Business context and reporting period
Richardson Electronics, Ltd. filed this Form 10-Q for the second quarter of fiscal 2019, ended December 1, 2018. The quarter and its year-ago comparison each had 13 weeks; the six-month periods had 26 and 27 weeks, respectively. The company supplies engineered electronics and related products through Power and Microwave Technologies Group (PMT), Canvys, and Healthcare.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Net sales | $41.3 | $39.1 | $85.5 | $76.1 |
| Gross profit / margin | $13.0 / 31.4% | $13.4 / 34.2% | $26.9 / 31.5% | $25.5 / 33.5% |
| SG&A | $13.4 | $12.6 | $26.5 | $24.9 |
| Operating income (loss) | ($0.5) | $0.8 | $0.4 | $0.8 |
| Net income (loss) | ($0.3) | $1.7 | $0.1 | $1.6 |
| Diluted common EPS | ($0.02) | $0.13 | $0.01 | $0.12 |
- Q2 sales rose 5.7%, but gross profit fell and operating results shifted to a loss. Q2 FY2018 net income included $1.5 million from discontinued operations.
- Six-month sales increased 12.3%, while gross margin declined 2.0 percentage points and operating income declined by approximately half. Six-month FY2018 net income also included $1.5 million from discontinued operations.
- For the six months, PMT sales grew 13.4%, Canvys grew 9.6%, and Healthcare grew 6.5%. Healthcare gross margin fell to 29.0% from 45.5%; PMT margin fell to 31.5% from 33.5%, while Canvys margin improved to 32.5% from 29.5%.
Cash flow, liquidity and capital
- Six-month operating cash flow was negative $2.7 million, compared with negative $2.3 million a year earlier. Working-capital movements used $5.3 million, mainly from a $3.9 million decrease in accounts payable and a $1.8 million inventory increase.
- Investing activities used $7.5 million, including $5.3 million of CD purchases and $2.2 million of capital expenditures. Financing activities used $1.3 million, mainly for dividends. Cash declined $12.6 million during the six months to $47.9 million.
- At December 1, cash and cash equivalents were $47.9 million and current investments were $5.3 million. Current assets were $131.3 million versus current liabilities of $26.7 million. Total liabilities were $27.9 million; the balance sheet does not list borrowings as a separate liability.
- The company paid $1.5 million in dividends during the six months. Dividends were $0.06 per common share and $0.054 per Class B share for the quarter.
Outlook, commentary and risks
- No quantitative earnings or sales guidance is provided. Management believes existing liquidity, including cash on hand, is sufficient for known capital needs and working capital over the next 12 months.
- Management attributed Q2 sales growth mainly to PMT’s newer technology partners and tube-market share gains. Lower gross margin reflected unfavorable product mix and manufacturing variances, particularly in PMT and Healthcare. SG&A increased with higher legal costs, severance, compensation and other costs.
- The company identifies foreign-currency exposure as its primary financial market risk and does not use derivatives to manage it. Six-month foreign-currency translation reduced accumulated other comprehensive income by $1.8 million.
- A Varex Imaging patent-infringement suit sought, among other relief, to stop sales of the ALTA750 CT product. The company said the claim lacked merit and a loss was not probable or estimable when the statements were issued; court hearings were scheduled for January 2019. A separate stockholder derivative case was dismissed with prejudice and was concluded after the appeal deadline passed without an appeal.
- Management expects the new lease standard, effective for the company in fiscal 2020, to materially affect the balance sheet through recognition of right-of-use assets and lease liabilities; the impact was not yet quantified. The company also reported a $9.2 million valuation allowance against deferred tax assets and a 77.9% effective tax rate for the first six months.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. It reported no material changes to previously disclosed risk factors.
Investor facts to verify
- Whether sales growth, especially in PMT, can be sustained while recovering gross margins and manufacturing performance.
- Healthcare segment profitability and the market acceptance and sales contribution of the ALTA750 and other new products.
- Working-capital trends, including inventory growth and vendor-payment timing, and the drivers of continued operating cash use.
- Developments in the Varex litigation and any effect on ALTA750 sales or related costs.
- The eventual balance-sheet impact of lease-standard adoption, tax-asset realizability and future dividend decisions.