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 this quarterly report on Form 10Q for the quarter endedFebruary 27, 2021 , as well as our Annual Report on Form 10-K filed onAugust 3, 2020 . 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 nine month periods ended February
27, 2021 and February 29, 2020 , as reflected in our consolidated
statements of comprehensive income (loss).
• Liquidity, Financial Position and Capital Resources - a discussion of our
primary sources and uses of cash for the nine month periods ended
our 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 disruptive RF, Wireless and Power technologies. As a designer, 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-One computers, specialized cabinet finishes, 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, repairs, refurbishes and distributes high value replacement parts and equipment 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; pre-owned CT systems; 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 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 third quarter of fiscal 2021 and fiscal 2020 each contained 13 weeks.
• Net sales during the third quarter of fiscal 2021 were
increase of 18.3%, compared to net sales of $38.2 million during the
third quarter of fiscal 2020.
• Gross margin increased to 34.9% during the third quarter of fiscal 2021
compared to 33.1% during the third quarter of fiscal 2020.
• Selling, general and administrative expenses were $15.5 million ,
including the
third quarter of fiscal 2021 compared to $12.7 million , or 33.1% of net
sales, during the third quarter of fiscal 2020.
• Operating income during the third quarter of fiscal 2021 was
compared to operating income of $11,000 during the third quarter of
fiscal 2020.
• Net income during the third quarter of fiscal 2021 was $0.2 million
compared to net loss of $0.1 million during the third quarter of fiscal
2020.
Financial Summary - Nine Months Ended
• The first nine months of fiscal 2021 and fiscal 2020 each contained 39 weeks.
• Net sales during the first nine months of fiscal 2021 were $126.5
million , an increase of 6.7%, compared to net sales of $118.5 million
during the first nine months of fiscal 2020.
• Gross margin increased to 33.6% during the first nine months of fiscal
2021 compared to 32.3% during the first nine months of fiscal 2020.
• Selling, general and administrative expenses were
including the
first nine months of fiscal 2021 compared to
net sales, during the first nine months of fiscal 2020.
• Operating income during the first nine months of fiscal 2021 was
million compared to operating loss of
months of fiscal 2020.
• Net loss during the first nine months of fiscal 2021 was $0.2 million
compared to net loss of $0.6 million during the first nine months of
fiscal 2020.
20
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Net sales by segment and percent change during the third quarter and first nine months of fiscal 2021 and fiscal 2020 were as follows (in thousands):
Net Sales Three Months Ended FY21 vs. FY20
February 27, 2021 February 29, 2020 % Change
PMT $ 35,237 $ 28,988 21.6 %
Canvys 7,078 7,200 -1.7 %
Healthcare 2,920 2,061 41.7 %
Total $ 45,235 $ 38,249 18.3 %
Nine Months Ended FY21 vs. FY20
February 27, 2021 February 29, 2020 % Change
PMT $ 98,418 $ 89,158 10.4 %
Canvys 20,491 22,333 -8.2 %
Healthcare 7,556 7,045 7.3 %
Total $ 126,465 $ 118,536 6.7 %
During the third quarter of fiscal 2021, consolidated net sales increased 18.3%
compared to the third quarter of fiscal 2020. Sales for PMT increased 21.6%,
sales for Canvys decreased 1.7% and sales for Healthcare increased 41.7%. The
increase in PMT was mainly due to strong growth from our Power and Microwave new
technology partners in various applications including Power Management and 5G
infrastructure and increased revenue from our Semiconductor Wafer Fabrication
customers buying engineered solutions. We also had growth in various Electron
Device product lines. The decrease in Canvys was primarily due to continuing
struggles in the European market related to the COVID-19 impact on demand for
equipment partially offset by strong sales in the North American market. The
increase in Healthcare was primarily due to a significant increase in demand for
the ALTA 750DTM tubes coupled with increased equipment sales in Latin America .
During the first nine months of fiscal 2021, consolidated net sales increased
6.7% compared to the first nine months of fiscal 2020. Sales for PMT increased
10.4%, sales for Canvys decreased 8.2% and sales for Healthcare increased 7.3%.
The increase in PMT was mainly due to strong growth in bookings and billings
from our Power Management and RF and microwave components with continued growth
in the Semiconductor Wafer Fab market. We also had growth in various Electron
Device product lines. The decrease in Canvys was primarily due to continuing
struggles in the European market related to the COVID-19 impact on demand for
equipment partially offset by strong sales in the North American market. The
increase in Healthcare was due to an increase in demand for the ALTA
750DTM tubes.
Gross profit by segment and percent of net sales for the third quarter and first nine months of fiscal 2021 and fiscal 2020 were as follows (in thousands):
Gross Profit Three Months Ended
February 27, 2021 % of Net Sales February 29, 2020 % of Net Sales
PMT $ 12,308 34.9 % $ 9,519 32.8 %
Canvys 2,493 35.2 % 2,362 32.8 %
Healthcare 965 33.0 % 789 38.3 %
Total $ 15,766 34.9 % $ 12,670 33.1 %
Nine Months Ended
February 27, 2021 % of Net Sales February 29, 2020 % of Net Sales
PMT $ 33,530 34.1 % $ 28,547 32.0 %
Canvys 7,156 34.9 % 7,268 32.5 %
Healthcare 1,782 23.6 % 2,486 35.3 %
Total $ 42,468 33.6 % $ 38,301 32.3 %
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.
21
--------------------------------------------------------------------------------Consolidated gross profit increased to$15.8 million during the third quarter of fiscal 2021 compared to$12.7 million during the third quarter of fiscal 2020. Consolidated gross margin as a percentage of net sales increased to 34.9% during the third quarter of fiscal 2021 from 33.1% during the third quarter of fiscal 2020, primarily due to favorable product mix in both PMT and Canvys, partially offset by product mix in Healthcare. Consolidated gross profit increased to$42.5 million during the first nine months of fiscal 2021 compared to$38.3 million during the first nine months of fiscal 2020. Consolidated gross margin as a percentage of net sales increased to 33.6% during the first nine months of fiscal 2021 from 32.3% during the first nine months of fiscal 2020, primarily due to improved manufacturing efficiencies in PMT and favorable product mix in both PMT and Canvys. These increases were partially offset by under absorbed manufacturing expenses in Healthcare during the first half of fiscal 2021.
Power and
PMT net sales increased 21.6% to$35.2 million during the third quarter of fiscal 2021 from$29.0 million during the third quarter of fiscal 2020. The increase was mainly due to strong growth from our Power and Microwave new technology partners in various applications including Power Management and 5G infrastructure and increased revenue from our Semiconductor Wafer Fabrication customers buying engineered solutions. We also had growth in various Electron Device product lines. Gross margin as a percentage of net sales increased to 34.9% during the third quarter of fiscal 2021 as compared to 32.8% during the third quarter of fiscal 2020 primarily due to favorable product mix. PMT net sales increased 10.4% to$98.4 million during the first nine months of fiscal 2021 from$89.2 million during the first nine months of fiscal 2020. The increase was mainly due to strong growth in bookings and billings from our Power Management and RF and microwave components with continued growth in the Semiconductor Wafer Fab market. We also had growth in various Electron Device product lines. Gross margin as a percentage of net sales increased to 34.1% during the first nine months of fiscal 2021 as compared to 32.0% during the first nine months of fiscal 2020 due to favorable product mix and improved manufacturing efficiencies.
Canvys
Canvys net sales decreased 1.7% to$7.1 million during the third quarter of fiscal 2021 from$7.2 million during the third quarter of fiscal 2020 primarily due to continuing struggles in the European market related to the COVID-19 impact on demand for equipment partially offset by strong sales in the North American market. Gross margin as a percentage of net sales increased to 35.2% during the third quarter of fiscal 2021 from 32.8% during the third quarter of fiscal 2020 due to favorable product mix. Canvys net sales decreased 8.2% to$20.5 million during the first nine months of fiscal 2021 from$22.3 million during the first nine months of fiscal 2020 primarily due to continuing struggles in the European market related to the COVID-19 impact on demand for equipment partially offset by strong sales in the North American market. Gross margin as a percentage of net sales increased to 34.9% during the first nine months of fiscal 2021 as compared to 32.5% during the first nine months of fiscal 2020 due to favorable product mix and foreign currency change impact. Healthcare Healthcare net sales increased 41.7% to$2.9 million during the third quarter of fiscal 2021 from$2.1 million during the third quarter of fiscal 2020. The increase in sales was primarily due to a significant increase in demand for the ALTA 750DTM tubes coupled with increased equipment sales inLatin America . Gross margin as a percentage of net sales decreased to 33.0% during the third quarter of fiscal 2021 as compared to 38.3% during the third quarter of fiscal 2020 primarily due to product mix. Healthcare net sales increased 7.3% to$7.6 million during the first nine months of fiscal 2021 from$7.0 million during the first nine months of fiscal 2020 due to an increase in demand for the ALTA 750DTM tubes. Gross margin as a percentage of net sales decreased to 23.6% during the first nine months of fiscal 2021 as compared to 35.3% during the first nine months of fiscal 2020 due to under absorbed manufacturing expenses in the first half of fiscal 2021.
Legal Settlement
OnOctober 15, 2018 , Varex Imaging Corporation ("Varex") filed its original Complaint (Case No. 1:18-cv-06911) againstRichardson Electronics Ltd. ("Richardson") in theNorthern District ofIllinois , which was subsequently amended onNovember 27, 2018 . Varex alleged counts of infringement ofU.S. Patent Nos. 6,456,692 and 6,519,317. Subsequently, onOctober 24, 2018 , Varex filed a motion for preliminary injunction to stop the sale of Richardson's ALTA750 TM product. Richardson filed an opposition to the preliminary injunction. InJanuary 2019 , the Court took evidence on the preliminary injunction issue. OnSeptember 30, 2019 , the Court denied Varex's Motion for Preliminary Injunction. OnAugust 6, 2020 , Varex amended its Complaint to add claims of trade secret misappropriation and Richardson moved to dismiss that Amended Complaint onSeptember 9, 2020 . OnApril 2, 2021 , as part of an overall settlement where Richardson did not admit liability but wanted to move forward, Richardson agreed to pay Varex$1.6 million to settle this matter, which is recorded in selling, general and administrative expenses within the Consolidated Statements of Comprehensive Income (Loss). 22 --------------------------------------------------------------------------------
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to$15.5 million during the third quarter of fiscal 2021 from$12.7 million in the third quarter of fiscal 2020. This increase included the$1.6 million legal settlement. The increase also resulted from higher employee compensation expense and legal fees, partially offset by lower travel expenses. Selling, general and administrative expenses increased to$41.9 million during the first nine months of fiscal 2021 from$38.7 million in the first nine months of fiscal 2020. This increase included the$1.6 million legal settlement. The remainder of the increase was primarily due to higher employee compensation expense and legal fees, partially offset by lower travel and consulting expenses.
Other Income/Expense
Other income/expense was expense of less than$0.1 million during the third quarter of fiscal 2021, compared to income of$0.1 million during the third quarter of fiscal 2020. Other income/expense during the third quarter of fiscal 2020 included$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 expense of$0.5 million during the first nine months of fiscal 2021, compared to income of$0.2 million during the first nine months of fiscal 2020. Other income/expense during the first nine months of fiscal 2021 included$0.6 million of foreign exchange losses partially offset by less than$0.1 million of investment/interest income. Other income/expense during the first nine months of fiscal 2020 included$0.3 million of investment/interest income partially offset by$0.1 million of foreign exchange losses.
Income Tax Provision
The income tax provision was$0.1 million for the third quarter of fiscal 2021 as compared to$0.2 million for the third quarter of fiscal 2020. The income tax provision reflected a provision for foreign income taxes, which was lower than in the prior year's third quarter, and the offset of aU.S. tax provision against the valuation allowance. We recorded an income tax provision of$0.2 million and$0.4 million for the first nine months of fiscal 2021 and the first nine months of fiscal 2020, respectively. The income tax provision reflected a provision for foreign income taxes, which was lower than in the prior year's first nine months, and noU.S. tax benefit due to the valuation allowance recorded against the net operating loss. In the normal course of business, we are subject to examination by taxing authorities throughout the world. Generally, years prior to fiscal 2015 are closed for examination under the statute of limitation forU.S. federal,U.S. state and local or non-U.S. tax jurisdictions. We are currently under examination inThailand (fiscal 2008 through 2011). Our primary foreign tax jurisdictions areGermany andthe Netherlands . We have tax years open inGermany beginning in fiscal 2015 andthe Netherlands beginning in fiscal 2018.
Net Income (Loss) and Per Share Data
Net income during the third quarter of fiscal 2021 was$0.2 million , or$0.02 per diluted common share and$0.02 per Class B diluted common share as compared to net loss of$0.1 million during the third quarter of fiscal 2020 or ($0.01 ) per diluted common share and ($0.01 ) per Class B diluted common share. Net loss during the first nine months of fiscal 2021 was$0.2 million or ($0.02 ) per diluted common share and ($0.02 ) per Class B diluted common share as compared to net loss of$0.6 million during the first nine months of fiscal 2020 or ($0.04 ) per diluted common share and ($0.04 ) 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$38.4 million atFebruary 27, 2021 . Investments included a CD classified as short-term investment of$9.0 million . Total cash and investments were$47.4 million atFebruary 27, 2021 . Cash, cash equivalents and investments atFebruary 27, 2021 consisted of$30.5 million inNorth America ,$8.3 million inEurope ,$1.0 million inLatin America and$7.6 million inAsia/Pacific . We repatriated a total of$0.7 million tothe United States in the third quarter of fiscal 2021, which included$0.5 million from our entity inKorea and$0.2 million from our entity inItaly . 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 endedMay 30, 2020 , filedAugust 3, 2020 for further information. Cash, cash equivalents and investments were$46.5 million atMay 30, 2020 . Cash, cash equivalents and investments atMay 30, 2020 , consisted of$30.6 million inNorth America ,$8.3 million inEurope ,$0.9 million inLatin America and$6.7 million inAsia/Pacific . We repatriated a total of$8.5 million tothe United States in fiscal 2020 from several of our foreign entities. This amount includes$4.4 million from our entities inGermany andthe Netherlands in the second quarter of fiscal 2020,$1.5 million from our entity inJapan in the third quarter of fiscal 2020 and$1.0 million from our entity inItaly in the fourth quarter of fiscal 2020. 23
-------------------------------------------------------------------------------- The Company continues to monitor the impact of the COVID-19 outbreak on its supply chain, manufacturing and distribution operations, customers and employees, as well as theU.S. economy in general. However, due to the uncertainty as to when governmental restrictions on business will be fully lifted, the impact thereof, and the duration and widespread nature of the COVID-19 outbreak, the Company cannot currently predict the long-term impact on its operations and financial results. The uncertainties associated with the COVID-19 outbreak include potential adverse effects on the overall economy, the Company's supply chain, transportation services, employees and customers. The COVID-19 outbreak could adversely affect the Company's revenues, earnings, liquidity and cash flows and may require significant actions in response, including expense reductions. Conditions surrounding COVID-19 change rapidly and additional impacts of which the Company is not currently aware may arise. Based on past performance and current expectations, we believe that the existing sources of liquidity, including current cash and investments, 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 provided by (used in) operating activities primarily resulted from net income (loss) adjusted for non-cash items and changes in our operating assets and liabilities. Operating activities provided$3.9 million of cash during the first nine months of fiscal 2021. We had a net loss of$0.2 million during the first nine months of fiscal 2021, which included non-cash stock-based compensation expense of$0.5 million associated with the issuance of stock option and restricted stock awards,$0.7 million for inventory reserve provisions and depreciation and amortization expense of$2.6 million associated with our property and equipment as well as amortization of our intangible assets. Changes in our operating assets and liabilities resulted in cash provided of$0.3 million during the first nine months of fiscal 2021, net of foreign currency exchange gains and losses, included an increase in accrued liabilities of$4.3 million , partially offset by a decrease of$2.0 million in accounts payable, an increase in accounts receivable of$1.0 million and an increase in inventory of$0.9 million . The increase in accrued liabilities was mainly due to a legal settlement and timing of employee compensation and payroll tax payments as well as the timing of other payments. The decrease in our accounts payable was due to timing of payments for some of our larger vendors for both inventory and services. The increase in accounts receivable was primarily due to the sales increase in fiscal 2021. The majority of the inventory increase was to support the electron tube and RF and microwave components business. Operating activities used$2.4 million of cash during the first nine months of fiscal 2020. We had a net loss of$0.6 million during the first nine months of fiscal 2020, which included non-cash stock-based compensation expense of$0.5 million associated with the issuance of stock option and restricted stock awards,$0.5 million for inventory reserve provisions and depreciation and amortization expense of$2.5 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$5.4 million during the first nine months of fiscal 2020, net of foreign currency exchange gains and losses, included an increase in inventory of$4.2 million , a decrease of$2.1 million in accounts payable and a decrease in accrued liabilities of$0.2 million partially offset by a decrease in accounts receivable of$1.1 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 majority of the inventory increase was to support the continued growth of our electron tube and RF and Power Technologies groups.
Cash Flows from Investing Activities
The cash flow provided by (used in) investing activities consisted primarily of purchases of investments and capital expenditures partially offset by proceeds from the maturities of investments. Cash provided by investing activities of$5.2 million during the first nine months of fiscal 2021 included proceeds from the maturities of investments of$16.0 million , partially offset by purchases of investments of$9.0 million and$1.8 million in capital expenditures. Capital expenditures related primarily to capital used for our Healthcare business and our IT system. Cash used in investing activities of$6.2 million during the first nine months of fiscal 2020 included purchases of investments of$13.0 million and$1.2 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, Healthcare and LaFox manufacturing businesses. 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
24
--------------------------------------------------------------------------------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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