Business context and reporting period
Richardson Electronics, Ltd. provides engineered electronic solutions and components through its Electron Device Group (EDG) and customized display solutions through Canvys. This unaudited Form 10-Q covers the fiscal third quarter ended March 1, 2014, and the first nine months of fiscal 2014; each nine-month period comprised 39 weeks. The filing is for fiscal 2014, notwithstanding the request’s “2013 Q3” label.
Financial results and liquidity
- Third quarter: Sales were $32.9 million, down 2.2% year over year. Gross profit was $9.7 million and gross margin was 29.3%, versus 29.5%. SG&A rose to $10.5 million (32.0% of sales), producing an operating loss of $0.9 million, versus operating income of $0.6 million a year earlier. Continuing operations lost $0.1 million; net loss was $0.5 million, or $0.04 per diluted common share.
- First nine months: Sales were $102.6 million, down 3.1%. Gross profit was $30.9 million and gross margin improved to 30.1% from 29.6%. SG&A increased to $31.1 million, and operating results shifted to a $0.2 million loss from $1.6 million of operating income. Continuing-operations income was $2.5 million and net income was $2.0 million, or $0.13 per diluted common share.
- Cash flow: Operating activities used $1.4 million in the nine-month period, compared with $4.9 million provided in the prior-year period. Investing activities provided $6.7 million, while financing activities used $11.1 million, including $8.7 million of share repurchases and $2.5 million of dividends.
- Liquidity and debt: At March 1, cash was $97.2 million; investments were $33.3 million current and $1.8 million non-current. Current assets were $192.7 million against current liabilities of $18.7 million. Total liabilities were $26.4 million; the balance sheet shows no borrowings. Management said existing liquidity should cover known capital and working-capital needs for the next 12 months.
Material changes versus prior comparable periods
- Quarterly sales declined in both segments: EDG by 0.6% and Canvys by 6.5%. Nine-month sales were nearly flat for EDG (down 0.4%) but fell 10.1% for Canvys.
- Quarterly SG&A rose $1.2 million, including costs to evaluate potential acquisitions, new-product development, and implementation of a new IT system. Nine-month SG&A increased $1.4 million, including the same categories of costs.
- Despite the nine-month operating loss, continuing-operations income increased year over year, supported by $2.5 million of class-action settlement proceeds included in other income. The third quarter included $0.4 million of settlement proceeds.
- Cash and cash equivalents declined $4.8 million from June 1, 2013. Total assets declined to $205.0 million from $217.3 million, and stockholders’ equity declined to $178.6 million from $185.2 million.
Outlook, commentary, risks and unusual items
- No specific revenue, earnings, or margin guidance was provided. Management noted uncertainty in Canvys healthcare demand associated with healthcare reform and hospital capital markets, and rescheduled deliveries to North American OEM customers. EDG reported strength in industrial heating and laser markets but weakness in broadcast and aviation.
- Management attributed improved nine-month gross margin partly to manufacturing efficiencies and product/geographic mix. It cited elevated support-function costs and acquisition-evaluation expenses as factors pressuring operating results.
- The company has exposure to foreign-exchange movements and does not use derivative instruments to manage that exposure. It also faces ongoing tax examinations, including an Italian audit; the filing records a $0.1 million discontinued-operations tax reserve related to that audit.
- Discontinued operations generated a $0.5 million nine-month net loss. These results relate to the former RF, Wireless and Power Division and its manufacturing agreement with Arrow, which ended March 1, 2014.
- The company reported ordinary-course litigation but did not believe pending claims were reasonably likely to result in a material loss. It reported no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether operating performance improves after the quarter’s higher SG&A and the identified acquisition-evaluation and IT costs.
- Whether Canvys sales recover, given the year-to-date decline and healthcare/OEM demand pressures.
- How much of reported nine-month earnings depends on the non-recurring $2.5 million legal settlement.
- Cash conversion and working-capital trends, particularly receivables and supplier-payment timing, after nine-month operating cash use.
- Developments in the Italian tax audit and other open tax matters, as well as the company’s foreign-currency exposure.