Richardson Electronics, Ltd. — Q3 FY2012 Form 10-Q
Reporting period: Third quarter ended March 3, 2012; year-to-date covers the first nine months of fiscal 2012. Comparatives are the quarter and nine months ended February 26, 2011. Fiscal 2012’s first nine months comprised 40 weeks versus 39 weeks in the prior-year period. Unless noted, financial amounts are in millions of dollars.
Business context
Richardson provides engineered electronic solutions, power-grid and microwave tubes and related components, and customized display solutions. Continuing operations comprise the Electron Device Group (EDG) and Canvys. The RF, Wireless and Power Division (RFPD) was sold to Arrow Electronics in March 2011; its remaining results are reported as discontinued operations. Richardson acquired UK-based technical-services business Powerlink in September 2011 for approximately $2.3 million.
Key financial results
| Metric | Q3 FY2012 | Q3 FY2011 | Nine months FY2012 | Nine months FY2011 |
|---|---|---|---|---|
| Continuing net sales | $38.3 | $39.7 | $119.0 | $118.1 |
| Gross profit / margin | $11.3 / 29.5% | $11.6 / 29.1% | $35.7 / 30.0% | $34.7 / 29.4% |
| SG&A | $9.5 | $10.7 | $30.2 | $32.5 |
| Operating income / margin | $1.8 / 4.8% | $0.8 / 2.1% | $5.6 / 4.7% | $2.3 / 1.9% |
| Income from continuing operations | $1.6 | $0.2 | $4.2 | $0.9 |
| Net income | $1.3 | $8.2 | $5.8 | $24.1 |
| Diluted EPS, common shares | $0.08 | $0.44 | $0.34 | $1.33 |
Q3 sales declined 3.3%; year-to-date sales increased 0.7%. The sharp drop in total net income primarily reflects the absence of prior-year RFPD results and sale-related earnings: discontinued operations were a $0.3 million loss in Q3 FY2012 versus $8.0 million income in Q3 FY2011, and $1.6 million income year-to-date versus $23.2 million in the prior-year period. Continuing operations improved as lower SG&A and higher gross margin lifted operating income. Q3 investment and interest income was $0.4 million; year-to-date it was $1.0 million.
- Segments: Q3 EDG sales fell 4.1% to $26.9 million, reflecting weakness in semiconductor fabrication equipment and broadcast, partly offset by industrial tube growth. Nine-month EDG sales rose 1.7%. Canvys Q3 sales declined 1.6% to $11.5 million, while its gross margin improved to 28.0%; management cited a more profitable OEM mix. Nine-month Canvys sales fell 1.9%, but gross margin increased to 28.1% from 24.5%.
- Cash flow: Operating cash use was $52.6 million for the first nine months, versus $6.5 million a year earlier. The main drivers included a $49.5 million decline in accrued liabilities, primarily tax payments related to the RFPD sale; an $8.3 million inventory increase; and a $4.8 million income-tax receivable. Investing cash use was $78.4 million, primarily reflecting purchases of time deposits and CDs, partly offset by maturities. Financing cash use was $14.9 million, including $13.1 million of share repurchases and $2.5 million of dividends.
- Liquidity and debt: At March 3, 2012, cash and equivalents were $24.4 million, with $144.4 million invested in time deposits and CDs; total cash and investments were approximately $169.2 million, including $0.4 million of equity securities. Current assets were $224.3 million and current liabilities $24.1 million. The balance sheet reported no borrowings or debt balance. Management said existing liquidity was sufficient for known capital and working-capital needs through fiscal year-end, June 2, 2012.
- Capital returns: The company repurchased approximately 98,500 shares for $1.2 million in Q3 and $13.1 million in the first nine months. Reported dividends for the quarter were $0.05 per common share and $0.045 per Class B share.
Material changes, outlook, and risks
- Management attributed lower SG&A to reduced headcount and professional-services costs. It reported no formal sales or earnings guidance in the provided filing text.
- Management did not anticipate material inventory write-down risks for the rest of FY2012 and did not expect Powerlink goodwill impairment testing to materially affect FY2012 results.
- The filing describes a material tax-accounting error: an incorrect deduction on the fiscal 2006 federal return overstated a net operating loss carryforward and understated the related tax accrual by approximately $2.1 million. The company recorded a $2.126 million reduction to retained earnings and increase in discontinued-operation liabilities in FY2012; it said the error was material to the current period’s financial statements but immaterial to FY2011, and planned to restate FY2011 in its FY2012 Form 10-K. The correction did not affect FY2012 net income.
- Richardson was under U.S. federal tax audit for fiscal 2009 and 2010. It disclosed $37.5 million of foreign earnings considered permanently reinvested and said any tax liability from repatriation could not be practicably determined. A $0.4 million uncertain-tax-position liability related to continuing operations was recorded.
- Foreign-currency movements are a principal market risk; the company said it did not use derivatives to manage currency exposure. Ordinary-course litigation was not considered reasonably likely to result in a material loss, and the filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Review the FY2012 Form 10-K for the promised FY2011 restatement and its final tax, retained-earnings, and EPS effects.
- Track operating cash conversion and inventory levels, given the $52.6 million year-to-date operating cash outflow and $8.3 million inventory build.
- Assess ongoing sales and margin trends by segment, particularly EDG’s semiconductor and broadcast exposure and Canvys’ reliance on improved OEM mix.
- Confirm the timing, maturity, and availability of the substantial time-deposit and CD portfolio, as well as cash needs for taxes, dividends, and repurchases.
- Monitor the federal tax audits, uncertain tax positions, and any remaining obligations or adjustments connected with the Arrow transaction and discontinued operations.