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; economic, labor and political systems and conditions; global business disruption caused by theRussia invasion inUkraine and related sanctions: currency exchange fluctuations; and the ability of the Company to manage its growth and the risk factors set forth in our Annual Report on Form 10-K filed onAugust 1, 2022 . 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 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 month periods ended August 27, 2022
and August 28, 2021 , as reflected in our consolidated statements of
comprehensive income.
• Liquidity, Financial Position and Capital Resources - a discussion of our
primary sources and uses of cash for the three month periods ended August
27, 2022 and August 28, 2021 , and a discussion of changes in our
financial position.
Business Overview
Richardson Electronics, Ltd. is a leading global manufacturer of engineered
solutions, power grid and microwave tubes, and related consumables; power
conversion and RF and microwave components; high-value replacement parts, tubes,
and service training for diagnostic imaging equipment; and customized display
solutions. More than 60% of our products are manufactured in LaFox, Illinois ,
Marlborough, Massachusetts , or Donaueschingen, Germany , or by one of our
manufacturing partners throughout the world. All our partners manufacture to our
strict specifications and per our supplier code of conduct. 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.
Some of the Company's products are manufactured in China and are imported into
the United States . The Office of the United States Trade Representative ("USTR")
instituted additional 10% to 25% tariffs on the importation of a number of
products into the United States from China effective July 6, 2018 , with
additional products added August 23, 2018 and September 24, 2018 . These
additional tariffs are a response to what the USTR considers to be certain
unfair trade practices by China . A number of the Company's products manufactured
in China are now subject to these additional duties of 25% when imported into
the United States .
Management continues to work with its suppliers as well as its customers to
mitigate the impact of the tariffs on our customers' markets. However, if the
Company is unable to successfully pass through the additional cost of these
tariffs, or if the higher prices reduce demand for the Company's products, it
will have a negative effect on the Company's sales and gross margins.
In our first quarter of fiscal year 2023, the Company made certain changes to
its reporting structure as we continue to focus on power management applications
that support the green energy market globally, and the Company began reporting
its financial performance based on four operating and reportable segments.
Commencing with the first quarter of fiscal 2023, we are reporting the results
for our new Green Energy Solutions ("GES") segment. The GES segment has been
carved out of our existing Power and Microwave Technologies ("PMT") segment. For
comparability purposes, the results for fiscal 2022 were adjusted to reflect the
presentation of the new GES segment.
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--------------------------------------------------------------------------------We have four operating and reportable segments, which we define as follows:
Power and Microwave Technologies 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, 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.Green Energy Solutions combines our key technology partners and engineered solutions capabilities to design and manufacture key products for the fast-growing energy storage market and power management applications. As a designer, manufacturer, technology partner and authorized distributor, GES's strategy is to provide specialized technical expertise and engineered solutions using our core design 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. GES's focus is on products for numerous green energy applications such as wind, solar, hydrogen and Electric Vehicles, and other power management applications that support green solutions such as synthetic diamond manufacturing. 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 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, 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 believe we can help our customers improve efficiency while lowering the cost of healthcare delivery.
Refer to Note 7, Segment Reporting, to our unaudited consolidated financial statements for additional information on the changes in operating and reportable segments.
We currently have operations in the following major geographic regions:
RESULTS OF OPERATIONS
Financial Summary - Three Months Ended
• The first quarter of fiscal 2023 and fiscal 2022 each contained 13 weeks.
• Net sales during the first quarter of fiscal 2023 were
increase of 25.8%, compared to net sales of $53.7 million during the
first quarter of fiscal 2022.
• Gross margin increased to 34.1% during the first quarter of fiscal 2023
compared to 30.3% during the first quarter of fiscal 2022.
• Selling, general and administrative expenses were
of net sales, during the first quarter of fiscal 2023 compared to $13.5
million , or 25.1% of net sales, during the first quarter of fiscal 2022.
• Operating income during the first quarter of fiscal 2023 was
compared to
• Net income during the first quarter of fiscal 2023 was $6.3 million
compared to $2.6 million during the first quarter of fiscal 2022.
17-------------------------------------------------------------------------------- As previously disclosed, we made certain changes in our reporting structure. As a result of these changes, we revised our reportable segments as further discussed in Note 7, Segment Reporting, to our unaudited consolidated financial statements. For comparability purposes, segment reporting for the prior period has been recast to conform to the current presentation.
Net sales by segment and percent change during the first quarter of fiscal 2023 and fiscal 2022 were as follows (in thousands):
Net Sales Three Months Ended FY23 vs. FY22
August 27, 2022 August 28, 2021 % Change
PMT $ 45,354 $ 40,435 12.2 %
GES 8,511 2,574 230.7 %
Canvys 10,413 8,441 23.4 %
Healthcare 3,279 2,254 45.5 %
Total $ 67,557 $ 53,704 25.8 %
During the first quarter of fiscal 2023, consolidated net sales increased 25.8%
compared to the first quarter of fiscal 2022. Sales for PMT increased 12.2%,
sales for GES increased 230.7%, sales for Canvys increased 23.4% and sales for
Healthcare increased 45.5%. The increase in PMT was mainly due to strong growth
in the semi-wafer fabrication industry. The increase in GES was mainly due to
growth in our ULTRA3000 and other related product sales into the wind turbine
industry and from customers manufacturing synthetic diamonds. We also saw an
increase in sales into the Electric Vehicle market. The increase in Canvys was
primarily due to strong sales in the North American market. The increase in
Healthcare was due to increased sales in all products lines.
Gross profit by segment and percent of net sales for the first quarter of fiscal 2023 and fiscal 2022 were as follows (in thousands):
Gross Profit Three Months Ended
August 27, 2022 % of Net Sales August 28, 2021 % of Net Sales
PMT $ 15,535 34.3 % $ 12,187 30.1 %
GES 3,022 35.5 % 744 28.9 %
Canvys 3,266 31.4 % 2,818 33.4 %
Healthcare 1,204 36.7 % 548 24.3 %
Total $ 23,027 34.1 % $ 16,297 30.3 %
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.
Consolidated gross profit increased to $23.0 million during the first quarter of
fiscal 2023 compared to $16.3 million during the first quarter of fiscal 2022.
Consolidated gross margin as a percentage of net sales increased to 34.1% during
the first quarter of fiscal 2023 from 30.3% during the first quarter of fiscal
2022, primarily due to product mix and manufacturing efficiencies in both PMT
and GES and decreased component scrap expense and improved manufacturing
efficiencies in Healthcare. The unfavorable product mix and foreign currency
effects in Canvys partially offset the favorable gross margin impact for PMT,
GES and Healthcare.
Power and Microwave Technologies
PMT net sales increased 12.2% to$45.4 million during the first quarter of fiscal 2023 from$40.4 million during the first quarter of fiscal 2022. The increase was mainly due to strong growth in the semi-wafer fabrication industry. Gross margin as a percentage of net sales increased to 34.3% during the first quarter of fiscal 2023 as compared to 30.1% during the first quarter of fiscal 2022 due to product mix.Green Energy Solutions GES net sales increased 230.7% to$8.5 million during the first quarter of fiscal 2023 from$2.6 million during the first quarter of fiscal 2022. The increase was mainly due to growth in our ULTRA3000 and other related product sales into the wind turbine industry and from customers manufacturing synthetic diamonds. We also saw an increase in sales into the Electric Vehicle market. Gross margin as a percentage of net sales increased to 35.5% during the first quarter of fiscal 2023 as compared to 28.9% during the first quarter of fiscal 2022 due to improved manufacturing efficiencies and product mix.
Canvys
Canvys net sales increased 23.4% to$10.4 million during the first quarter of fiscal 2023 from$8.4 million during the first quarter of fiscal 2022 primarily due to strong sales in the North American market. Gross margin as a percentage of net sales decreased 18 --------------------------------------------------------------------------------
to 31.4% during the first quarter of fiscal 2023 from 33.4% during the first quarter of fiscal 2022 primarily due to product mix and foreign currency effects.
Healthcare
Healthcare net sales increased 45.5% to$3.3 million during the first quarter of fiscal 2023 from$2.3 million during the first quarter of fiscal 2022 due to increases in all Healthcare product lines. Gross margin as a percentage of net sales increased to 36.7% during the first quarter of fiscal 2023 as compared to 24.3% during the first quarter of fiscal 2022 primarily due to improved manufacturing absorption and decreased component scrap expense.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") increased to $14.2 million
during the first quarter of fiscal 2023 from $13.5 million in the first quarter
of fiscal 2022. The increase was mainly due to higher employee compensation
expenses, including incentive expense from higher operating income. However, as
a percentage of net sales, SG&A for the first quarter of fiscal 2023 decreased
to 21.1% compared to 25.1% for the first quarter of fiscal 2022.
Other Income/Expense
Other expense was$0.3 million during the first quarter of fiscal 2023, compared to less than$0.1 million for the first quarter of fiscal 2022. Other expense during the first quarter of fiscal 2023 was mainly attributable to foreign exchange. 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.
Income Tax Provision
We recorded an income tax provision of$2.1 million and$0.2 million for the first three months of fiscal 2023 and the first three months of fiscal 2022, respectively. The effective income tax rate during the first three months of fiscal 2023 was a tax provision of 25.0% as compared to a tax provision of 5.9% during the first three months of fiscal 2022. The difference in rate during the first three months of fiscal 2023 as compared to the first three months of fiscal 2022 reflects changes in the valuation allowance recorded at year end fiscal 2022, absence of Net Operating Losses ("NOL") for utilization in fiscal 2023, our geographical distribution of income (loss), which is primarily driven by an increase inU.S. earnings for fiscal 2023 and a state income tax provision. The 25.0% effective income tax rate differs from the federal statutory rate of 21% as a result of our geographical distribution of income (loss), which is primarily driven by an increase inU.S. earnings for fiscal 2023, and a state income tax provision. In the normal course of business, we are subject to examination by taxing authorities throughout the world. Generally, years prior to fiscal 2017 are closed for examination under the statute of limitation forU.S. federal,U.S. state and local or non-U.S. tax jurisdictions. We were under examination for fiscal 2015 through fiscal 2018 inGermany . The audit was settled in the fourth quarter of fiscal 2022 and we expect an immaterial amount to be paid in the second quarter of fiscal 2023. Our primary foreign tax jurisdictions areGermany andthe Netherlands . We have tax years open inGermany beginning in fiscal 2019 andthe Netherlands beginning in fiscal 2018.
Net Income and Per Share Data
Net income during the first quarter of fiscal 2023 was$6.3 million , or$0.45 per diluted common share and$0.40 per Class B diluted common share as compared to$2.6 million during the first quarter of fiscal 2022 or$0.20 per diluted common share and$0.18 per Class B diluted common share.
LIQUIDITY, FINANCIAL POSITION AND CAPITAL RESOURCES
Our operations and cash needs have been primarily financed through income from operations and cash on hand.
Cash, cash equivalents and investments were$35.6 million atAugust 27, 2022 . Cash, cash equivalents and investments by geographic area atAugust 27, 2022 consisted of$22.9 million inNorth America ,$5.6 million inEurope ,$1.4 million inLatin America and$5.7 million inAsia/Pacific . No funds were repatriated tothe United States in first quarter of fiscal 2023. However, we anticipate repatriation of funds tothe United States in subsequent quarters. 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 7, 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 fiscal year endedMay 28, 2022 , filedAugust 1, 2022 for further information. Cash, cash equivalents and investments were$40.5 million atMay 28, 2022 . Cash, cash equivalents and investments by geographic area atMay 28, 2022 consisted of$25.7 million inNorth America ,$6.0 million inEurope ,$1.5 million inLatin America and$7.3 million inAsia/Pacific . We repatriated a total of$1.5 million tothe United States in fiscal 2022 from our foreign entities. This amount includes$0.7 million in the first quarter from our entity inChina ,$0.3 million in the second quarter from our entity inTaiwan and$0.5 million in the third quarter from our entity inJapan . Our short-term and long-term liquidity requirements primarily arise from: (i) working capital requirements, (ii) capital expenditure needs and (iii) cash dividend payments (if and when declared by our Board of Directors). Our ability to fund these 19 -------------------------------------------------------------------------------- requirements will depend, in part, on our future cash flows, which are determined by our future operating performance and, therefore, subject to prevailing global macroeconomic conditions and financial, business and other factors, some of which are beyond our control. The Company continues to monitor the impact of COVID-19, including the extent, duration and effectiveness of containment actions taken, the speed and extent of vaccination programs, the impact of the pandemic on its supply chain, manufacturing and distribution operations, customers and employees, as well as theU.S. economy in general. However, due to the uncertain and constantly evolving impacts of the COVID-19 pandemic across the globe, the Company cannot currently predict the long-term impact on its operations and financial results. The uncertainties associated with the COVID-19 pandemic and its effects include potential adverse effects on the overall economy, the Company's supply chain, transportation services, employees and customers. The COVID-19 pandemic and its effects 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, will provide sufficient resources to meet known capital requirements and working capital needs through the next twelve months. Additionally, while our future capital requirements will depend on many factors, including, but not limited to, the economy and the outlook for growth in our markets, we believe our existing sources of liquidity as well as our ability to generate operating cash flows will satisfy our future obligations and cash requirements.
Cash Flows from Operating Activities
Cash flows from operating activities primarily resulted from our net income adjusted for non-cash items and changes in our operating assets and liabilities.
Operating activities used$3.2 million of cash during the first three months of fiscal 2023. We had a net income of$6.3 million during the first three months of fiscal 2023, which included non-cash stock-based compensation expense of$0.3 million associated with the issuance of stock option and restricted stock awards, inventory reserve provisions of$0.1 million and depreciation and amortization expense of$0.9 million associated with our property and equipment as well as amortization of our intangible assets. Changes in our operating assets and liabilities used$10.8 million in cash during the first three months of fiscal 2023, net of foreign currency exchange gains and losses, included an increase in accounts receivable of$3.5 million , an increase in inventory of$10.5 million and an increase in prepaid expenses of$1.2 million . Partially offsetting the cash utilization for accounts receivable, inventory and prepaid expenses was an increase in accounts payable and accrued liabilities of$3.7 million . The increase in accounts receivable was primarily due to increased sales. The majority of the inventory increase was to support the product growth in LaFox manufacturing,Green Energy Solutions and the RF and microwave components. The increase in accounts payable was related to the inventory increase and the increase in accrued liabilities was timing related. Operating activities used$4.9 million of cash during the first three months of fiscal 2022. We had a net income of$2.6 million during the first three months of fiscal 2022, which included non-cash stock-based compensation expense of$0.2 million associated with the issuance of stock option and restricted stock awards,$0.1 million for inventory reserve provisions and depreciation and amortization expense of$0.8 million associated with our property and equipment as well as amortization of our intangible assets. Changes in our operating assets and liabilities used$8.7 million in cash during the first three months of fiscal 2022, net of foreign currency exchange gains and losses, included an increase in accounts receivable of$5.0 million and an increase in inventory of$5.0 million . Partially offsetting the cash utilization for accounts receivable and inventory was an increase in accounts payable and accrued liabilities of$1.1 million . The increase in accounts receivable was primarily due to increased sales revenue. The majority of the inventory increase was to support the growth in the RF and microwave components business. The increase in accounts payable was related to the inventory increase and the increase in accrued liabilities was timing related.
Cash Flows from Investing Activities
Cash flows from investing activities consisted primarily of capital expenditures and purchases and maturities of investments. Our purchases and proceeds from investments consist of time deposits and CDs. The purchasing of future investments varies from period to period due to interest and foreign currency exchange rates. Cash used in investing activities of$1.4 million during the first three months of fiscal 2023 was due to capital expenditures. Capital expenditures were primarily related to our IT system, as well as our LaFox manufacturing business and facilities, which also supports both EDG and green energy. The Company did not have any investment purchases or maturities in the first three months of fiscal 2023. Cash used in investing activities of$0.8 million during the first three months of fiscal 2022 was due to capital expenditures. Capital expenditures were primarily related to capital for our Healthcare business and our IT system. The Company did not have any investment purchases or maturities in the first three months of fiscal 2022. 20 --------------------------------------------------------------------------------
Cash Flows from Financing Activities
Cash flows used in financing activities consisted primarily of cash dividends and cash flows provided by financing activities consisted primarily of the proceeds from the issuance of stock.
Cash provided by financing activities of$0.5 million during the first three months of fiscal 2023 primarily resulted from the$1.4 million proceeds from the issuance of stock less the$0.8 million of dividend payments to stockholders.
Cash used in financing activities of
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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