RICHARDSON ELECTRONICS, LTD. Certain statements in this report may constitute "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. The terms "may," "should," "could," "anticipate," "believe," "continues," "estimate," "expect," "intend," "objective," "plan," "potential," "project" and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. These statements are based on management's current expectations, intentions or beliefs and are subject to a number of factors, assumptions and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Factors that could cause or contribute to such differences or that might otherwise impact the business include the risk factors set forth in Item 1A of our Annual Report on Form 10-K filed onAugust 5, 2019 . We undertake no obligation to update any such factor or to publicly announce the results of any revisions to any forward-looking statements contained herein whether as a result of new information, future events or otherwise. In addition, while we do, from time to time, communicate with securities analysts, it is against our policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.
INTRODUCTION
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is intended to assist the reader in better understanding our
business, results of operations, financial condition, changes in financial
condition, critical accounting policies and estimates and significant
developments. MD&A is provided as a supplement to, and should be read in
conjunction with, our consolidated financial statements and the accompanying
notes appearing elsewhere in this filing. This section is organized as follows:
• Business Overview
• Results of Operations - an analysis and comparison of our consolidated
results of operations for the three and six month periods ended November
30, 2019 and December 1, 2018 , as reflected in our consolidated
statements of comprehensive loss.
• Liquidity, Financial Position and Capital Resources - a discussion of our
primary sources and uses of cash for the six month periods ended November
30, 2019 and
financial position.
Business Overview
Richardson Electronics, Ltd. is a leading global provider of engineered solutions, power grid and microwave tubes and related consumables; power conversion and RF and microwave components; high value flat panel detector solutions, replacement parts, tubes and service training for diagnostic imaging equipment; and customized display solutions. We serve customers in the alternative energy, healthcare, aviation, broadcast, communications, industrial, marine, medical, military, scientific and semiconductor markets. The Company's strategy is to provide specialized technical expertise and "engineered solutions" based on our core engineering and manufacturing capabilities. The Company provides solutions and adds value through design-in support, systems integration, prototype design and manufacturing, testing, logistics and aftermarket technical service and repair through its global infrastructure.
Our products include electron tubes and related components, microwave generators, subsystems used in semiconductor manufacturing and visual technology solutions. These products are used to control, switch or amplify electrical power signals, or are used as display devices in a variety of industrial, commercial, medical and communication applications.
We have three operating and reportable segments which we define as follows:
Power andMicrowave Technologies Group ("PMT") combines our core engineered solutions capabilities, power grid and microwave tube business with new RF, Wireless and disruptive power technologies. As a manufacturer, technology partner and authorized distributor, PMT's strategy is to provide specialized technical expertise and engineered solutions based on our core engineering and manufacturing capabilities on a global basis. We provide solutions and add value through design-in support, systems integration, prototype design and manufacturing, testing, logistics and aftermarket technical service and repair-all through our existing global infrastructure. PMT's focus is on products for power, RF and microwave applications for customers in 5G, alternative energy, aviation, broadcast, communications, industrial, marine, medical, military, scientific and semiconductor markets. PMT focuses on various applications including broadcast transmission, CO2 laser cutting, diagnostic imaging, dielectric and induction heating, high energy transfer, high voltage switching, plasma, power conversion, radar and radiation oncology. PMT also offers its customers technical services for both microwave and industrial equipment. 19 -------------------------------------------------------------------------------- Canvys provides customized display solutions serving the corporate enterprise, financial, healthcare, industrial and medical original equipment manufacturers markets. Our engineers design, manufacture, source and support a full spectrum of solutions to match the needs of our customers. We offer long term availability and proven custom display solutions that include touch screens, protective panels, custom enclosures, all-in-ones, specialized cabinet finishes and application specific software packages and certification services. Our volume commitments are lower than the large display manufacturers, making us the ideal choice for companies with very specific design requirements. We partner with both private label manufacturing companies and leading branded hardware vendors to offer the highest quality display and touch solutions and customized computing platforms. Healthcare manufactures, refurbishes and distributes high value replacement parts for the healthcare market including hospitals, medical centers, asset management companies, independent service organizations and multi-vendor service providers. Products include Diagnostic Imaging replacement parts for CT and MRI systems; replacement CT and MRI tubes; CT service training; MRI coils, cold heads and RF amplifiers; hydrogen thyratrons, klystrons, magnetrons; flat panel detector upgrades; and additional replacement solutions currently under development for the diagnostic imaging service market. Through a combination of newly developed products and partnerships, service offerings and training programs, we believe we can help our customers improve efficiency and deliver better clinical outcomes while lowering the cost of healthcare delivery.
We currently have operations in the following major geographic regions:
RESULTS OF OPERATIONS
Financial Summary - Three Months Ended
• The second quarter of fiscal 2020 and fiscal 2019 each contained 13 weeks.
• Net sales during the second quarter of fiscal 2020 were
decrease of 4.1%, compared to net sales of $41.3 million during the
second quarter of fiscal 2019.
• Gross margin increased to 32.0% during the second quarter of fiscal 2020
compared to 31.4% during the second quarter of fiscal 2019.
• Selling, general and administrative expenses were
of net sales, during the second quarter of fiscal 2020 compared to
million, or 32.5% of net sales, during the second quarter of fiscal 2019.
• Operating loss during the second quarter of fiscal 2020 was $0.5 million
compared to an operating loss of $0.5 million during the second quarter
of fiscal 2019.
• Net loss during the second quarter of fiscal 2020 was $0.6 million
compared to net loss of $0.3 million during the second quarter of fiscal
2019.
Financial Summary - Six Months Ended
• The first six months of fiscal 2020 and fiscal 2019 each contained 26 weeks.
• Net sales during the first six months of fiscal 2020 were
a decrease of 6.1%, compared to net sales of $85.5 million during the
first six months of fiscal 2019.
• Gross margin increased to 31.9% during the first six months of fiscal
2020 compared to 31.5% during the first six months of fiscal 2019.
• Selling, general and administrative expenses were
of net sales, during the first six months of fiscal 2020 compared to
$26.5 million , or 31.0% of net sales, during the first six months of
fiscal 2019.
• Operating loss during the first six months of fiscal 2020 was $0.4
million compared to an operating income of $0.4 million during the first
six months of fiscal 2019.
• Net loss during the first six months of fiscal 2020 was $0.5 million
compared to net income of $0.1 million during the first six months of
fiscal 2019.
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Net sales by segment and percent change during the second quarter and first six months of fiscal 2020 and fiscal 2019 were as follows (in thousands):
Net Sales Three Months Ended FY20 vs. FY19
November 30, 2019 December 1, 2018 % Change
PMT $ 29,603 $ 32,328 -8.4 %
Canvys 7,856 6,498 20.9 %
Healthcare 2,175 2,488 -12.6 %
Total $ 39,634 $ 41,314 -4.1 %
Six Months Ended FY20 vs. FY19
November 30, 2019 December 1, 2018 % Change
PMT $ 60,170 $ 67,097 -10.3 %
Canvys 15,133 13,671 10.7 %
Healthcare 4,984 4,703 6.0 %
Total $ 80,287 $ 85,471 -6.1 %
During the second quarter of fiscal 2020, consolidated net sales decreased 4.1%
compared to the second quarter of fiscal 2019. Sales for PMT decreased 8.4%,
sales for Canvys increased 20.9% and sales for Healthcare decreased 12.6%. The
decrease in PMT was mainly due to economic softness in the power grid tube
business and a slow ramp up in sales in the semiconductor wafer fab equipment
business, partially offset by growth from our power conversion and RF and
microwave components. The increase in Canvys was due to increased customer
demand in both its North American and European markets. The decrease in
Healthcare was due to lower equipment and parts sales, partially offset by an
increase in CT tube sales.
During the first six months of fiscal 2020, consolidated net sales decreased
6.1% compared to the first six months of fiscal 2019. Sales for PMT decreased
10.3%, sales for Canvys increased 10.7% and sales for Healthcare increased 6.0%.
The decrease in PMT was mainly due to economic softness in the power grid tube
business and a slow ramp up in sales in the semiconductor wafer fab equipment
business, partially offset by growth from our power conversion and RF and
microwave components. The increase in Canvys was due to increased customer
demand in its North American market. The increase in Healthcare was due to
higher CT tube and parts sales.
Gross profit by segment and percent of net sales for the second quarter and
first six months of fiscal 2020 and fiscal 2019 were as follows (in thousands):
Gross Profit Three Months Ended
November 30, 2019 % of Net Sales December 1, 2018 % of Net Sales
PMT $ 9,349 31.6 % $ 10,107 31.3 %
Canvys 2,585 32.9 % 2,132 32.8 %
Healthcare 746 34.3 % 732 29.4 %
Total $ 12,680 32.0 % $ 12,971 31.4 %
Six Months Ended
November 30, 2019 % of Net Sales December 1, 2018 % of Net Sales
PMT $ 19,028 31.6 % $ 21,114 31.5 %
Canvys 4,906 32.4 % 4,445 32.5 %
Healthcare 1,697 34.0 % 1,365 29.0 %
Total $ 25,631 31.9 % $ 26,924 31.5 %
Gross profit reflects the distribution and manufacturing product margin less
manufacturing variances, inventory obsolescence charges, customer returns, scrap
and cycle count adjustments, engineering costs and other provisions.
Consolidated gross profit decreased to $12.7 million during the second quarter
of fiscal 2020 compared to $13.0 million during the second quarter of fiscal
2019. Consolidated gross margin as a percentage of net sales increased to 32.0%
during the second quarter of fiscal 2020 from 31.4% during the second quarter of
fiscal 2019, primarily due to favorable product mix in Healthcare and improved
manufacturing overhead absorption for both PMT and Healthcare.
21
-------------------------------------------------------------------------------- Consolidated gross profit decreased to$25.6 million during the first six months of fiscal 2020 compared to$26.9 million during the first six months of fiscal 2019. Consolidated gross margin as a percentage of net sales increased to 31.9% during the first six months of fiscal 2020 from 31.5% during the first six months of fiscal 2019, primarily due to favorable product mix and manufacturing overhead absorption for Healthcare.
Power and
PMT net sales decreased 8.4% to$29.6 million during the second quarter of fiscal 2020 from$32.3 million during the second quarter of fiscal 2019. The decrease was mainly due to economic softness in the power grid tube business and a slow ramp up in sales in the semiconductor wafer fab equipment business, partially offset by growth from our power conversion and RF and microwave components. Gross margin as a percentage of net sales increased to 31.6% during the second quarter of fiscal 2020 as compared to 31.3% during the second quarter of fiscal 2019 primarily due to favorable product mix. PMT net sales decreased 10.3% to$60.2 million during the first six months of fiscal 2020 from$67.1 million during the first six months of fiscal 2019. The decrease was mainly due to economic softness in the power grid tube business and a slow ramp up in sales in the semiconductor wafer fab equipment business, partially offset by growth from our power conversion and RF and microwave components. Gross margin as a percentage of net sales increased slightly to 31.6% during the first six months of fiscal 2020 as compared to 31.5% during the first six months of fiscal 2019.
Canvys
Canvys net sales increased 20.9% to$7.9 million during the second quarter of fiscal 2020 from$6.5 million during the second quarter of fiscal 2019 due to increased customer demand in both its North American and European markets. Gross margin as a percentage of net sales increased slightly to 32.9% during the second quarter of fiscal 2020 as compared to 32.8% during the second quarter of fiscal 2019. Canvys net sales increased 10.7% to$15.1 million during the first six months of fiscal 2020 from$13.7 million during the first six months of fiscal 2019 primarily due to increased customer demand in its North American market. Gross margin as a percentage of net sales decreased slightly to 32.4% during the first six months of fiscal 2020 as compared to 32.5% during the first six months of fiscal 2019. Healthcare Healthcare net sales decreased 12.6% to$2.2 million during the second quarter of fiscal 2020 from$2.5 million during the second quarter of fiscal 2019 due to lower equipment and parts sales, partially offset by an increase in CT tube sales. Gross margin as a percentage of net sales increased to 34.3% during the second quarter of fiscal 2020 as compared to 29.4% during the second quarter of fiscal 2019 due to favorable product mix and improved manufacturing efficiencies. Healthcare net sales increased 6.0% to$5.0 million during the first six months of fiscal 2020 from$4.7 million during the first six months of fiscal 2019 due to higher CT tube and parts sales. Gross margin as a percentage of net sales increased to 34.0% during the first six months of fiscal 2020 as compared to 29.0% during the first six months of fiscal 2019 due to favorable product mix and improved manufacturing efficiencies.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased to$13.2 million during the second quarter of fiscal 2020 from$13.4 million in the second quarter of fiscal 2019, primarily due to lower severance and legal expenses, partially offset by higher research and development expenses for Healthcare. Selling, general and administrative expenses decreased to$26.0 million during the first six months of fiscal 2020 from$26.5 million in the first six months of fiscal 2019, primarily due to lower severance, legal and IT expenses. 22 --------------------------------------------------------------------------------
Other Income/Expense
Other income/expense was expense of$0.1 million during the second quarter of fiscal 2020, compared to income of$0.3 million during the second quarter of fiscal 2019. Other income/expense during the second quarter of fiscal 2020 included$0.1 million of investment/interest income offset by$0.2 million of foreign exchange losses. Other income/expense during the second quarter of fiscal 2019 included$0.2 million of foreign exchange gains and$0.1 million of investment/interest income. Our foreign exchange gains and losses are primarily due to the translation ofU.S. dollars held in non-U.S. entities. We currently do not utilize derivative instruments to manage our exposure to foreign currency. Other income/expense was income of$0.2 million during the first six months of fiscal 2020, compared to income of$0.2 million during the first six months of fiscal 2019. Other income/expense during the first six months of fiscal 2020 included$0.2 million of investment/interest income. Other income/expense during the first six months of fiscal 2019 included$0.1 million of foreign exchange losses offset by$0.3 million of investment/interest income.
Income Tax Provision
We recorded an income tax provision of$0.3 million and$0.4 million for the first six months of fiscal 2020 and the first six months of fiscal 2019, respectively. The effective income tax rate during the first six months of fiscal 2020 was a tax provision of (123.6)% as compared to a tax provision of 77.9% during the first six months of fiscal 2019. The difference in rate during the first six months of fiscal 2020 as compared to the first six months of fiscal 2019 reflects changes in our geographical distribution of income (loss). The (123.6)% effective income tax rate differs from the federal statutory rate of 21% as a result of our geographical distribution of income (loss) and the movement of the valuation allowance against ourU.S. state and federal net deferred tax assets. In the normal course of business, we are subject to examination by taxing authorities throughout the world. Generally, years prior to fiscal 2009 are closed for examination under the statute of limitation forU.S. federal,U.S. state and local or non-U.S. tax jurisdictions. Our primary foreign tax jurisdictions areGermany andthe Netherlands . We have tax years open inGermany beginning in fiscal 2015 andthe Netherlands beginning in fiscal 2012.
Net Income and Per Share Data
Net loss during the second quarter of fiscal 2020 was$0.6 million or ($0.05 ) per diluted common share and ($0.04 ) per Class B diluted common share as compared to net loss of$0.3 million during the second quarter of fiscal 2019 or ($0.02 ) per diluted common share and ($0.02 ) per Class B diluted common share. Net loss during the first six months of fiscal 2020 was$0.5 million or ($0.04 ) per diluted common share and ($0.03 ) per Class B diluted common share as compared to net income of$0.1 million during the first six months of fiscal 2019 or$0.01 per diluted common share and$0.01 per Class B diluted common share.
LIQUIDITY, FINANCIAL POSITION AND CAPITAL RESOURCES
Our operations and cash needs have been primarily financed through cash on hand and investments.
Cash and cash equivalents were$33.1 million atNovember 30, 2019 . Investments included CDs classified as short-term investments of$13.0 million . Total cash and investments were$46.1 million atNovember 30, 2019 . Cash, cash equivalents and investments atNovember 30, 2019 consisted of$24.9 million inNorth America ,$11.8 million inEurope ,$1.0 million inLatin America and$8.4 million inAsia/Pacific . We repatriated$4.4 million total cash from our entities inGermany andthe Netherlands in the second quarter of fiscal 2020. Although the Tax Cuts and Jobs Act generally eliminated federal income tax on future cash repatriation tothe United States , cash repatriation may be subject to state and local taxes, withholding or similar taxes. See Note 9 "Income Taxes" of the notes to our consolidated financial statements in Part II, Item 8 of our Annual Report on Form 10-K for the year endedJune 1, 2019 , filed with theSEC onAugust 5, 2019 , for further information. Cash, cash equivalents and investments were$50.0 million atJune 1, 2019 . Cash, cash equivalents and investments atJune 1, 2019 , consisted of$21.5 million inNorth America ,$17.8 million inEurope ,$0.9 million inLatin America and$9.8 million inAsia/Pacific . We repatriated$2.3 million total cash from our entities inJapan andKorea in fiscal 2019 and$5.9 million total cash from our entities inGermany andFrance in fiscal 2019.
We believe that the existing sources of liquidity, including current cash, will provide sufficient resources to meet known capital requirements and working capital needs through the next twelve months.
Cash Flows from Operating Activities
The cash used in operating activities primarily resulted from net (loss) income adjusted for non-cash items and changes in our operating assets and liabilities.
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Operating activities used $1.4 million of cash during the first six months of
fiscal 2020. We had a net loss of $0.5 million during the first six months of
fiscal 2020, which included non-cash stock-based compensation expense of $0.4
million associated with the issuance of stock option and restricted stock
awards, $0.3 million for inventory reserve provisions and depreciation and
amortization expense of $1.7 million associated with our property and equipment
as well as amortization of our intangible assets. Changes in our operating
assets and liabilities resulted in a use of cash of $3.3 million during the
first six months of fiscal 2020, net of foreign currency exchange gains and
losses, included an increase in inventory of $3.4 million , a decrease of $1.4
million in accounts payable and a decrease in accrued liabilities of $0.4
million partially offset by a decrease in accounts receivable of $1.8 million
and a decrease of $0.2 million in prepaid expenses and other assets. The
decrease in our accounts payable was due to timing of payments for some of our
larger vendors for both inventory and services. The majority of the inventory
increase was to support the continued growth of our electron tube and RF and
Power Technologies groups.
Operating activities used $2.7 million of cash during the first six months of
fiscal 2019. We had net income of $0.1 million during the first six months of
fiscal 2019, which included non-cash stock-based compensation expense of $0.4
million associated with the issuance of stock option and restricted stock
awards, $0.4 million for inventory reserve provisions and depreciation and
amortization expense of $1.6 million associated with our property and equipment
as well as amortization of our intangible assets. Changes in our operating
assets and liabilities resulted in a use of cash of $5.3 million during the
first six months of fiscal 2019, net of foreign currency exchange gains and
losses, included a decrease of $3.9 million in accounts payable, an increase in
inventory of $1.8 million and an increase of $0.3 million in prepaid expenses
and other assets, partially offset by an increase in accrued liabilities of $0.6
million . The decrease in our accounts payable was due to timing of payments for
some of our larger vendors for both inventory and services. The inventory
increase was due to growth in supplying replacement systems and parts to the
Healthcare market as well as an increase in components for the production of the
ALTA 750 TM CT Tube.
Cash Flows from Investing Activities
The cash flow used in investing activities consisted primarily of purchases of investments and capital expenditures partially offset by proceeds from the maturities of investments.
Cash used in investing activities of$5.8 million during the first six months of fiscal 2020 included purchases of investments of$13.0 million and$0.8 million in capital expenditures, partially offset by proceeds from the maturities of investments of$8.0 million . Capital expenditures related primarily to capital used for our IT system and Healthcare and LaFox manufacturing businesses. Cash used in investing activities of$7.5 million during the first six months of fiscal 2019 included$5.3 million from purchases of investments and$2.2 million in capital expenditures. Capital expenditures related primarily to our Healthcare growth initiatives, a new air conditioner unit for the building, investments in our LaFox manufacturing operation and capital used for our IT system. Our purchases of investments consisted of CDs. Purchasing of future investments may vary from period to period due to interest and foreign currency exchange rates.
Cash Flows from Financing Activities
The cash flow used in financing activities consisted primarily of cash dividends paid.
Cash used in financing activities of
Cash used in financing activities of$1.3 million during the first six months of fiscal 2019 resulted from$1.5 million of cash used to pay dividends partially offset by$0.2 million of proceeds from the issuance of common stock from stock option exercises.
All future payments of dividends are at the discretion of the Board of Directors. Dividend payments will depend on earnings, capital requirements, operating conditions and such other factors that the Board may deem relevant.
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