Richardson Electronics, Ltd. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2013, ended March 2, 2013. The filing compares the quarter with the three months ended March 3, 2012, and the nine-month period with the nine months ended March 3, 2012. Although the request metadata says “2012 Q3,” the filing covers fiscal 2013 Q3.
Business: Richardson supplies engineered electronics solutions, electron and microwave tubes and components, technical services, and customized display solutions. Its reportable segments are Electron Device Group (EDG) and Canvys. Fiscal 2013 nine-month results cover 39 weeks versus 40 weeks in the prior-year period.
Financial performance
Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Net sales | $33.6 | $38.3 | $105.9 | $119.0 |
| Gross profit | $9.9 | $11.3 | $31.3 | $35.7 |
| Gross margin | 29.5% | 29.5% | 29.6% | 30.0% |
| Operating income | $0.6 | $1.8 | $1.6 | $5.6 |
| Income from continuing operations | $0.6 | $1.6 | $1.9 | $4.2 |
| Net income | $0.4 | $1.3 | $1.4 | $5.8 |
| Diluted earnings per common share | $0.03 | $0.08 | $0.09 | $0.34 |
- Operating costs and margins: SG&A was $9.3 million for Q3 and $29.7 million for nine months, down from $9.5 million and $30.2 million, respectively. SG&A as a share of sales rose to 27.7% in Q3 from 24.7%, and to 28.0% year to date from 25.4%. Operating margin fell to 1.8% in Q3 from 4.8%, and to 1.5% for nine months from 4.7%.
- Discontinued operations: The former RF, Wireless and Power Division (RFPD) generated a net loss of $0.2 million in Q3 and $0.5 million for nine months, versus losses of $0.3 million and income of $1.6 million, respectively, in the comparable periods. Prior-year nine-month results included a $0.3 million additional gain on sale.
- Cash flow: Nine-month operating activities provided $4.9 million, compared with $52.6 million used in the prior year. Investing activities provided $41.4 million, versus $78.4 million used; the current period largely reflects investment maturities exceeding purchases. Financing activities used $14.1 million, including $11.6 million of share repurchases and $2.7 million of dividends. Cash increased $33.1 million during the nine months.
- Liquidity and balance sheet: At March 2, 2013, cash and cash equivalents were $77.0 million; current and non-current investments were $63.6 million and $7.1 million. Total current assets were $205.5 million and current liabilities $21.6 million. Total liabilities were $31.5 million and stockholders’ equity $189.8 million. The balance sheet reports no borrowings or debt balance; the filing text does not provide a separate debt metric.
- Other metrics: Inventory was $34.8 million, broadly unchanged from $34.7 million at June 2, 2012. The nine-month effective tax rate on continuing operations was 2.1%, versus 32.5% a year earlier. Dividends per common share were $0.06 for Q3 and $0.18 for nine months; corresponding Class B dividends were $0.054 and $0.162.
Material changes and management commentary
- Sales declined 12.3% in Q3 and 11.0% year to date. EDG sales fell 9.4% in Q3 and 11.1% year to date; Canvys fell 18.9% and 10.9%, respectively.
- EDG’s tube sales weakened amid economic concerns and lower demand, particularly in Europe and China, as well as declines in plastics, wood, and semiconductor fabrication markets. Nine-month EDG margin was slightly lower, reflecting unabsorbed manufacturing labor and overhead associated with weaker semiconductor wafer fabrication demand.
- Canvys sales were affected by uncertainty about healthcare reform in North America and by economic weakness in Europe. Its gross margin declined, primarily from customer mix and price pressure in Q3 and from European customer mix and currency effects year to date.
- Q3 foreign exchange loss was $0.5 million, compared with a small gain in the prior-year quarter. Management says currency effects mainly reflect U.S. dollars held in non-U.S. entities; the company does not use derivatives to manage this exposure.
- The company acquired Florida-based D and C Import-Export in September 2012 for approximately $2.6 million. The preliminary purchase allocation includes $0.9 million of goodwill and remains subject to valuation completion.
Outlook, risks, and contingencies
- Management said existing liquidity, including cash, should be sufficient for known capital requirements and working-capital needs through fiscal year-end June 1, 2013. No quantitative sales or earnings guidance is provided.
- Management did not anticipate material inventory write-down risks for the remainder of fiscal 2013. It stated that no material changes had occurred in previously disclosed risk factors.
- Key exposures include demand and economic conditions in the markets served, foreign currency movements, and potential tax developments. The company was under U.S. federal audit for fiscal 2011; Germany and Netherlands tax years beginning in fiscal 2007 remained open. Approximately $37.2 million of foreign subsidiary earnings were treated as permanently reinvested, and any repatriation tax could not be practically determined.
- Uncertain tax positions related to continuing operations were $0.4 million, excluding interest and penalties. Management said unrecognized tax benefits could change within 12 months by up to approximately $0.3 million for continuing operations and $1.3 million for discontinued operations.
- The company reported ordinary-course litigation but did not consider material loss disclosure necessary. It stated that current claims were not expected to materially adversely affect financial position, results, or cash flows.
- Q3 discontinued-operations results include activity under a three-year manufacturing agreement with Arrow following the 2011 RFPD sale, including an inventory return. Future dividends remain at the board’s discretion.
Investor verification priorities
- Review the drivers and expected duration of sales declines in EDG and Canvys, especially semiconductor-related demand, healthcare sales, and European conditions.
- Assess whether lower sales and rising SG&A as a percentage of revenue could further pressure operating margins.
- Verify cash and investment balances, their geographic distribution, maturities, and any restrictions on foreign cash or repatriation.
- Monitor foreign exchange exposure and the effect of exchange movements on earnings and comprehensive income.
- Track D and C’s final purchase-price allocation and contribution to sales and profitability.
- Review continuing obligations and tax exposures associated with the RFPD sale and Arrow manufacturing agreement, including the discontinued-operations liabilities disclosed in the notes.
- Confirm dividend sustainability against operating results, capital needs, and board decisions; the filing provides no forward earnings guidance.