NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE COMPANY
Richardson Electronics, Ltd. is a leading global provider of engineered solutions, power grid and microwave tubes and related consumables; power conversion and RF and microwave components; high value displays, flat panel detector solutions and replacement parts for diagnostic imaging equipment; and customized display solutions. We serve customers in the alternative energy, healthcare, aviation, broadcast, communications, industrial, marine, medical, military, scientific and semiconductor markets. The Company’s strategy is to provide specialized technical expertise and “engineered solutions” based on our core engineering and manufacturing capabilities. The Company provides solutions and adds value through design-in support, systems integration, prototype design and manufacturing, testing, logistics, and aftermarket technical service and repair through its global infrastructure.
Our products include electron tubes and related components, microwave generators, subsystems used in semiconductor manufacturing, and visual technology solutions. These products are used to control, switch or amplify electrical power signals, or are used as display devices in a variety of industrial, commercial, medical, and communication applications.
We have three operating and reportable segments, which we define as follows:
Power and Microwave Technologies Group (“PMT”) combines our core engineered solutions, power grid and microwave tube business with new RF and power technologies. As a manufacturer and authorized distributor, PMT’s strategy is to provide specialized technical expertise and engineered solutions based on our core engineering and manufacturing capabilities. We provide solutions and add value through design-in support, systems integration, prototype design and manufacturing, testing, logistics, and aftermarket technical service and repair—all through our existing global infrastructure. PMT’s focus is on products for power, RF and microwave applications for customers in alternative energy, aviation, broadcast, communications, industrial, marine, medical, military, scientific, and semiconductor markets. PMT focuses on various applications including broadcast transmission, CO2 laser cutting, diagnostic imaging, dielectric and induction heating, high energy transfer, high voltage switching, plasma, power conversion, radar, and radiation oncology. PMT also offers its customers technical services for both microwave and industrial equipment.
Canvys provides customized display solutions serving the corporate enterprise, financial, healthcare, industrial, and medical original equipment manufacturers (“OEM”) markets.
Healthcare manufactures, distributes and services high value replacement parts for the healthcare market including hospitals, medical centers, independent service organizations, and multi-vendor service providers. Products include power grid tubes, hydrogen thyratrons, klystrons, magnetrons; Image Systems medical displays and workstations for picture archiving and communication systems (“PACS”); visual solutions for operating rooms/surgical environments; digital radiography solutions including replacement flat panel detectors and upgrades; and additional replacement components currently under development for the diagnostic imaging service market. Through a combination of newly developed products and partnerships, service offerings, and training programs, we believe we can help our customers improve efficiency and deliver better clinical outcomes while lowering the cost of healthcare delivery.
We currently have operations in the following major geographic regions: North America, Asia/Pacific, Europe, and Latin America.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and notes required by GAAP for complete financial statements.
Our fiscal quarter ends on the Saturday nearest the end of the quarter-ending month. The first nine months of fiscal 2017 and 2016 each contained 39 weeks.
In the opinion of management, all adjustments, which are of a normal and recurring nature, necessary for a fair presentation of the results of interim periods have been made. All inter-company transactions and balances have been eliminated. The unaudited consolidated financial statements presented herein include the accounts of our wholly owned subsidiaries. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The results of our operations for the three and nine months ended February 25, 2017, are not necessarily indicative of the results that may be expected for the fiscal year ending May 27, 2017.
The financial information contained in this report should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended May 28, 2016, that we filed on July 29, 2016.
3. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Inventories:
Our consolidated inventories are stated at the lower of cost or market, generally using a weighted-average cost method. Our inventories include approximately $36.9 million of finished goods, $4.9 million of raw materials, and $1.1 million of work-in-progress as of February 25, 2017, as compared to approximately $40.0 million of finished goods, $4.4 million of raw materials, and $1.0 million of work-in-progress as of May 28, 2016.
At this time, we do not anticipate any material risks or uncertainties related to possible future inventory write-downs. Provisions for obsolete or slow moving inventories are recorded based upon regular analysis of stock rotation privileges, obsolescence, the exiting of certain markets, and assumptions about future demand and market conditions. If future demand, changes in the industry, or market conditions differ from management’s estimates, additional provisions may be necessary. The inventory reserve was $3.4 million as of February 25, 2017, and May 28, 2016.
Revenue Recognition:
Our product sales are recognized as revenue upon shipment, when title passes to the customer, when delivery has occurred or services have been rendered, and when collectability is reasonably assured. We also record estimated discounts and returns based on our historical experience. Our products are often manufactured to meet the specific design needs of our customers’ applications. Our engineers work closely with customers to ensure that our products will meet their needs. Our customers are under no obligation to compensate us for designing the products we sell.
Loss Contingencies:
We accrue a liability for loss contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. If we determine that there is at least a reasonable possibility that a loss may have been incurred, we will include a disclosure describing the contingency.
Intangible Assets:
Intangible assets are initially recorded at their fair market values determined on quoted market prices in active markets, if available, or recognized valuation models. Intangible assets that have finite useful lives are amortized over their useful lives either on a straight-line basis or over their projected future cash flows and are tested for impairment when events or changes in circumstances occur that indicate possible impairment.
Income Taxes:
We recognize deferred tax assets and liabilities based on the differences between financial statement carrying amounts and the tax bases of assets and liabilities. We regularly review our deferred tax assets for recoverability and determine the need for a valuation allowance based on a number of factors, including both positive and negative evidence. These factors include historical taxable income or loss, projected future taxable income or loss, the expected timing of the reversals of existing temporary differences, and the implementation of tax planning strategies. In circumstances where we, or any of our affiliates, have incurred three years of cumulative losses which constitute significant negative evidence, positive evidence of equal or greater significance is needed to overcome the negative evidence before a tax benefit is recognized for deductible temporary differences and loss carryforwards.
In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes.” ASU 2015-17 eliminates the prior US GAAP guidance in Topic 740, Income Taxes, that required an entity to separate deferred tax liabilities and assets between current and noncurrent amounts in a classified balance sheet. The amendments in ASU 2015-17 require that all deferred tax liabilities and assets of the same tax jurisdiction or a tax filing group, as well as any related valuation allowance, be offset and presented as a single noncurrent amount in a classified balance sheet. ASU 2015-17 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. In order to simplify presentation of deferred tax balances, the Company adopted this standard prospectively in the first quarter of fiscal year 2017, ending August 27, 2016. Periods prior to August 27, 2016 were not retrospectively adjusted.
Accrued Liabilities:
Accrued liabilities consist of the following (
in thousands
):
|
|
February 25, 2017
|
|
|
May 28, 2016
|
|
Compensation and payroll taxes
|
|
$
|
2,543
|
|
|
$
|
3,404
|
|
Accrued severance (1)
|
|
|
1,010
|
|
|
|
650
|
|
Professional fees
|
|
|
578
|
|
|
|
775
|
|
Deferred revenue
|
|
|
1,437
|
|
|
|
1,879
|
|
Other accrued expenses
|
|
|
3,168
|
|
|
|
2,427
|
|
Accrued Liabilities
|
|
$
|
8,736
|
|
|
$
|
9,135
|
|
(1) In the three months ended November 26, 2016, the Company executed a reduction in headcount to streamline operations and reduce costs. For the three months ended November 26, 2016, the Company recorded $1.3 million of expense included in selling, general and administrative expenses for employee termination costs payable to terminated employees with employment and/or separation agreements with the Company. The changes in the severance accrual for the three months ended February 25, 2017 included payments of $0.4 million. The changes in the severance accrual for the nine months ended February 25, 2017 included provisions and payments of $1.3 million and $0.9 million, respectively.
4. ACQUISITION
On June 15, 2015, Richardson Electronics, Ltd (“the Company”), acquired certain assets of International Medical Equipment and Services, Inc. (“IMES”), for a purchase price of $12.2 million. This includes the purchase of inventory, receivables, fixed assets, and certain other assets of the Company. The Company did not acquire any liabilities of IMES. The total consideration paid excludes transaction costs.
IMES, based in South Carolina, provides reliable, cost-saving solutions worldwide for major brands of CT and MRI equipment. This acquisition positions Richardson Healthcare to provide cost effective diagnostic imaging replacement parts and training to hospitals, diagnostic imaging centers, medical institutions, and independent service organizations. IMES offers an extensive selection of replacement parts, as well as an interactive training center, on-site test bays and experienced technicians who provide 24/7 customer support. Replacement parts are readily available and triple tested to provide peace of mind when uptime is critical. IMES core operations have remained in South Carolina. Richardson Healthcare plans to expand IMES’ replacement parts and training offerings geographically to leverage the Company’s global infrastructure. During the fourth quarter of fiscal 2016, IMES opened up their first foreign location in Amsterdam.
The consideration paid by the Company to IMES at closing was $12.2 million in cash. The following table summarizes the fair values of the assets acquired at the date of the closing of the acquisition
(in thousands)
:
Accounts receivable
|
|
$
|
737
|
|
Inventories
|
|
|
1,420
|
|
Property, plant and equipment
|
|
|
230
|
|
Goodwill
|
|
|
6,332
|
|
Other intangibles
|
|
|
3,490
|
|
Net assets acquired
|
|
$
|
12,209
|
|
Intangible assets include trade names with an estimated life of 3 years for $0.6 million, customer relationships with an estimated life of 20 years for $2.5 million, non-compete agreements with an estimated life of 5 years for $0.2 million, and technology with an estimated life of 10 years for $0.2 million.
Goodwill recognized represents value the Company expects to be created by combining the operations of IMES with the Company’s operations, including the expansion into markets within existing business segments and geographic regions, access to new customers and potential cost savings and synergies.
Goodwill related to the acquisition is deductible for tax purposes.
In connection with the acquisition of IMES, the Company also entered into an Employment, Non-Disclosure, and Non-Compete Agreement (“Employment Agreement”) with Lee A. McIntyre III as the Company’s Executive Vice President, IMES. During the term of his employment, Mr. McIntyre will earn an annual base salary of $300,000. In addition to his base salary, he will be entitled to an annual bonus equal to 20% of the EBITDA of IMES provided that the EBITDA of the business is at least $2.0 million inclusive of the bonus payment. The annual bonus payment will terminate after five years. For fiscal year 2016, Mr. McIntyre did not receive a bonus as the minimum EBITDA needed was not achieved.
The financial results for the nine months ended February 27, 2016, includes the financial results for IMES from June 15, 2015, through February 27, 2016. The financial transactions for IMES from May 31, 2015, through June 14, 2015, were deemed immaterial for illustrating pro forma financial statements.
5. GOODWILL AND INTANGIBLE ASSETS
The carrying value of goodwill was $6.3 million as of February 25, 2017, and May 28, 2016.
Goodwill is initially recorded based on the premium paid for acquisitions and is subsequently tested for impairment, using the first day of our fourth quarter as the measurement date. We test goodwill for impairment annually and whenever events or circumstances indicates an impairment may have occurred, such as a significant adverse change in the business climate, loss of key personnel or a decision to sell or dispose of a reporting unit. The goodwill balance in its entirety relates to our IMES reporting unit which is included in our Healthcare segment.
Intangible assets are initially recorded at their fair market values determined on quoted market prices in active markets, if available, or recognized valuation models. Intangible assets that have finite useful lives are amortized over their useful lives either on a straight-line basis or over their projected future cash flows and are tested for impairment when events or changes in circumstances occur that indicate possible impairment.
Our intangible assets represent the fair value for trade name, customer relationships, non-compete agreements, and technology acquired in connection with our acquisitions. Intangible assets subject to amortization are as follows
(in thousands)
:
|
|
Intangible Assets Subject to
Amortization as of
|
|
|
|
February 25,
2017
|
|
|
May 28,
2016
|
|
Gross Amounts:
|
|
|
|
|
|
|
|
|
Trade Name
|
|
$
|
659
|
|
|
$
|
659
|
|
Customer Relationship
|
|
|
3,390
|
|
|
|
3,434
|
|
Non-compete Agreements
|
|
|
177
|
|
|
|
177
|
|
Technology
|
|
|
230
|
|
|
|
230
|
|
Total Gross Amounts
|
|
$
|
4,456
|
|
|
$
|
4,500
|
|
Accumulated Amortization:
|
|
|
|
|
|
|
|
|
Trade Name
|
|
$
|
388
|
|
|
$
|
231
|
|
Customer Relationship
|
|
|
420
|
|
|
|
374
|
|
Non-compete Agreements
|
|
|
75
|
|
|
|
55
|
|
Technology
|
|
|
45
|
|
|
|
22
|
|
Total Accumulated Amortization
|
|
$
|
928
|
|
|
$
|
682
|
|
|
|
|
|
|
|
|
|
|
Net Intangible Assets
|
|
$
|
3,528
|
|
|
$
|
3,818
|
|
The amortization expense associated with the intangible assets subject to amortization for the next five years is presented in the following table
(in thousands)
:
Fiscal Year
|
|
|
Amortization Expense
|
|
Remaining 2017
|
|
|
$
|
90
|
|
2018
|
|
|
|
431
|
|
2019
|
|
|
|
244
|
|
2020
|
|
|
|
256
|
|
2021
|
|
|
|
245
|
|
Thereafter
|
|
|
|
2,262
|
|
Total amortization expense
|
|
|
$
|
3,528
|
|
The weighted average number of years of amortization expense remaining is 15.7 years.
6. INVESTMENTS
As of February 25, 2017, we had approximately $8.2 million invested in time deposits and certificates of deposit (“CD”). Of these, $6.4 million mature in less than twelve months and $1.8 million mature in more than twelve months. The fair value of these investments is equal to the face value of each time deposit and CD.
As of May 28, 2016, we have invested in time deposits and certificates of deposit (“CD”) in the amount of $9.5 million. Of this, $2.3 million mature in less than twelve months and $7.2 million mature in greater than twelve months. The fair value of these investments is the face value of each time deposit and CD.
We also have investments in equity securities, all of which are classified as available-for-sale and are carried at their fair value based on quoted market prices. Our investments, which are included in non-current assets, had a carrying amount of $0.6 million as of February 25, 2017, and May 28, 2016. Proceeds from the sale of securities were $0.1 million during the third quarter of fiscal 2017 and fiscal 2016. We reinvested proceeds from the sale of securities, and the cost of the equity securities sold was based on a specific identification method. Gross realized losses on those sales were less than $0.1 million during the third quarter of fiscal 2017 and fiscal 2016. Net unrealized holding gains of less than $0.1 million during the third quarter of fiscal 2017 and fiscal 2016, have been included in accumulated other comprehensive income.
7. WARRANTIES
We offer warranties for the limited number of specific products we manufacture. We also provide extended warranties for some products we sell that lengthen the period of coverage specified in the manufacturer’s original warranty. Our warranty terms generally range from one to three years.
We estimate the cost to perform under the warranty obligation and recognize this estimated cost at the time of the related product sale. We record expense related to our warranty obligations as cost of sales in our consolidated statements of comprehensive loss. Each quarter, we assess actual warranty costs incurred on a product-by-product basis and compare the warranty costs to our estimated warranty obligation. With respect to new products, estimates are based generally on knowledge of the products, the extended warranty period, and warranty experience.
Warranty reserves are established for costs that are expected to be incurred after the sale and delivery of products under warranty. Warranty reserves are included in accrued liabilities on our consolidated balance sheets. The warranty reserves are determined based on known product failures, historical experience, and other available evidence. Warranty reserves were approximately $0.2 million as of February 25, 2017, and as of May 28, 2016.
8. LEASE OBLIGATIONS, OTHER COMMITMENTS, AND CONTINGENCIES
We lease certain warehouse and office facilities and office equipment under non-cancelable operating leases. Rent expense was $1.5 million during both the first nine months of fiscal 2017 and during the first nine months of fiscal 2016. Our future lease commitments for minimum rentals, including common area maintenance charges and property taxes during the next five years are as follows
(in thousands)
:
Fiscal Year
|
|
|
Payments
|
|
Remaining 2017
|
|
|
$
|
458
|
|
2018
|
|
|
|
1,533
|
|
2019
|
|
|
|
1,339
|
|
2020
|
|
|
|
1,164
|
|
2021
|
|
|
|
850
|
|
Thereafter
|
|
|
|
487
|
|
9. INCOME TAXES
We recorded an income tax provision of $0.8 million and $0.7 million for the first nine months of fiscal 2017 and the first nine months of fiscal 2016, respectively. Overall, the Company has certain foreign jurisdictions that have operating profits while the U.S. continues to experience operating losses while maintaining a full valuation allowance. The effective income tax rate during the first nine months of fiscal 2017 was a tax provision of (13.7%), as compared to a tax provision of (12.7%) during the first nine months of fiscal 2016. The difference in rate during the first nine months of fiscal 2017, as compared to the first nine months of fiscal 2016, reflects the impact of changes in our geographical distribution of income (loss), the recording of provision to return true-ups of various foreign jurisdictions, and our positions with respect to ASC 740-30, Income Taxes - Other Considerations or Special Areas (“ASC 740-30”). The (13.7%) effective income tax rate differs from the federal statutory rate of 34.0% as a result of our geographical distribution of income (loss), the recording of various provision to return true-ups in foreign jurisdictions, the closure of the French tax audit, and the recording of a valuation allowance against the increase in our U.S. state and federal net deferred tax assets.
During the first quarter of fiscal year 2017, we completed a distribution of cash from our Chinese entity to our U.S. parent company which consisted of a return of capital for $10.0 million and a dividend of $1.3 million. The impact on our income taxes recorded during the first quarter of fiscal 2017 was an increase to our foreign tax credits deferred tax asset of approximately $3.6 million, a decrease to the U.S. federal net operating loss deferred tax asset of $4.8 million, and a decrease to our deferred tax liability for earnings considered permanently reinvested of $1.2 million. In connection with the cash repatriation, we recorded and paid approximately $0.1 million of withholding tax during second quarter of fiscal year 2017.
In the normal course of business, we are subject to examination by taxing authorities throughout the world. Generally, years prior to fiscal 2006 are closed for examination under the statute of limitation for U.S. federal, U.S. state and local, or non-U.S. tax jurisdictions. We are currently under examination in Germany (fiscal 2011 through 2014) and Thailand (fiscal 2008 through 2011). We are also under examination in the state of Illinois (fiscal 2011 through 2013). Our primary foreign tax jurisdictions are Germany and the Netherlands. We have tax years open in Germany beginning in fiscal 2012 and the Netherlands beginning in fiscal 2010.
We have historically determined that certain undistributed earnings of our foreign subsidiaries, to the extent of cash available, will be repatriated to the U.S. Accordingly, we have provided a deferred tax liability totaling $5.3 million as of February 25, 2017, on foreign earnings of $38.0 million. In addition, as of February 25, 2017, approximately $6.2 million of cumulative positive earnings of some of our foreign subsidiaries are still considered permanently reinvested pursuant to ASC 740-30. Due to various tax attributes that are continuously changing, it is not practicable to determine what, if any, tax liability might exist if such earnings were to be repatriated.
As of February 25, 2017, we had no worldwide liability, from continuing operations, for uncertain tax positions, compared to $0.1 million of liabilities for uncertain tax positions, excluding interest and penalties, as of February 27, 2016. The decrease in uncertain tax positions relates to the closure of the French tax audit and a lapse of a statute of limitation. We record penalties and interest relating to uncertain tax positions in the income tax expense line item within the unaudited consolidated statements of comprehensive loss. It is not expected that there will be a change in the unrecognized tax benefits within the next twelve months.
The valuation allowance against the net deferred tax assets that will more likely than not be realized was $5.9 million as of May 28, 2016. The valuation allowance against the net deferred tax assets has increased to $8.6 million as of February 25, 2017 for additional domestic federal and state net deferred tax assets generated during the nine months of fiscal year 2017 due to additional losses in the U.S. jurisdiction. A full valuation allowance on the U.S. and state deferred tax assets will be maintained until sufficient positive evidence related to sources of future taxable income exists to support a reversal of the valuation allowance. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are increased, or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth.
10. CALCULATION OF EARNINGS PER SHARE
We have authorized 17,000,000 shares of common stock, and 3,000,000 shares of Class B common stock. The Class B common stock has 10 votes per share and has transferability restrictions; however, Class B common stock may be converted into common stock on a share-for-share basis at any time. With respect to dividends and distributions, shares of common stock and Class B common stock rank equally and have the same rights, except that Class B common stock cash dividends are limited to 90% of the amount of Class A common stock cash dividends.
In accordance with ASC 260-10,
Earnings Per Share
(“ASC 260”), our Class B common stock is considered a participating security requiring the use of the two-class method for the computation of basic and diluted earnings per share. The two-class computation method for each period reflects the cash dividends paid per share for each class of stock, plus the amount of allocated undistributed earnings per share computed using the participation percentage which reflects the dividend rights of each class of stock. Basic and diluted earnings per share were computed using the two-class method as prescribed in ASC 260. The shares of Class B common stock are considered to be participating convertible securities since the shares of Class B common stock are convertible on a share-for-share basis into shares of common stock and may participate in dividends with common stock according to a predetermined formula which is 90% of the amount of Class A common stock cash dividends.
The earnings per share (“EPS”) presented in our unaudited consolidated statements of comprehensive loss are based on the following amounts (
in thousands, except per share amounts
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
February 25, 2017
|
|
|
February 27, 2016
|
|
|
|
Basic
|
|
|
Diluted
|
|
|
Basic
|
|
|
Diluted
|
|
Numerator for Basic and Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,431
|
)
|
|
$
|
(1,431
|
)
|
|
$
|
(2,926
|
)
|
|
$
|
(2,926
|
)
|
Less dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
642
|
|
|
|
642
|
|
|
|
642
|
|
|
|
642
|
|
Class B common stock
|
|
|
116
|
|
|
|
116
|
|
|
|
116
|
|
|
|
116
|
|
Undistributed losses
|
|
$
|
(2,189
|
)
|
|
$
|
(2,189
|
)
|
|
$
|
(3,684
|
)
|
|
$
|
(3,684
|
)
|
Common stock undistributed losses
|
|
$
|
(1,855
|
)
|
|
$
|
(1,855
|
)
|
|
$
|
(3,122
|
)
|
|
$
|
(3,122
|
)
|
Class B common stock undistributed losses
|
|
|
(334
|
)
|
|
|
(334
|
)
|
|
|
(562
|
)
|
|
|
(562
|
)
|
Total undistributed losses
|
|
$
|
(2,189
|
)
|
|
$
|
(2,189
|
)
|
|
$
|
(3,684
|
)
|
|
$
|
(3,684
|
)
|
Denominator for basic and diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock weighted average shares
|
|
|
10,706
|
|
|
|
10,706
|
|
|
|
10,701
|
|
|
|
10,701
|
|
Class B common stock weighted average shares, and shares under if-converted method for diluted EPS
|
|
|
2,141
|
|
|
|
2,141
|
|
|
|
2,141
|
|
|
|
2,141
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive stock options
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
Denominator for diluted EPS adjusted for weighted average shares and assumed conversions
|
|
|
|
|
|
|
12,847
|
|
|
|
|
|
|
|
12,842
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
$
|
(0.11
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.23
|
)
|
Class B common stock
|
|
$
|
(0.10
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.21
|
)
|
Note: Common stock options that were anti-dilutive and not included in diluted earnings per common share for the third quarter of fiscal 2017 and fiscal 2016 were 853 and 1,020, respectively.
|
|
Nine Months Ended
|
|
|
|
February 25, 2017
|
|
|
February 27, 2016
|
|
|
|
Basic
|
|
|
Diluted
|
|
|
Basic
|
|
|
Diluted
|
|
Numerator for Basic and Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,803
|
)
|
|
$
|
(6,803
|
)
|
|
$
|
(6,611
|
)
|
|
$
|
(6,611
|
)
|
Less dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
1,925
|
|
|
|
1,925
|
|
|
|
1,973
|
|
|
|
1,973
|
|
Class B common stock
|
|
|
348
|
|
|
|
348
|
|
|
|
348
|
|
|
|
348
|
|
Undistributed losses
|
|
$
|
(9,076
|
)
|
|
$
|
(9,076
|
)
|
|
$
|
(8,932
|
)
|
|
$
|
(8,932
|
)
|
Common stock undistributed losses
|
|
$
|
(7,691
|
)
|
|
$
|
(7,691
|
)
|
|
$
|
(7,598
|
)
|
|
$
|
(7,598
|
)
|
Class B common stock undistributed losses
|
|
|
(1,385
|
)
|
|
|
(1,385
|
)
|
|
|
(1,334
|
)
|
|
|
(1,334
|
)
|
Total undistributed losses
|
|
$
|
(9,076
|
)
|
|
$
|
(9,076
|
)
|
|
$
|
(8,932
|
)
|
|
$
|
(8,932
|
)
|
Denominator for basic and diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock weighted average shares
|
|
|
10,704
|
|
|
|
10,704
|
|
|
|
10,976
|
|
|
|
10,976
|
|
Class B common stock weighted average shares, and shares under if-converted method for diluted EPS
|
|
|
2,141
|
|
|
|
2,141
|
|
|
|
2,141
|
|
|
|
2,141
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive stock options
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
Denominator for diluted EPS adjusted for weighted average shares and assumed conversions
|
|
|
|
|
|
|
12,845
|
|
|
|
|
|
|
|
13,117
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
$
|
(0.54
|
)
|
|
$
|
(0.54
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
(0.51
|
)
|
Class B common stock
|
|
$
|
(0.48
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
(0.46
|
)
|
Note: Common stock options that were anti-dilutive and not included in diluted earnings per common share for the first nine months of fiscal 2017 and fiscal 2016 were 853 and 800, respectively.
11. SEGMENT REPORTING
In accordance with ASC 280-10, Segment Reporting, we have identified three operating and reportable segments as follows:
Power and Microwave Technologies Group (“PMT”) combines our core engineered solutions, power grid and microwave tube business with new RF and power technologies. As a manufacturer and authorized distributor, PMT’s strategy is to provide specialized technical expertise and engineered solutions based on our core engineering and manufacturing capabilities. We provide solutions and add value through design-in support, systems integration, prototype design and manufacturing, testing, logistics, and aftermarket technical service and repair—all through our existing global infrastructure. PMT’s focus is on products for power, RF and microwave applications for customers in alternative energy, aviation, broadcast, communications, industrial, marine, medical, military, scientific, and semiconductor markets. PMT focuses on various applications including broadcast transmission, CO2 laser cutting, diagnostic imaging, dielectric and induction heating, high energy transfer, high voltage switching, plasma, power conversion, radar, and radiation oncology. PMT also offers its customers technical services for both microwave and industrial equipment.
Canvys provides customized display solutions serving the corporate enterprise, financial, healthcare, industrial, and medical original equipment manufacturers (“OEM”) markets.
Healthcare manufactures, distributes and services high value replacement parts for the healthcare market including hospitals, medical centers, independent service organizations, and multi-vendor service providers. Products include power grid tubes, hydrogen thyratrons, klystrons, magnetrons; Image Systems medical displays and workstations for picture archiving and communication systems (“PACS”); visual solutions for operating rooms/surgical environments; digital radiography solutions including replacement flat panel detectors and upgrades; and additional replacement components currently under development for the diagnostic imaging service market. Through a combination of newly developed products and partnerships, service offerings, and training programs, we believe we can help our customers improve efficiency and deliver better clinical outcomes while lowering the cost of healthcare delivery.
The CEO evaluates performance and allocates resources primarily based on the gross profit of each segment.
Operating results by segment are summarized in the following table (
in thousands
):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
February 25,
|
|
|
February 27,
|
|
|
February 25,
|
|
|
February 27,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
PMT
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
24,763
|
|
|
$
|
23,008
|
|
|
$
|
75,373
|
|
|
$
|
75,365
|
|
Gross Profit
|
|
|
8,075
|
|
|
|
7,140
|
|
|
|
23,803
|
|
|
|
22,793
|
|
Canvys
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
4,824
|
|
|
$
|
5,190
|
|
|
$
|
14,883
|
|
|
$
|
17,773
|
|
Gross Profit
|
|
|
1,331
|
|
|
|
1,204
|
|
|
|
4,222
|
|
|
|
4,439
|
|
Healthcare
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
2,726
|
|
|
$
|
3,093
|
|
|
$
|
9,257
|
|
|
$
|
9,310
|
|
Gross Profit
|
|
|
1,286
|
|
|
|
1,406
|
|
|
|
3,871
|
|
|
|
4,215
|
|
Geographic net sales information is primarily grouped by customer destination into five areas: North America; Asia/Pacific; Europe; Latin America; and Other.
Net sales and gross profit by geographic region are summarized in the following table (
in thousands
):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
February 25,
|
|
|
February 27,
|
|
|
February 25,
|
|
|
February 27,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
13,607
|
|
|
$
|
14,215
|
|
|
$
|
40,715
|
|
|
$
|
47,039
|
|
Asia/Pacific
|
|
|
5,916
|
|
|
|
6,081
|
|
|
|
20,192
|
|
|
|
18,045
|
|
Europe
|
|
|
10,950
|
|
|
|
9,659
|
|
|
|
32,418
|
|
|
|
32,782
|
|
Latin America
|
|
|
1,792
|
|
|
|
1,402
|
|
|
|
6,138
|
|
|
|
4,464
|
|
Other (1)
|
|
|
48
|
|
|
|
(66
|
)
|
|
|
50
|
|
|
|
118
|
|
Total
|
|
$
|
32,313
|
|
|
$
|
31,291
|
|
|
$
|
99,513
|
|
|
$
|
102,448
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
5,258
|
|
|
$
|
5,163
|
|
|
$
|
15,090
|
|
|
$
|
16,500
|
|
Asia/Pacific
|
|
|
2,085
|
|
|
|
2,094
|
|
|
|
7,012
|
|
|
|
5,909
|
|
Europe
|
|
|
3,764
|
|
|
|
2,908
|
|
|
|
10,540
|
|
|
|
9,763
|
|
Latin America
|
|
|
643
|
|
|
|
555
|
|
|
|
2,337
|
|
|
|
1,729
|
|
Other (1)
|
|
|
(1,058
|
)
|
|
|
(970
|
)
|
|
|
(3,083
|
)
|
|
|
(2,454
|
)
|
Total
|
|
$
|
10,692
|
|
|
$
|
9,750
|
|
|
$
|
31,896
|
|
|
$
|
31,447
|
|
(1)
|
Other includes primarily net sales not allocated to a specific geographical region, unabsorbed value-add costs, and other unallocated expenses.
|
We sell our products to customers in diversified industries and perform periodic credit evaluations of our customers’ financial condition. Terms are generally on open account, payable net 30 days in North America, and vary throughout Asia/Pacific, Europe, and Latin America. Estimates of credit losses are recorded in the financial statements based on monthly reviews of outstanding accounts.
12. LITIGATION
We are involved in several pending judicial proceedings concerning matters arising in the ordinary course of business. While the outcome of litigation is subject to uncertainties, based on information available at the time the financial statements were issued, we determined disclosure of contingencies relating to any of our pending judicial proceedings was not necessary because there is less than a reasonable possibility that a material loss will be incurred.
13. FAIR VALUE MEASUREMENTS
ASC 820,
Fair Value Measurements and Disclosures
(“ASC 820”), defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements.
ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists; therefore requiring an entity to develop its own assumptions.
As of February 25, 2017, and May 28, 2016, we held investments that are required to be measured at fair value on a recurring basis. Our investments consist of time deposits and CDs, where face value is equal to fair value, and equity securities of publicly traded companies for which market prices are readily available.
Investments measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 as of February 25, 2017, and May 28, 2016, were as follows (
in thousands
):
|
|
Level 1
|
|
February 25, 2017
|
|
|
|
|
Time deposits/CDs
|
|
$
|
8,193
|
|
Equity securities
|
|
|
601
|
|
Total
|
|
$
|
8,794
|
|
May 28, 2016
|
|
|
|
|
Time deposits/CDs
|
|
$
|
9,517
|
|
Equity securities
|
|
|
550
|
|
Total
|
|
$
|
10,067
|
|
14.
Related Party Transaction
On June 15, 2015, the Company entered into a lease agreement for the IMES facility with LDL, LLC. The Executive Vice President of IMES, Lee A. McIntyre III, has an ownership interest in LDL, LLC. The lease agreement provides for monthly payments over five years with total future minimum lease payments of $0.5 million. Rental expense related to this lease amounted to $0.1 million for the nine months ended February 25, 2017, and February 27, 2016. The Company shall be entitled to extend the term of the lease for a period of an additional five years by notifying the landlord in writing of its intention to do so within nine months of the expiration of the initial term.