Richardson Electronics, Ltd. — Q2 FY2021 Form 10-Q
Business and period: Richardson Electronics supplies engineered solutions, power and microwave products, customized displays, and healthcare replacement parts and services. This filing covers the 13 weeks ended November 28, 2020, and the six months ended that date; comparable prior-year periods also contained 13 and 26 weeks, respectively.
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Net sales | $42.4 million | $39.6 million | $81.2 million | $80.3 million |
| Gross profit / margin | $14.3 million / 33.8% | $12.7 million / 32.0% | $26.7 million / 32.9% | $25.6 million / 31.9% |
| Operating income (loss) | $0.9 million | $(0.5) million | $0.2 million | $(0.4) million |
| Net income (loss) | $0.7 million | $(0.6) million | $(0.5) million | $(0.5) million |
| Operating cash flow | $4.4 million | $0.6 million | $1.1 million | $(1.4) million |
- Q2 diluted EPS was $0.05 for both common and Class B shares, versus losses per share of $0.05 and $0.04, respectively. Six-month losses per share were $0.04 and $0.03, respectively, unchanged from the prior-year period.
- At November 28, 2020, cash and cash equivalents were $37.0 million and short-term investments were $9.0 million, for total cash and investments of $46.0 million. Current assets were $129.4 million and current liabilities $30.4 million.
- No conventional borrowings are reported. Lease liabilities totaled $2.8 million, including current and non-current amounts. Six-month capital expenditures were $1.3 million; cash dividends paid were $1.6 million.
Changes and segment results
- Q2 sales rose 7.0%; six-month sales rose 1.2%. Gross margin improved in both comparisons, while SG&A increased modestly.
- PMT: Q2 sales increased 11.2% to $32.9 million; six-month sales increased 5.0% to $63.2 million. Management cited power-grid tubes, new technology partners including 5G applications, and semiconductor wafer-fabrication demand; improved mix and manufacturing efficiency lifted margins.
- Canvys: Q2 sales fell 14.7% to $6.7 million; six-month sales fell 11.4% to $13.4 million. COVID-19-related customer demand weakness, particularly in Europe, was partly offset by North American sales. Margins improved on product mix.
- Healthcare: Q2 sales rose 28.2% to $2.8 million, including stronger ALTA 750D tube demand and Latin American equipment sales; six-month sales fell 7.0% to $4.6 million. Under-absorbed manufacturing costs reduced gross margin to 25.6% in Q2 and 17.6% for the six months.
- Six-month foreign-exchange losses were $0.6 million, versus $0.1 million in the prior-year period; management says exposure principally arises from foreign-currency balances and the company does not use derivatives to manage it.
Outlook, risks and unusual items
- Management provided no specific revenue or earnings guidance. It believes existing liquidity will meet known capital and working-capital needs for the next 12 months, but says the pandemic’s future effects cannot currently be estimated.
- COVID-19 may affect demand, suppliers, transportation, employees, revenue, earnings, liquidity and cash flow. The company remained operational as an essential business and reported no major supply-chain interruption, though component delays affected some new-product development schedules.
- Varex Imaging litigation includes patent-infringement claims and an amended complaint adding trade-secret claims. Richardson disputes the claims; management stated that a loss was not probable or estimable at the time of the filing. The court had denied Varex’s preliminary-injunction motion in 2019.
- The company deferred $0.8 million of employer Social Security tax payments under the CARES Act. A $12.5 million valuation allowance was recorded against deferred tax assets; management cited cumulative U.S. losses as negative evidence. A Thailand tax examination is ongoing.
- Foreign currency translation generated a $2.6 million gain for the six-month period, contributing to comprehensive income of $2.2 million despite a net loss. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether PMT’s growth and improved margins continue, and whether Canvys and Healthcare recover from pandemic-related weakness and Healthcare’s margin pressure.
- How COVID-19, customer demand, component availability, and the broader economy affect second-half results and liquidity.
- The status and potential exposure from the Varex lawsuit and the Thailand tax examination; no clear loss estimate for the litigation is provided.
- Whether operating cash generation is sustainable given working-capital movements, including higher inventory and accrued liabilities.
- The sustainability of dividends and the realization of deferred tax assets subject to the valuation allowance.