Richardson Electronics, Ltd. — Q1 FY2013 Form 10-Q
Reporting period: Three months ended September 1, 2012 (13 weeks), compared with the three months ended September 3, 2011 (14 weeks). Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise stated.
Business context
Richardson Electronics supplies engineered solutions, electron tubes and related components, technical services, and customized display solutions. Its reportable segments are Electron Device Group (EDG) and Canvys. The former RF, Wireless and Power Division (RFPD) was sold to Arrow Electronics in March 2011; remaining manufacturing-agreement results are reported as discontinued operations.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Net sales | $35.650 | $41.511 |
| Gross profit / margin | $10.646 / 29.9% | $12.702 / 30.6% |
| SG&A | $10.149 | $10.772 |
| Operating income / margin | $0.501 / 1.4% | $2.000 / 4.8% |
| Continuing-operations income | $0.734 | $1.029 |
| Discontinued-operations income (loss), net of tax | $(0.087) | $2.602 |
| Net income | $0.647 | $3.631 |
| Diluted EPS, common shares | $0.04 | $0.21 |
Sales fell 14.1% year over year; gross margin contracted 0.7 percentage points. Operating income declined 75%, while net income fell substantially, in part because the prior-year period included $2.6 million of discontinued-operations income, including a $2.1 million tax benefit. The current-period effective tax rate on continuing operations was 22.2%, versus 35.8%.
- EDG: Sales decreased 16.6% to $25.627 million and gross profit was $8.000 million (31.2% margin versus 31.5%). Tube sales declined amid weaker marine and semiconductor-fabrication demand.
- Canvys: Sales decreased 7.0% to $10.023 million; gross profit was $2.646 million (26.4% margin versus 28.1%). European sales were affected by the economic crisis and lower-margin customer mix.
Cash flow, liquidity and capital
Operating activities used $3.333 million of cash, mainly reflecting working-capital outflows; investing activities provided $5.948 million, principally from net maturities of time deposits and certificates of deposit; financing activities used $5.541 million, including $5.552 million for share repurchases. Cash decreased $2.655 million to $41.238 million.
At September 1, 2012, cash and cash equivalents were $41.238 million, current investments were $98.714 million, and non-current investments were $10.975 million, including $0.398 million of equity securities. The company reported $206.195 million of current assets and $19.891 million of current liabilities (about 10.4x current-asset coverage). No conventional interest-bearing debt is listed on the balance sheet. Total liabilities were $29.504 million; stockholders’ equity was $194.930 million.
The company repurchased 461,686 shares for approximately $5.552 million during the quarter. A quarterly dividend of $0.06 per common share and $0.054 per Class B share was declared and paid September 11, after quarter-end. Management said existing liquidity should be sufficient for known capital requirements and working-capital needs through fiscal year-end June 1, 2013.
Changes, outlook and risks
- SG&A declined $0.7 million, but this was more than offset by lower sales and gross profit. EDG sales weakness was attributed primarily to marine and semiconductor-fabrication markets; Canvys cited continued weakness in German exports.
- On September 4, 2012, after the quarter-end, the company acquired D and C Import-Export for approximately $2.6 million to add product lines, vendors, and customers.
- No specific sales or earnings guidance was provided. Management stated it did not anticipate material inventory write-down risks for the remainder of FY2013.
- Cash and investments were held across North America, Europe, Latin America, and Asia/Pacific. Foreign-currency exposure is a key market risk; the company said it did not use derivatives to manage currency exposure.
- The company was under U.S. federal tax audit for fiscal years 2009–2011. It reported $35.0 million of foreign-subsidiary earnings considered permanently reinvested; any repatriation tax was not practicably determinable. Uncertain tax positions related to continuing operations were $0.4 million.
- Management reported no material change to previously disclosed risk factors. It said pending ordinary-course litigation was not expected to have a material adverse effect; disclosure of a material loss contingency was deemed unnecessary.
Important facts for investors to verify
- Whether the sales decline and weaker margins persist, particularly in EDG’s marine and semiconductor-related markets and Canvys’ European business.
- Cash conversion and working-capital trends, given quarterly operating cash outflow despite reported net income.
- The effect of continued share repurchases and dividends on liquidity, alongside the post-quarter D and C acquisition.
- Developments in the federal tax audit, uncertain tax positions, and potential tax consequences if permanently reinvested foreign earnings are repatriated.
- Foreign-exchange exposure and the performance of the remaining Arrow manufacturing agreement and related discontinued-operation balances.