Richardson Electronics, Ltd. — FY2018 Form 10-K
Reporting period: Fiscal year ended June 2, 2018 (53 weeks), compared with fiscal 2017 ended May 27, 2017 (52 weeks). The filing also reports unaudited fourth-quarter results. Richardson Electronics provides engineered electronic solutions and components through Power and Microwave Technologies Group (PMT), Canvys visual technology, and Healthcare.
Financial results and position
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $163.2 million | $136.9 million |
| Gross profit / margin | $55.1 million / 33.7% | $43.9 million / 32.1% |
| Operating income (loss) | $3.6 million | $(5.8) million |
| Continuing operations income (loss) | $2.3 million | $(6.9) million |
| Net income (loss) | $3.8 million | $(6.9) million |
| Operating cash flow | $3.0 million | $1.8 million |
| Capital expenditures | $5.2 million | $5.2 million |
- Basic and diluted EPS for common stock were $0.30 for FY2018; Class B EPS was $0.27. FY2017 reported losses of $0.55 and $0.49, respectively.
- Cash and cash equivalents were $60.5 million at year-end, up from $55.3 million. Current assets were $137.8 million and current liabilities $29.9 million. Management said available liquidity should meet known capital and working-capital needs for the next 12 months.
- The balance sheet reports no borrowings; total liabilities were $31.1 million and stockholders’ equity was $135.2 million. Operating lease commitments totaled $3.8 million.
- Inventory rose to $50.7 million from $42.7 million, principally to support RF/power technology growth and semiconductor and Healthcare demand. Operating cash flow was partly constrained by this inventory build.
- Annual dividends were approximately $3.0 million; common shareholders received $0.24 per share and Class B holders $0.22. No shares were repurchased in FY2018.
Material changes and fourth quarter
- Sales increased 19.2% year over year; gross margin improved by 1.6 percentage points, and the company returned to operating and net profitability.
- PMT sales rose 23.1% to $128.3 million, supported by semiconductor wafer-fab demand, new RF/microwave/power suppliers and higher power-grid tube sales. Segment gross margin increased to 33.7% from 32.0%.
- Canvys sales rose 29.9% to $26.7 million, with new programs and stronger demand in Europe and North America; gross margin improved to 31.5% from 28.0%.
- Healthcare sales fell 32.0% to $8.2 million, mainly because the PACS display business was sold at the end of FY2017. Segment gross margin increased to 41.5% from 39.2%, reflecting the higher-margin mix after the sale.
- FY2018 fourth-quarter sales were $45.5 million versus $37.4 million a year earlier; gross profit was $15.5 million versus $12.0 million. Continuing-operations income was $1.7 million versus a $0.1 million loss.
- FY2018 net income included a $1.5 million discontinued-operations benefit from an Illinois tax refund tied to the 2011 sale of the RF, Wireless and Power Division. The refund was about $2.0 million, including interest, before $0.5 million of related professional fees.
Outlook, commentary and risks
- No specific revenue, earnings or margin guidance is provided. Management expects existing liquidity to cover known needs over the next 12 months; dividends remain subject to Board discretion.
- The Tax Cuts and Jobs Act accounting was provisional. The company recorded an estimated $3.5 million deemed-repatriation tax, which it expected foreign tax credit carryforwards to fully offset in cash. Further tax-law analysis and fiscal 2019 provisions could affect tax expense and deferred tax balances.
- International exposure is significant: approximately 59% of FY2018 sales were outside the U.S. A 10% unfavorable currency movement was estimated to reduce FY2018 foreign-denominated sales by $10.4 million. The company does not use currency hedges.
- Concentration risks include LAM Research at 11% of FY2018 sales and one supplier at 15% of cost of sales. Management states loss of LAM could materially harm results.
- Inventory obsolescence, technology shifts, competition and supplier availability could pressure sales or margins. Inventory reserves were $4.0 million, versus $3.5 million a year earlier.
- Goodwill of $6.3 million relates entirely to Healthcare’s IMES unit. No impairment was recorded, but estimated fair value exceeded carrying value by at least 8%; forecasts depend significantly on new products and market expansion.
- Other disclosed risks include cash held abroad and potential repatriation constraints, tariffs and U.S.-China trade disputes, Brexit-related uncertainty, cybersecurity, customer credit, product liability and data-protection regulation.
- A stockholder derivative lawsuit alleging fiduciary-duty breaches over earlier stock repurchases remained pending on motions to dismiss. The company considered the claims without merit and said a loss was not probable or estimable.
- The independent auditor issued unqualified opinions on the financial statements and internal controls; management and the auditor found internal control over financial reporting effective at year-end.
Most important facts for investors to verify
- Whether PMT and Canvys growth and improved margins continue, and whether the 53-week fiscal year affects comparability.
- Healthcare/IMES execution against forecasts, particularly adoption of new products and the assumptions supporting the no-impairment conclusion.
- Inventory growth, aging and reserve adequacy, and the resulting effect on working capital and cash conversion.
- Customer and supplier concentration, foreign cash accessibility, currency movements and trade-policy exposure.
- Final tax-reform accounting and the effects of fiscal 2019 international tax provisions.
- Outcome of the derivative litigation and any change in the company’s liquidity, capital allocation or dividend policy.