Richardson Electronics, Ltd. — Q1 FY2023 Form 10-Q
Reporting period: Three months ended August 27, 2022 (13 weeks), compared with the three months ended August 28, 2021. Richardson Electronics manufactures and distributes engineered solutions, power and microwave products, green-energy solutions, customized displays, and healthcare replacement parts and services.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Net sales | $67.6 million | $53.7 million |
| Gross profit / margin | $23.0 million / 34.1% | $16.3 million / 30.3% |
| SG&A | $14.2 million (21.1% of sales) | $13.5 million (25.1% of sales) |
| Operating income | $8.8 million | $2.8 million |
| Net income | $6.3 million | $2.6 million |
| Diluted EPS, common / Class B | $0.45 / $0.40 | $0.20 / $0.18 |
| Operating cash flow | $(3.2) million | $(4.9) million |
| Capital expenditures | $1.4 million | $0.8 million |
Sales increased 25.8%. Gross margin rose 3.8 percentage points, reflecting product mix and manufacturing efficiencies in PMT and GES, and improved manufacturing absorption and lower component scrap in Healthcare; Canvys mix and foreign-currency effects partly offset the gains. SG&A increased in dollars, mainly from compensation and incentive expense, but declined as a share of sales. Other expense was $0.3 million, primarily foreign exchange. The effective tax rate was 25.0%, versus 5.9%, reflecting, among other factors, no NOLs available for use in FY2023 and a larger share of U.S. earnings.
Segments and material changes
The company introduced Green Energy Solutions (GES) as a separate reportable segment, carved out of Power and Microwave Technologies (PMT), and recast prior-period segment results for comparison.
| Segment | Sales, Q1 FY2023 | Year-over-year sales change | Gross margin, FY2023 / FY2022 |
|---|---|---|---|
| PMT | $45.4 million | +12.2% | 34.3% / 30.1% |
| GES | $8.5 million | +230.7% | 35.5% / 28.9% |
| Canvys | $10.4 million | +23.4% | 31.4% / 33.4% |
| Healthcare | $3.3 million | +45.5% | 36.7% / 24.3% |
Management attributed PMT growth mainly to semiconductor wafer fabrication demand; GES growth to wind-turbine, synthetic-diamond and electric-vehicle customers; Canvys growth primarily to North America; and Healthcare growth to increases across product lines.
Financial position, liquidity and cash flows
At August 27, 2022, cash and cash equivalents were $30.6 million and current investments were $5.0 million, for cash, cash equivalents and investments of $35.6 million. Total assets were $187.6 million; current liabilities were $44.3 million; and stockholders’ equity was $140.7 million. The balance sheet lists no borrowings; lease liabilities totaled $2.8 million. Management said existing liquidity and expected operating cash flows should cover known capital and working-capital needs for the next 12 months.
Cash declined $4.9 million during the quarter. Operating cash use of $3.2 million reflected working-capital investment, including a $10.5 million inventory increase and a $3.5 million accounts-receivable increase, partly offset by higher payables and accrued liabilities. Investing used $1.4 million, principally for capital expenditures. Financing provided $0.5 million, including $1.4 million from stock issuance, less $0.8 million in dividends. Inventory was $89.1 million, up from $80.4 million at the fiscal-year end.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management said results for the quarter are not necessarily indicative of the full fiscal year.
- Management cited continuing uncertainty from COVID-19, supply-chain and freight disruption, component delays, foreign-exchange movements, economic and labor conditions, and the Russia-Ukraine war and related sanctions. Some China-manufactured products face U.S. tariffs; inability to pass through costs or resulting lower demand could pressure sales and margins.
- The company does not use derivative instruments to manage foreign-currency exposure. Foreign-currency translation reduced quarterly comprehensive income by $2.3 million.
- Operating cash use was driven in part by inventory built to support growth in LaFox manufacturing, GES and RF/microwave components. Deferred employer Social Security taxes of $0.4 million were due by December 31, 2022.
- A related-party lease with LDL, LLC, in which a company executive has an ownership interest, remains in place; future minimum payments were approximately $0.4 million. The executive was scheduled to depart effective September 24, 2022.
- The company reported effective disclosure controls and no material changes to internal control over financial reporting; it stated there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether sales and margin growth, particularly in GES and PMT, persist, and how much reflects demand, product mix or manufacturing efficiencies.
- Whether inventory growth converts to sales and cash, and whether working-capital needs continue to weigh on operating cash flow.
- Effects of supply-chain, freight, tariff, foreign-exchange and geopolitical risks on costs, demand and margins.
- Whether management’s stated liquidity coverage remains adequate as capital spending, dividends and working-capital requirements evolve.
- Developments in the related-party lease, deferred payroll taxes, and the German tax audit settlement payment described as immaterial.