Richardson Electronics, Ltd. — Q1 FY2020 Form 10-Q
Reporting period: Three months ended August 31, 2019 (13 weeks), compared with the three months ended September 1, 2018. Richardson provides engineered solutions, electronic components, diagnostic-imaging products and customized display solutions through PMT, Canvys and Healthcare.
Financial performance
Amounts below are in millions of U.S. dollars, except per-share data.
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Net sales | $40.653 | $44.157 |
| Gross profit / margin | $12.951 / 31.9% | $13.953 / 31.6% |
| SG&A | $12.847 | $13.099 |
| Operating income | $0.103 | $0.854 |
| Net income | $0.157 | $0.431 |
| Diluted EPS, common and Class B | $0.01 each | $0.03 each |
| Cash used in operating activities | $2.054 | $3.630 |
Gross margin improved modestly despite lower sales. Other income was $0.231 million, including investment/interest income and foreign-exchange gains; the prior-year quarter had $0.152 million of other expense. The effective tax rate was 53.0%, versus 38.6%, reflecting geographic income mix and the valuation allowance on U.S. deferred tax assets. Foreign-currency translation reduced comprehensive results by $0.716 million, resulting in a comprehensive loss of $0.559 million.
Segments and material year-over-year changes
- PMT: Sales fell 12.1% to $30.567 million; gross margin held at 31.7%. Management attributed the decline mainly to continued weakness in the wafer-fab-equipment market, partly offset by growth in power conversion and RF/microwave components.
- Canvys: Sales rose 1.4% to $7.277 million; gross margin eased to 31.9% from 32.2%. North American demand improved, while product mix and foreign exchange weighed on margin.
- Healthcare: Sales increased 26.8% to $2.809 million; gross margin rose to 33.9% from 28.6%, driven by higher CT tube and parts sales, favorable mix and manufacturing over-absorption.
Consolidated sales declined 7.9%. SG&A decreased by about $0.3 million, primarily on lower employee benefits, IT and bad-debt expenses, but operating income still fell as the lower gross-profit dollars outweighed those savings.
Cash, liquidity and obligations
- Cash and cash equivalents were $46.457 million at August 31, 2019, compared with $42.019 million at June 1, 2019. The quarter’s increase included $8.0 million of proceeds from maturing certificates of deposit; operating activities used $2.054 million and financing activities used $0.801 million.
- Current assets were $124.964 million and current liabilities were $24.785 million. The company reported no current investments at quarter-end; it had $8.0 million at June 1.
- No conventional borrowings are shown on the reported balance sheet. Lease liabilities totaled $4.219 million, of which $1.541 million was current and $2.678 million non-current. Adoption of the lease standard added right-of-use assets and lease liabilities; management said it did not materially affect results or cash flows.
- Capital expenditures were $0.339 million; cash dividends paid were $0.775 million. Quarterly dividends were $0.060 per common share and $0.054 per Class B share.
Management said existing liquidity, including cash on hand, should be sufficient for known capital requirements and working-capital needs over the next 12 months. This is not formal earnings guidance; the filing gives no quantified revenue or earnings forecast.
Risks, contingencies and other notable matters
- Foreign-currency exposure is the company’s primary stated financial market risk. It does not use derivative instruments to manage that exposure.
- Varex Imaging’s patent-infringement lawsuit concerns Richardson’s ALTA750 product. On September 30, 2019, the court denied Varex’s motion for a preliminary injunction. Richardson said it believes the lawsuit is without merit and that a loss was not probable or estimable when the financial statements were issued.
- The company maintained an $11.7 million valuation allowance against U.S. state and federal net deferred tax assets, citing insufficient positive evidence of future taxable income.
- Management stated that there were no material changes to the risk factors in the company’s June 1, 2019 Form 10-K. Disclosure controls and procedures were assessed as effective, with no material change in internal control reported for the quarter.
Most important facts for investors to verify
- Whether the wafer-fab-equipment slowdown persists and how PMT sales respond.
- Whether Healthcare’s sales and margin gains continue, and the drivers behind Canvys’ margin pressure.
- Working-capital and cash conversion trends, especially inventory growth and payments to suppliers; the quarter still used cash in operations.
- Developments in the Varex litigation and any potential financial or commercial impact.
- Foreign-exchange effects and the assumptions supporting the deferred-tax-asset valuation allowance.