RICHARDSON ELECTRONICS, LTD. annual report, FY2014

Business Context and Reporting Period

Richardson Electronics, Ltd. filed this Form 10-K for fiscal 2014, which ran from June 2, 2013, through May 31, 2014. The filing includes fourth-quarter results. The company supplies engineered electronic solutions, electron tubes and related components, and customized displays through its Electron Device Group (EDG) and Canvys segments; approximately 58% of fiscal 2014 sales were outside the United States.

Financial Performance and Position

• EDG sales rose 0.7% to $103.3 million; Canvys sales fell 9.8% to $34.7 million. Canvys gross margin improved to 27.1%, while EDG remained at 30.6%.
• SG&A increased to $43.5 million, or 31.5% of sales, from $41.5 million, or 29.4%. Fiscal 2014 included $1.2 million severance, $0.8 million ERP implementation expense, $1.1 million acquisition-evaluation costs, and $0.4 million new-product development costs.
• Fiscal 2014 other income included $2.5 million from an antitrust class-action settlement and $1.0 million investment income. A $1.7 million goodwill impairment charge eliminated the reported goodwill balance.
• At year end, cash was $102.8 million, current investments $31.7 million, and non-current investments $1.5 million. Total liabilities were $28.7 million; the balance sheet reported no short- or long-term debt. Current assets were $192.2 million versus current liabilities of $21.6 million.
• Total assets were $203.5 million and stockholders’ equity $174.8 million. Inventory was $33.9 million, approximately flat year over year. The company repurchased $8.7 million of shares and paid $3.3 million in dividends.

Material Changes, Outlook, and Risks

• Sales declined 2.2%, following a 10.6% decrease in fiscal 2013. North American sales fell 8.2%; Europe and Asia/Pacific grew 4.3% and 5.9%, respectively.
• Fourth-quarter sales were $35.4 million; continuing-operations loss was $2.84 million and net loss was $2.48 million. The filing’s quarterly data show a significant deterioration from the prior-year fourth quarter.
• Management said existing liquidity should be sufficient for known capital requirements and working-capital needs through fiscal 2015, and expected sufficient liquidity to support future growth. No specific revenue or earnings guidance was provided.
• Arrow notified the company in July 2014 that it would stop providing IT services on January 8, 2015. Richardson was migrating to a new ERP platform and intended to complete the transition before that date; delay or implementation problems could disrupt operations or increase costs.
• Other principal risks include inventory obsolescence and uncertain demand, competitive and technology-related pressures, dependence on a limited number of EDG suppliers (one supplier accounted for 17% of sales), foreign-currency exposure without hedging, and reliance on key executives. The CEO beneficially owned about 65% of voting power through Class B shares.
• Tax authorities were examining certain years in Germany, Italy, and Thailand. Management said pending ordinary-course litigation was not expected to have a material adverse effect. A $130,000 non-current discontinued-operations liability included a reserve for an ongoing tax audit.
• The filing reports a $0.6 million tax benefit associated with goodwill impairment in the MD&A but $0.4 million in the goodwill note; investors should confirm the correct amount. Ernst & Young issued unqualified opinions on the financial statements and internal controls.

Key Facts for Investors to Verify

1. Whether the ERP migration was completed by the January 8, 2015 Arrow-services cutoff, and its effect on costs and customer service.
2. Whether revenue and operating performance stabilized after the multi-year sales decline, particularly in Canvys and North America.
3. Inventory quality, obsolescence reserves, and the sustainability of gross margins amid weak or changing demand.
4. The resolution of the disclosed tax examinations and the recoverability of deferred tax assets subject to a $4.1 million valuation allowance.
5. The correct goodwill-impairment tax-benefit figure, given the difference between MD&A and the financial-statement note.