Richardson Electronics, Ltd. — FY2016 Form 10-K
Reporting period: Fiscal year ended May 28, 2016 (52/53-week fiscal year). The filing also reports fourth-quarter results. Richardson Electronics supplies engineered electronics solutions, power and microwave products, customized displays, and diagnostic-imaging replacement parts through PMT, Canvys, and Healthcare.
Financial performance and position
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $142.0 million | $137.0 million |
| Gross profit / margin | $44.8 million / 31.6% | $41.1 million / 30.0% |
| SG&A | $51.6 million | $49.2 million |
| Operating loss | $6.6 million | $8.1 million |
| Net loss | $6.8 million | $5.6 million |
| Operating cash flow | $(13.6) million | $(9.8) million |
- FY2016 diluted loss per common share was $0.53. The tax provision was $0.5 million despite the pretax loss; management cited valuation allowances, geographic income mix, and foreign-earnings tax effects.
- Fourth-quarter sales were $39.6 million versus $34.9 million a year earlier; fourth-quarter net loss narrowed to $0.2 million from $2.2 million.
- Cash and cash equivalents were $60.5 million at year-end, down from $74.5 million. Current and long-term investments totaled approximately $10.1 million, including equity securities. Total assets were $168.1 million and stockholders’ equity was $141.7 million.
- No borrowings are reported on the balance sheet. Current liabilities were $24.0 million; operating lease commitments totaled $6.3 million. Management said available liquidity should meet known needs through FY2017.
- Investing activities provided $8.2 million, including investment maturities, while financing activities used $8.0 million for repurchases and dividends. Capital expenditures were $4.8 million.
Changes and operating drivers
- Sales rose 3.7%, and gross margin improved 1.6 percentage points, but net loss increased. SG&A rose $2.4 million, reflecting $5.0 million of IMES-related costs and Healthcare investment, plus $0.7 million supporting PMT growth, partly offset by lower support-function expenses.
- Healthcare sales nearly doubled to $13.0 million, including $7.6 million from acquired IMES; segment gross margin rose to 44.0%. PMT sales were nearly flat at $105.6 million, while Canvys sales fell 4.8% to $23.5 million.
- North American sales increased 11.1%; Latin American sales declined 23.3%. Approximately 54% of FY2016 sales were outside the United States.
- Operating cash use worsened, largely reflecting working-capital demands: inventory increased $5.2 million and receivables increased $3.5 million. Inventory was $45.4 million, up from $38.8 million.
Outlook, risks, and unusual items
- No quantified revenue or earnings guidance is provided. Management plans to develop Healthcare and power-conversion businesses and expected to repatriate $11.3 million from China in FY2017. The company changed its assertion on Chinese earnings and recorded a $6.7 million deferred tax liability for tax on undistributed foreign earnings.
- IMES was acquired for $12.2 million in cash in June 2015. The acquisition contributed $7.6 million of FY2016 sales; its reported goodwill of $6.3 million passed the fiscal-year impairment test. A related-party lease with the former IMES owner’s entity has $0.6 million of future minimum payments.
- Key risks include inventory obsolescence and technology changes, supplier concentration, foreign-currency exposure, customer credit risk, execution of growth initiatives, and Brexit-related uncertainty. One supplier accounted for 11% of sales volume. A 10% adverse currency move was estimated to reduce foreign-currency-denominated sales by $9.9 million.
- One customer represented 15% of year-end receivables; the filing says it was collected in the first month of FY2017. The company does not hedge with derivatives or forward contracts. It held $52.7 million of cash at foreign subsidiaries, with potential repatriation restrictions and tax consequences.
- Current ordinary-course litigation was not expected to have a material adverse effect. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Investor verification priorities
- Assess whether Healthcare and PMT growth can offset Canvys weakness and whether the IMES acquisition can deliver sustainable returns.
- Track operating cash flow, inventory and receivables growth, and the company’s ability to fund dividends and repurchases while operating at a loss.
- Verify the timing, tax cost, and actual receipt of the planned China cash repatriation, and the availability of foreign-held cash for U.S. needs.
- Monitor the $6.3 million IMES goodwill and acquired intangible assets for impairment indicators, as well as inventory reserves and obsolescence.
- Consider concentrated voting control: the Chairman and CEO held approximately 66% of voting power through Class B shares.