Richardson Electronics, Ltd. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended February 27, 2016. The request metadata says “2015 Q3,” but the filing covers fiscal 2016 Q3. Dollar amounts are in millions unless noted.
Business context
Richardson Electronics supplies engineered solutions and components for power, RF and microwave applications, customized displays, and diagnostic-imaging replacement parts. It reports three segments: Power and Microwave Technologies Group (PMT), Canvys, and Healthcare. In June 2015, it acquired selected assets of International Medical Equipment and Services (IMES) for approximately $12.2 million in cash, expanding Healthcare’s diagnostic-imaging parts and training business.
Financial performance
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Net sales | $31.3 | $33.5 | $102.4 | $102.0 |
| Gross profit | $9.8 | $9.8 | $31.4 | $30.9 |
| Gross margin | 31.2% | 29.3% | 30.7% | 30.3% |
| SG&A | $12.5 | $12.6 | $37.9 | $36.4 |
| Operating loss | $(2.7) | $(2.7) | $(6.2) | $(5.4) |
| Net loss | $(2.9) | $(2.2) | $(6.6) | $(3.3) |
| Basic/diluted loss per common share | $(0.23) | $(0.16) | $(0.51) | $(0.24) |
| Cash used in operating activities | $(5.7) | $(5.7) | $(14.6) | $(8.0) |
- Quarterly sales declined 6.5%; nine-month sales increased 0.4%. Q3 gross profit was essentially flat despite lower sales, while gross margin improved, primarily because of higher-margin Healthcare replacement parts.
- Q3 segment sales were PMT $23.0 million, down 8.7%; Canvys $5.2 million, down 16.8%; and Healthcare $3.1 million, up 52.5%, largely reflecting IMES. For the first nine months, PMT sales fell 5.1%, Canvys fell 1.9%, and Healthcare rose 108.3%.
- Nine-month net loss widened as higher SG&A, a less favorable tax result, and lower other income offset modest sales and gross-profit growth. SG&A included $3.9 million of IMES-related costs and Healthcare growth investment.
- Cash and cash equivalents were $60.2 million at February 27, 2016, versus $74.5 million at May 30, 2015. Current investments were $3.5 million; non-current investments totaled $7.8 million, including $0.5 million of equity securities. Total assets were $164.0 million and stockholders’ equity was $141.2 million.
- The balance sheet lists no debt line item. Current liabilities were $20.8 million and current assets were $133.2 million. Cash declined $14.3 million in the first nine months. Investing activities provided $8.6 million, mainly from investment maturities, partly offset by the IMES purchase and capital spending; financing activities used $7.2 million, including share repurchases and dividends.
- Dividends for the nine-month period were $0.18 per common share and $0.162 per Class B share. The filing reports a dividend declaration in an April 6, 2016 press release; the amount of that declaration is not clear in the supplied filing text.
Management outlook, risks and unusual items
- Management said existing liquidity, including cash, should be sufficient for known capital requirements and working-capital needs through the fiscal year ending May 27, 2017. It also noted inventory purchases tied to growth initiatives and several large orders expected to ship in Q4; no numerical earnings or revenue guidance was provided.
- Management attributed PMT and Canvys sales weakness partly to uncontrollable shipping-backlog delays. Canvys also faced price pressure, currency effects, and inventory-obsolescence write-downs. PMT’s nine-month margin was affected by unabsorbed manufacturing labor and overhead, product mix, and currency fluctuations.
- Nine-month operating cash use of $14.6 million reflected the loss and working-capital outflows, especially a $5.6 million inventory increase, a $3.0 million decline in accounts payable, and a $2.1 million decline in accrued liabilities. Management said shorter supplier payment terms were required for some Healthcare-related purchases.
- The company recorded a $7.8 million valuation allowance against deferred tax assets, including all U.S. federal and state net deferred tax assets, amid cumulative losses. It reported tax examinations in Illinois and Thailand and contact from French tax authorities; the German audit settlement resulted in a $357,000 liability, of which $31,000 was recorded in Q3.
- Foreign-exchange exposure is a principal market risk; the company said it does not use derivatives to manage currency exposure. It reported ordinary-course litigation but did not consider a material loss reasonably possible based on information available. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
- Acquisition accounting for IMES remained preliminary; final valuation adjustments could affect recorded asset values and future expenses. The acquisition included $6.3 million of goodwill and $3.5 million of acquired intangible assets.
Important facts for investors to verify
- Whether the large orders expected in Q4 shipped, and whether delayed PMT and Canvys backlog converted to revenue.
- Healthcare/IMES growth, margins, and the extent to which performance reflects acquired operations versus organic growth.
- Inventory levels, obsolescence reserves, and whether working-capital outflows and operating cash burn moderated.
- Recoverability of deferred tax assets, future valuation-allowance changes, and outcomes of the disclosed tax examinations.
- Final IMES purchase-price allocation and the related goodwill and intangible-asset assumptions.
- The April 6 dividend declaration amount and subsequent dividend decisions by the board.