Richardson Electronics, Ltd. — Fiscal 2014 Second-Quarter Form 10-Q
Reporting period: Three and six months ended November 30, 2013. Amounts are in U.S. dollars; financial statement figures below are in millions unless noted. The company supplies engineered solutions, electronic components and tubes, and customized display solutions through its Electron Device Group (EDG) and Canvys segments.
Key financial results
| Metric | Three months ended Nov. 30, 2013 | Prior-year quarter | Six months ended Nov. 30, 2013 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $35.4 | $36.6 | $69.7 | $72.3 |
| Gross profit / margin | $11.0 / 31.1% | $10.7 / 29.3% | $21.2 / 30.4% | $21.4 / 29.6% |
| Operating income / margin | $0.5 / 1.5% | $0.5 / 1.4% | $0.7 / 0.9% | $1.0 / 1.4% |
| Income from continuing operations | $0.6 | $0.6 | $2.6 | $1.3 |
| Net income | $0.5 | $0.4 | $2.5 | $1.0 |
| Diluted common EPS | $0.03 | $0.03 | $0.17 | $0.06 |
| Operating cash flow | $0.2 | $6.2 | $(0.9) | $2.9 |
Balance sheet and liquidity at November 30, 2013: Cash was $92.6 million and investments were approximately $41.5 million, for cash and investments of about $134.1 million. Current assets were $194.8 million versus current liabilities of $19.6 million (about 9.9x current coverage). Total liabilities were $27.2 million; the balance sheet presents no borrowings or other debt. Stockholders’ equity was $179.5 million. Cash decreased $9.4 million from June 1, 2013.
Changes versus the prior comparable periods
- Quarterly sales declined 3.2%; six-month sales declined 3.5%. Canvys sales fell 11.0% for the quarter and 11.7% year to date, while EDG sales were nearly flat.
- Gross margin improved in both periods, led in EDG by manufacturing efficiencies and product and geographic mix. Higher gross margin did not prevent lower six-month operating income: SG&A rose as a share of sales to 29.5% from 28.2%.
- Six-month continuing-operations income included $2.1 million from an antitrust class-action settlement. The settlement materially contributed to the increase in reported income versus the prior year.
- Six-month operating cash flow moved from $2.9 million provided to $0.9 million used, primarily reflecting lower accounts payable and higher receivables. The company repurchased $8.7 million of stock and paid $1.7 million in dividends.
Management commentary, outlook and risks
- Management attributed Canvys weakness to healthcare-market uncertainty and difficult hospital capital markets, as well as rescheduled deliveries to key North American OEM accounts. New programs and customers partly offset OEM weakness.
- EDG tube sales improved in industrial heating, laser and marine markets but weakened in broadcast and aviation. The WVS acquisition, completed July 5, 2013 for approximately $1.0 million, added RF/microwave products and engineering and sales expertise.
- Management said existing liquidity should be sufficient for working-capital needs and known capital requirements for the fiscal year ending May 31, 2014, and to support future growth. The filing provides no specific revenue or earnings guidance.
- Foreign exchange is identified as the primary financial market risk; the company does not use derivatives to manage currency exposure. Management reported no material change to previously disclosed risk factors.
- Fiscal 2014’s six-month effective tax rate was 18.8%. A change in the company’s assertion that German earnings are permanently reinvested reduced the rate by 7.6 percentage points. Approximately $42.8 million of foreign earnings remained designated permanently reinvested; any repatriation tax exposure was not quantified.
- Discontinued RFPD operations continued to generate losses: $0.1 million after tax in the quarter and $0.1 million for the six months. Manufacturing obligations under the Arrow agreement were scheduled to end March 1, 2014. The company said pending ordinary-course litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Whether Canvys sales recover and whether EDG’s gains in selected markets offset broadcast and aviation weakness.
- How much of the six-month earnings improvement is sustainable apart from the $2.1 million legal settlement, and whether operating profitability improves as SG&A remains high relative to sales.
- Whether working-capital movements—particularly receivables and payables—continue to pressure operating cash flow.
- The status and economics of the Arrow manufacturing agreement as it approaches its stated March 1, 2014 end date, and any remaining discontinued-operation costs.
- The potential tax consequences of repatriating foreign earnings; the filing says the amount cannot practicably be determined.