Quarterly Report (10-q)

Date : 04/11/2019 @ 4:02PM
Source : Edgar (US Regulatory)
Stock : Richardson Electronics Ltd (RELL)
Quote : 5.69  0.0 (0.00%) @ 8:59AM

Quarterly Report (10-q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 2, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      To                    

Commission File Number: 0-12906

 

 

RICHARDSON ELECTRONICS, LTD.

 

(Exact name of registrant as specified in its charter)

 

 

Delaware

36-2096643

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

40W267 Keslinger Road, P.O. Box 393 

LaFox, Illinois 60147-0393

(Address of principal executive offices)

 

Registrant’s telephone number, including area code: (630) 208-2200

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒ Yes ☐ No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒ Yes    ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

 

Accelerated Filer

Non-Accelerated Filer

 

Smaller Reporting Company

Emerging Growth Company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes     No

As of April 9, 2019, there were outstanding 10,956,852 shares of Common Stock, $0.05 par value and 2,096,919 shares of Class B Common Stock, $0.05 par value, which are convertible into Common Stock of the registrant on a share for share basis.

 

 

 


T ABLE OF CONTENTS

 

 

 

 

Page

 

 

 

 

Part I.

Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements

 

2

 

Consolidated Balance Sheets

 

2

 

Unaudited Consolidated Statements of Comprehensive (Loss) Income

 

3

 

Unaudited Consolidated Statements of Cash Flows

 

4

 

Unaudited Consolidated Statement of Stockholders’ Equity

 

5

 

       Notes to Unaudited Consolidated Financial Statements

 

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

18

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

23

Item 4.

Controls and Procedures

 

24

 

 

 

 

Part II.

Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

25

Item 1A.

Risk Factors

 

25

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

25

Item 5.

Other Information

 

25

Item 6.

Exhibits

 

26

Exhibit Index

 

26

Signatures

 

 

27

 

 

 

 

1


PART I.   FINAN CIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS 

Richardson Electronics, Ltd.

Consolidated Balance Sheets

(in thousands, except per share amounts)

 

 

 

Unaudited

 

 

Audited

 

 

 

March 2, 2019

 

 

June 2, 2018

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

33,869

 

 

$

60,465

 

Accounts receivable, less allowance of $422 and $309, respectively

 

 

23,102

 

 

 

22,892

 

Inventories, net

 

 

53,094

 

 

 

50,720

 

Prepaid expenses and other assets

 

 

3,365

 

 

 

3,747

 

Investments - current

 

 

15,500

 

 

 

 

Total current assets

 

 

128,930

 

 

 

137,824

 

Non-current assets:

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

19,316

 

 

 

18,232

 

Goodwill

 

 

6,332

 

 

 

6,332

 

Intangible assets, net

 

 

2,829

 

 

 

3,014

 

Non-current deferred income taxes

 

 

641

 

 

 

927

 

Total non-current assets

 

 

29,118

 

 

 

28,505

 

Total assets

 

$

158,048

 

 

$

166,329

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

14,052

 

 

$

19,603

 

Accrued liabilities

 

 

11,292

 

 

 

10,343

 

Total current liabilities

 

 

25,344

 

 

 

29,946

 

Non-current liabilities:

 

 

 

 

 

 

 

 

Non-current deferred income tax liabilities

 

 

281

 

 

 

281

 

Other non-current liabilities

 

 

948

 

 

 

921

 

Total non-current liabilities

 

 

1,229

 

 

 

1,202

 

Total liabilities

 

 

26,573

 

 

 

31,148

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Common stock, $0.05 par value; issued and outstanding 10,956 shares at March 2,

   2019 and 10,806 shares at June 2, 2018

 

 

547

 

 

 

540

 

Class B common stock, convertible, $0.05 par value; issued and outstanding 2,097

   shares at March 2, 2019 and 2,137 shares at June 2, 2018

 

 

105

 

 

 

107

 

Preferred stock, $1.00 par value, no shares issued

 

 

 

 

 

 

Additional paid-in-capital

 

 

60,846

 

 

 

60,061

 

Common stock in treasury, at cost, no shares at March 2, 2019 and June 2, 2018

 

 

 

 

 

 

Retained earnings

 

 

66,851

 

 

 

70,107

 

Accumulated other comprehensive income

 

 

3,126

 

 

 

4,366

 

Total stockholders’ equity

 

 

131,475

 

 

 

135,181

 

Total liabilities and stockholders’ equity

 

$

158,048

 

 

$

166,329

 

2


 

Richardson Electronics, Ltd.

Unaudited Consolidated Statements of Comprehensive (Loss) Income

(in thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 2, 2019

 

 

March 3, 2018

 

 

March 2, 2019

 

 

March 3, 2018

 

Statements of Comprehensive (Loss) Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

39,018

 

 

$

41,645

 

 

$

124,489

 

 

$

117,722

 

Cost of sales

 

 

26,719

 

 

 

27,578

 

 

 

85,266

 

 

 

78,133

 

Gross profit

 

 

12,299

 

 

 

14,067

 

 

 

39,223

 

 

 

39,589

 

Selling, general and administrative expenses

 

 

13,097

 

 

 

13,097

 

 

 

39,621

 

 

 

38,023

 

Loss (gain) on disposal of assets

 

 

 

 

 

3

 

 

 

 

 

 

(188

)

Operating (loss) income

 

 

(798

)

 

 

967

 

 

 

(398

)

 

 

1,754

 

Other (income) expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment/interest income

 

 

(155

)

 

 

(208

)

 

 

(402

)

 

 

(378

)

Foreign exchange loss

 

 

130

 

 

 

159

 

 

 

205

 

 

 

475

 

Other, net

 

 

 

 

 

1

 

 

 

(4

)

 

 

(14

)

Total other (income) expense

 

 

(25

)

 

 

(48

)

 

 

(201

)

 

 

83

 

(Loss) income from continuing operations before income taxes

 

 

(773

)

 

 

1,015

 

 

 

(197

)

 

 

1,671

 

Income tax provision

 

 

305

 

 

 

488

 

 

 

754

 

 

 

1,084

 

(Loss) income from continuing operations

 

 

(1,078

)

 

 

527

 

 

 

(951

)

 

 

587

 

Income from discontinued operations

 

 

 

 

 

 

 

 

 

 

 

1,496

 

Net (loss) income

 

 

(1,078

)

 

 

527

 

 

 

(951

)

 

 

2,083

 

Foreign currency translation gain (loss), net of tax

 

 

541

 

 

 

1,646

 

 

 

(1,240

)

 

 

3,997

 

Fair value adjustments on investments loss

 

 

 

 

 

(164

)

 

 

 

 

 

(130

)

Comprehensive (loss) income

 

$

(537

)

 

$

2,009

 

 

$

(2,191

)

 

$

5,950

 

Net (loss) income per Common share - Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

$

(0.08

)

 

$

0.04

 

 

$

(0.07

)

 

$

0.05

 

Income from discontinued operations

 

 

 

 

 

 

 

 

 

 

 

0.12

 

Total net (loss) income per Common share - Basic

 

$

(0.08

)

 

$

0.04

 

 

$

(0.07

)

 

$

0.17

 

Net (loss) income per Class B common share - Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

$

(0.08

)

 

$

0.04

 

 

$

(0.07

)

 

$

0.04

 

Income from discontinued operations

 

 

 

 

 

 

 

 

 

 

 

0.11

 

Total net (loss) income per Class B common share - Basic

 

$

(0.08

)

 

$

0.04

 

 

$

(0.07

)

 

$

0.15

 

Net (loss) income per Common share - Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

$

(0.08

)

 

$

0.04

 

 

$

(0.07

)

 

$

0.05

 

Income from discontinued operations

 

 

 

 

 

 

 

 

 

 

 

0.12

 

Total net (loss) income per Common share - Diluted

 

$

(0.08

)

 

$

0.04

 

 

$

(0.07

)

 

$

0.17

 

Net (loss) income per Class B common share - Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

$

(0.08

)

 

$

0.04

 

 

$

(0.07

)

 

$

0.04

 

Income from discontinued operations

 

 

 

 

 

 

 

 

 

 

 

0.11

 

Total net (loss) income per Class B common share - Diluted

 

$

(0.08

)

 

$

0.04

 

 

$

(0.07

)

 

$

0.15

 

Weighted average number of shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares – Basic

 

 

10,953

 

 

 

10,792

 

 

 

10,911

 

 

 

10,753

 

Class B common shares – Basic

 

 

2,097

 

 

 

2,137

 

 

 

2,108

 

 

 

2,137

 

Common shares – Diluted

 

 

10,953

 

 

 

10,872

 

 

 

10,911

 

 

 

10,793

 

Class B common shares – Diluted

 

 

2,097

 

 

 

2,137

 

 

 

2,108

 

 

 

2,137

 

Dividends per common share

 

$

0.060

 

 

$

0.060

 

 

$

0.180

 

 

$

0.180

 

Dividends per Class B common share

 

$

0.054

 

 

$

0.054

 

 

$

0.162

 

 

$

0.162

 

 

3


Richardson Electronics, Ltd.

Unaudited Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 2, 2019

 

 

March 3, 2018

 

 

March 2, 2019

 

 

March 3, 2018

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(1,078

)

 

$

527

 

 

$

(951

)

 

$

2,083

 

Adjustments to reconcile net (loss) income to cash (used in)

   provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

794

 

 

 

752

 

 

 

2,350

 

 

 

2,219

 

Inventory provisions

 

 

203

 

 

 

183

 

 

 

568

 

 

 

470

 

Gain on sale of investments

 

 

 

 

 

(159

)

 

 

 

 

 

(183

)

Loss (gain) on disposal of assets

 

 

 

 

 

3

 

 

 

 

 

 

(188

)

Share-based compensation expense

 

 

176

 

 

 

116

 

 

 

571

 

 

 

425

 

Deferred income taxes

 

 

113

 

 

 

124

 

 

 

268

 

 

 

186

 

Change in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(478

)

 

 

(551

)

 

 

(576

)

 

 

(239

)

Inventories

 

 

(1,484

)

 

 

(598

)

 

 

(3,315

)

 

 

(5,232

)

Prepaid expenses and other assets

 

 

614

 

 

 

43

 

 

 

332

 

 

 

(572

)

Accounts payable

 

 

(1,561

)

 

 

552

 

 

 

(5,442

)

 

 

(446

)

Accrued liabilities

 

 

309

 

 

 

1,116

 

 

 

880

 

 

 

1,325

 

Other

 

 

(86

)

 

 

(137

)

 

 

88

 

 

 

(140

)

Net cash (used in) provided by operating activities

 

 

(2,478

)

 

 

1,971

 

 

 

(5,227

)

 

 

(292

)

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(974

)

 

 

(1,461

)

 

 

(3,166

)

 

 

(4,196

)

Proceeds from sale of assets

 

 

 

 

 

 

 

 

 

 

 

276

 

Proceeds from maturity of investments

 

 

2,300

 

 

 

3,943

 

 

 

2,300

 

 

 

12,120

 

Purchases of investments

 

 

(12,500

)

 

 

 

 

 

(17,800

)

 

 

(3,943

)

Proceeds from sales of available-for-sale securities

 

 

 

 

 

648

 

 

 

 

 

 

913

 

Purchases of available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

(265

)

Other

 

 

 

 

 

(2

)

 

 

 

 

 

(7

)

Net cash (used in) provided by investing activities

 

 

(11,174

)

 

 

3,128

 

 

 

(18,666

)

 

 

4,898

 

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

16

 

 

 

44

 

 

 

219

 

 

 

44

 

Cash dividends paid

 

 

(771

)

 

 

(763

)

 

 

(2,305

)

 

 

(2,284

)

Net cash used in financing activities

 

 

(755

)

 

 

(719

)

 

 

(2,086

)

 

 

(2,240

)

Effect of exchange rate changes on cash and cash equivalents

 

 

417

 

 

 

1,049

 

 

 

(617

)

 

 

2,189

 

(Decrease) increase in cash and cash equivalents

 

 

(13,990

)

 

 

5,429

 

 

 

(26,596

)

 

 

4,555

 

Cash and cash equivalents at beginning of period

 

 

47,859

 

 

 

54,453

 

 

 

60,465

 

 

 

55,327

 

Cash and cash equivalents at end of period

 

$

33,869

 

 

$

59,882

 

 

$

33,869

 

 

$

59,882

 

 

4


Richardson Electronics, Ltd.

Unaudited Consolidated Statement of Stockholders’ Equity

(in thousands, except per share amounts)

 

 

 

Common

 

 

Class B

Common

 

 

Par

Value

 

 

Additional

Paid In

Capital

 

 

Common

Stock in

Treasury

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Income

 

 

Total

 

Balance June 2, 2018:

 

 

10,806

 

 

 

2,137

 

 

$

647

 

 

$

60,061

 

 

$

 

 

$

70,107

 

 

$

4,366

 

 

$

135,181

 

Comprehensive (loss) income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(951

)

 

 

 

 

 

(951

)

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,240

)

 

 

(1,240

)

Share-based compensation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock

 

 

 

 

 

 

 

 

 

 

 

226

 

 

 

 

 

 

 

 

 

 

 

 

226

 

Stock options

 

 

 

 

 

 

 

 

 

 

 

345

 

 

 

 

 

 

 

 

 

 

 

 

345

 

Common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercised

 

 

40

 

 

 

 

 

 

2

 

 

 

217

 

 

 

 

 

 

 

 

 

 

 

 

219

 

Restricted stock issuance

 

 

70

 

 

 

 

 

 

3

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

 

Converted Class B to common

 

 

40

 

 

 

(40

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends paid to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common ($0.18 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,963

)

 

 

 

 

 

(1,963

)

Class B ($0.162 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(342

)

 

 

 

 

 

(342

)

Balance March 2, 2019:

 

 

10,956

 

 

 

2,097

 

 

$

652

 

 

$

60,846

 

 

$

 

 

$

66,851

 

 

$

3,126

 

 

$

131,475

 

 

5


RICHARDSON ELECTRONICS, LTD.

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 flat panel detector solutions, replacement parts, tubes and service training 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 markets. Our engineers design, manufacture, source and support a full spectrum of solutions to match the needs of our customers. We offer long term availability and proven custom display solutions that include touch screens, protective panels, custom enclosures, all-in-ones, specialized cabinet finishes and application specific software packages and certification services. We partner with both private label manufacturing companies and leading branded hardware vendors to offer the highest quality display and touch solutions and customized computing platforms.

Healthcare manufactures, refurbishes and distributes high value replacement parts for the healthcare market including hospitals, medical centers, asset management companies, independent service organizations and multi-vendor service providers. Products include Diagnostic Imaging replacement parts for CT and MRI systems; replacement CT and MRI tubes; CT service training; MRI coils, cold heads and RF amplifiers; hydrogen thyratrons, klystrons, magnetrons; flat panel detector upgrades; and additional replacement solutions 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 third quarter of fiscal 2019 and fiscal 2018 both contained 13 weeks. The first nine months of fiscal 2019 and fiscal 2018 contained 39 and 40 weeks, respectively.

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 March 2, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending June 1, 2019.

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The financial information contained in this report should be read in conjunction with our Annu al Report on Form 10-K for the fiscal year ended June  2, 201 8 , that we filed on August   2 , 201 8 .

3.  CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Inventories, net:  Our consolidated inventories were stated at the lower of cost and net realizable value, generally using a weighted-average cost method. Our net inventories include approximately $46.3 million of finished goods, $4.7 million of raw materials and $2.1 million of work-in-progress as of March 2, 2019, as compared to approximately $42.6 million of finished goods, $5.7 million of raw materials and $2.4 million of work-in-progress as of June 2, 2018.

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. Inventory reserves were approximately $4.3 million as of March 2, 2019 and $4.0 million as of June 2, 2018.

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.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers, which amends guidance for revenue recognition. ASU 2014-09 is principles based guidance that can be applied to all contracts with customers, enhancing comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. The core principle of the guidance is that entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The guidance details the steps entities should apply to achieve the core principle. In August 2015, the FASB issued an amendment to defer the effective date for all entities by one year. For public entities, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted as of annual reporting periods beginning after December 15, 2016. Companies have the option of using either a full or modified retrospective approach in applying this standard. During fiscal 2016 and 2017, the FASB issued four additional updates which further clarify the guidance provided in ASU 2014-09.

Effective June 3, 2018, the Company adopted the standard using the modified retrospective method to all contracts. As a result, financial information for the reporting period beginning June 3, 2018 was reported under the new standard, while comparative financial information has not been adjusted and continues to be reported in accordance with the previous standard. The adoption of this standard did not impact the timing of revenue recognition for our customer sales. The adoption did not result in the recognition of a cumulative adjustment to beginning retained earnings, nor did it have a material impact on the consolidated financial statements. For the Company, the most significant impact of the new standard is the addition of required disclosures within the notes to the financial statements.

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.

Goodwill and Intangible Assets: We test goodwill for impairment annually and whenever events or circumstances indicate 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.

During the fourth quarter of each fiscal year, our goodwill balances are reviewed for impairment using the first day of our fourth quarter as the measurement date. If after reviewing the totality of events or circumstances, we determine that it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, then we test for impairment through the application of a fair value based test. We estimate the fair value of each of our reporting units based on projected future operating results, market approach and discounted cash flows.

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.

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

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d ifferences 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 signific ance is needed to overcome the negative evidence before a tax benefit is recognized for deductible temporary differences and loss carryforwards.

Accrued Liabilities: Accrued liabilities consist of the following (in thousands):

 

 

 

March 2, 2019

 

 

June 2, 2018

 

Compensation and payroll taxes

 

$

3,007

 

 

$

3,449

 

Accrued severance

 

 

636

 

 

 

454

 

Professional fees

 

 

767

 

 

 

527

 

Deferred revenue

 

 

1,921

 

 

 

1,888

 

Other accrued expenses

 

 

4,961

 

 

 

4,025

 

Accrued Liabilities

 

$

11,292

 

 

$

10,343

 

 

4.  REVENUE RECOGNITION

Richardson has a number of defined revenue streams across our reportable segments. For each of these revenue streams, all products are typically sold directly by the Company to the end customer. Distribution is the Company’s largest revenue stream. The distribution business does not include a separate service bundled with the product sold or sold on top of the product. Distribution typically includes the sale of products purchased from our suppliers, stocked in our warehouses and then sold to our customers. Revenue is recognized when control of the promised goods is transferred to our customers, which is simultaneous with when the title transfers to the customer, in an amount that reflects the transaction price consideration that we expect to receive in exchange for those goods. Control refers to the ability of the customer to direct the use of, and obtain substantially all of, the remaining benefits from the goods. Our transaction price consideration is fixed, unless otherwise disclosed below as variable consideration. G enerally, our contracts require our customers to pay for goods after we deliver products to them. Terms are generally on open account, payable net 30 days in North America, and vary throughout Asia/Pacific, Europe and Latin America.

The Company also sells products that are manufactured or assembled in our manufacturing facility. These products can be either built to the customer’s prints or designs or are products that we stock in our warehouse to sell to any customer that places an order. The manufacturing business does not include a separate service bundled with the product sold or sold on top of the product.

The Company recognizes services revenue when the repair, installation or training is performed. Based on our analysis of services revenue, ASU 2014-09 has an immaterial impact on the timing, amount or characterization of services revenue recognized by the Company. The services we provide are relatively short in duration, typically completed in one to two weeks, thus, at each reporting date, the amount of unbilled work performed is insignificant. The services revenue has consistently accounted for less than 5% of the Company’s total revenues and is expected to continue at that level.

Contracts with customers

A contract is an agreement between two or more parties that creates enforceable rights and obligations. A revenue contract exists for us once a customer purchase order is received, reviewed and accepted. Prior to accepting a customer purchase order, we review the credit worthiness of the customer. Purchase orders are deemed to meet the collectability criterion once the customer’s credit is approved. Contract assets arise when the Company transfers a good or performs a service in advance of receiving consideration from the customer and contract liabilities arise when the Company receives consideration from its customer in advance of performance.

Contract Liabilities: Contract liabilities and revenue recognized were as follows ( in thousands ):

 

 

 

June 2, 2018

 

 

Additions

 

 

Revenue

Recognized

 

 

March 2, 2019

 

Contract liabilities (deferred revenue)

 

$

1,888

 

 

$

2,580

 

 

$

(2,547

)

 

$

1,921

 

 

The Company receives advances or deposits from our customers before revenue is recognized, resulting in contract liabilities. Contract liabilities are included in accrued liabilities in the consolidated balance sheets.

Performance obligations and satisfaction of performance obligation in the contract

Each accepted purchase order identifies a distinct good or service as the performance obligation. The goods are generally standard products we purchased from a supplier and stocked on our shelves. They can also be customized products purchased from a supplier or products that are customized or have value added to them in-house prior to shipping to the customer, but only after a purchase order is received. Our contracts for customized products generally include termination provisions if a customer cancels their order. However, we recognize revenue at a point in time because the termination provisions do not require, upon cancelation, the customer to pay fees that are commensurate with the work performed. Each purchase order explicitly states the goods or service that we promise to transfer to the customer. The promises to the customer are limited to only those goods or service. The performance

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oblig ation is our promise to deliver both goods that were produced by the Company and resale of goods that we purchase from our suppliers. Our shipping and handling activities for destination shipments are performed prior to the customer obtaining control. As s uch, they are not a separate promised service. For shipping point, Richardson is making the election under ASC