Richardson Electronics, Ltd. — Q1 FY2012 Form 10-Q
Reporting period: Three months ended September 3, 2011; comparative quarter ended August 28, 2010. The current quarter comprised 14 weeks versus 13 weeks in the prior-year quarter. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
Richardson supplies engineered electronic solutions, electron tubes and related products, and customized display solutions. Following the March 1, 2011 sale of its RF, Wireless and Power Division (RFPD) to Arrow Electronics, continuing operations comprise the Electron Device Group (EDG) and Canvys. The filing presents RFPD results as discontinued operations.
Financial performance and position
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Continuing-operations sales | $41.5 | $37.5 |
| Gross profit / margin | $12.7 / 30.6% | $11.4 / 30.4% |
| Operating income | $2.0 | $0.8 |
| Continuing-operations income | $1.0 | $0.5 |
| Discontinued-operations income, net of tax | $2.6 | $7.9 |
| Net income | $3.6 | $8.4 |
| Diluted EPS, common / Class B | $0.21 / $0.19 | $0.47 / $0.43 |
- Sales rose 10.7%. EDG sales increased 11.8% to $30.7 million; Canvys sales increased 7.6% to $10.8 million. Canvys gross margin improved to 28.1% from 23.3%, while EDG margin declined to 31.5% from 32.9%.
- SG&A was $10.8 million, or 25.9% of sales, versus $10.5 million, or 28.1%. The effective tax rate on continuing operations was 35.8%, compared with 23.4%.
- Operating cash flow was negative $47.6 million, compared with positive $0.4 million. The company attributed the outflow mainly to reductions in accrued and tax liabilities, an $8.3 million income-tax receivable, and higher inventory.
- Investing cash flow was negative $78.8 million, primarily from purchases of time deposits and CDs; financing cash flow was negative $8.4 million, mainly reflecting $7.7 million of stock repurchases and $0.8 million of dividends.
- Cash and equivalents were $37.2 million at September 3, versus $171.0 million at May 28. The company also held $113.6 million of current and $33.5 million of non-current time deposits and CDs. Total reported liabilities were $43.2 million; no debt was reported at quarter-end.
- Current assets were $225.1 million and current liabilities were $39.2 million. Stockholders’ equity was $220.8 million.
Material changes, outlook and risks
- Continuing-operations sales and operating income improved year over year, but total net income and EPS fell because discontinued-operations income was substantially lower. Prior-year comparisons include RFPD’s pre-sale operations.
- Management said the EDG sales increase reflected industrial tube sales under a strategic distribution agreement and demand tied to semiconductor fabrication equipment. Canvys growth reflected North American OEM demand and a more profitable OEM mix, as well as lower inbound freight costs.
- The Arrow sale generated $238.8 million, including an estimated pre-closing working-capital adjustment. Arrow sought a $4.2 million purchase-price reduction; Richardson agreed to about $3.9 million in Q1 and expected to finalize the adjustment in Q2 FY2012. A three-year manufacturing agreement with Arrow continues for certain RFPD products.
- Discontinued-operations income included a $2.1 million deferred-tax-liability reduction following an IRS examination and a $0.3 million benefit from revised estimates of discontinued-operation liabilities. These items contributed to reported earnings.
- Richardson acquired Powerlink Specialist Electronics Support Limited on September 5, 2011, for approximately $2.0 million, after quarter-end. Management said existing liquidity should cover known capital and working-capital needs through FY2012; it provided no earnings or revenue forecast.
- Foreign-exchange loss was $0.8 million, versus $0.1 million a year earlier. The company said it does not use derivatives to manage currency exposure. It reported $43.4 million of foreign earnings treated as permanently reinvested; any related repatriation tax liability was not quantifiable.
- The company reported a U.S. federal tax audit for fiscal 2009 and 2010, with no material adjustment identified to date; it also disclosed ordinary-course litigation it did not expect to materially affect results. Management reported effective disclosure controls and no material change in internal controls.
- Management did not anticipate material inventory write-down risks for the remainder of FY2012. Future dividends remain at the board’s discretion. No material changes to previously disclosed risk factors were reported.
Key facts for investors to verify
- Final Arrow working-capital adjustment and related cash settlement, including the outstanding difference between the $4.2 million claim and the approximately $3.9 million agreed amount.
- How much of discontinued-operations income reflects non-recurring tax and liability-estimate benefits, versus ongoing manufacturing-agreement activity.
- Cash-flow normalization after substantial tax-related payments and the conversion of cash into time deposits and CDs; confirm deposit maturities and geographic availability.
- Whether growth and margins in EDG and Canvys persist, particularly given EDG’s lower margin and the strategic agreement’s pricing commitments.
- Foreign-exchange exposure, potential tax consequences of foreign earnings, and developments in the disclosed tax audits.