Richardson Electronics, Ltd. — FY2019 Form 10-K
Period clarification: The supplied filing is for the fiscal year ended June 1, 2019, not fiscal 2018. Fiscal 2019 and fiscal 2018 each included 52 and 53 weeks, respectively. The filing also reports fourth-quarter results.
Business context
Richardson Electronics provides engineered electronic components and solutions through three segments: Power and Microwave Technologies Group (PMT), Canvys visual technology solutions, and Healthcare replacement parts, tubes, and services. Approximately 61% of fiscal 2019 sales were outside the United States.
Financial results and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $166.7 million | $163.2 million |
| Gross profit / margin | $51.7 million / 31.0% | $55.1 million / 33.7% |
| Operating income (loss) | $(6.8) million | $3.6 million |
| Net income (loss) | $(7.3) million | $3.8 million |
| Operating cash flow | $(2.6) million | $3.0 million |
- FY2019 diluted loss per common share was $0.57; common dividends were $0.24 per share for the year.
- Cash and cash equivalents were $42.0 million at year-end, with $8.0 million of current investments, for combined cash and investments of $50.0 million. Management said available liquidity should cover known capital and working-capital needs for the next 12 months.
- Total assets were $153.0 million and stockholders’ equity was $123.8 million. The balance sheet presents no borrowings; operating lease commitments totaled $4.3 million.
- Capital expenditures were $3.9 million. Cash used in investing activities was $11.9 million, including net purchases of investments; financing activities used $2.8 million, primarily for dividends.
Material changes and unusual items
- Sales increased 2.1%, but gross margin fell 2.7 percentage points. Management cited product mix, $1.6 million of manufacturing under-absorption related to the semiconductor wafer-fab equipment slowdown, and inventory provisions.
- PMT sales were $128.9 million, up 0.5%; Canvys sales were $28.0 million, up 4.8%; Healthcare sales were $9.8 million, up 18.8%. Healthcare gross margin dropped to 24.5% from 41.5%, reflecting mix, manufacturing absorption, and scrap costs associated with the ALTA750 CT tube launch.
- The company recorded a $6.3 million non-cash impairment, writing off all goodwill associated with the IMES reporting unit. Management attributed this to weaker expected sales from new products, management changes, and increased net assets. Excluding the impairment, operating loss was approximately $0.5 million.
- Operating cash flow turned negative, with working-capital use driven primarily by higher inventories, higher receivables, and lower accounts payable. Inventory rose to $53.2 million from $50.7 million.
- Fourth-quarter sales were $42.2 million versus $45.5 million in the prior-year quarter. Fourth-quarter net loss was $6.4 million, including the $6.3 million goodwill impairment; prior-year fourth-quarter net income was $1.7 million.
Outlook, risks, and contingencies
- The filing gives no specific revenue, earnings, or margin guidance. Management discussed growth initiatives in Healthcare and power conversion, and cited growth in 5G and RF/microwave markets; the semiconductor equipment market slowdown was a headwind.
- U.S. tariffs on certain China-origin products reached 25% for some company products. Management was working with suppliers and customers to mitigate the effect, but warned that inability to pass through costs or resulting weaker demand could hurt sales and margins.
- Key risks include inventory obsolescence and forecasting demand, supplier concentration (one supplier represented 11% of cost of sales), foreign exchange exposure without derivative hedging, international cash access and repatriation, and competitive or technological change. A 10% unfavorable currency movement was estimated to reduce FY2019 foreign-currency-denominated sales by about $10.5 million.
- Varex Imaging sued over alleged patent infringement and sought to enjoin sales of the ALTA750. Richardson disputed the claims; the company said a loss was not probable or estimable at the time the financial statements were issued. The case was awaiting court rulings.
- The company held $29.3 million, about 59% of cash, cash equivalents, and investments, at foreign subsidiaries. The filing notes potential tax, regulatory, and liquidity consequences of transfers.
- The company established an $11.7 million valuation allowance against deferred tax assets. It also cautioned that future impairment of remaining intangible assets was possible.
Important facts for investors to verify
- Whether Healthcare can improve margins and realize expected demand for the ALTA750 following launch costs and the IMES goodwill write-off.
- Whether gross margin and operating performance recover as semiconductor equipment demand and manufacturing absorption change.
- Inventory quality, obsolescence exposure, and the cash implications of inventory growth and negative operating cash flow.
- Developments and potential business impact of the Varex litigation and applicable tariffs.
- Availability and use of foreign-held liquidity, tax valuation allowances, and the sustainability of dividends while the company reports losses.