Richardson Electronics, Ltd. — FY2012 Form 10-K
Reporting period: Fiscal year ended June 2, 2012 (the filing’s fiscal 2012, rather than calendar-year 2011 Q4). Comparisons are principally with the fiscal year ended May 28, 2011. Amounts below are in U.S. dollars.
Business context
Richardson supplies engineered electronic solutions, power-grid and microwave tubes and components, technical services, and customized display products. Its continuing operations comprise Electron Device Group (EDG) and Canvys. In March 2011, the company sold its RF, Wireless and Power Division (RFPD) and certain other assets to Arrow Electronics; accordingly, FY2011 results include substantial discontinued-operation and sale-related effects. In September 2011, Richardson acquired UK-based technical services company Powerlink for approximately $2.3 million.
Financial performance and position
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales, continuing operations | $157.8 million | $158.9 million |
| Gross profit / gross margin | $46.8 million / 29.6% | $46.1 million / 29.0% |
| SG&A | $40.6 million | $43.3 million |
| Operating income | $6.3 million | $2.8 million |
| Continuing-operations income | $8.0 million | $2.0 million |
| Discontinued-operations income, net of tax | $0.5 million | $86.0 million |
| Net income | $8.5 million | $87.9 million |
| Net income per diluted common share | $0.50 | $4.83 |
| Operating cash flow | $(48.7) million | $2.1 million |
FY2012 sales declined 0.6%. EDG sales fell 1.0% to $112.6 million, including lower tube and semiconductor-fabrication-related sales; Canvys sales increased 0.2% to $45.3 million. Canvys gross margin improved to 26.9%, while EDG margin was unchanged at 30.8%. Lower SG&A—mainly reduced headcount and professional-services costs—helped lift operating income. Other income was $1.4 million, primarily investment income; the company reported a $0.3 million income-tax benefit.
Cash and cash equivalents were $43.9 million at year-end, with $105.0 million of current investments and $10.7 million of non-current investments. Total assets were $231.4 million; total liabilities were $31.2 million and equity was $200.2 million. The company had no debt outstanding. Operating cash use reflected, among other items, approximately $40.1 million of income taxes paid and decreases in accrued liabilities. Investing cash use was $49.4 million, including net purchases of time deposits and CDs; financing cash use was $26.6 million, including $24.0 million of share repurchases and $3.3 million of dividends.
Material changes and unusual items
- Net income fell sharply from FY2011, largely because FY2011 included a substantial gain associated with the RFPD sale; continuing-operations income, in contrast, increased to $8.0 million.
- The company restated FY2011 to correct an approximately $2.1 million tax-related misstatement involving an overstated net-operating-loss carryforward. Restated FY2011 net income was $87.9 million, versus $90.1 million as previously reported.
- Richardson recorded and paid Arrow approximately $3.9 million in FY2012 to settle an agreed post-closing working-capital adjustment. FY2011 discontinued operations also included approximately $3.8 million of transaction-related executive and former-employee bonuses.
- Share repurchases totaled approximately $24.0 million in FY2012. The quarterly common-stock dividend was $0.05 during the year; after year-end, the board approved an increase to $0.06.
- FY2012 operating cash flow was negative despite reported earnings. The cash-flow statement includes discontinued operations and reflects significant tax and accrued-liability cash movements.
Outlook, risks and contingencies
Management stated that it expects available liquidity to fund known capital and working-capital needs for the fiscal year ending June 1, 2013, and intends to pursue growth through acquisitions and internal initiatives. Its longer-term objective is to double the business over three to five years. No specific FY2013 revenue or earnings guidance is provided. Management cautioned that FY2012 sales volume had declined and that a near-term recovery was not assured.
- Key risks include economic weakness, competitive pressure, inventory obsolescence, and dependence on a limited number of EDG suppliers; one supplier represented 18% of total sales volume.
- International operations generated approximately 53.5% of FY2012 sales. Richardson does not hedge currency exposure; its sensitivity analysis estimated that an adverse 10% currency move would reduce FY2012 foreign-denominated sales by about $15.8 million.
- Arrow’s IT services agreement was due to end March 1, 2014. Richardson was negotiating an extension and planned to migrate to a new ERP platform before termination; delays could disrupt operations or increase costs.
- Edward J. Richardson beneficially owned approximately 99% of Class B shares, representing about 69% of voting power, as of the date cited in the filing.
- The company disclosed pending ordinary-course legal proceedings but stated it did not consider a material adverse outcome likely. It was under U.S. federal tax audit for fiscal 2009 and 2010, and the IRS had notified it of a planned fiscal 2011 audit.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- Review the FY2011 restatement and the tax-audit disclosures, including the remaining uncertain-tax-position liabilities.
- Assess whether reported earnings translate into sustainable operating cash generation after the unusually large FY2012 tax and accrued-liability cash outflows.
- Track sales, gross margins, and inventory quality by EDG and Canvys, including exposure to the significant EDG supplier and semiconductor market demand.
- Confirm the ERP migration and post-Arrow IT-services transition remain on schedule and within expected cost.
- Evaluate capital allocation—share repurchases, dividends, and acquisition spending—against liquidity needs and management’s growth objective.