Richardson Electronics, Ltd. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2012, ended December 3, 2011. Unless otherwise stated, amounts below are in millions. The company supplies engineered electronic solutions, power-grid and microwave tubes, technical services, and customized display solutions through its EDG and Canvys segments.
Financial performance
| Metric | Quarter ended Dec. 3, 2011 | Prior-year quarter | Six months ended Dec. 3, 2011 | Prior-year six months |
|---|---|---|---|---|
| Continuing net sales | $39.1 | $41.0 | $80.6 | $78.5 |
| Gross profit / margin | $11.7 / 29.9% | $11.8 / 28.8% | $24.4 / 30.2% | $23.2 / 29.5% |
| SG&A | $10.0 | $11.2 | $20.7 | $21.7 |
| Operating income / margin | $1.7 / 4.4% | $0.6 / 1.5% | $3.7 / 4.6% | $1.4 / 1.8% |
| Income from continuing operations | $1.6 | $0.2 | $2.7 | $0.6 |
| Discontinued operations, net of tax | $(0.8) | $7.3 | $1.8 | $15.2 |
| Net income | $0.8 | $7.5 | $4.5 | $15.8 |
| Diluted EPS, common shares | $0.04 | $0.41 | $0.25 | $0.87 |
Comparisons of total net income are heavily affected by the 2011 sale of the RF, Wireless and Power Division (RFPD): its much larger prior-year contribution was reported as discontinued operations. Continuing operations improved despite lower quarterly sales, with higher gross margin and reduced SG&A.
Segments and material changes
- EDG: Quarterly sales fell 2.2% to $28.0 million; gross margin declined to 30.5% from 31.2%. Management cited softer semiconductor fabrication equipment, textile, and broadcast demand, plus lower-margin strategic distribution business and sales mix. Six-month sales rose 4.6% to $58.8 million, while margin eased to 31.0% from 32.1%.
- Canvys: Quarterly sales decreased 9.8% to $11.1 million, principally from weaker European OEM demand. Margin improved to 28.3% from 23.1%, reflecting a more profitable OEM mix and lower inbound freight. Six-month sales declined 2.0% to $21.9 million; margin increased to 28.2% from 23.2%.
- Quarterly SG&A decreased $1.2 million, including $1.0 million of lower support-function costs. Six-month SG&A decreased $1.0 million, primarily from lower support costs.
- Powerlink, a UK-based technical service company, was acquired in September 2011 for approximately $2.3 million. The preliminary allocation included $1.7 million of goodwill; its prior fiscal-year revenue was approximately $2.0 million.
Cash, liquidity, debt and capital allocation
- At December 3, cash and cash equivalents were $25.2 million; time deposits and CDs were $151.1 million, including $136.1 million current and $15.0 million non-current. Combined cash and these deposits totaled approximately $176.3 million. Total assets were $253.1 million and stockholders’ equity was $212.3 million.
- Current assets were $229.4 million against current liabilities of $30.9 million. The balance sheet reports no outstanding debt at period-end; interest expense for the six months was $0.001 million.
- Operating cash flow was $(47.0) million for the six months, versus $3.2 million provided in the prior-year period. Management attributed the use mainly to tax-related payments and liability reductions, including a $42.9 million decrease in accrued liabilities, alongside a $5.6 million tax receivable and inventory investment.
- Investing cash outflow was $85.1 million, mainly from $82.8 million placed in time deposits/CDs and the $2.3 million Powerlink acquisition. Financing cash outflow was $13.2 million, including $11.9 million of share repurchases and $1.7 million of dividends.
- The company repurchased 311,786 shares during the quarter for $4.2 million at an average $13.47 per share; $29.4 million remained under the authorization at quarter-end. Quarterly dividends were $0.05 per common share and $0.045 per Class B share.
Outlook, risks and unusual items
- Management stated existing liquidity was sufficient for known capital requirements and working-capital needs for the fiscal year ending June 2, 2012. No specific revenue or earnings guidance was provided. Management expected lower net income following the RFPD sale, alongside lower working-capital and capital-spending needs.
- The RFPD sale to Arrow closed March 1, 2011, for stated consideration of $238.8 million, subject to working-capital adjustments. Richardson paid Arrow $3.9 million in the quarter to settle the agreed adjustment and continues to manufacture certain products for Arrow under a three-year agreement.
- Tax restatement: An IRS examination identified an erroneous fiscal 2006 tax deduction that overstated a tax-loss carryforward benefit. The company recorded a $2.1 million reduction to retained earnings and an increase in discontinued-operation liabilities. The error was deemed material to the current-period financial statements but immaterial to fiscal 2011; the company said it would restate fiscal 2011 in its fiscal 2012 Form 10-K. The adjustment had no current-period net-income impact. U.S. federal audits for fiscal 2009 and 2010 were ongoing.
- Quarterly discontinued-operations loss included tax provision and adjustment items; six-month discontinued results also included a $0.4 million benefit from revised liability estimates. Foreign-exchange movements affected results, and the company said it did not use derivatives to manage currency exposure.
- Management reported no material change to previously disclosed risk factors. Pending ordinary-course litigation was not considered reasonably likely to result in a material loss. Disclosure controls were deemed effective; no material internal-control changes were identified.
Important facts for investors to verify
- Review the tax-error correction, planned fiscal 2011 restatement, and outcome of the IRS examinations and other open tax matters.
- Track continuing-operation sales and margins, especially semiconductor-related EDG demand and European OEM demand at Canvys.
- Confirm the company’s cash and investment balances, geographic availability of funds, and any tax implications of repatriating foreign earnings; $37.5 million of foreign earnings were considered permanently reinvested.
- Assess operating cash conversion after unusual tax payments and liability settlements, and the cash impact of further repurchases and dividends.
- Monitor remaining Arrow-related obligations and the performance and goodwill assessment of the Powerlink acquisition.