Richardson Electronics, Ltd. — Fiscal 2018 Second-Quarter Form 10-Q
Reporting period: Quarter ended December 2, 2017; the quarter comprised 13 weeks. Six-month results cover 27 weeks, compared with 26 weeks in the prior-year period. Amounts below are in millions of dollars unless stated otherwise.
Business context
Richardson Electronics supplies engineered solutions, power grid and microwave tubes, RF and power components, diagnostic-imaging replacement products and customized display solutions. Its reportable segments are Power and Microwave Technologies Group (PMT), Canvys and Healthcare.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Net sales | $39.1 | $33.8 | $76.1 | $67.2 |
| Gross profit / margin | $13.4 / 34.2% | $11.0 / 32.4% | $25.5 / 33.5% | $21.2 / 31.6% |
| SG&A | $12.6 | $13.4 | $24.9 | $25.7 |
| Operating income (loss) | $0.8 | $(2.4) | $0.8 | $(4.5) |
| Income (loss) from continuing operations | $0.2 | $(2.5) | $0.1 | $(5.4) |
| Net income (loss) | $1.7 | $(2.5) | $1.6 | $(5.4) |
| Diluted EPS, common / Class B | $0.13 / $0.12 | $(0.20) / $(0.18) | $0.12 / $0.11 | $(0.43) / $(0.38) |
Q2 sales increased 15.5% year over year; six-month sales increased 13.2%. Improved gross margin and lower SG&A supported the return to operating profitability. Prior-year Q2 SG&A included $1.3 million of severance expense; management said current-quarter expense also reflected higher R&D and investment in PMT and Healthcare growth strategies.
- Segments, Q2 sales: PMT $30.1 million, up 19.2%; Canvys $6.7 million, up 23.3%; Healthcare $2.3 million, down 26.8%.
- PMT growth reflected power grid tubes, products for semiconductor capital equipment and new technology partners. Canvys growth was primarily driven by European demand. Healthcare sales fell following the sale of its PACS display business at fiscal 2017 year-end, partly offset by certified pre-owned CT tubes.
- Management attributed better consolidated margins principally to PMT product mix, Canvys mix and lower selected-product costs, and the exit of lower-margin PACS display sales.
Cash flow, liquidity and capital resources
- Six-month operating cash flow was negative $2.3 million, versus negative $1.9 million in the prior-year period. Inventory rose $4.6 million and accounts payable fell $1.0 million; management linked inventory growth to RF and power technologies, semiconductor-market needs and Healthcare products.
- Investing activities provided $1.8 million, including $8.2 million of investment maturities, offset by $3.9 million of investment purchases and $2.7 million of capital expenditures. Financing used $1.5 million for dividends. Cash declined $0.9 million to $54.5 million.
- At December 2, cash was $54.5 million; current time deposits and CDs were $4.1 million and non-current equity investments were $0.7 million. Current assets were $131.4 million and current liabilities $23.9 million. The company reported no debt balance in the presented balance sheet.
- Management said existing liquidity, including cash, should be sufficient for known capital requirements and working-capital needs over the next 12 months. Dividends remain subject to Board discretion.
Outlook, risks and unusual items
- The filing provides no quantified revenue or earnings guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- Q2 and six-month net income included $1.5 million of discontinued-operations income: a $2.0 million Illinois tax refund, net of $0.5 million in professional fees, relating to the 2011 sale of the RF, Wireless and Power Division.
- The six-month effective tax rate on continuing operations was 90.9%. The company cited geographic income mix, valuation allowances, return true-ups and German tax-audit matters. It recorded a $0.2 million assessment/reserve related to preliminary German audit findings; tax examinations also include Thailand and Illinois.
- The December 22, 2017 Tax Cuts and Jobs Act may affect deferred taxes and the fiscal 2018 estimated tax rate. The company said it could not yet comprehensively estimate the impact or determine the operating-cash-flow effect.
- A stockholder derivative lawsuit filed December 5, 2017 challenges prior stock repurchases and a special committee decision. Richardson Electronics considers the claims without merit and said a loss was not probable or estimable based on information available.
- Foreign exchange is the company’s primary identified market risk; it reported no use of derivatives to manage currency exposure. Management said there were no material changes to risk factors from the prior annual report. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether PMT and Canvys sales and margin improvements persist, and whether Healthcare stabilizes after the PACS display divestiture.
- Whether inventory growth converts to sales and cash, given negative six-month operating cash flow.
- The ultimate German audit and other tax-examination outcomes, valuation allowance changes, and the tax-law effects disclosed as not yet estimable.
- The status and potential financial consequences of the stockholder derivative lawsuit.
- Cash availability by geography, ongoing capital spending, and the Board’s future dividend decisions.