Richardson Electronics, Ltd. — FY2015 Form 10-K
Reporting period: Fiscal year ended May 30, 2015; fourth-quarter figures are unaudited. The company supplies engineered electronic components and solutions, customized displays, and diagnostic-imaging replacement parts. It operates through Electron Device Group (EDG), Canvys, and Richardson Healthcare. Approximately 56% of fiscal 2015 sales were outside the U.S.
Financial results
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $137.0 million | $138.0 million |
| Gross profit / margin | $41.1 million / 30.0% | $41.0 million / 29.7% |
| SG&A | $49.2 million (35.9% of sales) | $43.5 million (31.5% of sales) |
| Operating loss | $8.1 million | $4.2 million |
| Continuing-operations loss | $5.5 million | $0.3 million |
| Net loss | $5.6 million | $0.5 million |
| Basic loss per common share | $0.41 | $0.04 |
| Operating cash flow | Use of $9.8 million | Source of $4.6 million |
- Fiscal 2015 fourth-quarter sales were $34.9 million and net loss was $2.2 million; fourth-quarter FY2014 sales were $35.4 million and net loss was $2.5 million.
- Cash and cash equivalents were $74.5 million at year-end, down from $102.8 million. Current and non-current investments were $23.7 million and $11.5 million, respectively. Total assets were $185.0 million and stockholders’ equity was $156.7 million.
- Cash used in investing activities was $6.9 million, including $4.7 million of capital expenditures, primarily for the ERP system. Financing used $6.9 million, including $3.9 million for share repurchases and $3.3 million in dividends.
- The balance sheet reports no borrowings or interest expense; total liabilities were $28.3 million. The filing provides no debt facility or borrowing-capacity figure.
Changes and management commentary
- Sales declined 0.7% year over year. EDG sales rose 2.4% to $105.7 million; Canvys fell 11.5% to $24.6 million; Healthcare fell 3.9% to $6.6 million.
- Consolidated gross margin improved slightly, but operating performance deteriorated as SG&A increased $5.7 million. The increase included $3.9 million of new IT-system implementation expenses and $2.4 million for engineered-solutions and healthcare growth initiatives, partly offset by $0.6 million of other expense reductions.
- Canvys cited delayed new programs and the loss of completed customer programs; Healthcare reported hospital budget constraints, competitive pricing, and unfavorable product mix. EDG benefited from stronger engineered-solutions and selected tube sales and improved product/geographic mix.
- Fiscal 2014 included $2.5 million from an antitrust class-action settlement and a $1.7 million goodwill impairment charge. There was no goodwill on the FY2015 balance sheet.
- Operating cash use reflected the net loss and working-capital investment: inventory purchases used $7.5 million and receivables growth used $4.5 million, partly offset by higher payables and lower income-tax receivables. Management attributed slower collections in part to the global IT-platform implementation.
Outlook, risks, and notable items
- Management said existing liquidity should be sufficient to fund growth strategies and known capital and working-capital needs for the following fiscal year. No numerical sales or earnings guidance was provided; management cautioned that it could not assure a near-term recovery.
- The company established Healthcare as a separate strategic business unit to pursue demand for lower-cost diagnostic-imaging replacement parts and services. On June 15, 2015, after year-end, it acquired certain assets of IMES for $12.2 million in cash; IMES had approximately $10 million in annual sales.
- Key risks include inventory obsolescence and demand forecasting, supplier concentration (one supplier represented 17% of sales volume), competitive and technology changes, foreign currency exposure, customer credit risk, and reliance on global distribution and IT systems. The company did not hedge foreign-currency exposure; it estimated that an adverse 10% currency movement would have reduced FY2015 foreign-denominated sales by $9.6 million.
- Cash and investments were distributed internationally, and $33.7 million of foreign subsidiary earnings were treated as permanently reinvested; the filing says any related repatriation tax liability was not practicable to determine. A $5.2 million valuation allowance was recorded against deferred tax assets. The company was under examination in Germany and reported $2.0 million of uncertain tax positions, largely related to discontinued operations.
- Ordinary-course litigation was not considered reasonably likely to result in a material loss. The auditor gave unqualified opinions on the financial statements and internal controls; management also reported effective disclosure controls and internal control over financial reporting.
Investor verification priorities
- Assess whether the IT-system implementation and growth spending translate into lower SG&A, improved collections, and positive operating cash flow.
- Track EDG growth against continued declines in Canvys and Healthcare margins, and verify progress in Healthcare following the IMES acquisition.
- Review inventory aging, reserve adequacy, and working-capital needs, given inventory growth and the company’s exposure to obsolete or slow-moving products.
- Verify acquisition funding, post-close adjustments, and IMES profitability; the filing does not provide a purchase-price allocation or pro forma results.
- Monitor foreign-exchange effects, tax examinations and uncertain tax positions, dividend sustainability, and the company’s cash and investment balances.