Business context and reporting period
Richardson Electronics, Ltd. filed this unaudited Form 10-Q for the second quarter of fiscal 2016, ended November 28, 2015; the six-month period also ended that date. The company supplies engineered electronic and healthcare products and services through PMT, Canvys and Healthcare. Results include International Medical Equipment and Services (IMES) from its June 15, 2015 acquisition.
Financial performance and position
Amounts are in millions of dollars except per-share data and margins.
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Net sales | $34.1 | $33.8 | $71.2 | $68.5 |
| Gross profit / margin | $10.4 / 30.6% | $10.5 / 30.9% | $21.7 / 30.5% | $21.1 / 30.8% |
| SG&A | $13.2 | $12.6 | $25.5 | $23.8 |
| Operating loss | $(2.5) | $(2.2) | $(3.5) | $(2.7) |
| Net loss | $(2.3) | $(1.1) | $(3.7) | $(1.1) |
| Basic loss per common share | $(0.18) | $(0.07) | $(0.28) | $(0.08) |
- Segment trends: Q2 PMT sales fell 6.1% to $25.2 million, Canvys sales were essentially flat at $5.9 million, and Healthcare sales rose 163.2% to $3.0 million, primarily due to IMES. For six months, PMT sales fell 3.4%, Canvys rose 6.0%, and Healthcare rose 154.7%.
- Cash flow: Six-month operating cash use was $8.8 million, investing activities provided $9.9 million, and financing activities used $6.5 million. Cash decreased $6.7 million to $67.9 million.
- Liquidity and debt: At November 28, cash was $67.9 million and investments totaled approximately $11.6 million, including $11.1 million in time deposits/CDs and $0.6 million in equity securities. Current liabilities were $22.4 million; total liabilities were $24.2 million. The balance sheet lists no borrowings or other interest-bearing debt.
- Balance-sheet changes: Total assets were $168.8 million versus $185.0 million at May 30, 2015; stockholders’ equity was $144.6 million versus $156.7 million. The period-end balance includes $6.3 million of goodwill and $3.9 million of net intangible assets from the IMES acquisition.
- Capital returns: The company repurchased $5.0 million of common stock and paid $1.6 million in dividends during the first six months. Dividends were $0.06 per common share and $0.054 per Class B share in Q2.
Material changes, outlook and risks
- Sales growth was modest and largely reflected the IMES acquisition. Lower PMT sales and margins, continued Canvys price pressure, and product/geographic mix and currency effects weighed on gross margin. Higher SG&A included $1.4 million of Q2 IMES-related costs and investment in Healthcare; management cited offsets from cost reductions elsewhere.
- Q2 included a $0.243 million gain on asset disposal; six-month results included a $0.3 million German tax-audit liability. The six-month effective tax rate was a provision of (20.6%), affected by a $7.0 million valuation allowance against deferred tax assets, geographic income mix and the German audit settlement.
- IMES was acquired for $12.2 million cash, with no liabilities assumed. Preliminary purchase accounting assigned $6.3 million to goodwill and $3.4 million to acquired intangibles; management said valuations could change during the measurement period. The acquired facility is leased from an entity in which IMES’s executive vice president has an ownership interest; minimum payments total $0.7 million over five years.
- Management said existing liquidity, including cash, should cover known capital requirements and working-capital needs for the fiscal year ending May 28, 2016. The filing provides no earnings or revenue guidance. Future dividends remain subject to board discretion.
- Key risks discussed include foreign-currency exposure (the company does not use derivatives to manage it), inventory demand and obsolescence estimates, deferred-tax-asset recoverability and tax examinations. Management reported no material change to previously disclosed risk factors and did not consider pending ordinary-course litigation likely to cause a material loss.
Important facts for investors to verify
- Whether IMES can sustain its contribution to Healthcare revenue and margins, and how final purchase accounting affects goodwill, amortization and future results.
- Whether PMT sales and manufacturing utilization recover and whether Canvys can offset price pressure and currency impacts.
- The persistence of operating cash outflows and working-capital needs, particularly inventory growth and declining payables.
- The assumptions supporting the $7.0 million deferred-tax valuation allowance, foreign earnings repatriation provision and open tax examinations.
- The terms and governance of the related-party IMES facility lease, and the effect of continued repurchases and dividends on cash available for operations.