Richardson Electronics, Ltd. — Q2 FY2015 Form 10-Q
Reporting period: Three and six months ended November 29, 2014. The company supplies engineered electronics solutions, electron and microwave tubes, and customized display products. Its segments are Electron Device Group (EDG), Canvys, and Healthcare; Healthcare was established as a separate strategic business unit in the first quarter of FY2015, with prior segment results reclassified.
Financial performance
| Metric | Three months ended Nov. 29, 2014 | Six months ended Nov. 29, 2014 |
|---|---|---|
| Net sales | $33.8 million, down 4.5% year over year | $68.5 million, down 1.7% |
| Gross profit / margin | $10.5 million / 30.9%, versus $11.0 million / 31.1% | $21.1 million / 30.8%, versus $21.2 million / 30.4% |
| SG&A | $12.6 million, 37.3% of sales | $23.8 million, 34.7% of sales |
| Operating income (loss) | $(2.2) million, versus $0.5 million income | $(2.7) million, versus $0.7 million income |
| Continuing operations income (loss) | $(1.1) million | $(1.2) million, versus $2.6 million income |
| Net income (loss) | $(1.1) million, versus $0.5 million income | $(1.1) million, versus $2.5 million income |
| Basic/diluted EPS, common shares | $(0.07) | $(0.08) |
| Operating cash flow | Not separately emphasized in MD&A | $(2.3) million, versus $(0.9) million |
Balance sheet and liquidity: At November 29, cash and cash equivalents were $89.9 million; investments were $35.4 million, including $23.4 million current and $12.0 million non-current. Cash and investments totaled approximately $125.3 million, compared with $136.0 million at May 31, 2014. Current assets were $171.5 million and current liabilities $21.4 million. Total liabilities were $28.1 million; the balance sheet reports no debt. Stockholders’ equity was $166.2 million, down from $174.8 million. The company said existing liquidity should cover known capital and working-capital needs for FY2015.
Cash uses: Six-month investing activities used $4.1 million, including $1.9 million of capital expenditures. Financing activities used $4.0 million, including $2.6 million for share repurchases and $1.6 million of dividends. Cash declined by $12.9 million over the six months, including a $2.4 million adverse effect from exchange rates.
Material changes and operating drivers
- EDG sales increased 2.4% in the quarter and 5.0% year to date, led by magnetrons and related assemblies for semiconductor equipment and gains in certain industrial, avionics, and marine applications. Quarterly segment margin eased to 31.9% from 32.5%, mainly due to product and geographic mix.
- Canvys sales declined 22.2% in the quarter and 21.0% year to date. Management cited delayed new programs and lost or lower-cost customer programs; margins improved to 28.0% in the quarter and 27.9% year to date.
- Healthcare sales declined 31.7% in the quarter and 19.0% year to date, reflecting hospital budget constraints and a difficult hospital capital market. Margins fell amid pricing pressure, mix shifts, and lower volume.
- SG&A rose by $2.1 million in the quarter and $3.3 million year to date. In the first half, increases included $1.2 million for IT implementation and $1.6 million for growth initiatives in microwave generators, power conversion, and Healthcare.
- Six-month results benefited from a 43.1% effective tax benefit rate on continuing-operations losses. The prior-year six-month comparison included $2.1 million of income from an antitrust settlement, which did not recur.
Outlook, risks, and unusual items
- Management expected the new global IT platform to go live before fiscal year-end May 30, 2015, while the amended transition-services agreement allowed transition until August 31, 2015. Duplicative IT costs were expected until that agreement ended.
- No numerical earnings or revenue guidance was provided. Management described Healthcare as a growth opportunity, but reported lower Healthcare sales and margins in the period.
- Foreign exchange is identified as the primary financial market risk; the company said it did not use derivatives to hedge currency exposure. Foreign-currency translation reduced first-half comprehensive income by $4.0 million.
- The company was under tax examinations in Germany and Thailand. It reported $6.1 million of deferred tax liability on $39.7 million of foreign earnings and approximately $40.8 million of foreign earnings considered permanently reinvested; potential tax on repatriation was not quantified.
- Management said current litigation was not expected to have a material adverse effect and reported no material changes to previously disclosed risk factors. The discontinued operation contributed $87,000 of income in the period, primarily from reversal of tax reserves.
Important facts for investors to verify
- Whether Canvys program delays and Healthcare demand weakness persist, and whether EDG growth can offset them.
- Whether IT implementation proceeds on schedule and whether transition and duplicative costs decline after the TSA ends.
- How working-capital investment, share repurchases, dividends, and currency movements affect the cash and investment balance.
- The sustainability of operating costs and margins, given the shift to operating losses despite relatively stable gross profit.
- Developments in foreign tax examinations and the potential tax and availability implications of foreign cash and earnings.