Richardson Electronics, Ltd. — FY2013 Form 10-K
Reporting period: Fiscal year ended June 1, 2013, including fourth-quarter results. The filing is an annual report, not a fiscal 2012 Q4 report. Unless stated otherwise, amounts below are in U.S. dollars.
Business context and reporting period
Richardson Electronics supplies engineered solutions, electron tubes and related components, and customized display systems. Its two reportable segments are Electron Device Group (EDG) and Canvys. It sold its RF, Wireless and Power Division to Arrow Electronics in 2011; continuing operations are the focus of the FY2013 operating results. Approximately 55% of FY2013 sales were outside the United States.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $141.1 million | $157.8 million |
| Gross profit / gross margin | $41.5 million / 29.5% | $46.8 million / 29.6% |
| SG&A | $41.5 million | $40.6 million |
| Operating income | $11,000 | $6.3 million |
| Income from continuing operations | $482,000 | $8.0 million |
| Net income | $1.2 million | $8.5 million |
| Diluted common EPS | $0.08 | $0.50 |
| Operating cash flow | $8.6 million | $(48.7) million |
- Sales fell 10.6%. EDG sales declined 8.9% to $102.6 million; Canvys fell 15.0% to $38.5 million.
- Gross margin was nearly unchanged, but SG&A rose and equaled 29.4% of sales, leaving only $11,000 of operating income. FY2013 SG&A included $1.2 million of employee termination costs.
- FY2013 other income was $631,000, including $1.3 million investment income and a $760,000 foreign-exchange loss.
- Fourth-quarter sales were $35.2 million; continuing operations recorded a $1.4 million loss, discontinued operations income of $1.2 million, and a net loss of $181,000.
- Cash and cash equivalents were $102.0 million; current and non-current investments were $39.0 million and $5.5 million. Cash plus investments totaled approximately $146.4 million. The company reported no short- or long-term debt.
- Current assets were $203.0 million and current liabilities $24.1 million. Stockholders’ equity was $185.2 million, down from $200.2 million.
- Cash from investing activities was $67.2 million, mainly reflecting net investment maturities and purchases; financing used $18.4 million, including $15.0 million of share repurchases and $3.6 million of dividends.
Material changes and unusual items
- Demand weakened across both segments. EDG cited economic weakness and softer demand, particularly in Europe and China; Canvys cited healthcare-reform uncertainty in North America and economic pressure in Europe.
- FY2013 continuing-operations income fell sharply from $8.0 million to $482,000, despite gross margin holding near 30%, principally as lower sales reduced gross profit while SG&A increased.
- FY2013 discontinued-operations income was $766,000. A $2.1 million tax benefit, primarily from reversing tax reserves related to the Arrow transaction, contributed to fourth-quarter discontinued-operations income.
- FY2011 comparative results were restated for a $2.1 million tax/NOL misstatement. The company says the error was material to FY2012 financial statements but immaterial to FY2011; the FY2011 statement was restated, and the FY2012 retained-earnings adjustment did not affect FY2012 net income.
- The company acquired D and C Import-Export for approximately $2.6 million in September 2012; purchase-price allocation remained preliminary. After year-end, it acquired WVS-Technology for approximately $1.0 million in July 2013.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Outlook, risks and contingencies
- Management provided no specific sales or earnings guidance. It said existing liquidity should be sufficient for known working-capital and capital needs through FY2014 and for foreseeable growth strategies, while warning there was no assurance of a near-term sales recovery.
- Key risks include inventory obsolescence and uncertain demand, competitive pricing and margin pressure, dependence on a limited number of EDG suppliers (one supplier represented 16% of sales), customer credit risk, and economic weakness.
- Foreign currency exposure is significant; the company did not hedge with forward contracts. Management estimated an adverse 10% currency move could reduce FY2013 foreign-denominated net sales by $14.1 million.
- Arrow’s IT services were scheduled to end March 1, 2014. Richardson was migrating to a new ERP system and identified delays or implementation problems as potential sources of disruption and added cost.
- Edward J. Richardson beneficially owned approximately 99% of Class B shares, representing about 67% of voting power. The filing also identifies dependence on key management, including Mr. Richardson.
- Ordinary-course litigation was not considered likely to have a material adverse effect. Contractual obligations totaled $4.6 million, including lease and IT-service commitments.
Important facts for investors to verify
- Whether sales and operating profitability recover after the broad FY2013 declines, and whether SG&A can be brought into line with revenue.
- Whether inventory quality, product obsolescence provisions, and EDG supplier availability remain manageable as demand and technology change.
- Progress and costs of the ERP migration before Arrow IT support ends, and whether business operations remain uninterrupted.
- How much reported cash and investment liquidity is practically available across regions, considering foreign earnings, tax, and repatriation constraints.
- The earnings quality of discontinued operations and the effects of the tax-reserve reversal and prior-period restatement.
- Whether the D and C purchase-price allocation, subsequent WVS acquisition, and stated acquisition benefits are finalized and realized.