Business context and reporting period
Richardson Electronics, Ltd. supplies engineered electronic solutions and components, customized display solutions, and healthcare replacement parts and services. Its reportable segments are Power and Microwave Technologies Group (PMT), Canvys, and Healthcare. This Form 10-Q covers the three months ended September 2, 2017 (the first quarter of fiscal 2018); the comparable quarter ended August 27, 2016. The periods contained 14 and 13 weeks, respectively, which affects year-over-year comparability.
Financial performance and position
- Revenue: Net sales were $37.0 million, up 10.9% from $33.4 million. Gross profit rose to $12.1 million from $10.2 million, and gross margin improved to 32.8% from 30.7%.
- Operating results: SG&A was essentially flat at $12.3 million, equal to 33.3% of sales versus 36.9%. Operating income was $15,000, compared with an operating loss of $2.1 million. The current quarter included a $191,000 gain on disposal of assets.
- Net income and distributions: Net loss was $112,000, or $0.01 per common and Class B share, versus a $2.85 million loss ($0.23 per common share and $0.20 per Class B share). The company paid dividends of $0.06 per common share and $0.054 per Class B share; total cash dividends were $758,000.
- Cash flow: Operating activities used $2.5 million, compared with $1.7 million used in the prior-year quarter. Investing activities provided $3.3 million, including $4.0 million of investment maturities, partly offset by $1.0 million of capital expenditures. Financing activities used $758,000 for dividends. Cash increased $1.1 million to $56.4 million, including a $1.1 million favorable effect from exchange rates.
- Liquidity and capital structure: At September 2, cash was $56.4 million and investments totaled approximately $4.9 million; current assets were $127.6 million and current liabilities $22.6 million. Total liabilities were $23.5 million and stockholders’ equity $133.7 million. The balance sheet presents no borrowings or debt balance. Management said existing liquidity should cover known capital requirements and working-capital needs for the next 12 months.
- Working capital: Inventory increased to $46.1 million from $42.7 million; accounts receivable declined to $19.3 million from $20.8 million. Management attributed the inventory build principally to growth in RF and power technologies, semiconductor capital equipment, and healthcare replacement parts.
Material changes versus the prior comparable period
- PMT sales increased 14.7% to $29.1 million, with gross margin up to 32.9% from 29.4%. Management cited market-share gains and growth in engineered, semiconductor-related, and partner products.
- Canvys sales increased 24.8% to $5.8 million on stronger demand from key OEMs, while gross margin declined to 26.8% from 29.2%, reflecting product mix, freight costs, and lower-margin engineering billings.
- Healthcare sales fell 37.5% to $2.1 million, mainly because the PACS display business was sold at the end of fiscal 2017; that business contributed $1.4 million of prior-year-quarter sales. Healthcare gross margin rose to 48.8% from 42.6%, partly due to the exit of that lower-margin business.
- Consolidated gross-margin improvement reflected growth in higher-margin products with greater engineering content and the PACS business sale. Despite improved operating results, the company remained slightly loss-making.
Outlook, risks, contingencies, and unusual items
- No specific revenue or earnings guidance was provided. Management stated that liquidity was sufficient for anticipated needs over the next 12 months; future dividends remain at the board’s discretion.
- On September 12, 2017, the company received an approximately $2.0 million Illinois tax refund related to an amended return concerning the 2011 sale of RFPD. It expects to recognize a net benefit of $1.5 million, after $0.5 million in professional fees, in the second quarter of fiscal 2018 in discontinued operations.
- The company reported a $9.2 million valuation allowance against net deferred tax assets, up from $8.5 million at May 27, 2017, and said it would maintain a full valuation allowance on U.S. and state deferred tax assets until sufficient positive evidence supports reversal. Tax examinations were ongoing in Germany, Thailand, and Illinois.
- Foreign currency is a principal market risk; the quarter included $201,000 of foreign-exchange losses, and the company said it does not use derivatives to manage this exposure. Foreign-currency translation produced a $2.1 million gain in other comprehensive income.
- Management said it did not anticipate material inventory write-down risks, but noted that changed demand or market conditions could require additional provisions. Ordinary-course legal proceedings were disclosed; the company did not believe current claims would materially adversely affect its financial position, results, or cash flows. No material changes to previously disclosed risk factors were reported.
- The company was evaluating the impact of the new revenue-recognition standard and expected to complete its assessment in fiscal 2018’s second quarter; the filing did not establish whether adoption would have a material impact.
Important facts for investors to verify
- Assess the durability of revenue and margin improvement, considering the extra week in the current quarter and the continued growth in higher-engineering-content products.
- Track Healthcare sales after the PACS display business sale and whether growth in CT tubes and equipment can offset the lost business.
- Monitor inventory growth, operating cash use, and working-capital conversion as sales expand.
- Confirm the timing and reported treatment of the Illinois tax-refund benefit, and review developments in tax examinations and deferred-tax valuation allowances.
- Review foreign-exchange exposure, dividend decisions, and any update on the expected effects of the revenue-recognition standard.