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RELL > SEC Filings for RELL > Form 10-Q on 10-Oct-2013All Recent SEC Filings

Show all filings for RICHARDSON ELECTRONICS LTD/DE | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for RICHARDSON ELECTRONICS LTD/DE


10-Oct-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 July 26, 2013. 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 Continuing Operations - an analysis and comparison of our
          consolidated results of operations for the three month periods ended
          August 31, 2013, and September 1, 2012, 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 31, 2013, and September 1, 2012, and a discussion of changes in
          our financial position.

Business Overview
Richardson Electronics, Ltd. ("we", "us", "the Company", and "our") is incorporated in the state of Delaware. We are a leading global provider of engineered solutions, power grid and microwave tubes and related components, and customized display solutions, serving customers in the alternative energy, aviation, broadcast, communications, industrial, marine, medical, military, scientific, and semiconductor markets. Our 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.
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. On July 5, 2013, we acquired the assets of WVS-Technology ("WVS") for approximately $1.0 million. WVS, located in Meerbusch, Germany, develops and sells RF and microwave products, power grid tubes, vacuum capacitors, as well as industrial microwave equipment. This acquisition provides us with engineering and sales expertise to help expand our presence in the vacuum capacitor market. We have two operating segments, which we define as follows:


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Electron Device Group ("EDG") provides engineered solutions and distributes electronic components to customers in alternative energy, aviation, broadcast, communications, industrial, marine, medical, military, scientific, and semiconductor markets. EDG 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. EDG 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 manufacturer ("OEM") markets.
We currently have operations in the following major geographic regions:
North America;
Asia/Pacific;
Europe; and
Latin America.

RESULTS OF CONTINUING OPERATIONS
FINANCIAL SUMMARY - THREE MONTHS ENDED AUGUST 31, 2013

Net sales for the first quarter of fiscal 2014 were $34.3 million, down 3.9%, compared to net sales of $35.7 million during the first quarter of fiscal 2013.

Gross margin was relatively flat at 29.8% during the first quarter of fiscal 2014, compared to 29.9% during the first quarter of fiscal 2013.

Selling, general, and administrative expenses remained flat at $10.1 million for the first quarter of fiscal 2014 and fiscal 2013, or 29.4% and 28.5% of net sales, respectively.

Operating income during the first quarter of fiscal 2014 was $0.1 million, or 0.4% of net sales, compared to an operating income of $0.5 million, or 1.4% of net sales, during the first quarter of fiscal 2013.

Income from continuing operations during the first quarter of fiscal 2014 was $2.0 million, or $0.14 per diluted common share, versus of $0.7 million, or $0.05 per diluted common share, during the first quarter of fiscal 2013.

Loss from discontinued operations, net of tax, was less than $0.1 million, during the first quarters of fiscal 2014 and fiscal 2013.

Net income during the first quarter of fiscal 2014 was $2.0 million, compared to net income of $0.6 million during the first quarter of fiscal 2013, $0.14 and $0.04 per diluted common share, respectively.

Net Sales and Gross Profit Analysis
Net sales by segment and percent change for the first quarter of fiscal 2014 and
2013 were as follows (in thousands):
Net Sales                          FY14 vs. FY13
           FY 2014     FY 2013       % Change
EDG       $ 25,479    $ 25,627          (0.6 )%
Canvys       8,778      10,023         (12.4 )%
   Total  $ 34,257    $ 35,650          (3.9 )%

During the first quarter of fiscal 2014 consolidated net sales decreased 3.9% compared to the first quarter of fiscal 2013. Sales for Canvys declined by 12.4%, and sales for EDG declined 0.6%.
Gross profit by segment and percent of segment net sales for the first quarter of fiscal 2014 and 2013 were as follows (in thousands):


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Gross Profit
                 FY 2014            FY 2013
EDG          $  7,859  30.8 %   $  8,000  31.2 %
Canvys          2,333  26.6 %      2,646  26.4 %
   Total     $ 10,192  29.8 %   $ 10,646  29.9 %

Gross profit reflects the distribution and manufacturing product margin less manufacturing variances, inventory obsolescence charges, customer returns, scrap and cycle count adjustments, engineering costs, unabsorbed manufacturing labor and overhead, and other provisions.
Consolidated gross profit was $10.2 million during the first quarter of fiscal 2014, compared to $10.6 million during the first quarter of fiscal 2013. Consolidated gross margin as a percentage of net sales declined slightly to 29.8% during the first quarter of fiscal 2014, from 29.9% during the first quarter of fiscal 2013. In addition, gross margin included $0.2 million related to unabsorbed manufacturing labor and overhead from continuing operations during the first quarters of fiscal 2014 and 2013. Electron Device Group
Net sales for EDG decreased 0.6% to $25.5 million during the first quarter of fiscal 2014, from $25.6 million during the first quarter of fiscal 2013. Net sales of tubes decreased to $19.3 million during the first quarter of fiscal 2014, as compared to $20.4 million during the first quarter of fiscal 2013, due primarily to declines in the industrial heating, broadcast and aviation markets but offset by growth in the laser and marine markets. Net sales of continuous wave magnetrons and related assemblies sold primarily into the semiconductor wafer fabrication market stabilized at $2.5 million during the first quarters of fiscal 2014 and 2013. Gross margin as a percentage of net sales decreased slightly to 30.8% during the first quarter of fiscal 2014, as compared to 31.2% during the first quarter of fiscal 2013 primarily due to shifts in product and geographic mix.
Canvys
Canvys net sales decreased 12.4% to $8.8 million during the first quarter of fiscal 2014, from $10.0 million during the first quarter of fiscal 2013. Sales were down in our North America Healthcare market driven by the uncertainty surrounding health care reform and a difficult capital market for hospitals while sales in our North America OEM market were down due to delays in new program startups. Gross margin as a percentage of net sales increased to 26.6% during the first quarter of fiscal 2014 as compared to 26.4% during the first quarter of fiscal 2013, due to the higher margin business in Europe as well as currency fluctuations.
Selling, General, and Administrative Expenses Selling, general, and administrative expenses ("SG&A") remained flat at $10.1 during the first quarter of fiscal 2014 and fiscal 2013. This includes SG&A with respect to EDG, Canvys, and our support functions. SG&A as a percentage of sales from continuing operations, increased to 29.4% during the first quarter of fiscal 2014 from 28.5% during the first quarter of fiscal 2013. Other (Income) Expense
Other (income) expense was income of $2.3 million during the first quarter of fiscal 2014, compared to income of $0.4 million during the first quarter of fiscal 2013. Other income (expense) during the first quarter of fiscal 2014 included an anti-trust class action lawsuit settlement of $2.1 million and investment income of $0.3 million, partially offset by foreign exchange loss of $0.1 million. 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. Income Tax Provision
The effective income tax rate from continuing operations during the first three months of fiscal 2014 was 18.5%, as compared to 22.2% during the first three months of fiscal 2013. The decrease in rate during the first three months of fiscal 2014, as compared to fiscal 2013, was due to a reduction in the amount of foreign earnings considered to be permanently reinvested and a reduction in forecasted cash available in foreign jurisdictions to


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distribute foreign earnings with respect to ASC 740-30, Income Taxes - Other Considerations or Special Areas. The effective rate as compared to the federal statutory rate of 34.0% resulted from our geographical distribution of income, apportionment of income to various states, in addition to our position with respect to ASC 740-30, Income Taxes - Other Considerations or Special Areas. In the normal course of business, we are subject to examination by taxing authorities throughout the world. Generally, years prior to fiscal 2006 are closed for examination under the statute of limitation for U.S. federal, state or local, or non-U.S. tax jurisdictions. During fiscal 2013, we completed federal audits in the U.S. for fiscal 2009, 2010, and 2011. Our primary foreign tax jurisdictions are Germany and the Netherlands. We have tax years open in Germany and the Netherlands beginning in fiscal 2008.
As of August 31, 2013, approximately $42.4 million of cumulative positive earnings of some of our foreign subsidiaries are still considered permanently reinvested pursuant to ASC 740-30, Income Taxes-Other Considerations or Special Areas. Due to various tax attributes that are continuously changing, it is not practical to determine what, if any, tax liability might exist if such earnings were to be repatriated.
As of August 31, 2013, we did not have any worldwide liability for uncertain tax positions related to continuing operations as compared to $0.4 million as of September 1, 2012. Therefore, we have no recorded penalties and interest relating to uncertain tax positions in the income tax expense line item within the unaudited consolidated statements of income and comprehensive income. It is not expected that there will be a change in the unrecognized tax benefits within the next 12 months.
Discontinued Operations
Financial Summary - Discontinued Operations Summary financial results for the three months ended August 31, 2013, and September 1, 2012, are presented in the following table (in thousands):

                                                               Three Months Ended
                                                   August 31, 2013          September 1, 2012
Net sales                                       $                86       $                221
Gross profit (loss) (1)                                         (49 )                      (93 )
Selling, general, and administrative expenses
(2)                                                              32                         65
Income tax provision (benefit)                                  (70 )                      (71 )
Income (loss) from discontinued operations, net
of tax                                          $               (11 )     $                (87 )

Notes:
(1) Gross profit (loss) for fiscal year 2013 includes unabsorbed manufacturing
labor and overhead expenses related to the Manufacturing Agreement with RFPD.
(2) Selling, General, and Administrative expenses relates primarily to tax
audits resulting from the Transaction.
Assets and liabilities classified as discontinued operations on our consolidated
balance sheets as of August 31, 2013, and June 1, 2013, include the following
(in thousands):
                                       August 31, 2013      June 1, 2013
Inventories                           $             338    $         303
Discontinued operations - Assets      $             338    $         303

Accrued liabilities - current (1)     $             541    $         245
Discontinued operations - Liabilities $             541    $         245

(1) Included in accrued liabilities as of June 2, 2012, is $0.5 million of other accrued liabilities primarily related to transition services.


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In accordance with ASC 230, Statement of Cash Flows, entities are permitted but not required to separately disclose, either in the statement of cash flows or footnotes to the financial statements, cash flows pertaining to discontinued operations. Entities that do not present separate operating cash flow information related to discontinued operations must do so consistently for all periods presented, which may include periods long after the sale or liquidation of the operation. We did not have cash balances that were specific to RFPD and elected not to present separate cash flows from discontinued operations on our statement of cash flows.
Net Income and Per share Data
Net income during the first quarter of fiscal 2014 was $2.0 million, or $0.14 per diluted common share and $0.13 per Class B diluted common share, as compared to net income of $0.6 million during the first quarter of fiscal 2013, or $0.04 per diluted common share and $0.04 per Class B diluted common share.
LIQUIDITY, FINANCIAL POSITION, AND CAPITAL RESOURCES Our growth and cash needs have been primarily financed through income from operations. Cash and cash equivalents for the first quarter ended August 31, 2013, were $92.5 million. In addition, CDs and time deposits classified as short-term investments were $39.8 million and long-term investments were $4.2 million, including equity securities of $0.5 million. Cash and investments at August 31, 2013, consisted of $77.8 million in North America, $17.8 million in Europe, $0.7 million in Latin America, and $40.2 million in Asia/Pacific. At June 1, 2013, cash and cash equivalents were $102.0 million. In addition, CDs and time deposits classified as short-term investments were $39.0 million and long-term investments were $5.4 million, including equity securities of $0.4 million. Cash and investments at June 1, 2013, consisted of $82.1 million in North America, $22.1 million in Europe, $1.2 million in Latin America, and $41.0 million in Asia/Pacific.
Cash Flows from Discontinued Operations
In accordance with ASC 230, Statement of Cash Flows, entities are permitted but not required to separately disclose, either in the statement of cash flows or footnotes to the financial statements, cash flows pertaining to discontinued operations. Entities that do not present separate operating cash flow information related to discontinued operations must do so consistently for all periods presented, which may include periods long after the sale or liquidation of the operation.
We believe we will continue to have sufficient liquidity to fund our future growth strategies for our business in the foreseeable future. Cash Flows from Operating Activities
The cash flow from operating activities primarily resulted from our net income, adjusted for non-cash items, and changes in our operating assets and liabilities.
Operating activities, which include our discontinued operations, used $1.2 million of cash during the first quarter of fiscal 2014. We had net income of $2.0 million during the first quarter of fiscal 2014, which included non-cash stock-based compensation expense of $0.1 million associated with the issuance of stock option awards and depreciation and amortization expense of $0.2 million associated with our property and equipment as well as amortization of our intangible assets. Changes in our operating assets and liabilities, net of effects of acquired businesses, used $3.5 million of cash during the first quarter of fiscal 2014, due primarily to the increase in our inventory of $0.5 million, the decrease in our accounts payable of $2.5 million, the increase in our accounts receivable of $1.2 million, partially offset by a decrease to our prepaid expenses of $0.2 million. The increase in our inventory was due to a increase in purchases related to specific projects within our Canvys business. The decrease in our accounts payable relates primarily to the timing of some of our major vendors. The increase in our receivables of $1.2 million was due primarily to a slight increase in our day sales outstanding caused primarily by a shift in customer mix by geography. The decrease in prepaid expenses of $0.2 million was due primarily to a decrease in VAT prepayments.
Operating activities, which include our discontinued operations, used $3.3 million of cash during the first three months of fiscal 2013. We had net income of $0.6 million in the first three months of fiscal 2013, which included non-cash stock-based compensation expense of $0.1 million associated with the issuance of stock option awards and depreciation and amortization expense of $0.3 million associated with our investments in property and


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equipment as well as amortization of our intangible assets. Changes in our operating assets and liabilities, net of effects of acquired businesses, used $4.4 million of cash during the first three months of fiscal 2013, due primarily to decreases in our operating liabilities, including accounts payable and accrued liabilities, and increases in our operating assets including prepaid expenses, inventories, and receivables. The decrease in accounts payable of $1.4 million was due primarily to the timing of vendor payments. The decrease in accrued liabilities of $1.0 million was due primarily to a reduction in employee related compensation accruals. The increase in prepaid expenses of $0.6 million was due primarily to $0.4 million of cash used to renew our liability insurance coverage and $0.2 million of cash used for computer support services. The increase in inventories of $0.6 million, was due primarily to increased purchasing to support expected future sales growth. The increase in receivables of $0.6 million, excluding the impact of foreign currency exchange of $0.2 million, was due primarily to the timing of customer payments. Cash Flows from Investing Activities
The cash flow from investing activities has consisted primarily of purchases and maturities of investments and capital expenditures.
Cash used in investing activities of $1.0 million during the first quarter of fiscal 2014, included proceeds from the maturities of investments of $40.5 million, offset by the purchase of investments of $40.1 million, $1.0 million for the acquisition of WVS, and $0.4 million in capital expenditures. Cash provided by investing activities of $5.9 million during the first three months of fiscal 2013, included proceeds from maturities of investments of $57.7 million, offset by purchases of investments of $51.7 million and $0.1 million in capital expenditures.
Our purchases and proceeds from investments consist of time deposits and 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 primarily consists of repurchases of common stock and cash dividends paid.
Cash used in financing activities of $7.5 million during the first three months of fiscal 2014, resulted from $6.7 million of cash used to repurchase common stock under our share repurchase authorization and $0.9 million of cash used to pay dividends, offset by $0.1 million of proceeds from the issuance of common stock.
Cash used in financing activities of $5.5 million during the first three months of fiscal 2013, resulted from $5.6 million of cash used to repurchase common stock under our share repurchase authorization, offset by less than $0.1 million of proceeds from the issuance of common stock.
Dividend payments for the first three months of fiscal 2014 were approximately $0.9 million. 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.
We believe that the existing sources of liquidity, including current cash, will provide sufficient resources to meet known capital requirements and working capital needs for the fiscal year ending May 31, 2014.


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