Richardson Electronics, Ltd. — Fiscal 2021 Q1 Form 10-Q
Reporting period: Three months ended August 29, 2020 (13 weeks); comparisons are with the three months ended August 31, 2019. Richardson Electronics provides engineered solutions and electronic components through its Power and Microwave Technologies Group (PMT), Canvys, and Healthcare segments.
Financial performance
- Revenue: $38.8 million, down 4.5% year over year. PMT sales were $30.3 million (down 1.0%), Canvys $6.7 million (down 7.8%), and Healthcare $1.8 million (down 34.2%).
- Gross profit and margin: $12.4 million versus $13.0 million; gross margin was 31.8% versus 31.9%. Healthcare’s gross margin fell to 5.6% from 33.9%, while PMT and Canvys margins improved.
- Operating results: SG&A was $13.0 million, or 33.4% of sales, compared with $12.8 million, or 31.6%. Operating loss was $0.6 million versus operating income of $0.1 million.
- Net results: Net loss was $1.1 million, or $0.09 per basic and diluted common share and $0.08 per Class B share, compared with net income of $0.2 million, or $0.01 per share for each class. A $2.1 million foreign currency translation gain lifted comprehensive income to $1.0 million.
- Cash flow: Operating cash used was $3.4 million, versus $2.1 million used a year earlier. Investing activities provided $6.3 million, primarily reflecting investment maturities net of purchases; financing activities used $0.8 million, mainly for dividends. Cash increased $3.0 million to $33.5 million.
- Liquidity: Cash and cash equivalents were $33.5 million and short-term investments were $9.0 million, totaling $42.5 million. Current assets were $126.6 million and current liabilities $28.5 million. Management expects existing liquidity to cover known capital and working-capital needs for the next 12 months.
- Debt and obligations: The filing reports no borrowings. Lease liabilities totaled $3.1 million, including $1.4 million current. The company also reported $0.5 million of deferred employer Social Security taxes under the CARES Act.
- Dividends: Quarterly dividends were $0.060 per common share and $0.054 per Class B share; $0.8 million was paid in total.
Material changes and management commentary
- Sales declines were attributed in part to COVID-19, power-grid tube market softness, continuing weakness in Europe, and economic issues in Latin America. PMT growth in new Power and Microwave technology applications, including 5G, and semiconductor wafer-fabrication engineered solutions partly offset weakness.
- Healthcare’s sales and gross profit were particularly weak; management attributed the margin decline primarily to under-absorbed manufacturing expenses. Favorable product mix and improved manufacturing efficiency supported PMT, while favorable mix benefited Canvys.
- Foreign-exchange losses of $0.4 million compared with foreign-exchange gains of $0.1 million in the prior-year quarter; management said currency results primarily reflected translation of U.S. dollars held by non-U.S. entities. The company does not use derivatives to manage this exposure.
- Operating cash use reflected working-capital movements, including a $2.7 million decrease in accounts payable, $1.6 million of inventory growth, and a $0.9 million increase in receivables, partly offset by a $1.8 million increase in accrued liabilities.
Outlook, risks, and contingencies
- The filing provides no specific revenue or earnings guidance. Management said the duration and financial effects of COVID-19 could not be estimated; the pandemic could affect demand, suppliers, transportation, employees, liquidity, and cash flows. Some component delays affected new-product development, but no major supply-chain interruption was reported.
- Richardson remained operational as an essential business during relevant stay-at-home directives. Management stated it was monitoring the pandemic and may need to take actions, including expense reductions, if conditions warrant.
- Varex Imaging amended its patent lawsuit in August 2020 to add trade-secret-misappropriation claims. Richardson moved to dismiss and stated it believed the lawsuit was without merit; management said a loss was not probable or estimable based on information available when the statements were issued.
- The company maintained a $12.7 million valuation allowance against deferred tax assets. Its U.S. state and federal deferred tax assets remain subject to uncertainty about future taxable income. A tax examination in Thailand covers fiscal 2008–2011.
- Management reported disclosure controls and procedures were effective and no material changes to internal control over financial reporting occurred during the quarter. No material changes to previously disclosed risk factors were reported.
Key facts investors should verify
- Whether revenue and margins recover, especially in Healthcare, and whether COVID-19-related and regional market pressures persist.
- Whether the increase in inventory and ongoing operating cash use convert into sales and cash generation.
- Whether $42.5 million of cash and investments remains adequate under continued pandemic or foreign-exchange stress.
- Developments in the Varex litigation, including the added trade-secret claims and the pending motion to dismiss.
- The sustainability of dividends while the company is reporting losses and using cash in operations.