Richardson Electronics, Ltd. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended February 28, 2015; comparatives ended March 1, 2014. The filing describes this as fiscal 2015 Q3, notwithstanding the request metadata’s “2014 Q3.” Amounts below are U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and reporting period
Richardson Electronics supplies engineered solutions, electronic components and tubes, and customized display products. Its three reportable segments are Electron Device Group (EDG), Canvys, and Healthcare. Healthcare was established as a strategic business unit in fiscal 2015; prior segment results were reclassified to reflect the change. The filing covers continuing operations unless otherwise noted.
Key financial results
| Metric | Three months ended Feb. 28, 2015 | Three months ended Mar. 1, 2014 | Nine months ended Feb. 28, 2015 | Nine months ended Mar. 1, 2014 |
|---|---|---|---|---|
| Net sales | $33.5 | $32.9 | $102.0 | $102.6 |
| Gross profit / margin | $9.8 / 29.3% | $9.7 / 29.3% | $30.9 / 30.3% | $30.9 / 30.1% |
| SG&A | $12.6 | $10.5 | $36.4 | $31.1 |
| Operating income (loss) | $(2.7) | $(0.9) | $(5.4) | $(0.2) |
| Continuing operations income (loss) | $(2.2) | $(0.1) | $(3.4) | $2.5 |
| Net income (loss) | $(2.2) | $(0.5) | $(3.3) | $2.0 |
| Operating cash flow | Not separately highlighted in MD&A | Not separately highlighted in MD&A | $(8.0) | $(1.4) |
Third-quarter basic loss per share was $0.16 for common stock and $0.15 for Class B shares. For the nine months, basic loss per common share was $0.24 and per Class B share was $0.21. The company paid dividends of $0.18 per common share and $0.162 per Class B share during the nine-month period.
At February 28, 2015, cash and cash equivalents were $78.4, short-term investments $23.6, and non-current investments $11.8. Total investments included approximately $34.9 in time deposits and certificates of deposit and $0.6 in equity securities. Cash and investments were reported as $113.3 in total. Total assets were $183.1; current liabilities were $19.5 and total liabilities $23.3. The balance sheet lists no borrowings or other debt. Cash and investments were $135.5 at May 31, 2014.
Material changes versus prior comparable periods
- Quarterly sales rose 1.8%; nine-month sales fell 0.6%. EDG sales increased 4.2% for the quarter and 4.7% year to date, while Canvys fell 7.4% and 16.8%, respectively. Healthcare rose 3.5% in the quarter but declined 10.1% year to date.
- Quarterly gross margin was unchanged at 29.3%; nine-month margin edged up to 30.3% from 30.1%. EDG margin improved, while Canvys and Healthcare margins declined in the quarter and year to date.
- SG&A increased $2.0 in the quarter and $5.3 year to date. Management cited IT implementation and spending on engineered-solutions and Healthcare growth initiatives. The higher expense contributed to materially larger operating losses.
- Nine-month results shifted from net income of $2.0 to a net loss of $3.3. The prior-year period included $2.6 of legal-settlement proceeds; current-period other income was $1.1, primarily investment and foreign-exchange income.
- Operating cash use widened to $8.0 from $1.4 year to date, with inventory, receivables, and prepaid expenses among the uses. Cash declined $24.4 from fiscal year-end, including a $4.7 adverse effect from exchange-rate changes.
- Accumulated other comprehensive income fell to $3.9 from $10.1, principally reflecting a $6.1 foreign-currency translation loss for the nine months.
Outlook, management commentary, risks and unusual items
- Management gave no specific sales, earnings, or margin forecast. It stated that existing liquidity, including current cash, should cover known capital requirements and working-capital needs for the next 12 months.
- The new global IT platform went live March 1, 2015; the company gave notice to end its transition-services agreement with Arrow effective April 30, 2015. Nine-month IT-related operating expense was reported as $4.4, and related capital spending as $1.7.
- Management’s Healthcare strategy seeks growth in replacement parts and services for diagnostic imaging. The filing cites hospital budget constraints, deferred display refreshes, competitive pricing pressure, and product-mix changes as challenges.
- Foreign currency is identified as the primary financial market risk. The company said it did not use derivatives to manage foreign-currency exposure. Foreign earnings include $37.5 for which a $5.0 deferred tax liability was provided; approximately $34.6 of other foreign earnings were considered permanently reinvested.
- The company was undergoing tax examinations in Germany and Thailand. It reported no recorded uncertain-tax-position liability for continuing operations and did not expect a change in unrecognized tax benefits within 12 months.
- Ordinary-course litigation was not considered reasonably likely to result in a material loss; management reported no material changes to previously disclosed risk factors. The filing also disclosed ongoing share repurchases: approximately $3.9 spent during the nine months, with $14.6 remaining under the authorization at February 28, 2015.
Most important facts for investors to verify
- Whether EDG’s growth and Healthcare’s strategic investment can offset continued Canvys weakness and Healthcare’s year-to-date sales and margin declines.
- How quickly IT transition and growth-related expenses normalize, and whether the new platform delivers the expected operating benefits.
- Whether operating cash use moderates, particularly given inventory and receivables increases, and how much of reported liquidity is accessible across jurisdictions.
- The effects of currency exposure, foreign-earnings repatriation and tax examinations on future earnings, cash flows, and comprehensive income.
- The sustainability of dividends and buybacks if operating losses and cash outflows continue.