Richardson Electronics, Ltd. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2023, ended February 25, 2023; comparable periods ended February 26, 2022. The filing covers fiscal 2023, notwithstanding the “2022 Q3” request metadata. Amounts below are in millions of dollars unless noted.
Business context
Richardson Electronics designs, manufactures and distributes engineered electronic solutions, power and microwave products, customized displays, and diagnostic-imaging replacement products and services. It reports four segments: Power and Microwave Technologies (PMT), Green Energy Solutions (GES), Canvys and Healthcare. Fiscal 2023 results present GES separately from PMT; prior-period segment results were recast for comparison.
Financial results and liquidity
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Net sales | $70.4 | $55.3 | $203.8 | $163.0 |
| Gross profit / margin | $22.4 / 31.8% | $17.6 / 31.8% | $67.3 / 33.0% | $51.5 / 31.6% |
| Operating income | $7.6 | $3.6 | $23.6 | $11.0 |
| Net income | $6.3 | $2.9 | $18.2 | $9.6 |
| Diluted EPS, common shares | $0.44 | $0.21 | $1.27 | $0.71 |
- Sales rose 27.2% in Q3 and 25.1% year to date. Q3 diluted EPS for Class B shares was $0.40, versus $0.19 a year earlier; nine-month EPS was $1.15 versus $0.64.
- SG&A increased to $14.8 in Q3 and $43.7 year to date, but fell as a share of sales to 21.0% and 21.4%, respectively, from 25.2% and 24.9%.
- Nine-month operating cash flow was negative $11.4, compared with negative $1.5 in the prior year. Working-capital changes used $33.4, including $21.8 for inventory and $12.7 for receivables. Capital expenditures were $5.0.
- Cash and cash equivalents were $24.6 at period end, down from $35.5 at May 28, 2022; current assets were $170.8 and current liabilities $42.2. Cash plus investments was $40.5 at the prior year-end; the $5.0 investment matured during the period.
- The balance sheet reports no borrowings; lease liabilities totaled $2.4. On March 20, 2023, after quarter-end, the company established a three-year secured revolving facility of up to $30.0; no amount was outstanding as of the report date. The facility includes leverage and fixed-charge-coverage covenants.
- Common and Class B dividends were $0.060 and $0.054 per share for Q3, unchanged from the comparable quarter.
Material changes and segment performance
- Q3 sales increased in PMT (22.0% to $46.8), GES (103.0% to $11.5) and Canvys (19.0% to $9.7); Healthcare sales fell 23.9% to $2.4. GES growth reflected EV locomotive battery modules and wind-turbine products; PMT cited semiconductor wafer-fabrication and RF/microwave demand. Healthcare’s decline reflected lower parts and CT-tube sales to China, partly offset by equipment sales.
- For the first nine months, sales grew in PMT (14.8%), GES (145.7%), Canvys (17.3%) and Healthcare (1.6%). GES gross margin declined year over year in both Q3 (25.7% versus 34.6%) and the nine-month period (31.4% versus 32.6%), primarily from product mix. Consolidated Q3 gross margin was unchanged; nine-month margin improved, with PMT mix and Healthcare manufacturing absorption and lower component scrap cited as contributors.
- Cash declined by $10.9 during the first nine months, reflecting operating cash use and investment in working capital and capital expenditures. Inventory increased to $101.4 from $80.4 at fiscal year-end.
Outlook, commentary and risks
Management provided no numerical earnings or revenue guidance. It said existing liquidity and expected operating cash generation should meet known capital and working-capital needs for the next 12 months. Management cautioned that nine-month results are not necessarily indicative of full-year results.
- Risks include continued supply-chain, freight and component delays; uncertain COVID-19 effects; foreign-exchange exposure (the company does not use derivatives to manage it); and U.S. tariffs of up to 25% on certain China-origin products, which could pressure sales and margins if costs cannot be passed through.
- Management also cited macroeconomic and geopolitical uncertainty, including disruption related to Russia’s invasion of Ukraine and sanctions. No material changes to previously disclosed risk factors were reported.
- The effective tax rate was 22.5% for the first nine months, versus 12.1% a year earlier, reflecting the absence of NOL utilization, geographic earnings mix, state taxes and valuation-allowance changes. A $3.4 valuation allowance remained against deferred tax assets at period end.
- Disclosure controls and procedures were considered effective as of February 25, 2023; the filing reported no material third-quarter change in internal control over financial reporting.
Investor facts to verify
- Whether inventory and receivables convert to cash as sales growth continues, given the substantial year-to-date operating cash outflow.
- Whether GES can sustain rapid sales growth while recovering from its Q3 gross-margin decline, and whether Healthcare’s Q3 sales weakness persists.
- The utilization, pricing and covenant headroom of the new $30 million revolving credit facility, and any subsequent borrowings.
- Exposure to foreign exchange, tariffs, supply-chain constraints and customer demand changes, including impacts on margins and delivery schedules.
- Whether the higher effective tax rate and deferred-tax-asset valuation allowance change as earnings and tax forecasts develop.