Richardson Electronics(RELL) - 2022 Q4 - Annual Report

Part I Business The company is a global manufacturer of engineered solutions, operating through PMT, Canvys, and Healthcare segments, with a new Green Energy Solutions segment planned for fiscal 2023 - The company operates through three reportable segments: Power and Microwave Technologies (PMT), Canvys (Visual Technology Solutions), and Healthcare[29][36][38] - Starting in fiscal 2023, the company will introduce a new Green Energy Solutions (GES) segment, carved out from the existing PMT segment[28][121] - The COVID-19 pandemic led to component delays and supply chain disruptions, negatively impacting gross margins in the Canvys and Healthcare segments during fiscal 2022[17][18] - As of May 28, 2022, the company employed 447 individuals[45] - International sales constituted approximately 57% of the company's total sales in fiscal 2022[42] Risk Factors The company faces significant operational, supply chain, financial, and ownership risks, including supplier dependency and concentrated voting power - Business and Operational Risks: The company faces risks from potential failure to achieve sales growth, inventory obsolescence for its tube technology products, and competitive pressures. It is also dependent on a limited number of vendors, with one supplier representing 11% of total cost of sales[52][54][56] - Supply Chain and Global Events: The business is subject to disruptions from global events like the COVID-19 pandemic and the Russia-Ukraine conflict, which have caused component delays, increased material costs, and strained logistics[58][69] - International Operations Risks: With significant worldwide operations, the company is exposed to risks from currency fluctuations, political instability, and changing trade policies such as tariffs and the effects of Brexit[75][76][77] - Financial Risks: As of May 28, 2022, approximately 42% of the company's cash and cash equivalents ($15.0 million) was held by foreign subsidiaries, which could affect domestic liquidity needs[74] - Ownership Risk: A single stockholder, Chairman and CEO Edward J. Richardson, beneficially owns approximately 98% of Class B common stock, representing about 63% of the total voting power, allowing him to exert control over stockholder votes[90] Unresolved Staff Comments The company reports that there are no unresolved staff comments - None[99] Properties The company owns its corporate headquarters in Illinois and leases 26 other facilities globally for its operations Owned and Leased Facilities | Location | Status | Primary Use | | :--- | :--- | :--- | | LaFox, Illinois | Owned | Corporate HQ, Sales, Distribution, Manufacturing | | Various Global Locations | Leased | Sales, Distribution, Manufacturing, Testing, Repair | Legal Proceedings The company settled a legal dispute with Varex Imaging Corporation for $1.6 million in fiscal 2021 - The company settled a legal dispute with Varex Imaging Corporation for $1.6 million in April 2021 to resolve allegations of patent infringement and trade secret misappropriation[102] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ (RELL), and it paid quarterly dividends totaling $3.2 million in fiscal 2022 without any share repurchases - The company's common stock trades on the NASDAQ Global Select Market under the symbol "RELL"[107] - No share repurchases were made in fiscal 2022[105] Fiscal 2022 Dividend Information | Security | Quarterly Dividend per Share | Annual Dividend Payments | | :--- | :--- | :--- | | Common Share | $0.06 | ~$3.2 million | | Class B Common Share | $0.054 | ~$3.2 million | Selected Financial Data The five-year financial summary shows strong growth, with net sales reaching $224.6 million and net income of $17.9 million in fiscal 2022 Five-Year Financial Highlights (in thousands) | Fiscal Year Ended | Net Sales | Income (loss) from continuing operations | Net income (loss) | Total assets | | :--- | :--- | :--- | :--- | :--- | | May 28, 2022 | $224,620 | $17,927 | $17,927 | $179,819 | | May 29, 2021 | $176,937 | $1,655 | $1,655 | $156,753 | | May 30, 2020 | $155,898 | $(1,838) | $(1,838) | $150,720 | | June 1, 2019 | $166,652 | $(7,328) | $(7,328) | $153,017 | | June 2, 2018 | $163,212 | $2,326 | $3,822 | $166,329 | Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2022 saw 26.9% sales growth to $224.6 million and a tenfold increase in net income, driven by strong demand and controlled expenses Results of Operations Fiscal 2022 net sales grew 26.9% driven by all segments, while operating income surged due to strong sales leverage over flat SG&A expenses Fiscal 2022 vs. Fiscal 2021 Performance (in thousands) | Metric | FY 2022 | FY 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $224,620 | $176,937 | 26.9% | | Gross Profit | $71,700 | $58,825 | 21.9% | | Operating Income | $15,957 | $2,887 | 452.7% | | Net Income | $17,927 | $1,655 | 983.2% | Net Sales by Segment (in thousands) | Segment | FY 2022 | FY 2021 | % Change | | :--- | :--- | :--- | :--- | | PMT | $178,056 | $137,280 | 29.7% | | Canvys | $35,187 | $29,319 | 20.0% | | Healthcare | $11,377 | $10,338 | 10.1% | - Gross margin as a percentage of net sales decreased to 31.9% in FY2022 from 33.2% in FY2021, primarily due to PMT's product mix, higher freight costs, and increased component scrap expenses in Healthcare[129] - SG&A expenses as a percentage of sales decreased significantly to 24.8% in FY2022 from 31.6% in FY2021, as expenses remained relatively flat while sales grew[139] - The effective income tax rate was (13.7%) in FY2022, compared to 28.3% in FY2021, primarily due to the release of the valuation allowance on U.S. deferred tax assets[143] Liquidity, Financial Position and Capital Resources The company maintained a strong liquidity position with $40.5 million in cash and investments, despite increased inventory to support growth - Cash, cash equivalents, and investments totaled $40.5 million at the end of fiscal 2022[153] - Cash flow from operating activities was $1.9 million in FY2022, significantly impacted by a $20.6 million increase in inventories to support manufacturing and sales growth[157] - Cash used in investing activities was $8.1 million, including $5.0 million for a CD purchase and $3.1 million in capital expenditures[160] - Cash used in financing activities was $0.4 million, reflecting $3.2 million in dividend payments partially offset by proceeds from stock option exercises[163] Critical Accounting Policies and Estimates Key accounting estimates involve inventory valuation and income taxes, with a significant release of the valuation allowance on deferred tax assets in fiscal 2022 - The inventory reserve for obsolete or slow-moving items was $6.1 million as of May 28, 2022. The company recorded provisions of $0.5 million to this reserve in fiscal 2022[174][176] - Revenue is recognized at a point in time when control of the promised goods is transferred to the customer[170][171] - Due to positive evidence of future profitability, the company released the full valuation allowance on its U.S. federal and state deferred tax assets in fiscal 2022[147][182] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is foreign currency exposure, with a hypothetical 10% unfavorable exchange rate change estimated to reduce sales by $12.1 million - The primary financial risk is foreign currency exchange exposure. The company does not currently use derivative instruments to manage this risk[185][187] - A hypothetical 10% unfavorable change in the U.S. dollar against foreign currencies would have lowered fiscal 2022 net sales by an estimated $12.1 million[188] Financial Statements and Supplementary Data This section includes the audited consolidated financial statements, which received an unqualified opinion with a critical audit matter related to inventory reserves - The independent auditor, BDO USA, LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[191][192] - A critical audit matter identified was the estimation of the inventory reserve for the PMT segment, which requires significant judgment regarding future demand and net realizable value for trailing-edge technology products[198][199] Consolidated Balance Sheet Highlights (in thousands) | Account | May 28, 2022 | May 29, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $35,495 | $43,316 | | Inventories, net | $80,390 | $63,508 | | Total Assets | $179,819 | $156,753 | | Total Liabilities | $43,972 | $35,193 | | Total Stockholders' Equity | $135,847 | $121,560 | - One supplier accounted for 11% of the total cost of sales in fiscal 2022, down from 15% in fiscal 2021[218] - The valuation allowance for deferred tax assets was reduced from $12.2 million in FY2021 to $3.5 million in FY2022, reflecting management's increased confidence in realizing these assets[279][284] Controls and Procedures Management concluded that the company's disclosure controls, procedures, and internal control over financial reporting were effective as of May 28, 2022 - Management concluded that the company's disclosure controls and procedures were effective as of May 28, 2022[316] - Management concluded that the company's internal control over financial reporting was effective as of May 28, 2022, a conclusion audited and affirmed by BDO USA, LLP[318][319] Other Information The company reports that there is no other information to disclose under this item - None[328] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, officers, and corporate governance is incorporated by reference from the company's 2022 Proxy Statement - This section incorporates information by reference from the company's Proxy Statement for the October 4, 2022 Annual Meeting of Stockholders[330] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2022 Proxy Statement - This section incorporates information by reference from the company's Proxy Statement for the October 4, 2022 Annual Meeting of Stockholders[331] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the company's 2022 Proxy Statement - This section incorporates information by reference from the company's Proxy Statement for the October 4, 2022 Annual Meeting of Stockholders[332] Equity Compensation Plan Information (as of May 28, 2022) | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | Approved by Security Holders | 1,124,291 | $7.71 | 1,301,589 | | Not Approved by Security Holders | 23,564 | $12.95 | — | Certain Relationships and Related Transactions, and Director Independence Information regarding related transactions and director independence is incorporated by reference from the company's 2022 Proxy Statement - This section incorporates information by reference from the company's Proxy Statement for the October 4, 2022 Annual Meeting of Stockholders[334] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's 2022 Proxy Statement - This section incorporates information by reference from the company's Proxy Statement for the October 4, 2022 Annual Meeting of Stockholders[335] Part IV Exhibits and Financial Statement Schedules This section lists the documents filed as part of the Form 10-K, including financial statements and an exhibit index - This section lists the consolidated financial statements and exhibits filed with the Form 10-K[336][341] Form 10-K Summary The company indicates that no Form 10-K summary is provided - None[340]