Quarterly Report (10-q)

Date : 10/10/2019 @ 5:58PM
Source : Edgar (US Regulatory)
Stock : Richardson Electronics Ltd (RELL)
Quote : 5.58  -0.01 (-0.18%) @ 8:37PM

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 August 31, 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

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common stock, $0.05 Par Value

 

RELL

 

NASDAQ Global Select Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

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 October 8, 2019, there were outstanding 11,038,235 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.

 

 

 


TABLE OF CONTENTS

 

 

 

 

Page

 

 

 

 

Part I.

Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements

 

2

 

Consolidated Balance Sheets

 

2

 

Unaudited Consolidated Statements of Comprehensive Loss

 

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

 

17

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

21

Item 4.

Controls and Procedures

 

21

 

 

 

 

Part II.

Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

22

Item 1A.

Risk Factors

 

22

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

22

Item 5.

Other Information

 

22

Item 6.

Exhibits

 

23

Exhibit Index

 

23

Signatures

 

 

24

 

1


PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS 

Richardson Electronics, Ltd.

Consolidated Balance Sheets

(in thousands, except per share amounts)

 

 

 

Unaudited

 

 

Audited

 

 

 

August 31, 2019

 

 

June 1, 2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

46,457

 

 

$

42,019

 

Accounts receivable, less allowance of $296 and $339, respectively

 

 

21,946

 

 

 

24,296

 

Inventories, net

 

 

54,137

 

 

 

53,232

 

Prepaid expenses and other assets

 

 

2,424

 

 

 

3,067

 

Investments - current

 

 

 

 

 

8,000

 

Total current assets

 

 

124,964

 

 

 

130,614

 

Non-current assets:

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

18,640

 

 

 

19,111

 

Intangible assets, net

 

 

2,696

 

 

 

2,763

 

Lease ROU asset

 

 

4,107

 

 

 

 

Non-current deferred income taxes

 

 

579

 

 

 

529

 

Total non-current assets

 

 

26,022

 

 

 

22,403

 

Total assets

 

$

150,986

 

 

$

153,017

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

12,906

 

 

$

16,943

 

Accrued liabilities

 

 

10,338

 

 

 

11,273

 

Lease liability current

 

 

1,541

 

 

 

 

Total current liabilities

 

 

24,785

 

 

 

28,216

 

Non-current liabilities:

 

 

 

 

 

 

 

 

Non-current deferred income tax liabilities

 

 

216

 

 

 

212

 

Lease liability non-current

 

 

2,678

 

 

 

 

Other non-current liabilities

 

 

692

 

 

 

832

 

Total non-current liabilities

 

 

3,586

 

 

 

1,044

 

Total liabilities

 

 

28,371

 

 

 

29,260

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Common stock, $0.05 par value; issued and outstanding 11,029 shares at

   August 31, 2019 and 10,957 shares at June 1, 2019

 

 

551

 

 

 

547

 

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

   2,097 shares at August 31, 2019 and June 1, 2019

 

 

105

 

 

 

105

 

Preferred stock, $1.00 par value, no shares issued

 

 

 

 

 

 

Additional paid-in-capital

 

 

61,200

 

 

 

61,012

 

Common stock in treasury, at cost, no shares at August 31, 2019 and June 1, 2019

 

 

 

 

 

 

Retained earnings

 

 

59,085

 

 

 

59,703

 

Accumulated other comprehensive income

 

 

1,674

 

 

 

2,390

 

Total stockholders’ equity

 

 

122,615

 

 

 

123,757

 

Total liabilities and stockholders’ equity

 

$

150,986

 

 

$

153,017

 

2


 

Richardson Electronics, Ltd.

Unaudited Consolidated Statements of Comprehensive Loss

(in thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

 

August 31, 2019

 

 

September 1, 2018

 

Statements of Comprehensive Loss

 

 

 

 

 

 

 

 

Net sales

 

$

40,653

 

 

$

44,157

 

Cost of sales

 

 

27,702

 

 

 

30,204

 

Gross profit

 

 

12,951

 

 

 

13,953

 

Selling, general and administrative expenses

 

 

12,847

 

 

 

13,099

 

Loss on disposal of assets

 

 

1

 

 

 

 

Operating income

 

 

103

 

 

 

854

 

Other (income) expense:

 

 

 

 

 

 

 

 

Investment/interest income

 

 

(120

)

 

 

(126

)

Foreign exchange (gain) loss

 

 

(110

)

 

 

286

 

Other, net

 

 

(1

)

 

 

(8

)

Total other (income) expense

 

 

(231

)

 

 

152

 

Income before income taxes

 

 

334

 

 

 

702

 

Income tax provision

 

 

177

 

 

 

271

 

Net income

 

 

157

 

 

 

431

 

Foreign currency translation loss, net of tax

 

 

(716

)

 

 

(740

)

Comprehensive loss

 

$

(559

)

 

$

(309

)

Net income per share

 

 

 

 

 

 

 

 

Common shares - Basic

 

$

0.01

 

 

$

0.03

 

Class B common shares - Basic

 

$

0.01

 

 

$

0.03

 

Common shares - Diluted

 

$

0.01

 

 

$

0.03

 

Class B common shares - Diluted

 

$

0.01

 

 

$

0.03

 

Weighted average number of shares:

 

 

 

 

 

 

 

 

Common shares – Basic

 

 

10,990

 

 

 

10,829

 

Class B common shares – Basic

 

 

2,097

 

 

 

2,132

 

Common shares – Diluted

 

 

10,990

 

 

 

10,982

 

Class B common shares – Diluted

 

 

2,097

 

 

 

2,132

 

Dividends per common share

 

$

0.060

 

 

$

0.060

 

Dividends per Class B common share

 

$

0.054

 

 

$

0.054

 

 

3


Richardson Electronics, Ltd.

Unaudited Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Three Months Ended

 

 

 

August 31, 2019

 

 

September 1, 2018

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

157

 

 

$

431

 

Adjustments to reconcile net income to cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

833

 

 

 

764

 

Inventory provisions

 

 

161

 

 

 

215

 

Loss on disposal of assets

 

 

1

 

 

 

 

Share-based compensation expense

 

 

188

 

 

 

165

 

Deferred income taxes

 

 

(48

)

 

 

58

 

Change in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

2,161

 

 

 

(198

)

Inventories

 

 

(1,357

)

 

 

77

 

Prepaid expenses and other assets

 

 

625

 

 

 

37

 

Accounts payable

 

 

(3,955

)

 

 

(5,419

)

Accrued liabilities

 

 

(876

)

 

 

227

 

Other

 

 

56

 

 

 

13

 

Net cash used in operating activities

 

 

(2,054

)

 

 

(3,630

)

Investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(339

)

 

 

(1,072

)

Proceeds from maturity of investments

 

 

8,000

 

 

 

 

Purchases of investments

 

 

 

 

 

(2,300

)

Net cash provided by (used in) investing activities

 

 

7,661

 

 

 

(3,372

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

 

 

 

192

 

Cash dividends paid

 

 

(775

)

 

 

(764

)

Payment of financing lease principal

 

 

(30

)

 

 

 

Other

 

 

4

 

 

 

 

Net cash used in financing activities

 

 

(801

)

 

 

(572

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(368

)

 

 

(413

)

Increase (decrease) in cash and cash equivalents

 

 

4,438

 

 

 

(7,987

)

Cash and cash equivalents at beginning of period

 

 

42,019

 

 

 

60,465

 

Cash and cash equivalents at end of period

 

$

46,457

 

 

$

52,478

 

 

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 1, 2019:

 

 

10,957

 

 

 

2,097

 

 

$

652

 

 

$

61,012

 

 

$

 

 

$

59,703

 

 

$

2,390

 

 

$

123,757

 

Comprehensive (loss) income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

157

 

 

 

 

 

 

157

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(716

)

 

 

(716

)

Share-based compensation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock

 

 

 

 

 

 

 

 

 

 

 

99

 

 

 

 

 

 

 

 

 

 

 

 

99

 

Stock options

 

 

 

 

 

 

 

 

 

 

 

89

 

 

 

 

 

 

 

 

 

 

 

 

89

 

Common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock issuance

 

 

72

 

 

 

 

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4

 

Dividends paid to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common ($0.060 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(662

)

 

 

 

 

 

(662

)

Class B ($0.054 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(113

)

 

 

 

 

 

(113

)

Balance August 31, 2019:

 

 

11,029

 

 

 

2,097

 

 

$

656

 

 

$

61,200

 

 

$

 

 

$

59,085

 

 

$

1,674

 

 

$

122,615

 

 

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 capabilities, power grid and microwave tube business with new RF, Wireless and disruptive power technologies. As a manufacturer, technology partner and authorized distributor, PMT’s strategy is to provide specialized technical expertise and engineered solutions based on our core engineering and manufacturing capabilities on a global basis. 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 5G, 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 first three months of fiscal 2020 and fiscal 2019 both contained 13 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 months ended August 31, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending May 30, 2020.

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 June 1, 2019, that we filed on August 5, 2019.

6


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 $48.5 million of finished goods, $4.0 million of raw materials and $1.6 million of work-in-progress as of August 31, 2019, as compared to approximately $47.2 million of finished goods, $4.2 million of raw materials and $1.8 million of work-in-progress as of June 1, 2019.

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 $4.6 million as of August 31, 2019 and June 1, 2019.

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.

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. 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 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.

7


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

 

 

 

August 31, 2019

 

 

June 1, 2019

 

Compensation and payroll taxes

 

$

3,469

 

 

$

2,846

 

Accrued severance

 

 

487

 

 

 

520

 

Professional fees

 

 

523

 

 

 

471

 

Deferred revenue

 

 

1,750

 

 

 

2,260

 

Other accrued expenses

 

 

4,109

 

 

 

5,176

 

Accrued Liabilities

 

$

10,338

 

 

$

11,273

 

 

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 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 the title transferring 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. Generally, 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 subject to customary credit checks.

The Company also sells products that are manufactured or assembled in our manufacturing facility. These products can either be built to the customer’s prints/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 in addition to 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 and typically completed in one to two weeks. Therefore, 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 1, 2019

 

 

Additions

 

 

Revenue

Recognized

 

 

August 31, 2019

 

Contract liabilities (deferred revenue)

 

$

2,260

 

 

$

581

 

 

$

(1,091

)

 

$

1,750

 

 

The Company receives advance payments 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.

 

8


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. Our contracts for customized products generally include termination provisions if a customer cancels its 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 only to those goods or service. The performance obligation 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 such, they are not a separate promised service. For shipping point, Richardson is making the election under ASC 606-10-25-18B to account for shipping and handling as activities to fulfill the promise to transfer the goods. The goods we provide to our customers are distinct in that our customers benefit from the goods we sell them through use in their own processes. Our customers are generally not resellers, but rather businesses that incorporate our products into their processes from which they generate an economic benefit. The goods are also distinct in that each item sold to the customer is clearly identified on both the purchase order and resulting invoice. Each product we sell benefits the customer independently of the other products. Each item on each purchase order from the customer can be used by the customer unrelated to any other products we provide to the customer.

Determine the transaction price and variable consideration

The transaction price for each product is the amount invoiced to the customer. Each product on a purchase order is a separate performance obligation with an observable standalone selling price. The transaction price is a fixed price per unit, except for the variable consideration. The Company elects to exclude sales tax from the transaction price. With the exception of sale with right of return, variable consideration has been identified only in the form of customer early payment discounts, which are immaterial to the Company’s financial statements. Although there is not a material impact on our financial statements, we will continue to account for customer discounts when they are taken by the customer and address further if they grow.

Recognize revenue when the entity satisfies a performance obligation

We recognize revenue when title transfers to the customer, at the shipping point for FOB shipping contracts and at the customer’s delivery location for FOB destination contracts. We believe that the transfer of title best represents when the customer obtains control of the goods. Prior to that date, we do not have right to payment, and the significant risks and rewards remain with us. The significant risks and rewards of ownership of the inventory transfer simultaneously with the transfer of title. The customer’s acceptance of the goods is based on objective measurements, not subjective.

Additional considerations

Sale with right of return:

Our return policy is available to customers in our terms and conditions found on our website www.rell.com. The policy varies by business unit. The Company allows returns with prior written authorization and we allow returns within 10 days of shipment for replacement parts.

The Company maintains a reserve for returns based on historical trends that covers all contracts and revenue streams using the expected value method because we have a large number of contracts with similar characteristics, which is considered variable consideration. The reserve for returns creates a refund liability on our balance sheet as a contra Trade Accounts Receivable as well as an asset in inventory. We value the inventory at cost due to there being minimal or no costs to the Company as we generally require the customer to pay freight and we typically do not have costs associated with activities such as relabeling or repackaging.

The reserve is considered immaterial at each balance sheet date for further consideration. Returns for defective product are typically covered by our supplier’s warranty, thus, returns for defective product are not factored into our reserve.

Warranties:

We offer warranties for the limited number of specific products we manufacture. 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 sale. Each quarter, we assess actual warranty costs incurred on a product-by-product basis and compare the warranty costs to our estimated warranty reserve. With respect to new products, estimates are based generally on knowledge of the products and warranty experience, if a sufficient history exists. See Note 7, Warranties, for further information regarding the impact of warranties concerning ASU 2014-09.

9


Principal versus agent considerations:

Principal versus agent guidance was considered for customized products that are provided by our suppliers versus manufactured by the Company. Richardson acts as the principal as we are responsible for satisfying the performance obligation. We have primary responsibility for fulfilling the contract, we have inventory risk prior to delivery to our customer, we establish prices, our consideration is not in the form of a commission and we bear the credit risk. The Company recognizes revenue in the gross amount of consideration.

See Note 11, Segment Reporting, for a disaggregation of revenue by reportable segment and geographic region, which represents how our chief operating decision maker reviews information internally to evaluate our financial performance and to make resource allocation and other decisions for the Company.

5.  INTANGIBLE ASSETS

Intangible assets are initially recorded at their fair market values determined by 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 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 were as follows (in thousands):

 

 

 

August 31, 2019

 

 

June 1, 2019

 

Gross Amounts:

 

 

 

 

 

 

 

 

Trade Name

 

$

659

 

 

$

659

 

Customer Relationships(1)

 

 

3,384

 

 

 

3,394

 

Non-compete Agreements

 

 

177

 

 

 

177

 

Technology

 

 

230

 

 

 

230

 

Total Gross Amounts

 

$

4,450

 

 

$

4,460

 

Accumulated Amortization:

 

 

 

 

 

 

 

 

Trade Name

 

$

659

 

 

$

659

 

Customer Relationships

 

 

841

 

 

 

796

 

Non-compete Agreements

 

 

144

 

 

 

139

 

Technology

 

 

110

 

 

 

103

 

Total Accumulated Amortization

 

$

1,754

 

 

$

1,697

 

Net Intangible Assets

 

$

2,696

 

 

$

2,763

 

 

(1)

Change from prior periods reflect impact of foreign currency translation.

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 2020

 

$

192

 

2021

 

 

245

 

2022

 

 

251

 

2023

 

 

245

 

2024

 

 

231

 

Thereafter

 

 

1,532

 

Total amortization expense

 

$

2,696

 

 

The weighted average number of years of amortization expense remaining is 14.3 years.

 

6.  INVESTMENTS

As of August 31, 2019, we had no investments.

As of June 1, 2019, we had $8.0 million invested in CDs which mature in less than twelve months. The fair value of these investments was equal to the face value of the CDs. 

 

10


7.  WARRANTIES

We offer warranties for the limited number of specific products we manufacture. 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 and warranty experience, if a sufficient history exists.

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 $0.3 million as of August 31, 2019 and June 1, 2019.

8.  LEASE OBLIGATIONS, OTHER COMMITMENTS AND CONTINGENCIES

 

In February 2016, the FASB issued ASU 2016-02 (“ASU 2016-02”), Leases (“Topic 842”). ASU 2016-02 establishes a right-of-use (“ROU”) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.

 

ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company elects the practical expedients (which must be elected as a package and applied consistently to all of our leases) for which we will not reassess: (1) whether any expired or existing contracts are or contains leases, (2) the lease classification for any expired or existing leases and (3) the initial indirect costs for any existing leases. We have also elected the practical expedient to combine lease and non-lease components for all of our leases. We have adopted an accounting policy to not apply the requirements of Topic 842 to leases with a term of 12 months or less, which the Company has within our facility leases. Short-term leases will be reassessed if events occur that disqualify them from short-term status.

The new standard was effective for the Company on June 2, 2019. The FASB issued ASU 2018-11, targeted improvements to Topic 842, which includes an option to not restate comparative periods in transition and elect to use the effective date of Topic 842 as the date of initial application of transition. We adopted the new standard applying the new transition method allowed under ASU 2018-11. As a result of adopting Topic 842, we recognized operating right-of-use assets of $3.6 million, finance right-of-use assets of $0.5 million, operating lease liabilities of $3.8 million and finance lease liabilities of $0.5 million. Existing deferred rent of $0.2 million was recorded as an offset to our gross operating lease right-of-use assets. Several leases include renewal clauses which vary in length and may not include specific rent renewal amounts. The Company will revise the value of the right of use assets and associated lease liabilities when the Company is reasonably certain it will renew the lease. The standard did not have a material impact on our results of operations or cash flows.

The gross amounts of assets and liabilities related to both operating and finance leases at August 31, 2019 were as follows (in thousands):

 

Lease Type

 

Amount

 

Operating lease ROU asset

 

$

3,643

 

Finance lease ROU asset

 

 

464

 

Total Lease ROU asset

 

$

4,107

 

 

 

 

 

 

Operating lease liability current

 

$

1,390

 

Finance lease liability current

 

 

151

 

Total lease liability current

 

$

1,541

 

 

 

 

 

 

Operating lease liability non-current

 

$

2,386

 

Finance lease liability non-current

 

 

292

 

Total lease liability non-current

 

$

2,678

 

 

11


The components of lease costs were as follows (in thousands):

 

Lease Type

 

Classification

 

Three Months Ended August 31, 2019

 

Consolidated operating lease expense

 

Operating expenses

 

$

478

 

 

 

 

 

 

 

 

Consolidated finance lease amortization

 

Operating expenses

 

 

 

Consolidated finance lease interest

 

Interest expense

 

 

9

 

Consolidated finance lease expense

 

 

 

 

9

 

 

 

 

 

 

 

 

Net lease cost

 

 

 

$

487

 

 

The Company recorded $0.4 million of lease expense in the first quarter of fiscal 2019.

The approximate future minimum lease payments under operating and finance leases at August 31, 2019 were as follows (in thousands):

 

Fiscal Year

 

Operating Leases

 

 

Finance Lease

 

 

Total

 

Remaining 2020

 

$

1,164

 

 

$

136

 

 

$

1,300

 

2021

 

 

1,354

 

 

 

181

 

 

 

1,535

 

2022

 

 

598

 

 

 

151

 

 

 

749

 

2023

 

 

417

 

 

 

 

 

 

417

 

2024

 

 

309

 

 

 

 

 

 

309

 

Thereafter

 

 

241

 

 

 

 

 

 

241

 

Total lease payments

 

 

4,083

 

 

 

468

 

 

 

4,551

 

Less imputed interest

 

 

307

 

 

 

25

 

 

 

332

 

Net minimum lease payments

 

$

3,776

 

 

$

443

 

 

$

4,219

 

 

The approximate future minimum lease payments under operating and finance leases at June 1, 2019 were as follows (in thousands):

 

Fiscal Year (1)

 

Operating Leases

 

2020

 

$

1,586

 

2021

 

 

1,367

 

2022

 

 

509

 

2023

 

 

340

 

2024

 

 

289

 

Thereafter

 

 

234

 

 

(1)

On June 2, 2019, the Company elected the modified retrospective method of transition to adopt the new lease standard Topic 842, which resulted in no restatement of prior period results. At June 1, 2019, prior to adoption of the new lease standard, operating lease obligations were not included as a liability on the balance sheet. Therefore, the operating lease obligations were included in the table for comparative purposes only and the total lease liability was not included as it is not applicable.

The weighted average remaining lease terms and interest rates of leases held by the Company as of August 31, 2019 were as follows:

 

Lease Type

 

Weighted Average Remaining Lease Term in Years

 

Weighted Average Interest Rate

 

Operating leases

 

3.5

 

4.6%

 

Finance lease

 

2.6

 

4.6%

 

 

The cash outflows of the leasing activity of the Company as lessee for the three months ending August 31, 2019 were as follows (in thousands):

 

Cash Flow Source

 

Classification

 

Amount

 

Operating cash flows from operating leases

 

Operating activities

 

$

256

 

Operating cash flows from finance lease

 

Operating activities

 

 

25

 

Finance cash flows from finance lease

 

Financing activities

 

 

30

 

12


 

9.  INCOME TAXES

We recorded an income tax provision of $0.2 million and $0.3 million for the first three months of fiscal 2020 and the first three months of fiscal 2019, respectively. The effective income tax rate during the first three months of fiscal 2020 was a tax provision of 53.0% as compared to a tax provision of 38.6% during the first three months of fiscal 2019. The difference in rate during the first three months of fiscal 2020 as compared to the first three months of fiscal 2019 reflects changes in our geographical distribution of income (loss). The 53.0% effective income tax rate differs from the federal statutory rate of 21% as a result of our geographical distribution of income (loss) and the movement of the valuation allowance against our U.S. state and federal net deferred tax assets.

In the normal course of business, we are subject to examination by taxing authorities throughout the world. Generally, years prior to fiscal 2009 are closed for examination under the statute of limitation for U.S. federal, U.S. state and local or non-U.S. tax jurisdictions. Our primary foreign tax jurisdictions are Germany and the Netherlands. We have tax years open in Germany beginning in fiscal 2015 and the Netherlands beginning in fiscal 2012.

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. We have provided a deferred tax liability totaling $0.2 million as of August 31, 2019. As of June 1, 2019, the deferred tax liability totaled $0.2 million. 

As of August 31, 2019, our worldwide liability for uncertain tax positions related to continuing operations was $0.1 million, excluding interest and penalties as compared to $0.1 million liabilities for uncertain tax positions as of June 1, 2019. There was no change in recorded uncertain tax positions during the first three months of fiscal 2020. We record penalties and interest related to uncertain tax positions in the income tax expense line item within the consolidated statements of comprehensive loss.

The valuation allowance against the net deferred tax assets that will more likely than not be realized was $11.7 million as of June 1, 2019. The valuation allowance against the net deferred tax assets was $11.7 million as of August 31, 2019 as no material additional domestic federal and state net deferred tax assets were generated during the first quarter of fiscal 2020 from 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.   

13


The earnings per share (“EPS”) presented in our unaudited consolidated statements of comprehensive loss were based on the following amounts (in thousands, except per share amounts):

 

 

 

Three Months Ended

 

 

 

August 31, 2019

 

 

September 1, 2018

 

 

 

Basic

 

 

Diluted

 

 

Basic

 

 

Diluted

 

Numerator for Basic and Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

157

 

 

$

157

 

 

$

431

 

 

$

431

 

Less dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

662

 

 

 

662

 

 

 

648

 

 

 

648

 

Class B common stock

 

 

113

 

 

 

113

 

 

 

116

 

 

 

116

 

Undistributed losses

 

$

(618

)

 

$

(618

)

 

$

(333

)

 

$

(333

)

Common stock undistributed losses

 

$

(527

)

 

$

(527

)

 

$

(283

)

 

$

(283

)

Class B common stock undistributed losses

 

 

(91

)

 

 

(91

)

 

 

(50

)

 

 

(50

)

Total undistributed losses

 

$

(618

)

 

$

(618

)

 

$

(333

)

 

$

(333

)

Denominator for Basic and Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock weighted average shares

 

 

10,990

 

 

 

10,990

 

 

 

10,829

 

 

 

10,829

 

Class B common stock weighted average shares, and

   shares under if-converted method for diluted EPS

 

 

2,097

 

 

 

2,097

 

 

 

2,132

 

 

 

2,132

 

Effect of dilutive securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

153

 

Denominator for diluted EPS adjusted for weighted

   average shares and assumed conversions