Richardson Electronics, Ltd. — Q2 FY2020 Form 10-Q
Reporting period: Quarter and six months ended November 30, 2019; comparable periods ended December 1, 2018. Both quarters comprised 13 weeks and both six-month periods 26 weeks. Amounts below are in U.S. dollars; financial figures are rounded to millions.
Business context
Richardson supplies engineered solutions, power grid and microwave products, customized displays, and diagnostic-imaging replacement parts and services. Its reportable segments are Power and Microwave Technologies Group (PMT), Canvys, and Healthcare.
Financial performance
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Net sales | $39.6 | $41.3 | $80.3 | $85.5 |
| Gross profit | $12.7 | $13.0 | $25.6 | $26.9 |
| Gross margin | 32.0% | 31.4% | 31.9% | 31.5% |
| SG&A | $13.2 | $13.4 | $26.0 | $26.5 |
| Operating income (loss) | $(0.5) | $(0.5) | $(0.4) | $0.4 |
| Net income (loss) | $(0.6) | $(0.3) | $(0.5) | $0.1 |
| Diluted EPS, common / Class B | $(0.05) / $(0.04) | $(0.02) / $(0.02) | $(0.04) / $(0.03) | $0.01 / $0.01 |
Q2 sales fell 4.1% year over year, while gross margin improved 0.6 percentage points. SG&A declined, but as a share of sales rose to 33.2% from 32.5%. For the six months, sales fell 6.1%; improved gross margin did not prevent a shift from operating income to operating loss and from net income to net loss.
Segments and material changes
- PMT: Q2 sales declined 8.4% to $29.6 million; six-month sales declined 10.3% to $60.2 million. Management cited softness in power grid tubes and a slower semiconductor wafer-fab equipment ramp, partly offset by growth in power conversion and RF/microwave components.
- Canvys: Q2 sales rose 20.9% to $7.9 million, with demand growth in North America and Europe; six-month sales rose 10.7% to $15.1 million, primarily on North American demand.
- Healthcare: Q2 sales declined 12.6% to $2.2 million on lower equipment and parts sales, partly offset by CT tubes. Six-month sales increased 6.0% to $5.0 million. Margin improvement reflected favorable product mix and manufacturing efficiencies.
Consolidated gross-margin improvement was attributed to Healthcare product mix and better manufacturing overhead absorption; PMT also cited favorable mix. Q2 other expense was $0.1 million, compared with $0.3 million of other income a year earlier, largely reflecting a $0.2 million foreign-exchange loss versus a prior-year gain.
Cash flow, liquidity, and obligations
- At November 30, 2019, cash and cash equivalents were $33.1 million and short-term certificates of deposit were $13.0 million, for total cash and investments of $46.1 million. Total cash and investments were $50.0 million at June 1, 2019.
- Current assets were $127.4 million and current liabilities $27.9 million. No borrowings are listed on the balance sheet; lease liabilities totaled approximately $4.1 million, including current and non-current amounts.
- For the first six months, operating activities used $1.4 million, versus $2.7 million used in the prior-year period. Inventory growth of $3.4 million and declines in accounts payable and accrued liabilities weighed on cash, partly offset by lower receivables.
- Investing activities used $5.8 million, including $13.0 million of CD purchases, partly offset by $8.0 million of investment maturities and $0.8 million of capital expenditures. Financing activities used $1.6 million, mainly for dividends. Cash declined $9.0 million over the six months.
- Inventory was $56.2 million, up from $53.2 million at fiscal year-end. The company paid dividends of $0.120 per common share and $0.108 per Class B share for the six-month period.
Outlook, risks, and unusual items
- No quantified earnings or revenue guidance is provided. Management stated that current liquidity should be sufficient for known capital requirements and working-capital needs through the next 12 months.
- Richardson repatriated $4.4 million from Germany and the Netherlands in Q2; repatriation may incur state, local, withholding, or similar taxes.
- Foreign-currency movements are a risk; the company reported Q2 foreign-exchange losses and stated it does not use derivatives to manage currency exposure.
- The Varex Imaging patent lawsuit concerning two patents and the ALTA750 product remained pending. The court denied Varex’s preliminary-injunction motion on September 30, 2019. Richardson considers the suit without merit and said a loss was not probable or estimable.
- A $11.9 million valuation allowance remained against U.S. state and federal deferred tax assets. Management said a full valuation allowance would remain until sufficient positive evidence supports realization; the six-month effective tax rate was unusually negative at (123.6)%, reflecting geographic income mix and valuation-allowance movements.
- Management reported no material changes to the risk factors in its prior Form 10-K. Disclosure controls were assessed as effective, with no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether PMT demand stabilizes, particularly in power grid tubes and semiconductor wafer-fab equipment, and whether Canvys growth continues.
- Whether higher inventory converts to sales and operating cash flow, given the six-month operating cash use and cash decline.
- Current status and potential financial exposure of the Varex litigation; the filing gives no clear estimated loss amount.
- Evidence supporting eventual realization of deferred tax assets and the sustainability of reported tax expense.
- Whether dividends can be maintained amid losses and working-capital needs; future dividends remain at the board’s discretion.