Richardson Electronics, Ltd. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2013, ended December 1, 2012; comparable periods ended December 3, 2011. The current first half comprised 26 weeks versus 27 weeks in the prior-year period. Unless otherwise stated, amounts below are in millions of dollars.
Business context
Richardson Electronics supplies engineered solutions, electron tubes and related components, technical services, and customized display solutions. Its reportable segments are Electron Device Group (EDG) and Canvys. The former RF, Wireless and Power Division was sold to Arrow Electronics in 2011 and is reported as discontinued operations; the company continued manufacturing certain products for Arrow under a three-year agreement. Richardson acquired Florida distributor D and C Import-Export in September 2012 for approximately $2.6 million.
Financial results and position
| Metric | Three months ended Dec. 1, 2012 | Three months ended Dec. 3, 2011 | Six months ended Dec. 1, 2012 | Six months ended Dec. 3, 2011 |
|---|---|---|---|---|
| Net sales | $36.6 | $39.1 | $72.3 | $80.6 |
| Gross profit / margin | $10.7 / 29.3% | $11.7 / 29.9% | $21.4 / 29.6% | $24.4 / 30.2% |
| Operating income / margin | $0.5 / 1.4% | $1.7 / 4.4% | $1.0 / 1.4% | $3.7 / 4.6% |
| Continuing-operations income | $0.6 | $1.6 | $1.3 | $2.7 |
| Discontinued-operations income (loss), net of tax | $(0.2) | $(0.8) | $(0.3) | $1.8 |
| Net income | $0.4 | $0.8 | $1.0 | $4.5 |
| Diluted EPS, common stock | $0.03 | $0.04 | $0.06 | $0.25 |
- Segment trends: EDG sales declined 6.6% for the quarter and 11.8% for the first half; management cited weaker demand in plastic, wood, and semiconductor fabrication markets. Canvys sales fell 6.3% and 6.7%, respectively, with European weakness; its margin also declined amid customer mix and currency effects.
- Cash flow: First-half operating cash flow was $2.9 million, compared with cash use of $47.0 million a year earlier. Investing activities provided $18.8 million, mainly reflecting net investment maturities; financing activities used $13.3 million, including $11.6 million of share repurchases and $1.8 million of dividends. Cash increased $9.6 million to $53.5 million.
- Liquidity and debt: At December 1, cash was $53.5 million, current investments were $86.4 million, and non-current investments were $7.4 million, including equity securities. Current assets were $206.8 million and current liabilities $22.7 million. The balance sheet lists no borrowings or other financial debt.
- Other metrics: Total assets were $222.6 million and stockholders’ equity $190.3 million. The first-half effective tax rate on continuing operations was 15.3%, versus 34.7% a year earlier. The quarterly common-stock dividend was $0.06 per share ($0.054 for Class B).
Material changes and management commentary
- Sales fell 6.5% in the quarter and 10.4% in the first half. Lower sales and gross margins, together with higher SG&A as a percentage of sales, reduced operating profitability. Quarter SG&A rose to $10.2 million from $10.0 million; first-half SG&A decreased to $20.4 million from $20.7 million.
- EDG’s lower sales and manufacturing under-absorption, particularly for semiconductor wafer-fabrication components, weighed on results. Canvys experienced weaker European demand and lower European margins.
- First-half net income comparisons were also affected by discontinued operations: the prior-year period included a $266,000 additional gain on the Arrow sale, while the current period recorded a $290,000 discontinued-operations loss.
- Management stated existing liquidity should be sufficient for known capital requirements and working-capital needs through the fiscal year ending June 1, 2013. It gave no specific sales or earnings forecast and said it did not anticipate material inventory write-down risks.
Risks, contingencies, and unusual items
- Foreign currency is identified as the primary financial market risk; the company does not use derivatives to hedge foreign-exchange exposure. A quarterly foreign-exchange loss of $0.3 million contrasted with a $0.5 million gain in the prior-year quarter.
- The company had $46.7 million of foreign-subsidiary earnings considered permanently reinvested; any tax liability on repatriation could not be practically determined. It was under U.S. federal audit for fiscal 2011, with no material adjustment identified at the time of filing.
- Uncertain tax positions related to continuing operations were $0.4 million, excluding interest and penalties. Management estimated possible changes within the next 12 months of $0 to approximately $0.03 million.
- Ordinary-course litigation was disclosed, but management said a material loss was not reasonably possible based on information available. The filing reported no material changes to previously disclosed risk factors.
- D and C’s purchase-price allocation was preliminary and subject to valuation. Goodwill totaled $2.3 million, including $0.9 million from D and C.
- During the quarter the company repurchased 502,945 shares for approximately $6.0 million; first-half repurchases totaled $11.6 million. Management stated future dividends remain at the board’s discretion.
Important facts for investors to verify
- Whether sales weakness in EDG’s semiconductor-related markets and in Europe continued after the quarter, and whether segment margins stabilized.
- How much of reported cash generation reflects recurring operations versus movements in working capital and investment maturities.
- The final D and C acquisition valuation, its contribution to sales and earnings, and the performance of the acquired business.
- The continuing costs, obligations, and tax exposures associated with the Arrow transaction and discontinued operations.
- The effects of foreign-exchange movements, the U.S. tax audit, and possible repatriation taxes on future results and liquidity.
- Whether the stated liquidity outlook and dividend level remain supported by operating performance; the filing provides no detailed earnings guidance.