Richardson Electronics(RELL) - 2019 Q4 - Annual Report

PART I ITEM 1. Business Richardson Electronics, Ltd. is a global provider of engineered solutions and components across three segments, with significant international sales and a diversified customer base - 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, and customized display solutions[13][186] - The company serves customers across diverse markets including alternative energy, healthcare, aviation, and semiconductor[13][186] - The company operates through three reportable segments: Power and Microwave Technologies Group (PMT), Canvys – Visual Technology Solutions, and Healthcare[17][188] - International sales constituted approximately 61% of total sales in fiscal 2019[28] - No single customer accounted for more than 10% of consolidated net sales in fiscal 2019, though LAM Research Corporation accounted for 11% in fiscal 2018[29][192] ITEM 1A. Risk Factors The company faces diverse risks including liquidity, operational performance, supply chain dependencies, international operations, and regulatory changes - Approximately 59% ($29.3 million) of cash, cash equivalents, and investments are held by foreign subsidiaries, potentially impacting future liquidity due to repatriation restrictions and tax consequences[34][35] - The company faces risks in achieving sales growth and margin targets due to competitive pressures, inventory obsolescence, and global infrastructure complexity[36][37] - Dependence on a limited number of vendors for essential products poses a risk if suppliers are unable or unwilling to continue business[41] - Significant international operations expose the company to risks including foreign currency fluctuations, political instability, and trade protection measures[42][43] - A non-cash goodwill impairment charge of $6.3 million was recorded in the fourth quarter of fiscal 2019 for the IMES reporting unit[63] - New tariffs and the evolving trade policy dispute between the United States and China may adversely affect the business, potentially increasing costs or reducing product demand[68][69][70] ITEM 1B. Unresolved Staff Comments The company reported no unresolved staff comments from the SEC - There are no unresolved staff comments[71] ITEM 2. Properties The company owns one facility and leases 27 globally, including its corporate headquarters, supporting sales, distribution, manufacturing, testing, and repair across its segments - The company owns one facility and leases 27 facilities globally[73] - The corporate facility and largest distribution center, located in LaFox, Illinois, is owned and comprises approximately 242,000 square feet for manufacturing, warehouse, and office space[73] Key Facility Locations and Segments Served | Location | Leased/Owned | Use | Segment | | :--- | :--- | :--- | :--- | | Woodland Hills, California | Leased | Sales | PMT | | 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 | | Sao Paulo, Brazil | Leased | Sales/Distribution | PMT | | Beijing, China | Leased | Sales | PMT | | Nanjing, China | Leased | Sales | PMT | | Shanghai, China | Leased | Sales/Distribution | PMT | | Shenzhen, China | Leased | Sales | PMT | | Brive, France | Leased | Manufacturing Support/Testing | PMT | | Nanterre, France | Leased | Sales | PMT | | Donaueschingen, Germany | Leased | Sales/Distribution/Manufacturing | Canvys | | Puchheim, Germany | Leased | Sales | PMT | | Mumbai, India | Leased | Sales | PMT | | Ramat Gan, Israel | Leased | Sales | PMT | | Florence, Italy ** | Leased | Sales | PMT | | Milan, Italy | Leased | Sales | PMT | | Tokyo, Japan | Leased | Sales | PMT | | Mexico City, Mexico | Leased | Sales | PMT | | Amsterdam, Netherlands | Leased | Sales/Distribution/Manufacturing | PMT/Healthcare | | Singapore, Singapore | Leased | Sales/Distribution | PMT | | Seoul, South Korea | Leased | Sales | PMT | | Madrid, Spain | Leased | Sales | PMT | | Taipei, Taiwan | Leased | Sales | PMT/Canvys | | Bangkok, Thailand | Leased | Sales/Distribution | PMT | | Dubai, United Arab Emirates | Leased | Sales/Distribution/Testing/Repair | PMT | | Hook, United Kingdom | Leased | Sales/Distribution/Testing/Repair | PMT | | Lincoln, United Kingdom | Leased | Sales | PMT/Canvys | ITEM 3. Legal Proceedings Richardson Electronics Ltd. is involved in a patent infringement lawsuit by Varex Imaging Corporation, which the company believes is without merit and not probable of loss - Varex Imaging Corporation filed a patent infringement lawsuit against Richardson Electronics Ltd. on October 15, 2018 (Case No. 1:18-cv-06911) in the Northern District of Illinois[76][295] - The lawsuit alleges infringement of U.S. Patent Nos. 6,456,692 and 6,519,317, specifically targeting Richardson's ALTA750™ product[76][295] - Richardson believes the lawsuit is without merit and that a loss is not probable or estimable[76][295] PART II ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under 'RELL', with specific share counts and dividend payments in fiscal 2019, and no share repurchases - The company's common stock is traded on the NASDAQ Global Select Market under the trading symbol 'RELL'[81] - As of July 22, 2019, there were 10,956,852 shares of Common Stock and 2,096,919 shares of Class B Common Stock outstanding[5] - Quarterly dividends were $0.06 per common share and $0.054 per Class B common share, with annual payments of approximately $3.1 million in fiscal 2019 and $3.0 million in fiscal 2018[80] - No share repurchases were made in fiscal 2019[79] High and Low Closing Prices of Common Stock (Fiscal Quarters) | Fiscal Quarter | High (2019) | Low (2019) | High (2018) | Low (2018) | | :--- | :--- | :--- | :--- | :--- | | First | $9.84 | $8.91 | $6.09 | $5.54 | | Second | $9.13 | $6.85 | $6.75 | $5.42 | | Third | $8.70 | $6.81 | $8.21 | $6.27 | | Fourth | $7.52 | $5.08 | $9.74 | $7.66 | ITEM 6. Selected Financial Data The company's five-year financial data shows fluctuating performance with net losses in most years, increasing net sales, and declining total assets and stockholders' equity Five-Year Financial Review (in thousands, except per share amounts) | Metric | FY 2019 | FY 2018 | FY 2017 | FY 2016 | FY 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $166,652 | $163,212 | $136,872 | $142,016 | $136,957 | | (Loss) income from continuing operations before tax | $(6,311) | $3,860 | $(6,116) | $(6,220) | $(6,994) | | Income tax provision (benefit) | $1,017 | $1,534 | $812 | $546 | $(1,466) | | (Loss) income from continuing operations | $(7,328) | $2,326 | $(6,928) | $(6,766) | $(5,528) | | Income (loss) from discontinued operations | $— | $1,496 | $— | $— | $(31) | | Net (loss) income | $(7,328) | $3,822 | $(6,928) | $(6,766) | $(5,559) | | Total net (loss) income per Common share - Basic | $(0.57) | $0.30 | $(0.55) | $(0.53) | $(0.41) | | Total net (loss) income per Class B common share - Basic | $(0.51) | $0.27 | $(0.49) | $(0.47) | $(0.36) | | Dividends per common share | $0.24 | $0.24 | $0.24 | $0.24 | $0.24 | | Dividends per Class B common share | $0.22 | $0.22 | $0.22 | $0.22 | $0.22 | | Total assets | $153,017 | $166,329 | $157,464 | $168,130 | $184,994 | | Stockholders' equity | $123,757 | $135,181 | $132,327 | $141,675 | $156,652 | ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion reviews the company's financial performance, condition, and operational changes for fiscal years 2019, 2018, and 2017, highlighting sales growth, net loss, and liquidity - Consolidated net sales increased by 2.1% to $166.7 million in fiscal 2019 compared to fiscal 2018[100] - The company reported a net loss of $7.3 million in fiscal 2019, compared to a net income of $3.8 million in fiscal 2018, primarily due to a $6.3 million non-cash goodwill impairment charge[100] - Gross margin decreased to 31.0% in fiscal 2019 from 33.7% in fiscal 2018, influenced by product mix, manufacturing under-absorption, and inventory provisions[100][102] - Operating activities used $2.6 million of cash in fiscal 2019, primarily due to increases in inventories and accounts receivable, and a decrease in accounts payable[136] - Cash, cash equivalents, and investments decreased to $50.0 million at June 1, 2019, from $60.5 million at June 2, 2018[131] Business Overview Richardson Electronics, Ltd. provides engineered solutions and components across three operating segments, with products manufactured in China subject to U.S. tariffs - Richardson Electronics, Ltd. provides engineered solutions, power grid and microwave tubes, power conversion and RF/microwave components, flat panel detector solutions, and customized display solutions[92] - The company's three operating segments are Power and Microwave Technologies Group (PMT), Canvys – Visual Technology Solutions, and Healthcare[95][96][97] - Products manufactured in China are subject to additional U.S. tariffs (10% to 25%), potentially negatively affecting sales and gross margins if costs cannot be passed through or demand is reduced[94] Results of Operations Fiscal 2019 saw a 2.1% net sales increase but a $7.3 million net loss due to a goodwill impairment charge and decreased gross margin, with detailed segment and geographic performance Net Sales by Segment (in thousands) | Net Sales | FY 2019 | FY 2018 | FY 2017 | FY19 vs. FY18 % Change | FY18 vs. FY17 % Change | | :--- | :--- | :--- | :--- | :--- | :--- | | PMT | $128,902 | $128,296 | $104,226 | 0.5% | 23.1% | | Canvys | $27,968 | $26,683 | $20,534 | 4.8% | 29.9% | | Healthcare | $9,782 | $8,233 | $12,112 | 18.8% | (32.0%) | | Total | $166,652 | $163,212 | $136,872 | 2.1% | 19.2% | Gross Profit by Segment (in thousands) | Gross Profit | FY 2019 | % of Net Sales (FY19) | FY 2018 | % of Net Sales (FY18) | FY 2017 | % of Net Sales (FY17) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | PMT | $40,254 | 31.2% | $43,254 | 33.7% | $33,382 | 32.0% | | Canvys | $9,085 | 32.5% | $8,410 | 31.5% | $5,752 | 28.0% | | Healthcare | $2,396 | 24.5% | $3,418 | 41.5% | $4,749 | 39.2% | | Total | $51,735 | 31.0% | $55,082 | 33.7% | $43,883 | 32.1% | - PMT net sales increased 0.5% in fiscal 2019, driven by market share growth in electron devices and new technology suppliers in 5G/RF/Microwave, offset by a decline in the semi-wafer fab equipment market, with gross margin decreasing due to product mix and manufacturing under-absorption[104] - Canvys net sales increased 4.8% in fiscal 2019, with North American growth partially offset by foreign currency effects in Europe, and gross margin improved due to product mix and foreign currency effects[106] - Healthcare net sales increased 18.8% in fiscal 2019, primarily due to the launch of the ALTA750™ CT Tube and equipment sales growth, though gross margin significantly decreased due to unfavorable product mix, manufacturing absorption, and high scrap expenses related to the launch[108] Net Sales by Geographic Area (in thousands) | Net Sales | FY 2019 | FY 2018 | FY 2017 | FY19 vs. FY18 % Change | FY18 vs. FY17 % Change | | :--- | :--- | :--- | :--- | :--- | :--- | | North America | $66,228 | $67,662 | $55,963 | -2.1% | 20.9% | | Asia/Pacific | $34,681 | $32,607 | $27,997 | 6.4% | 16.5% | | Europe | $55,038 | $53,818 | $44,296 | 2.3% | 21.5% | | Latin America | $10,653 | $9,123 | $8,552 | 16.8% | 6.7% | | Other | $52 | $2 | $64 | 2500.0% | (96.9%) | | Total | $166,652 | $163,212 | $136,872 | 2.1% | 19.2% | - Selling, general and administrative expenses increased to $52.2 million in fiscal 2019 from $51.7 million in fiscal 2018, primarily due to higher legal, severance, and bad debt expenses, partially offset by lower incentive expenses[114] - A $6.3 million non-cash goodwill impairment charge was recorded in the fourth quarter of fiscal 2019, writing off all goodwill associated with the IMES reporting unit[116] - The effective income tax rate from continuing operations was (16.1%) in fiscal 2019, compared to 39.7% in fiscal 2018, primarily due to a valuation allowance against U.S. state and federal net deferred tax assets and the impact of the Tax Cuts and Jobs Act[118] - In fiscal 2018, the company recognized a net benefit of $1.5 million from discontinued operations, related to an income tax refund from the State of Illinois for the sale of the RF, Wireless and Power Division in 2011[129] Liquidity, Financial Position and Capital Resources The company's liquidity, primarily from cash and investments, decreased to $50.0 million in fiscal 2019, with cash used in operating, investing, and financing activities - Cash, cash equivalents, and investments decreased to $50.0 million at June 1, 2019, from $60.5 million at June 2, 2018[131] - Operating activities used $2.6 million of cash in fiscal 2019, primarily due to increases in inventories ($4.2 million) and accounts receivable ($2.0 million), and a decrease in accounts payable ($2.4 million)[136] - Investing activities used $11.9 million in fiscal 2019, including $17.8 million in investment purchases and $3.9 million in capital expenditures, partially offset by $9.8 million from investment maturities[139] - Financing activities used $2.8 million in fiscal 2019, mainly for cash dividends paid ($3.1 million), partially offset by proceeds from common stock issuance[142] Contractual Obligations as of June 1, 2019 (in thousands) | | Less than 1 year | 1 - 3 years | 4 - 5 years | More than 5 years | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Lease obligations | $1,586 | $2,216 | $289 | $234 | $4,325 | Critical Accounting Policies and Estimates The company's critical accounting policies involve significant estimates for doubtful accounts, revenue recognition, inventory, goodwill, loss contingencies, and income taxes, including a $6.3 million goodwill impairment charge in fiscal 2019 - Critical accounting policies include allowance for doubtful accounts, revenue recognition, inventory obsolescence, goodwill and other intangible assets, loss contingencies, and income taxes, all requiring significant management estimates[145][146] - Revenue from product sales is recognized upon shipment or delivery when title passes and collectability is assured, with the adoption of ASU 2014-09 in fiscal 2019 having no material impact on timing or financial statements[148][150] - Inventories are stated at the lower of cost and net realizable value, using a weighted-average cost method, with provisions for obsolete or slow-moving inventories totaling $1.1 million in fiscal 2019[151][153] - Goodwill is reviewed annually for impairment, with a $6.3 million non-cash impairment charge recorded in fiscal 2019 for the IMES reporting unit due to its fair value falling below carrying value[116][154] - Deferred tax assets are assessed for recoverability, and a valuation allowance of $11.7 million was established as of June 1, 2019, due to significant cumulative losses in the U.S. jurisdiction[125] New Accounting Pronouncements The company adopted ASU 2014-09 in fiscal 2019 with no material impact and is evaluating ASU 2016-02 (Leases) and ASU 2016-13 (Credit Losses) for future implementation - The company adopted ASU 2014-09, Revenue from Contracts with Customers, effective June 3, 2018, using the modified retrospective method, with no material impact on consolidated financial statements[165] - ASU 2016-02, Leases, is effective for the company on June 2, 2019, and will require recording Right-of-Use (ROU) assets and lease liabilities on the balance sheet for leases longer than 12 months[166][168] - The company is evaluating ASU 2016-13, Financial Instruments—Credit Losses, effective for periods beginning after December 15, 2019, which introduces an expected loss approach for credit losses on financial instruments[169] - The company elected not to early adopt ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income[170] ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is foreign currency exchange rate fluctuations, which are managed without derivative instruments, and a hypothetical 10% unfavorable change would significantly impact financial metrics - The primary financial risk is foreign currency exchange, as certain operations, assets, and liabilities are denominated in foreign currencies[172] - The company manages foreign exchange exposures through currency clauses in sales contracts and local debt to offset asset exposures, but does not use derivative instruments or forward contracts[174] - A hypothetical 10% unfavorable change in the U.S. dollar against foreign currencies would have resulted in an estimated $10.5 million lower net sales in fiscal 2019, $4.7 million decline in total assets, and $1.1 million decrease in total liabilities[175] ITEM 8. Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for fiscal years 2019, 2018, and 2017, including balance sheets, income statements, cash flow statements, and detailed notes, reflecting a net loss and decreased assets in fiscal 2019 Consolidated Balance Sheets (in thousands) | Asset/Liability | June 1, 2019 | June 2, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $42,019 | $60,465 | | Accounts receivable, net | $24,296 | $22,892 | | Inventories, net | $53,232 | $50,720 | | Total current assets | $130,614 | $137,824 | | Property, plant and equipment, net | $19,111 | $18,232 | | Goodwill | $— | $6,332 | | Intangible assets, net | $2,763 | $3,014 | | Total assets | $153,017 | $166,329 | | Accounts payable | $16,943 | $19,603 | | Accrued liabilities | $11,273 | $10,343 | | Total current liabilities | $28,216 | $29,946 | | Total liabilities | $29,260 | $31,148 | | Total stockholders' equity | $123,757 | $135,181 | Consolidated Statements of Comprehensive (Loss) Income (in thousands) | Metric | FY 2019 | FY 2018 | FY 2017 | | :--- | :--- | :--- | :--- | | Net sales | $166,652 | $163,212 | $136,872 | | Gross profit | $51,735 | $55,082 | $43,883 | | Selling, general and administrative expenses | $52,156 | $51,729 | $49,854 | | Impairment of goodwill | $6,332 | $— | $— | | Operating (loss) income | $(6,776) | $3,629 | $(5,762) | | (Loss) income from continuing operations before income taxes | $(6,311) | $3,860 | $(6,116) | | Income tax provision | $1,017 | $1,534 | $812 | | (Loss) income from continuing operations | $(7,328) | $2,326 | $(6,928) | | Income from discontinued operations | $— | $1,496 | $— | | Net (loss) income | $(7,328) | $3,822 | $(6,928) | | Comprehensive (loss) income | $(9,304) | $5,272 | $(6,784) | Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | FY 2019 | FY 2018 | FY 2017 | | :--- | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(2,563) | $2,952 | $1,809 | | Net cash (used in) provided by investing activities | $(11,874) | $4,152 | $(3,787) | | Net cash used in financing activities | $(2,817) | $(2,951) | $(3,001) | | Effect of exchange rate changes on cash and cash equivalents | $(1,192) | $985 | $(148) | | (Decrease) increase in cash and cash equivalents | $(18,446) | $5,138 | $(5,127) | | Cash and cash equivalents at end of period | $42,019 | $60,465 | $55,327 | Selected Quarterly Financial Data (Unaudited) (in thousands, except per share amounts) | Description | Q1 FY19 | Q2 FY19 | Q3 FY19 | Q4 FY19 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $44,157 | $41,314 | $39,018 | $42,163 | | Gross profit | $13,953 | $12,971 | $12,299 | $12,512 | | Income (loss) from continuing operations | $431 | $(304) | $(1,078) | $(6,377) | | Net income (loss) | $431 | $(304) | $(1,078) | $(6,377) | | Net income (loss) Common stock - basic | $0.03 | $(0.02) | $(0.08) | $(0.50) | | Net income (loss) Class B common stock - basic | $0.03 | $(0.02) | $(0.08) | $(0.44) | ITEM 9A. Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of June 1, 2019, with no material changes in the most recent fiscal quarter - The company's disclosure controls and procedures were evaluated and deemed effective as of June 1, 2019[315][316] - Management concluded that the company's internal control over financial reporting was effective as of June 1, 2019, based on the COSO framework[319] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[321] ITEM 9B. Other Information No other information is reported under this item - No other information is reported under this item[322] PART III ITEM 10. Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance will be provided in the Proxy Statement for the Annual Meeting of Stockholders on October 8, 2019 - Information on directors, executive officers, and corporate governance is incorporated by reference from the Proxy Statement for the Annual Meeting of Stockholders on October 8, 2019[324] ITEM 11. Executive Compensation Details concerning executive compensation will be disclosed in the Proxy Statement for the Annual Meeting of Stockholders on October 8, 2019 - Information on executive compensation is incorporated by reference from the Proxy Statement for the Annual Meeting of Stockholders on October 8, 2019[325] ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and related stockholder matters will be provided in the Proxy Statement, with details on outstanding options and securities available for future issuance as of June 1, 2019 - Information on security ownership is incorporated by reference from the Proxy Statement for the Annual Meeting of Stockholders on October 8, 2019[326] Equity Compensation Plan Information as of June 1, 2019 | Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted Average Per Share Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in the First Column) | | :--- | :--- | :--- | :--- | | Equity Compensation Plans Approved by Security Holders | 1,340,155 | $9.01 | 1,173,421 | | Equity Compensation Plans Not Approved by Security Holders | 23,564 (1) | $12.95 (1) | — | | Total | 1,363,719 | $9.08 | 1,173,421 | ITEM 13. Certain Relationships and Related Transactions, and Director Independence Information concerning certain relationships, related transactions, and director independence will be included in the Proxy Statement for the Annual Meeting of Stockholders on October 8, 2019 - Information on certain relationships, related transactions, and director independence is incorporated by reference from the Proxy Statement for the Annual Meeting of Stockholders on October 8, 2019[328] ITEM 14. Principal Accountant Fees and Services Information regarding principal accountant fees and services will be provided in the Proxy Statement for the Annual Meeting of Stockholders on October 8, 2019 - Information on principal accountant fees and services is incorporated by reference from the Proxy Statement for the Annual Meeting of Stockholders on October 8, 2019[329] PART IV ITEM 15. Exhibits and Financial Statement Schedules This section lists all exhibits and financial statement schedules filed as part of the Form 10-K report, including consolidated financial statements and the independent auditor's report - The section includes an index to consolidated financial statements: Balance Sheets, Statements of Comprehensive (Loss) Income, Statements of Cash Flows, Statements of Stockholders' Equity, and Notes to Consolidated Financial Statements[332][333] - The Report of BDO USA, LLP, Independent Registered Public Accounting Firm, is also included[334] - All other financial statement schedules are omitted because the required information is included in the consolidated financial statements or notes, or is not applicable[334] - A comprehensive list of exhibits, including purchase agreements, corporate governance documents, incentive plans, employment agreements, and certifications, is provided[337][338] ITEM 16. Form 10-K Summary The company has not provided a Form 10-K Summary - No Form 10-K Summary is provided[335]