Richardson Electronics, Ltd. — Form 10-Q Summary
Period: Third quarter and first nine months of fiscal 2020, ended February 29, 2020, compared with periods ended March 2, 2019. The request metadata says “2019 Q3,” but the filing is for fiscal 2020 Q3.
Business context
Richardson supplies engineered solutions, power grid and microwave tubes, RF and power products, diagnostic-imaging replacement products and customized display solutions. Its reportable segments are Power and Microwave Technologies Group (PMT), Canvys and Healthcare.
Financial results
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Net sales | $38.2 million | $39.0 million | $118.5 million | $124.5 million |
| Gross profit / margin | $12.7 million / 33.1% | $12.3 million / 31.5% | $38.3 million / 32.3% | $39.2 million / 31.5% |
| SG&A | $12.7 million | $13.1 million | $38.7 million | $39.6 million |
| Operating income (loss) | $11,000 | ($798,000) | ($367,000) | ($398,000) |
| Net loss | ($93,000) | ($1.1 million) | ($558,000) | ($951,000) |
| Diluted loss per share | ($0.01) | ($0.08) | ($0.04) | ($0.07) |
| Operating cash flow | ($925,000) | ($2.5 million) | ($2.4 million) | ($5.2 million) |
At February 29, 2020, cash and equivalents were $30.9 million and short-term investments were $13.0 million, for total cash and investments of $43.9 million. Current assets were $126.5 million and current liabilities $27.2 million. Total liabilities were $30.5 million, including $3.8 million of lease liabilities; the balance sheet reports no borrowings. Nine-month capital expenditures were $1.2 million and dividends paid were $2.3 million. Common and Class B dividends were $0.180 and $0.162 per share, respectively, for the nine-month period.
Changes and segment performance
- Quarterly sales fell 2.0%; nine-month sales fell 4.8%. Gross margin improved in both periods, while lower SG&A helped narrow quarterly losses and reduce the nine-month net loss.
- Q3 PMT sales declined 2.5% to $29.0 million; Canvys rose 3.5% to $7.2 million; Healthcare declined 11.9% to $2.1 million. For nine months, PMT fell 7.9%, Canvys rose 8.3% and Healthcare was essentially flat.
- Management attributed PMT weakness to softness in power grid tubes, a slow semiconductor-equipment sales ramp, and COVID-related shipment effects. Canvys benefited from North American demand. Healthcare’s quarterly decline reflected lower equipment and non-core parts sales, partly offset by CT tubes.
- Higher gross margins were attributed primarily to favorable product mix and improved manufacturing efficiencies, especially in PMT and Healthcare. Lower severance, legal and professional-services costs reduced SG&A, partly offset by higher Healthcare R&D expense.
- Cash and investments declined from $50.0 million at June 1, 2019 to $43.9 million. Operating cash use reflected inventory growth of $4.2 million and lower accounts payable of $2.1 million, partly offset by a $1.1 million reduction in receivables.
Outlook, risks and unusual items
- Management said existing liquidity should cover known capital requirements and working-capital needs for the next 12 months. No numerical earnings or sales guidance was provided.
- COVID-19 had affected China-related shipments and approximately 5% of Q3 shipments, according to management. The filing, issued April 9, 2020, said the pandemic’s effects on fiscal 2020 results, financial condition and liquidity could not then be estimated. It identified potential disruption to demand, suppliers, transportation and the workforce as material risks.
- The company was evaluating the impact of the CARES Act. The filing notes a $12.0 million valuation allowance against deferred tax assets and an ongoing German tax audit covering fiscal 2015–2018.
- Varex Imaging’s patent lawsuit concerning the ALTA750 product remained pending. The court denied Varex’s motion for a preliminary injunction in September 2019; Richardson said it believed the case lacked merit and that a loss was not probable or estimable.
- The company adopted lease accounting Topic 842 during the period, recording lease right-of-use assets and liabilities; management said adoption did not materially affect results or cash flows. The reported nine-month effective tax rate was unusually negative because of geographic income mix and deferred-tax valuation allowances.
Important facts for investors to verify
- Whether COVID-19 materially affected subsequent-quarter orders, shipments, supply availability or the fiscal 2020 outlook.
- Whether PMT’s sales decline stabilizes, and whether Canvys growth and Healthcare margin improvement continue.
- How inventory levels and working-capital movements affect operating cash flow and liquidity.
- Any developments in the Varex litigation, German tax audit, deferred-tax valuation allowance or dividend policy.