Richardson Electronics, Ltd. — Form 10-Q Summary
Reporting period: Quarter ended March 3, 2018 (fiscal 2018 third quarter), with nine-month results also presented. The request metadata says “2017 Q3,” but the filing covers fiscal 2018 Q3. Dollar amounts below are in millions unless otherwise stated.
Business context
Richardson Electronics supplies engineered solutions, power grid and microwave tubes, RF and power components, diagnostic-imaging replacement parts and services, and customized display solutions. Its reportable segments are Power and Microwave Technologies Group (PMT), Canvys, and Healthcare.
Financial performance
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Net sales | $41.6 | $32.3 | $117.7 | $99.5 |
| Gross profit / margin | $14.1 / 33.8% | $10.7 / 33.1% | $39.6 / 33.6% | $31.9 / 32.1% |
| SG&A | $13.1 | $12.0 | $38.0 | $37.7 |
| Operating income (loss) | $1.0 | $(1.3) | $1.8 | $(5.8) |
| Continuing-operations income (loss) | $0.5 | $(1.4) | $0.6 | $(6.8) |
| Net income (loss) | $0.5 | $(1.4) | $2.1 | $(6.8) |
| Diluted EPS, common shares | $0.04 | $(0.11) | $0.17 | $(0.54) |
Q3 sales rose 28.9%; nine-month sales rose 18.3%. Nine-month comparisons include 40 weeks in FY2018 and 39 weeks in FY2017. Nine-month net income included $1.5 million from discontinued operations, including a $1.5 million net benefit from an Illinois tax refund recognized in Q2.
Segments and material changes
- PMT: Sales increased 28.7% in Q3 to $31.9 million and 20.8% year to date to $91.1 million. Management cited semiconductor-market products, new power-conversion and RF/microwave technology partners, and higher power-grid tube sales; margins also improved.
- Canvys: Sales increased 57.2% in Q3 to $7.6 million and 34.8% year to date to $20.1 million, reflecting stronger North American and European demand. Gross margins improved in both periods.
- Healthcare: Sales declined 19.6% in Q3 to $2.2 million and 28.6% year to date to $6.6 million, mainly following the sale of the PACS display business at the end of FY2017. Q3 margin fell to 38.3% from 47.2%, partly due to product mix.
Consolidated gross margin improved year over year, while SG&A increased in dollars but fell as a share of sales. Management attributed expense growth to compensation, higher research and development, and costs supporting Healthcare growth; the prior-year nine-month comparison included $1.3 million of severance expense.
Cash, liquidity, debt and capital
- At March 3, 2018, cash and cash equivalents were $59.9 million and current investments were $0.2 million, versus $55.3 million cash and $6.4 million current investments at May 27, 2017. Total current assets were $134.8 million and current liabilities $25.7 million.
- Total liabilities were $26.9 million. The balance sheet reports no borrowings or debt balance.
- For the first nine months, operating cash flow was a use of $0.3 million, compared with a use of $3.2 million in the prior-year period. Inventory growth used $5.2 million of cash, reflecting business growth and support for customer demand.
- Investing activities provided $4.9 million, including investment maturities, while capital expenditures were $4.2 million. Financing activities used $2.2 million, principally for dividends. Cash increased $4.6 million, including a $2.2 million favorable effect from exchange rates.
- The company paid dividends of $0.18 per common share and $0.162 per Class B share during the nine months. The filing says future dividends remain at the Board’s discretion.
Outlook, tax matters and risks
- Management said existing liquidity should be sufficient for known capital requirements and working-capital needs for the next 12 months. The filing provides no quantitative sales or earnings guidance and cautions that interim results are not necessarily indicative of full-year results.
- The Tax Cuts and Jobs Act accounting was provisional. The estimated deemed-repatriation tax, net of available foreign tax credits, was $3.5 million; the company did not expect cash tax payments because foreign tax credit carryforwards were expected to offset it. The company was still evaluating tax-law effects and future provisions, including GILTI and BEAT.
- The nine-month effective tax rate on continuing operations was 65.0%, affected by geographic income mix, valuation allowances, foreign tax matters and a German audit. The deferred-tax valuation allowance increased to $10.0 million from $8.5 million at fiscal year-end.
- Foreign currency is identified as the primary financial market risk; the company said it does not use derivatives to manage currency exposure. Inventory reserves were $3.7 million; management said it did not anticipate material write-down risks, while noting that changed demand or market conditions could require additional provisions.
- A stockholder derivative lawsuit alleges director fiduciary-duty breaches related to historical share repurchases. The company said it considers the suit without merit and that a loss was not probable or estimable. No material changes to previously disclosed risk factors were reported.
- Management concluded disclosure controls were effective at quarter-end and reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether PMT and Canvys sales and margin gains persist, and whether Healthcare stabilizes after the PACS business sale.
- Inventory levels and operating cash conversion, given the $5.2 million year-to-date inventory cash use and negative operating cash flow.
- Final accounting and cash consequences of the Tax Cuts and Jobs Act, valuation allowances, and ongoing tax examinations, particularly in Germany.
- Developments in the stockholder litigation and any resulting financial exposure.
- Cash availability by geography and the Board’s future dividend decisions; management’s liquidity statement is not a guarantee of future cash generation.