UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 2, 2019

OR

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      To                    

Commission File Number: 0-12906

 

 

RICHARDSON ELECTRONICS, LTD.

 

(Exact name of registrant as specified in its charter)

 

 

 

40W267 Keslinger Road, P.O. Box 393 

LaFox, Illinois 60147-0393

(Address of principal executive offices)

 

Registrant’s telephone number, including area code: (630) 208-2200

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒ Yes ☐ No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒ Yes    ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ☐ Yes   ☒ No

As of April 9, 2019, there were outstanding 10,956,852 shares of Common Stock, $0.05 par value and 2,096,919 shares of Class B Common Stock, $0.05 par value, which are convertible into Common Stock of the registrant on a share for share basis.

 

 

 

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TABLE OF CONTENTS

 

 

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PART I. FINANCIAL INFORMATION

Richardson Electronics, Ltd.

Consolidated Balance Sheets

(in thousands, except per share amounts)

 

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Richardson Electronics, Ltd.

Unaudited Consolidated Statements of Comprehensive (Loss) Income

(in thousands, except per share amounts)

 

 

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Richardson Electronics, Ltd.

Unaudited Consolidated Statements of Cash Flows

(in thousands)

 

 

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Richardson Electronics, Ltd.

Unaudited Consolidated Statement of Stockholders’ Equity

(in thousands, except per share amounts)

 

 

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RICHARDSON ELECTRONICS, LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.  DESCRIPTION OF THE COMPANY

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 and Microwave Technologies Group (“PMT”) combines our core engineered solutions, power grid and microwave tube business with new RF and power technologies. As a manufacturer and authorized distributor, PMT’s strategy is to provide specialized technical expertise and engineered solutions based on our core engineering and manufacturing capabilities. 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 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.

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. 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: North America, Asia/Pacific, Europe and Latin America.

2.  BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and notes required by GAAP for complete financial statements.

Our fiscal quarter ends on the Saturday nearest the end of the quarter-ending month. The third quarter of fiscal 2019 and fiscal 2018 both contained 13 weeks. The first nine months of fiscal 2019 and fiscal 2018 contained 39 and 40 weeks, respectively.

In the opinion of management, all adjustments, which are of a normal and recurring nature, necessary for a fair presentation of the results of interim periods have been made. All inter-company transactions and balances have been eliminated. The unaudited consolidated financial statements presented herein include the accounts of our wholly owned subsidiaries. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The results of our operations for the three and nine months ended March 2, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending June 1, 2019.

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The financial information contained in this report should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended June 2, 2018, that we filed on August 2, 2018.

3.  CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Inventories, net: Our consolidated inventories were stated at the lower of cost and net realizable value, generally using a weighted-average cost method. Our net inventories include approximately $46.3 million of finished goods, $4.7 million of raw materials and $2.1 million of work-in-progress as of March 2, 2019, as compared to approximately $42.6 million of finished goods, $5.7 million of raw materials and $2.4 million of work-in-progress as of June 2, 2018.

At this time, we do not anticipate any material risks or uncertainties related to possible future inventory write-downs. Provisions for obsolete or slow moving inventories are recorded based upon regular analysis of stock rotation privileges, obsolescence, the exiting of certain markets and assumptions about future demand and market conditions. If future demand changes in the industry, or market conditions differ from management’s estimates, additional provisions may be necessary. Inventory reserves were approximately $4.3 million as of March 2, 2019 and $4.0 million as of June 2, 2018.

Revenue Recognition: Our product sales are recognized as revenue upon shipment, when title passes to the customer, when delivery has occurred or services have been rendered and when collectability is reasonably assured. We also record estimated discounts and returns based on our historical experience. Our products are often manufactured to meet the specific design needs of our customers’ applications. Our engineers work closely with customers to ensure that our products will meet their needs. Our customers are under no obligation to compensate us for designing the products we sell.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers, which amends guidance for revenue recognition. ASU 2014-09 is principles based guidance that can be applied to all contracts with customers, enhancing comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. The core principle of the guidance is that entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The guidance details the steps entities should apply to achieve the core principle. In August 2015, the FASB issued an amendment to defer the effective date for all entities by one year. For public entities, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted as of annual reporting periods beginning after December 15, 2016. Companies have the option of using either a full or modified retrospective approach in applying this standard. During fiscal 2016 and 2017, the FASB issued four additional updates which further clarify the guidance provided in ASU 2014-09.

Effective June 3, 2018, the Company adopted the standard using the modified retrospective method to all contracts. As a result, financial information for the reporting period beginning June 3, 2018 was reported under the new standard, while comparative financial information has not been adjusted and continues to be reported in accordance with the previous standard. The adoption of this standard did not impact the timing of revenue recognition for our customer sales. The adoption did not result in the recognition of a cumulative adjustment to beginning retained earnings, nor did it have a material impact on the consolidated financial statements. For the Company, the most significant impact of the new standard is the addition of required disclosures within the notes to the financial statements.

Loss Contingencies: We accrue a liability for loss contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. If we determine that there is at least a reasonable possibility that a loss may have been incurred, we will include a disclosure describing the contingency.

Goodwill and Intangible Assets: We test goodwill for impairment annually and whenever events or circumstances indicate an impairment may have occurred, such as a significant adverse change in the business climate, loss of key personnel or a decision to sell or dispose of a reporting unit.

During the fourth quarter of each fiscal year, our goodwill balances are reviewed for impairment using the first day of our fourth quarter as the measurement date. If after reviewing the totality of events or circumstances, we determine that it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, then we test for impairment through the application of a fair value based test. We estimate the fair value of each of our reporting units based on projected future operating results, market approach and discounted cash flows.

Intangible assets are initially recorded at their fair market values determined on quoted market prices in active markets, if available, or recognized valuation models. Intangible assets that have finite useful lives are amortized over their useful lives either on a straight-line basis or over their projected future cash flows and are tested for impairment when events or changes in circumstances occur that indicate possible impairment. Our intangible assets represent the fair value for trade name, customer relationships, non-compete agreements and technology acquired in connection with our acquisitions.

Income Taxes: We recognize deferred tax assets and liabilities based on the differences between financial statement carrying amounts and the tax bases of assets and liabilities. We regularly review our deferred tax assets for recoverability and determine the need for a valuation allowance based on a number of factors, including both positive and negative evidence. These factors include historical taxable income or loss, projected future taxable income or loss, the expected timing of the reversals of existing temporary

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differences and the implementation of tax planning strategies. In circumstances where we, or any of our affiliates, have incurred three years of cumulative losses which constitute significant negative evidence, positive evidence of equal or greater significance is needed to overcome the negative evidence before a tax benefit is recognized for deductible temporary differences and loss carryforwards.

Accrued Liabilities: Accrued liabilities consist of the following (in thousands):

 

 

4.  REVENUE RECOGNITION

Richardson has a number of defined revenue streams across our reportable segments. For each of these revenue streams, all products are typically sold directly by the Company to the end customer. Distribution is the Company’s largest revenue stream. The distribution business does not include a separate service bundled with the product sold or sold on top of the product. Distribution typically includes the sale of products purchased from our suppliers, stocked in our warehouses and then sold to our customers. Revenue is recognized when control of the promised goods is transferred to our customers, which is simultaneous with when the title transfers to the customer, in an amount that reflects the transaction price consideration that we expect to receive in exchange for those goods. Control refers to the ability of the customer to direct the use of, and obtain substantially all of, the remaining benefits from the goods. Our transaction price consideration is fixed, unless otherwise disclosed below as variable consideration. Generally, our contracts require our customers to pay for goods after we deliver products to them. Terms are generally on open account, payable net 30 days in North America, and vary throughout Asia/Pacific, Europe and Latin America.

The Company also sells products that are manufactured or assembled in our manufacturing facility. These products can be either built to the customer’s prints or designs or are products that we stock in our warehouse to sell to any customer that places an order. The manufacturing business does not include a separate service bundled with the product sold or sold on top of the product.

The Company recognizes services revenue when the repair, installation or training is performed. Based on our analysis of services revenue, ASU 2014-09 has an immaterial impact on the timing, amount or characterization of services revenue recognized by the Company. The services we provide are relatively short in duration, typically completed in one to two weeks, thus, at each reporting date, the amount of unbilled work performed is insignificant. The services revenue has consistently accounted for less than 5% of the Company’s total revenues and is expected to continue at that level.

Contracts with customers

A contract is an agreement between two or more parties that creates enforceable rights and obligations. A revenue contract exists for us once a customer purchase order is received, reviewed and accepted. Prior to accepting a customer purchase order, we review the credit worthiness of the customer. Purchase orders are deemed to meet the collectability criterion once the customer’s credit is approved. Contract assets arise when the Company transfers a good or performs a service in advance of receiving consideration from the customer and contract liabilities arise when the Company receives consideration from its customer in advance of performance.

Contract Liabilities: Contract liabilities and revenue recognized were as follows (in thousands):

 

 

The Company receives advances or deposits from our customers before revenue is recognized, resulting in contract liabilities. Contract liabilities are included in accrued liabilities in the consolidated balance sheets.

Performance obligations and satisfaction of performance obligation in the contract

Each accepted purchase order identifies a distinct good or service as the performance obligation. The goods are generally standard products we purchased from a supplier and stocked on our shelves. They can also be customized products purchased from a supplier or products that are customized or have value added to them in-house prior to shipping to the customer, but only after a purchase order is received. Our contracts for customized products generally include termination provisions if a customer cancels their order. However, we recognize revenue at a point in time because the termination provisions do not require, upon cancelation, the customer to pay fees that are commensurate with the work performed. Each purchase order explicitly states the goods or service that we promise to transfer to the customer. The promises to the customer are limited to only those goods or service. The performance

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obligation is our promise to deliver both goods that were produced by the Company and resale of goods that we purchase from our suppliers. Our shipping and handling activities for destination shipments are performed prior to the customer obtaining control. As such, they are not a separate promised service. For shipping point, Richardson is making the election under ASC 606-10-25-18B to account for shipping and handling as activities to fulfill the promise to transfer the goods. The goods we provide to our customers are distinct in that our customers benefit from the goods we sell them through use in their own processes. Our customers are generally not resellers, but rather businesses that incorporate our products into their processes from which they generate an economic benefit. The goods are also distinct in that each item sold to the customer is clearly identified on both the purchase order and resulting invoice. Each product we sell benefits the customer independently of the other products. Each item on each purchase order from the customer can be used by the customer unrelated to any other products we provide to the customer.

Determine the transaction price and variable consideration

The transaction price for each product is the amount invoiced to the customer. Each product on a purchase order is a separate performance obligation with an observable standalone selling price. The transaction price is a fixed price per unit, except for the variable consideration. The Company elects to exclude sales tax from the transaction price. With the exception of sale with right of return, variable consideration has been identified only in the form of customer early payment discounts, which are immaterial to the Company’s financial statements. Although there is not a material impact on our financial statements, we will continue to account for customer discounts when they are taken by the customer and address further if they grow.

Recognize revenue when the entity satisfies a performance obligation

We recognize revenue when title transfers to the customer, at the shipping point for FOB shipping contracts and at the customer’s delivery location for FOB destination contracts. We believe that the transfer of title best represents when the customer obtains control of the goods. Prior to that date, we do not have right to payment, and the significant risks and rewards remain with us. The significant risks and rewards of ownership of the inventory transfer simultaneously with the transfer of title. The customer’s acceptance of the goods is based on objective measurements, not subjective.

Additional considerations

Sale with right of return:

Our return policy is available to customers in our terms and conditions found on our website www.rell.com. The policy varies by the different businesses we engage in. The Company allows returns with prior written authorization and we allow returns within 10 days of shipment for replacement parts.  

The Company maintains a reserve for returns based on historical trends that covers all contracts and revenue streams using the expected value method because we have a large number of contracts with similar characteristics, which is considered variable consideration. The reserve for returns creates a refund liability on our balance sheet as a contra Trade Accounts Receivable as well as an asset in inventory. We value the inventory at cost due to there being minimal or no costs to the Company as we generally require the customer to pay freight and we typically do not have costs associated with activities such as relabeling or repackaging.

The reserve is considered immaterial at each balance sheet date for further consideration. Returns for defective product are typically covered by our supplier’s warranty, thus, returns for defective product are not factored into our reserve.

Warranties:

All warranties are considered assurance warranties in that the goods are warranted to work as intended for the period covered. For products the Company does not offer a warranty, these products are covered by our suppliers. We generally offer a one to three year warranty that assures that the goods will perform as intended. The length of the warranty is typical to the industry and generally follows our supplier’s warranty period. This is due to that, in most instances, the Company’s warranty is not utilized due to our supplier’s warranty still covers the necessary repairs or replacements. We also offer a thirty-day assurance warranty on parts sales that parts will work as intended. See Note 7, Warranties, for further information regarding the impact of warranties concerning ASU 2014-09.

Principal versus agent considerations:

Principal versus agent guidance was considered for customized products that are provided by our suppliers versus in-house.   Richardson acts as the principal as we are responsible for satisfying the performance obligation. We have primary responsibility for fulfilling the contract, we have inventory risk prior to delivery to our customer, we establish prices, our consideration is not in the form of a commission and we bear the credit risk. The Company recognizes revenue in the gross amount of consideration.

See Note 11, Segment Reporting, for a disaggregation of revenue by reportable segment and geographic region, which represents how our chief operating decision maker reviews information internally to evaluate our financial performance and to make resource allocation and other decisions for the Company.

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5.  GOODWILL AND INTANGIBLE ASSETS

The carrying value of goodwill was $6.3 million as of March 2, 2019 and June 2, 2018. The goodwill balance in its entirety relates to our IMES reporting unit, which is included in our Healthcare segment.

Goodwill is initially recorded based on the premium paid for acquisitions and is subsequently tested for impairment, using the first day of our fourth quarter as the measurement date. We test goodwill for impairment annually and whenever events or circumstances indicate an impairment may have occurred, such as a significant adverse change in the business climate, an adverse action or assessment by a regulator, unanticipated competition, loss of key personnel or a decision to sell or dispose of a reporting unit.

During the first nine months of fiscal 2019, no events or circumstances were identified that would indicate impairment may have occurred. Although the Company has not identified any triggering events in fiscal 2019 that would require a more frequent test for impairment, the IMES reporting unit is experiencing lower than forecasted results through the first nine months of fiscal 2019 due to slower than anticipated sales of its ALTA750 ^TM tubes and costs associated with its regional expansion. The Company is currently in the process of analyzing internal strategic initiatives to improve operating performance, and forecasting for fiscal 2020 and future years as part of its annual impairment assessment, which is performed as of the first day of our fourth quarter and will be completed in the fourth quarter. As of the date of this filing, the Company has not yet completed its assessment.

Although we believe our projected future operating results and cash flows and related estimates regarding fair values were based on reasonable assumptions, historically, projected operating results and cash flows have not always been achieved. Changes in any of the significant assumptions used, including if the Company does not successfully achieve its operating plan, which is largely dependent on sales from new product offerings, can materially affect the expected cash flows, and such impacts could result in a material non-cash impairment charge of goodwill and other long lived assets.

Potential events or changes in circumstances that could reasonably be expected to negatively affect key assumptions are deterioration in general market conditions or the environment in which the reporting unit or entity operates, an increased competitive environment in which the reporting unit or entity operates or other relevant entity-specific events such as market acceptance of our new CT tubes and other new product offerings, approvals to sell in foreign markets and changes in management or key personnel.

Our intangible assets represent the fair value for trade name, customer relationships, non-compete agreements and technology acquired in connection with our acquisitions. Intangible assets subject to amortization were as follows (in thousands):

 

 

The amortization expense associated with the intangible assets subject to amortization for the next five years is presented in the following table (in thousands): 

 

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The weighted average number of years of amortization expense remaining is 14.7 years.

 

6.  INVESTMENTS

As of March 2, 2019, we had $15.5 million invested in certificate of deposits (“CDs”) which mature in less than twelve months. The fair value of these investments was equal to the face value of the CDs.

As of June 2, 2018, we had no investments.     

7.  WARRANTIES

All warranties are considered assurance warranties in that the goods are warranted to work as intended for the period covered. For products the Company does not offer a warranty, these products are covered by our suppliers. We generally offer a one to three year warranty that assures that the goods will perform as intended.

We estimate the cost to perform under the warranty obligation and recognize this estimated cost at the time of the related product sale. We record expense related to our warranty obligations as cost of sales in our consolidated statements of comprehensive (loss) income. Each quarter, we assess actual warranty costs incurred on a product-by-product basis and compare the warranty costs to our estimated warranty obligation. With respect to new products, estimates are based generally on knowledge of the products, the extended warranty period and warranty experience.

Warranty reserves are established for costs that are expected to be incurred after the sale and delivery of products under warranty. Warranty reserves are included in accrued liabilities on our consolidated balance sheets. The warranty reserves are determined based on known product failures, historical experience and other available evidence. Warranty reserves were approximately $0.2 million as of March 2, 2019 and $0.1 million as of June 2, 2018.

8.  LEASE OBLIGATIONS, OTHER COMMITMENTS AND CONTINGENCIES

We lease certain warehouse and office facilities and office equipment under non-cancelable operating leases. Rent expense was $1.3 million during the first nine months of fiscal 2019 and $1.3 million during the first nine months of fiscal 2018. Our future lease commitments for minimum rentals, including common area maintenance charges and property taxes during the next five years are as follows (in thousands):

 

 

In February 2016, the FASB issued ASU 2016-02 (“ASU 2016-02”), Leases. ASU 2016-02 establishes a right-of-use (“ROU”) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.

The new standard is effective for the Company on June 2, 2019, with early adoption permitted. We expect to adopt the new standard on its effective date. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. We are in the process of evaluating the impact that the new standard will have on the consolidated financial statements. We expect that this standard will have a material effect on our financial statements. While we continue to assess all of the effects of adoption, we are unable to quantify the impact at this time. We currently believe the most significant effects relate to the recognition of new ROU assets and lease liabilities on our balance sheet for our operating leases and providing significant new disclosures about our leasing activities. We do not expect a significant change in our leasing activities between now and adoption.

 

 

9.  INCOME TAXES

We recorded an income tax provision of $0.8 million and $1.1 million for the first nine months of fiscal 2019 and the first nine months of fiscal 2018, respectively. The effective income tax rate during the first nine months of fiscal 2019 was a tax provision of (383.3)%, as compared to a tax provision of 65.0% during the first nine months of fiscal 2018. The difference in rate during the first nine months of fiscal 2019, as compared to the first nine months of fiscal 2018, reflects the change in overall loss realized through the third quarter in each respective period, changes in our geographical distribution of income (loss), the recording of provision to return

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true-ups of various foreign jurisdictions and our positions with respect to ASC 740-30, Income Taxes - Other Considerations or Special Areas. The (383.3)% 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 our U.S. state and federal net deferred tax assets.

On December 22, 2017, the U.S. government enacted new tax legislation, Tax Cuts and Jobs Act (the “Act”). The primary provision of the Act that impacted the Company in fiscal 2019 was a reduction to the U.S. corporate income tax rate from 35% to 21%. The 21% corporate income tax rate was effective January 1, 2018 and is in effect for the Company’s fiscal 2019 tax year. 

 

The tax impact recorded for the Act for fiscal 2018 was finalized in the third quarter of fiscal 2019 upon the completion of the federal tax return. The Company completed an assessment of earnings that will be repatriated based on reinvestment needs of non-U.S. operations and earnings available for repatriation. The withholding tax that will be incurred from the repatriation of these earnings was included in fiscal 2018 income tax expense. The Company analyzed the provisions of the Act addressing the net deferred tax asset remeasurement and its calculations, the deemed earnings repatriation, including the determination of undistributed non-U.S. earnings, and finalized the calculations based on the most recent legislative actions and regulatory interpretations of the Act.

The Company is subject to additional requirements of the Act beginning in fiscal 2019. Those provisions include a tax on global intangible low-taxed income (“GILTI”), a tax determined by base erosion and anti-avoidance tax (“BEAT”) related to certain payments between a U.S. corporation and foreign related entities, a limitation of certain executive compensation and a deduction for foreign derived intangible income. The Company has not recorded any tax liability/(benefit) for these provisions during the first nine months of fiscal 2019 due to tax attributes or credits anticipated to offset these liabilities. The Company has determined its accounting policy to treat the taxes due on GILTI as a period cost. The Company does not anticipate being subject to BEAT provision due to the revenue thresholds.

In December 2017, the SEC issued Staff Accounting Bulletin No. 118 that allows for a measurement period up to one year after the enactment date of the Act to complete the accounting requirements. The Company completed the adjustments related to the Act in the third quarter of fiscal 2019 within the allowed period.

In the normal course of business, we are subject to examination by taxing authorities throughout the world. Generally, years prior to fiscal 2008 are closed for examination under the statute of limitation for U.S. federal, U.S. state and local or non-U.S. tax jurisdictions. We are currently under examination in Thailand (fiscal 2008 through 2011). Our primary foreign tax jurisdictions are Germany and the Netherlands. We have tax years open in Germany beginning in fiscal 2015 and the Netherlands beginning in fiscal 2012.

We have historically determined that certain undistributed earnings of our foreign subsidiaries, to the extent of cash available, will be repatriated to the U.S. Due to the deemed repatriation tax, the untaxed outside basis difference for which the historic balance has primarily related to has been reduced. Accordingly, we have provided a deferred tax liability totaling $0.3 million as of March 2, 2019. As of June 2, 2018, the deferred tax liability totaled $0.3 million. Due to various tax attributes that are continuously changing, it is not practicable to determine what, if any, tax liability might exist if such earnings were to be repatriated. 

As of March 2, 2019, our worldwide liability for uncertain tax positions related to continuing operations was $0.1 million, excluding interest and penalties, as compared to $0.1 million liabilities for uncertain tax positions as of June 2, 2018. There was no change in recorded uncertain tax positions during the first nine months of fiscal year 2019. We record penalties and interest related to uncertain tax positions in the income tax expense line item within the consolidated statements of comprehensive (loss) income.

The valuation allowance against the net deferred tax assets that will more likely than not be realized was $9.1 million as of June 2, 2018. The valuation allowance against the net deferred tax assets was $10.8 million as of March 2, 2019 as $1.7 million of additional domestic federal and state net deferred tax assets were generated during the first three quarters of fiscal year 2019 from losses in the U.S. jurisdiction. A full valuation allowance on the U.S. and state deferred tax assets will be maintained until sufficient positive evidence related to sources of future taxable income exists to support a reversal of the valuation allowance. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are increased, or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth.

10.  CALCULATION OF EARNINGS PER SHARE

We have authorized 17,000,000 shares of common stock, and 3,000,000 shares of Class B common stock. The Class B common stock has 10 votes per share and has transferability restrictions; however, Class B common stock may be converted into common stock on a share-for-share basis at any time. With respect to dividends and distributions, shares of common stock and Class B common stock rank equally and have the same rights, except that Class B common stock cash dividends are limited to 90% of the amount of Class A common stock cash dividends.

In accordance with ASC 260-10, Earnings Per Share (“ASC 260”), our Class B common stock is considered a participating security requiring the use of the two-class method for the computation of basic and diluted earnings per share. The two-class computation method for each period reflects the cash dividends paid per share for each class of stock, plus the amount of allocated undistributed earnings per share computed using the participation percentage which reflects the dividend rights of each class of stock.

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Basic and diluted earnings per share were computed using the two-class method as prescribed in ASC 260. The shares of Class B common stock are considered to be participating convertible securities since the shares of Class B common stock are convertible on a share-for-share basis into shares of common stock and may participate in dividends with common stock according to a predetermined formula which is 90% of the amount of Class A common stock cash dividends.   

The earnings per share (“EPS”) presented in our unaudited consolidated statements of comprehensive (loss) income were based on the following amounts (in thousands, except per share amounts):

 

 

Note: Common stock options that were anti-dilutive and not included in diluted earnings per common share for the third quarter of fiscal 2019 were 1,084.

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Note: Common stock options that were anti-dilutive and not included in diluted earnings per common share for the first nine months of fiscal 2019 were 918.

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11.  SEGMENT REPORTING

In accordance with ASC 280-10, Segment Reporting, we have identified three operating and reportable segments as follows:

Power and Microwave Technologies Group (“PMT”) combines our core engineered solutions, power grid and microwave tube business with new RF and power technologies. As a manufacturer and authorized distributor, PMT’s strategy is to provide specialized technical expertise and engineered solutions based on our core engineering and manufacturing capabilities. 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 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.

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. 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.

The CEO evaluates performance and allocates resources primarily based on the gross profit of each segment.

Operating results by segment are summarized in the following table (in thousands):

 

 

Geographic net sales information is primarily grouped by customer destination into five areas: North America; Asia/Pacific; Europe; Latin America; and Other.

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Net sales and gross profit by geographic region are summarized in the following table (in thousands):

 

 

We sell our products to customers in diversified industries and perform periodic credit evaluations of our customers’ financial condition. Terms are generally on open account, payable net 30 days in North America, and vary throughout Asia/Pacific, Europe and Latin America. Estimates of credit losses are recorded in the financial statements based on monthly reviews of outstanding accounts.

12. LITIGATION

On October 15, 2018, Varex Imaging Corporation (“Varex”) filed its original Complaint (Case No. 1:18-cv-06911) against Richardson Electronics Ltd. (“Richardson”) in the Northern District of Illinois, which was subsequently amended on November 27, 2018. Varex alleged counts of infringement of U.S. Patent Nos. 6,456,692 and 6,519,317. Subsequently, on October 24, 2018, Varex filed a motion for preliminary injunction to stop the sale of Richardson’s ALTA750 ^TM product. Richardson moved to dismiss this case and filed an opposition to the preliminary injunction. In January 2019, the Court took evidence on the preliminary injunction issue as well as heard oral arguments on the motion to dismiss. The parties are presently waiting for rulings from the Court. Richardson believes the lawsuit to be without merit and a loss is not probable or estimable based on the information at the time the financial statements were issued.

13. FAIR VALUE MEASUREMENTS

ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements.

ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists; therefore requiring an entity to develop its own assumptions.

As of March 2, 2019, we held investments that were required to be measured at fair value on a recurring basis. Our investments consisted of CDs where face value was equal to fair value.

Investments measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 as of March 2, 2019 were as follows (in thousands):

 

 

 

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14. RELATED PARTY TRANSACTION

On June 15, 2015, the Company entered into a lease agreement for the IMES facility with LDL, LLC. The Executive Vice President of IMES, Lee A. McIntyre III (former owner of IMES), has an ownership interest in LDL, LLC. The lease agreement provides for monthly payments over five years with total future minimum lease payments of $0.2 million. Rental expense related to this lease amounted to $0.1 million for the nine months ended March 2, 2019 and $0.1 million for the nine months ended March 3, 2018. The Company shall be entitled to extend the term of the lease for a period of an additional five years by notifying the landlord in writing of its intention to do so within nine months of the expiration of the initial term.

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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 on August 2, 2018. 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

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 and Microwave Technologies Group (“PMT”) combines our core engineered solutions, power grid and microwave tube business with new RF and power technologies. As a manufacturer and authorized distributor, PMT’s strategy is to provide specialized technical expertise and engineered solutions based on our core engineering and manufacturing capabilities. 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 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.

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,

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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: North America, Asia/Pacific, Europe and Latin America.

RESULTS OF OPERATIONS

Financial Summary – Three Months Ended March 2, 2019

Financial Summary – Nine Months Ended March 2, 2019

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Net Sales and Gross Profit Analysis

Net sales by segment and percent change for the third quarter and first nine months of fiscal 2019 and fiscal 2018 were as follows (in thousands):

 

 

 

During the third quarter of fiscal 2019, consolidated net sales decreased 6.3% compared to the third quarter of fiscal 2018. Sales for PMT decreased 6.7%, sales for Canvys decreased 8.3% and sales for Healthcare increased 6.8%. The decrease in PMT was mainly due to a continued slowdown in the wafer fab markets, however the decline was slightly offset by strong growth in our new technology partners in RF and microwave components and market share gains in the RF and microwave tube business. The decrease in Canvys was due to several large non-recurring orders that shipped in the third quarter of fiscal 2018. The increase in Healthcare was due to higher equipment sales.

During the first nine months of fiscal 2019, consolidated net sales increased 5.7% compared to the first nine months of fiscal 2018. Sales for PMT increased 6.3%, sales for Canvys increased 2.8% and sales for Healthcare increased 6.6%. The increase in PMT was due to strong growth with new technology partners relating to 5G infrastructure rollout and market share gains in our legacy tube business. The increase in Canvys was due to increased customer demand in our North American and European markets, partially offset by unfavorable foreign exchange rates. The increase in Healthcare was due to ALTA750 ^TM  tube sales and equipment sales.

Gross profit by segment and percent of net sales for the third quarter and first nine months of fiscal 2019 and fiscal 2018 were as follows (in thousands):

 

 

 

 

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 $12.3 million during the third quarter of fiscal 2019 compared to $14.1 million during the third quarter of fiscal 2018. Consolidated gross margin as a percentage of net sales decreased to 31.5% during the third quarter of fiscal 2019 from 33.8% during the third quarter of fiscal 2018, primarily due to unfavorable product mix and comparison to positive manufacturing variances for PMT last year, unfavorable product mix as well as unfavorable foreign exchange rates for Canvys and higher percentage of equipment sales as well as higher costs associated with tube development and the write down of some inventory to market value for Healthcare.

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Consolidated gross profit decreased to $39.2 million during the first nine months of fiscal 2019 compared to $39.6 million during the first nine months of fiscal 2018. Consolidated gross margin as a percentage of net sales decreased to 31.5% during the first nine months of fiscal 2019 from 33.6% during the first nine months of fiscal 2018, primarily due to unfavorable product mix and manufacturing variances for PMT, a higher percent of equipment sales and manufacturing variances for Healthcare, partially offset by favorable product mix and lower costs on selected products for Canvys.

Power and Microwave Technologies Group

PMT net sales decreased 6.7% to $29.7 million during the third quarter of fiscal 2019 from $31.9 million during the third quarter of fiscal 2018. The decrease was due to a decline in the wafer fab market, however the decline was mostly offset by strong growth from our new technology partners in the RF and microwave components as well as market share gains in the RF and microwave tube business. Gross margin as a percentage of net sales decreased to 31.6% during the third quarter of fiscal 2019 as compared to 33.4% during the third quarter of fiscal 2018, due to unfavorable product mix and manufacturing variances in comparison to positive manufacturing variances last year.

PMT net sales increased 6.3% to $96.8 million during the first nine months of fiscal 2019 from $91.1 million during the first nine months of fiscal 2018. The increase was due to strong sales growth with our new technology partners supporting 5G infrastructure and market share gains in our legacy tube business. Gross margin as a percentage of net sales decreased to 31.5% during the first nine months of fiscal 2019 as compared to 33.5% during the first nine months of fiscal 2018, due to unfavorable product mix and manufacturing variances.

Canvys

Canvys net sales decreased 8.3% to $6.9 million during the third quarter of fiscal 2019 from $7.6 million during the third quarter of fiscal 2018 due to several large non-recurring orders that shipped in the third quarter of fiscal 2018. Gross margin as a percentage of net sales decreased to 32.8% during the third quarter of fiscal 2019 as compared to 33.9% during the third quarter of fiscal 2018, due to unfavorable product mix.

Canvys net sales increased 2.8% to $20.6 million during the first nine months of fiscal 2019 from $20.1 million during the first nine months of fiscal 2018 due to increased customer demand in both the North American and European markets, partially offset by unfavorable foreign exchange rates. Gross margin as a percentage of net sales increased to 32.6% during the first nine months of fiscal 2019 as compared to 31.1% during the first nine months of fiscal 2018, due to favorable product mix and lower costs on selected products sold.

Healthcare

Healthcare net sales increased 6.8% to $2.3 million during the third quarter of fiscal 2019 from $2.2 million during the third quarter of fiscal 2018 due to higher equipment sales. Gross margin as a percentage of net sales decreased to 26.2% during the third quarter of fiscal 2019 as compared to 38.3% during the third quarter of fiscal 2018 due to a higher percentage of equipment sales, costs associated with tube development and the write down of some inventory to market value.

Healthcare net sales increased 6.6% to $7.0 million during the first nine months of fiscal 2019 from $6.6 million during the first nine months of fiscal 2018 due to ALTA750 ^TM  tube sales and equipment sales. Gross margin as a percentage of net sales decreased to 28.1% during the first nine months of fiscal 2019 as compared to 43.2% during the first nine months of fiscal 2018 due to a higher percent of equipment sales and manufacturing variances.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $13.1 million during both the third quarter of fiscal 2019 and the third quarter of fiscal 2018. During the third quarter of fiscal 2019, the Company incurred $0.1 million in severance expense associated with actions to further reduce costs as well as $0.2 million of higher legal expenses. These expenses were offset by lower incentive compensation expenses.

Selling, general and administrative expenses increased to $39.6 million during the first nine months of fiscal 2019 from $38.0 million during the first nine months of fiscal 2018. The increase was due to additional compensation and other expenses related to the increase in net sales earlier in the year as well as the higher legal, severance and bad debt expense.

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Other Income/Expense

Other income/expense was less than $0.1 million of income during both the third quarter of fiscal 2019 and the third quarter of fiscal 2018. Other income/expense during the third quarter of fiscal 2019 included $0.1 million of investment/interest income offset by $0.1 million of foreign exchange losses. Other income/expense during the third quarter of fiscal 2018 included $0.2 million of investment/interest income offset by $0.2 million of foreign exchange losses. Our foreign exchange gains and losses are primarily due to the translation of U.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 $0.2 million of income during the first nine months of fiscal 2019 compared to expense of $0.1 million during the first nine months of fiscal 2018. Other income during the first nine months of fiscal 2019 included $0.4 million of investment/interest income partially offset by $0.2 million of foreign exchange losses. Other expense during the first nine months of fiscal 2018 included $0.5 million of foreign exchange losses partially offset by $0.4 million of investment/interest income.

Income Tax Provision

 

We recorded an income tax provision of $0.8 million and $1.1 million for the first nine months of fiscal 2019 and the first nine months of fiscal 2018, respectively. The effective income tax rate during the first nine months of fiscal 2019 was a tax provision of (383.3)%, as compared to a tax provision of 65.0% during the first nine months of fiscal 2018. The difference in rate during the first nine months of fiscal 2019, as compared to the first nine months of fiscal 2018, reflects the change in overall loss realized through the third quarter in each respective period, changes in our geographical distribution of income (loss), the recording of provision to return true-ups of various foreign jurisdictions and our positions with respect to ASC 740-30, Income Taxes - Other Considerations or Special Areas. The (383.3)% 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 our U.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 2008 are closed for examination under the statute of limitation for U.S. federal, U.S. state and local or non-U.S. tax jurisdictions. We are currently under examination in Thailand (fiscal 2008 through 2011). Our primary foreign tax jurisdictions are Germany and the Netherlands. We have tax years open in Germany beginning in fiscal 2015 and the Netherlands beginning in fiscal 2012.

Net (Loss)Income and Per Share Data

Net loss during the third quarter of fiscal 2019 was $1.1 million or ($0.08) per diluted common share and ($0.08) per Class B diluted common share as compared to net income of $0.5 million during the third quarter of fiscal 2018 or $0.04 per diluted common share and $0.04 per Class B diluted common share.

Net loss during the first nine months of fiscal 2019 was $1.0 million or ($0.07) per diluted common share and ($0.07) per Class B diluted common share as compared to net income, including income from discontinued operations of $1.5 million, of $2.1 million during the first nine months of fiscal 2018 or $0.17 per diluted common share and $0.15 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 $33.9 million at March 2, 2019. Investments included CDs classified as short-term investments of $15.5 million. Total cash and investments were $49.4 million at March 2, 2019. Cash and investments at March 2, 2019 consisted of $25.1 million in North America, $15.0 million in Europe, $0.9 million in Latin America and $8.4 million in Asia/Pacific. We repatriated $2.3 million total cash from our entities in Japan and Korea in the first quarter of fiscal 2019 and $5.9 million total cash from our entities in Germany and France in the third quarter of fiscal 2019.

Cash and cash equivalents were $60.5 million at June 2, 2018. We had no investments at June 2, 2018. Cash and cash equivalents at June 2, 2018 consisted of $26.5 million in North America, $20.2 million in Europe, $1.0 million in Latin America and $12.8 million in Asia/Pacific. We repatriated $21.2 million of foreign cash to our U.S. parent company in fiscal 2018, $17.7 million from our Hong Kong entity and the remainder from our entities in Singapore, Italy and Taiwan.

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 income (loss) adjusted for non-cash items and changes in our operating assets and liabilities.

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Operating activities used $5.2 million of cash during the first nine months of fiscal 2019. We had net loss of $1.0 million during the first nine months of fiscal 2019, which included non-cash stock-based compensation expense of $0.6 million associated with the issuance of stock option and restricted stock awards, $0.6 million for inventory reserve provisions and depreciation and amortization expense of $2.4 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 $8.0 million during the first nine months of fiscal 2019, net of foreign currency exchange gains and losses, included a decrease of $5.4 million in accounts payable, an increase in inventory of $3.3 million, an increase in accounts receivable of $0.6 million partially offset by an increase in accrued liabilities of $0.9 million and a decrease of $0.3 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 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.

Operating activities used $0.3 million of cash during the first nine months of fiscal 2018. We had net income of $2.1 million during the first nine months of fiscal 2018, which included non-cash stock-based compensation expense of $0.4 million associated with the issuance of stock option and restricted stock awards and depreciation and amortization expense of $2.2 million associated with our property and equipment as well as amortization of our intangible assets. Changes in our operating assets and liabilities during the first nine months of fiscal 2018, net of foreign currency exchange gains and losses, included an increase in inventories of $5.2 million, a decrease of $0.4 million in accounts payable and an increase in prepaid expenses and other assets of $0.6 million, partially offset by an increase in accrued liabilities of $1.3 million. The inventory increase was due to the ongoing growth of our RF and power technologies business, increase in raw material and work in process supporting the semiconductor capital equipment market and growth in supplying replacement systems and parts to the Healthcare market. The decrease in our accounts payable was due to timing of payments for some of our larger vendors for both inventory and services.

Cash Flows from Investing Activities

The cash flow used in investing activities consisted primarily of purchases of investments and capital expenditures.

Cash used in investing activities of $18.7 million during the first nine months of fiscal 2019 included $17.8 million from purchases of investments and $3.2 million in capital expenditures partially offset by proceeds from the maturities of investments of $2.3 million. Capital expenditures relates primarily to our Healthcare growth initiatives, a new air conditioner unit for the global headquarters, investments in our LaFox manufacturing operation and capital used for our IT system.

Cash provided by investing activities of $4.9 million during the first nine months of fiscal 2018 included proceeds from the maturities of investments of $12.1 million, partially offset by $3.9 million from purchases of investments and $4.2 million in capital expenditures. Capital expenditures relates primarily to our Healthcare growth initiatives, a new roof for part of our warehouse 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 from financing activities consisted primarily of cash dividends paid.

Cash used in financing activities of $2.1 million during the first nine months of fiscal 2019 resulted from $2.3 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.

Cash used in financing activities of $2.2 million during the first nine months of fiscal 2018 resulted from cash used to pay dividends.

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.

Risk Management and Market Sensitive Financial Instruments

We are exposed to many different market risks with the various industries we serve. The primary financial risk we are exposed to is foreign currency exchange, as certain operations, assets and liabilities of ours are denominated in foreign currencies. We manage these risks through normal operating and financing activities.

The interpretation and analysis of these disclosures should not be considered in isolation since such variances in exchange rates would likely influence other economic factors. Such factors, which are not readily quantifiable, would likely also affect our operations. Additional disclosure regarding various market risks are set forth in Part I, Item 1A, “Risk Factors“ of our Annual Report on Form 10-K for the year ended June 2, 2018, filed August 2, 2018.

 

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Management of the Company, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 2, 2019.

Disclosure controls and procedures are intended to provide reasonable assurance that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the third quarter of fiscal 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

On October 15, 2018, Varex Imaging Corporation (“Varex”) filed its original Complaint (Case No. 1:18-cv-06911) against Richardson Electronics Ltd. (“Richardson”) in the Northern District of Illinois, which was subsequently amended on November 27, 2018. Varex alleged counts of infringement of U.S. Patent Nos. 6,456,692 and 6,519,317. Subsequently, on October 24, 2018, Varex filed a motion for preliminary injunction to stop the sale of Richardson’s ALTA750 ^TM product. Richardson moved to dismiss this case and filed an opposition to the preliminary injunction. In January 2019, the Court took evidence on the preliminary injunction issue as well as heard oral arguments on the motion to dismiss. The parties are presently waiting for rulings from the Court. Richardson believes the lawsuit to be without merit and a loss is not probable or estimable based on the information at the time the financial statements were issued.

There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended June 2, 2018, filed August 2, 2018.

Results of Operation and Financial Condition and Declaration of Dividend

On April 9, 2019, we issued a press release reporting results for our third quarter ended March 2, 2019, and the declaration of a cash dividend. A copy of the press release is furnished as Exhibit 99.1 to this Form 10-Q and incorporated by reference herein.

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Exhibit Index

 

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

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