Richardson Electronics(RELL) - 2019 Q3 - Quarterly Report

Part I. Financial Information Financial Statements Q3 FY2019 financial statements show decreased assets and equity, a net loss, and negative operating cash flow Consolidated Balance Sheets 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 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 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 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] - Key drivers of the equity decrease were the net loss of $951 thousand and cash dividends paid of $2.3 million[15] Notes to Unaudited Consolidated Financial Statements 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][19][20] - 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] - 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][54] - 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] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 sales decline, nine-month sales growth, gross margin compression, shift to operating loss, and sufficient but reduced liquidity 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][107] - 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] - 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] 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] - 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] - Investing activities used $18.7 million, which included $17.8 million for purchases of investments (CDs) and $3.2 million in capital expenditures[134] - The company repatriated $8.2 million from foreign entities in Japan, Korea, Germany, and France during the first nine months of fiscal 2019[127] Quantitative and Qualitative Disclosures About Market Risk 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] - The company does not utilize derivative instruments to manage its foreign currency exposure[120] Controls and Procedures 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] - No material changes to the company's internal control over financial reporting occurred during the third quarter of fiscal 2019[143] Part II. Other Information Legal Proceedings 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] - Richardson believes the lawsuit lacks merit and considers a loss neither probable nor estimable at this time[145] Risk Factors 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] Unregistered Sales of Equity Securities and Use of Proceeds This item is listed in the table of contents, but no specific information is provided in the report body Other Information 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] Exhibits 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]