Richardson Electronics, Ltd. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2017, the three months ended August 27, 2016 (13 weeks), compared with the three months ended August 29, 2015. Financial statements are unaudited.
Business context
Richardson Electronics supplies engineered solutions and electronic components, displays, and diagnostic-imaging replacement parts. Its reportable segments are Power and Microwave Technologies Group (PMT), Canvys, and Healthcare, serving customers across industrial, healthcare, communications, and other markets.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Net sales | $33.4 million | $37.1 million |
| Gross profit / margin | $10.2 million / 30.7% | $11.3 million / 30.4% |
| SG&A | $12.3 million | $12.3 million |
| Operating loss | $2.1 million | $1.0 million |
| Net loss | $2.9 million | $1.4 million |
| Operating cash flow | $(1.7) million | $(6.5) million |
- Sales declined 10.0%. PMT sales fell 6.7% to $25.4 million, Canvys fell 30.8% to $4.6 million, and Healthcare rose 5.5% to $3.4 million.
- Management attributed PMT and Canvys declines mainly to lower demand from key OEMs; Healthcare growth reflected increased demand for diagnostic-imaging replacement parts.
- Gross margin edged up to 30.7%, reflecting improved Canvys product mix and higher-margin Healthcare replacement-parts sales. PMT margin fell to 29.4%, partly due to production shutdown and equipment-transfer costs at the Brive, France facility; Healthcare margin declined to 42.6% due to mix.
- Foreign exchange losses contributed $0.3 million to other expense. The income-tax provision was $0.5 million despite the pretax loss; the reported effective rate was negative 21.1%, affected by geographic income mix, tax true-ups, uncertain tax positions, and deferred-tax valuation allowances.
Financial position and cash flows
- At August 27, 2016, cash and cash equivalents were $57.5 million; investments were approximately $8.8 million, including time deposits/CDs and equity securities. Cash plus investments totaled about $66.3 million. Cash declined $3.0 million from May 28, 2016.
- Total assets were $160.6 million and total liabilities were $22.0 million. The balance sheet lists no borrowings; liabilities principally comprise accounts payable, accruals, and deferred taxes.
- Operating activities used $1.7 million. Investing activities used $0.6 million, including $2.1 million of capital expenditures, primarily for Healthcare growth initiatives and a new IT system. Financing activities used $0.8 million, mainly for dividends.
- The company repatriated $11.3 million from its Chinese entity, comprising a $10.0 million return of capital and a $1.3 million dividend; approximately $0.1 million of withholding tax was paid.
- Quarterly dividends were $0.060 per common share and $0.054 per Class B share. The filing says future dividends remain subject to Board discretion.
Outlook, risks, and unusual items
- Management said available liquidity should be sufficient for known capital requirements and working-capital needs over the next 12 months. The filing provides no specific revenue or earnings guidance and cautions that quarterly results are not necessarily indicative of the full fiscal year.
- In September 2016, the company executed a workforce-reduction plan to lower fixed costs and expected to record approximately $1.3 million of severance expense in Q2 FY2017.
- Key exposures include foreign-currency fluctuations; the company reported that it does not use derivatives to manage currency exposure. Tax examinations were ongoing in France, Thailand, and Illinois; the uncertain-tax-position liability was $0.2 million. U.S. deferred-tax assets had a $7.1 million valuation allowance.
- Management said ordinary-course litigation was not expected to have a material adverse effect and reported no material changes to previously disclosed risk factors. Disclosure controls were judged effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether OEM demand stabilizes, particularly in Canvys and PMT, and whether Healthcare growth continues.
- Execution and costs of the Brive facility production shutdown/transfer and the announced workforce reduction, including the expected $1.3 million severance charge.
- Cash generation, capital spending, and the sustainability of dividends while the company reports operating losses.
- Potential outcomes of tax examinations, realization of deferred-tax assets, and the effect of future repatriations.
- Foreign-exchange sensitivity and the geographic concentration of cash and investments.