Business context and reporting period
Richardson Electronics, Ltd. is a global provider of engineered solutions, power and microwave products, customized displays, and diagnostic-imaging replacement parts. Its reportable segments are Power and Microwave Technologies Group (PMT), Canvys, and Healthcare. This unaudited Form 10-Q covers the quarter and six months ended November 26, 2016 (fiscal 2017), compared with the corresponding fiscal 2016 periods.
Key financial results
| Metric | Q2 FY2017 | Q2 FY2016 | Six months FY2017 | Six months FY2016 |
|---|---|---|---|---|
| Net sales | $33.8 million | $34.1 million | $67.2 million | $71.2 million |
| Gross profit / margin | $11.0 million / 32.4% | $10.4 million / 30.6% | $21.2 million / 31.6% | $21.7 million / 30.5% |
| SG&A | $13.4 million | $13.2 million | $25.7 million | $25.5 million |
| Operating loss | $2.4 million | $2.5 million | $4.5 million | $3.5 million |
| Net loss | $2.5 million | $2.3 million | $5.4 million | $3.7 million |
| Basic and diluted loss per common share | $0.20 | $0.18 | $0.43 | $0.28 |
Class B loss per share was $0.18 for Q2 and $0.38 for the six months, compared with $0.16 and $0.25, respectively, a year earlier. The company reported a six-month income tax provision of $0.8 million; its effective tax rate was affected by geographic income mix, foreign tax adjustments, uncertain tax positions, and valuation allowances.
Financial position, cash flow and liquidity
At November 26, 2016, cash and cash equivalents were $54.1 million, versus $60.5 million at May 28, 2016. Cash, current and non-current investments totaled approximately $62.8 million. Current assets were $126.7 million and current liabilities $21.3 million. Total liabilities were $22.6 million; the balance sheet does not report a debt balance.
Operating activities used $1.9 million of cash during the six months, compared with $8.8 million used in the prior-year period. Investing activities used $1.9 million, including $3.3 million of capital expenditures; financing activities used $1.5 million, primarily for dividends. Cash decreased by $6.3 million over the six months. Management said existing liquidity was sufficient for known capital requirements and working-capital needs over the next 12 months.
Material changes versus the prior comparable period
- Six-month sales fell 5.6%; Canvys sales declined 20.1%, PMT declined 3.3%, and Healthcare increased 5.1%. In Q2, total sales were down 0.8%, with PMT and Healthcare growth partly offset by a 7.8% Canvys decline.
- Gross margin improved in both comparative periods, attributed principally to product mix and scrap-metal recoveries at PMT’s Brive, France facility. Healthcare margins declined as sales mix shifted toward lower-margin equipment.
- Six-month net loss widened to $5.4 million from $3.7 million. SG&A included a $1.3 million charge for workforce-reduction severance.
- Cash from operations improved year over year, while capital expenditures rose to $3.3 million from $1.8 million. The prior-year investing period included the $12.2 million IMES acquisition.
- Foreign-currency translation losses were $2.2 million for the six months, contributing to comprehensive loss of $7.6 million.
Outlook, management commentary and risks
The filing provides no numerical earnings or revenue guidance. Management described liquidity as adequate for the next 12 months. It cited weaker demand from key Canvys OEM customers and lower PMT marine and specialty-manufactured-product sales, partly offset by new PMT technology partners and growth in Healthcare. The company paid dividends of $1.5 million during the six months; future dividends are at the board’s discretion.
Key exposures include foreign-currency movements (the company does not use derivatives to manage currency exposure), customer-demand and product-mix changes, inventory obsolescence, and realization of U.S. deferred tax assets. The valuation allowance on net deferred tax assets increased to $8.2 million. Tax examinations were ongoing in France, Germany, Thailand, and Illinois. The company reported ordinary-course litigation but did not consider material loss reasonably possible; it reported no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether Canvys demand weakness and PMT market declines persist, and whether new-partner sales can offset them.
- Whether improved gross margins are sustainable after the favorable mix and Brive scrap-metal recoveries.
- Progress and costs associated with the workforce reduction, Healthcare growth initiatives, and the new IT system.
- Future operating cash flow, investment levels, and the board’s dividend decision amid continuing losses.
- Developments in tax audits, deferred-tax-asset valuation allowances, and foreign-exchange exposure.