Richardson Electronics(RELL) - 2020 Q1 - Quarterly Report

Part I. Financial Information Presents the company's unaudited consolidated financial statements and management's analysis for the quarter Financial Statements Unaudited Q1 FY2020 financials show decreased assets, sales, and net income, with increased cash from investment maturities Consolidated Balance Sheets Total assets slightly decreased to $151.0 million as of August 31, 2019, primarily due to reduced current assets Consolidated Balance Sheet Highlights (in thousands) | Account | August 31, 2019 | June 1, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $46,457 | $42,019 | | Inventories, net | $54,137 | $53,232 | | Total current assets | $124,964 | $130,614 | | Total assets | $150,986 | $153,017 | | Liabilities & Equity | | | | Total current liabilities | $24,785 | $28,216 | | Total liabilities | $28,371 | $29,260 | | Total stockholders' equity | $122,615 | $123,757 | Unaudited Consolidated Statements of Comprehensive Loss Q1 FY2020 net sales decreased to $40.7 million, resulting in $0.2 million net income, down from the prior year Q1 FY2020 vs Q1 FY2019 Performance (in thousands, except per share data) | Metric | Three Months Ended Aug 31, 2019 | Three Months Ended Sep 1, 2018 | | :--- | :--- | :--- | | Net sales | $40,653 | $44,157 | | Gross profit | $12,951 | $13,953 | | Operating income | $103 | $854 | | Net income | $157 | $431 | | Diluted EPS (Common) | $0.01 | $0.03 | | Comprehensive loss | $(559) | $(309) | Unaudited Consolidated Statements of Cash Flows Q1 FY2020 saw $2.1 million cash used in operations, $7.7 million provided by investing, and a $4.4 million overall cash increase Cash Flow Summary (in thousands) | Activity | Three Months Ended Aug 31, 2019 | Three Months Ended Sep 1, 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | $(2,054) | $(3,630) | | Net cash provided by (used in) investing activities | $7,661 | $(3,372) | | Net cash used in financing activities | $(801) | $(572) | | Increase (decrease) in cash | $4,438 | $(7,987) | Notes to Unaudited Consolidated Financial Statements Detailed notes cover three business segments, new accounting standards, segment performance, and ongoing litigation - The company operates through three reportable segments: Power and Microwave Technologies Group (PMT), Canvys (customized display solutions), and Healthcare (replacement parts for diagnostic imaging)[21][22][23] - Effective June 3, 2018, the company adopted the new revenue recognition standard (ASU 2014-09) using the modified retrospective method, which did not have a material impact on the consolidated financial statements[33] - The company adopted the new lease standard (Topic 842) on June 2, 2019, resulting in the recognition of operating right-of-use assets of $3.6 million and finance right-of-use assets of $0.5 million[62] Net Sales by Segment (in thousands) | Segment | Three Months Ended Aug 31, 2019 | Three Months Ended Sep 1, 2018 | | :--- | :--- | :--- | | PMT | $30,567 | $34,769 | | Canvys | $7,277 | $7,173 | | Healthcare | $2,809 | $2,215 | Management's Discussion and Analysis of Financial Condition and Results of Operations Discusses a 7.9% consolidated net sales decrease in Q1 FY2020, driven by PMT segment decline, while liquidity remains strong Results of Operations Q1 FY2020 net sales declined 7.9% due to PMT weakness, partially offset by Healthcare growth, with slight gross margin improvement Net Sales by Segment - Q1 FY20 vs Q1 FY19 (in thousands) | Segment | Aug 31, 2019 | Sep 1, 2018 | % Change | | :--- | :--- | :--- | :--- | | PMT | $30,567 | $34,769 | -12.1% | | Canvys | $7,277 | $7,173 | 1.4% | | Healthcare | $2,809 | $2,215 | 26.8% | | Total | $40,653 | $44,157 | -7.9% | - The decrease in PMT sales was mainly due to a continued slowdown in the wafer fab equipment market[97][101] - The increase in Healthcare sales was driven by higher CT tube and parts sales, which also led to an improved gross margin for the segment (33.9% vs 28.6% YoY) due to favorable product mix and manufacturing over-absorption[97][103] - Selling, general and administrative expenses decreased primarily due to lower employee benefits, IT, and bad debt expenses[104] Liquidity, Financial Position and Capital Resources The company maintains strong liquidity with $46.5 million in cash, sufficient for future needs, despite cash used in operating activities - Cash and cash equivalents stood at $46.5 million at August 31, 2019, with $24.5 million in North America, $14.6 million in Europe, and the remainder in Asia/Pacific and Latin America[109] - Operating activities used $2.1 million in cash, primarily due to a $4.0 million decrease in accounts payable and a $1.4 million increase in inventory[113] - Investing activities provided $7.7 million, driven by $8.0 million in proceeds from maturing investments, partially offset by $0.3 million in capital expenditures[116] - Financing activities used $0.8 million for cash dividend payments[118] Quantitative and Qualitative Disclosures About Market Risk Foreign currency exchange is the primary financial market risk, managed through normal operating and financing activities - The primary financial risk exposure is foreign currency exchange, as certain operations, assets, and liabilities are denominated in foreign currencies[120] Controls and Procedures Management concluded disclosure controls were effective as of August 31, 2019, with no material changes in internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[123] - No changes in internal control over financial reporting occurred during the first quarter of fiscal 2020 that have materially affected, or are reasonably likely to materially affect, the company's internal controls[124] Part II. Other Information Provides updates on legal proceedings, risk factors, stockholder meeting outcomes, and required exhibits Legal Proceedings The company is involved in a patent infringement lawsuit where a preliminary injunction was denied, and a loss is not considered probable - Varex Imaging Corporation filed a patent infringement lawsuit against Richardson Electronics regarding U.S. Patent Nos. 6,456,692 and 6,519,317[125] - On September 30, 2019, the Court denied Varex's Motion for a Preliminary Injunction against the sale of Richardson's ALTA750™ product[125] - Richardson believes the lawsuit is without merit and a loss is not considered probable or estimable[125] Risk Factors No material changes to previously disclosed risk factors have been 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[126] Other Information Stockholders elected directors, ratified the accounting firm, and approved executive compensation at the annual meeting - The annual meeting of stockholders was held on October 8, 2019[127] - Stockholders approved three key proposals: election of directors, ratification of the independent accounting firm, and an advisory vote on executive compensation[127][128][129] Exhibits Lists exhibits filed with the Form 10-Q, including corporate governance documents and Sarbanes-Oxley Act certifications - The report includes certifications from the CEO (Edward J. Richardson) and CFO (Robert J. Ben) pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002[131]