79][80] - The CEO evaluates performance and allocates resources primarily based on the gross profit of each segment[81] | 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 - A stockholder derivative complaint filed by Steven H. Busch was dismissed with prejudice on November 14, 2018, and the case is concluded[85] - 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] 13. Fair Value Measurements - 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] - 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] 14. Related Party Transaction - 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] - The lease agreement provides for monthly payments over five years, with total future minimum lease payments of $0.2 million[91] - Rental expense related to this lease amounted to $0.1 million for the six months ended December 1, 2018, and December 2, 2017[91] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses business, financial condition, operating results, segment performance, liquidity, and capital resources Business Overview - 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] - The company serves diverse markets including alternative energy, healthcare, aviation, broadcast, communications, industrial, marine, medical, military, scientific, and semiconductor[96] - 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][98][99] Results of Operations Financial Summary – Three Months Ended December 1, 2018 - Net sales for Q2 FY2019 increased 5.7% to $41.3 million compared to Q2 FY2018[103] - Gross margin decreased to 31.4% in Q2 FY2019 from 34.2% in Q2 FY2018[103] - Operating loss was $0.5 million in Q2 FY2019, a shift from operating income of $0.8 million in Q2 FY2018[103] - 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] Financial Summary – Six Months Ended December 1, 2018 - Net sales for H1 FY2019 increased 12.3% to $85.5 million compared to H1 FY2018[103] - Gross margin decreased to 31.5% in H1 FY2019 from 33.5% in H1 FY2018[103] - Operating income was $0.4 million in H1 FY2019, down from $0.8 million in H1 FY2018[103] - 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] Net Sales and Gross Profit Analysis | 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][108] Power and Microwave Technologies Group - 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][110] - PMT gross margin decreased due to unfavorable product mix and manufacturing variances[109][110] Canvys - Canvys net sales decreased 3.1% in Q2 FY19 due to several large non-recurring orders in Q2 FY18[111] - Canvys net sales increased 9.6% in H1 FY19 due to increased customer demand in North American and European markets[112] - Canvys gross margin increased for both periods due to favorable product mix and lower costs on selected products[111][112] 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][114] - Healthcare gross margin significantly decreased for both periods due to an unfavorable product mix and manufacturing variances[113][114] Selling, General and Administrative Expenses | 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] Other Income/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] - 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] Income Tax Provision | 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] Net (Loss)Income and Per Share Data | 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][123] Liquidity, Financial Position and Capital Resources - Cash and cash equivalents were $47.9 million at December 1, 2018, with an additional $5.3 million in current investments (CDs)[125] - The company believes existing liquidity sources will provide sufficient resources for known capital requirements and working capital needs for the next twelve months[127] Cash Flows from Operating Activities - Operating activities used $2.7 million of cash during H1 FY19, compared to $2.3 million used in H1 FY18[129][130] - 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] - 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] Cash Flows from Investing Activities - Cash used in investing activities was $7.5 million during H1 FY19, a significant change from $1.8 million provided in H1 FY18[132][133] - H1 FY19 investing cash use included $5.3 million for purchases of investments and $2.2 million in capital expenditures[132] - Capital expenditures primarily related to Healthcare growth initiatives, building improvements, and IT system investments[132] Cash Flows from Financing Activities - 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] - Cash used in financing activities was $1.5 million during H1 FY18, solely from cash dividends paid[135] - Future dividend payments are at the discretion of the Board of Directors[136] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] - The company manages these risks through normal operating and financing activities and does not currently utilize derivative instruments for foreign currency exposure[118][137] Item 4. Controls and Procedures 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] - No material changes in internal control over financial reporting occurred during the second quarter of fiscal 2019[141] Part II. Other Information Item 1. Legal Proceedings 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] - Varex Imaging Corporation filed a patent infringement lawsuit on October 15, 2018, against Richardson's ALTA750TM product[144] - Richardson believes the Varex lawsuit is without merit and a loss is not probable or estimable[144] Item 1A. Risk Factors 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] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section is a placeholder with no specific information on unregistered equity sales or use of proceeds Item 5. Other Information 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] - The press release is furnished as Exhibit 99.1 to this Form 10-Q[146] Item 6. Exhibits 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][150] 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] - The signing date was January 10, 2019[153]