Richardson Electronics, Ltd. — Q1 FY2015 Form 10-Q
Reporting period: 13 weeks ended August 30, 2014; comparison is the 13 weeks ended August 31, 2013. The interim financial statements are unaudited. Richardson provides engineered solutions, electronic components, power and microwave tubes, and customized display and healthcare products. In Q1 FY2015, it established Richardson Healthcare as a separate reportable segment; prior-period segment results were revised accordingly.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Net sales | $34.7 million | $34.3 million |
| Gross profit / margin | $10.7 million / 30.7% | $10.2 million / 29.8% |
| SG&A | $11.2 million | $10.1 million |
| Operating income (loss) | $(0.5) million | $0.1 million |
| Income (loss) from continuing operations | $(0.1) million | $2.0 million |
| Net income (loss) | $(0.1) million | $2.0 million |
| Net income (loss) per common share, diluted | $(0.01) | $0.14 |
| Operating cash flow | $(0.3) million | $(1.2) million |
Gross margin improved primarily because LaFox manufacturing had lower unabsorbed labor and overhead costs. SG&A rose by $1.1 million, including $0.5 million for growth initiatives and $0.5 million for the ERP implementation. The prior-year quarter included a $2.1 million antitrust settlement in other income; excluding that unusual comparison item helps explain the year-over-year earnings decline.
Segments
- Electron Device Group (EDG): Sales increased 7.7% to $27.4 million; gross margin rose to 31.7% from 30.8%. Growth in semiconductor-capital-equipment products and laser-market tubes was partly offset by declines in industrial heating and aviation.
- Canvys: Sales fell 19.8% to $6.0 million, attributed to delayed OEM program starts and loss of a key customer in the prior year. Gross margin improved to 27.7% from 25.6%.
- Richardson Healthcare: Sales declined 2.9% to $1.3 million, with weaker PACS displays amid hospital budget constraints and difficult capital markets. Gross margin fell to 24.4% from 32.3%, due to pricing pressure and product mix.
Financial position, cash flow, and liquidity
- At August 30, 2014, cash and cash equivalents were $98.1 million; current investments were $26.4 million and non-current investments were $8.8 million. Together, cash and investments totaled approximately $133.2 million.
- Total assets were $200.9 million and total liabilities were $28.1 million. The filing does not report interest-bearing debt on the balance sheet.
- Cash declined $4.7 million during the quarter to $98.1 million. Investing activities used $2.7 million, primarily reflecting net investment purchases and $0.8 million of capital expenditures; financing activities used $1.2 million, including $0.5 million of share repurchases and $0.8 million of dividends.
- Operating cash use was $0.3 million. Inventory increased $2.1 million, partly for new product offerings; a $2.3 million income-tax refund partly offset working-capital uses.
- Quarterly dividends were $0.060 per common share and $0.054 per Class B share. Management said existing liquidity was sufficient for known capital requirements and working-capital needs through fiscal year-end May 30, 2015.
Outlook, risks, and contingencies
The filing provides no numerical earnings or revenue guidance. Management described Healthcare as a growth opportunity based on demand for independent diagnostic-imaging replacement parts, while noting hospital cost pressures. Results for the quarter are not necessarily indicative of full-year results.
- Foreign currency exposure is identified as the primary financial market risk; the company said it does not use derivatives to manage currency exposure.
- Tax authorities were examining Germany (fiscal 2009–2011), Italy (fiscal 2011), and Thailand (fiscal 2008–2011). The company reported a $6.8 million deferred tax liability on $41.6 million of foreign earnings and $43.1 million of cumulative foreign earnings considered permanently reinvested.
- Ordinary-course litigation was pending, but management said a material loss was not reasonably possible based on information available. The filing reported no material changes to previously disclosed risk factors.
- Management stated disclosure controls were effective and reported no material changes in internal control over financial reporting during the quarter.
Investor verification points
- Confirm whether higher SG&A, including growth and ERP costs, translates into improved sales and operating profitability.
- Track EDG growth against continuing weakness in Canvys and Healthcare, including Healthcare margins and hospital-market demand.
- Assess whether inventory growth supports new products and customer demand or creates additional working-capital and obsolescence risk.
- Review cash generation, investment maturities, share repurchases, and dividend decisions against the company’s stated liquidity outlook.
- Monitor the identified foreign tax examinations, repatriation exposure, and currency effects.