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 disruptive RF, Wireless and Power technologies. As a designer, 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-One computers, specialized cabinet finishes, 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, repairs, refurbishes and distributes high value replacement parts and equipment 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; pre-owned CT systems; 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 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 2021 and fiscal 2020 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 29, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending May 29, 2021.
The financial information contained in this report should be read in conjunction with our Annual Report on Form 10-K for the year ended May 30, 2020, that we filed on August 3, 2020.
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 $53.3 million of finished goods, $4.0 million of raw materials and $2.9 million of work-in-progress as of August 29, 2020, as compared to approximately $51.8 million of finished goods, $3.6 million of raw materials and $2.1 million of work-in-progress as of May 30, 2020.
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 $5.6 million as of August 29, 2020 and $5.4 million as of May 30, 2020.
Revenue Recognition: 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 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.
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. 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.
Accrued Liabilities: Accrued liabilities consisted of the following (in thousands):
|
|
August 29, 2020
|
|
|
May 30, 2020
|
|
Compensation and payroll taxes
|
|
$
|
4,645
|
|
|
$
|
3,469
|
|
Accrued severance
|
|
|
650
|
|
|
|
650
|
|
Professional fees
|
|
|
853
|
|
|
|
471
|
|
Deferred revenue
|
|
|
1,875
|
|
|
|
1,671
|
|
Other accrued expenses
|
|
|
4,279
|
|
|
|
4,063
|
|
Accrued Liabilities
|
|
$
|
12,302
|
|
|
$
|
10,324
|
|
7
4. REVENUE RECOGNITION
The Company 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):
|
|
May 30, 2020
|
|
|
Additions
|
|
|
Revenue
Recognized
|
|
|
August 29, 2020
|
|
Contract liabilities (deferred revenue)
|
|
$
|
1,671
|
|
|
$
|
799
|
|
|
$
|
(595
|
)
|
|
$
|
1,875
|
|
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.
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, the Company 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.
8
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. As 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 the related product sale. 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. See Note 7, Warranties, for further information regarding the impact of warranties concerning ASU 2014-09.
Principal versus agent considerations:
Principal versus agent guidance was considered for customized products that are provided by our suppliers versus manufactured by the Company. The Company 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.
9
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 29, 2020
|
|
|
May 30, 2020
|
|
Gross Amounts:
|
|
|
|
|
|
|
|
|
Trade Name
|
|
$
|
659
|
|
|
$
|
659
|
|
Customer Relationships(1)
|
|
|
3,408
|
|
|
|
3,388
|
|
Non-compete Agreements
|
|
|
177
|
|
|
|
177
|
|
Technology
|
|
|
230
|
|
|
|
230
|
|
Total Gross Amounts
|
|
$
|
4,474
|
|
|
$
|
4,454
|
|
Accumulated Amortization:
|
|
|
|
|
|
|
|
|
Trade Name
|
|
$
|
659
|
|
|
$
|
659
|
|
Customer Relationships
|
|
|
1,069
|
|
|
|
1,000
|
|
Non-compete Agreements
|
|
|
177
|
|
|
|
176
|
|
Technology
|
|
|
119
|
|
|
|
114
|
|
Total Accumulated Amortization
|
|
$
|
2,024
|
|
|
$
|
1,949
|
|
Net Intangible Assets
|
|
$
|
2,450
|
|
|
$
|
2,505
|
|
(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 2021
|
|
$
|
185
|
|
2022
|
|
|
252
|
|
2023
|
|
|
246
|
|
2024
|
|
|
232
|
|
2025
|
|
|
219
|
|
Thereafter
|
|
|
1,316
|
|
Total amortization expense
|
|
$
|
2,450
|
|
The weighted average number of years of amortization expense remaining is 13.4 years.
6. INVESTMENTS
As of August 29, 2020, we had $9.0 million invested in a CD which matures in less than twelve months. The fair value of the investment was equal to the face value of the CD.
As of May 30, 2020, we had $16.0 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.
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 income (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 $0.5 million as of August 29, 2020 and $0.5 million as of May 30, 2020.
10
8. LEASE OBLIGATIONS AND OTHER COMMITMENTS
The Company leases real and personal property in the normal course of business under various operating leases and financing leases. The Company has two types of operating leases: leases for facility space and leases for automobiles. Most of the leased facility space is for sales and general office use. Automobile leases are used throughout the Company. The financing lease is for our computer servers.
The gross amounts of assets and liabilities related to both operating and financing leases at August 29, 2020 and May 30, 2020 were as follows (in thousands):
Lease Type
|
|
August 29, 2020
|
|
|
May 30, 2020
|
|
Operating lease ROU asset
|
|
$
|
2,773
|
|
|
$
|
3,018
|
|
Financing lease ROU asset
|
|
|
378
|
|
|
|
401
|
|
Total Lease ROU asset
|
|
$
|
3,151
|
|
|
$
|
3,419
|
|
|
|
|
|
|
|
|
|
|
Operating lease liability current
|
|
$
|
1,265
|
|
|
$
|
1,329
|
|
Financing lease liability current
|
|
|
158
|
|
|
|
156
|
|
Total lease liability current
|
|
$
|
1,423
|
|
|
$
|
1,485
|
|
|
|
|
|
|
|
|
|
|
Operating lease liability non-current
|
|
$
|
1,582
|
|
|
$
|
1,778
|
|
Financing lease liability non-current
|
|
|
119
|
|
|
|
163
|
|
Total lease liability non-current
|
|
$
|
1,701
|
|
|
$
|
1,941
|
|
The components of lease costs were as follows (in thousands):
|
|
|
|
Three Months Ended
|
|
|
|
|
|
August 29, 2020
|
|
|
August 31, 2019
|
|
Consolidated operating lease expense
|
|
Operating expenses
|
|
$
|
488
|
|
|
$
|
478
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated financing lease amortization
|
|
Operating expenses
|
|
|
23
|
|
|
|
—
|
|
Consolidated financing lease interest
|
|
Interest expense
|
|
|
4
|
|
|
|
9
|
|
Consolidated financing lease expense
|
|
|
|
|
27
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
Net lease cost
|
|
|
|
$
|
515
|
|
|
$
|
487
|
|
The approximate future minimum lease payments under operating and financing leases at August 29, 2020 were as follows (in thousands):
Fiscal Year
|
|
Operating Leases
|
|
|
Financing Leases
|
|
|
Total
|
|
Remaining 2021
|
|
$
|
1,098
|
|
|
$
|
136
|
|
|
$
|
1,234
|
|
2022
|
|
|
751
|
|
|
|
151
|
|
|
|
902
|
|
2023
|
|
|
511
|
|
|
|
—
|
|
|
|
511
|
|
2024
|
|
|
360
|
|
|
|
—
|
|
|
|
360
|
|
2025
|
|
|
221
|
|
|
|
—
|
|
|
|
221
|
|
Thereafter
|
|
|
124
|
|
|
|
—
|
|
|
|
124
|
|
Total lease payments
|
|
|
3,065
|
|
|
|
287
|
|
|
|
3,352
|
|
Less imputed interest
|
|
|
218
|
|
|
|
10
|
|
|
|
228
|
|
Net minimum lease payments
|
|
$
|
2,847
|
|
|
$
|
277
|
|
|
$
|
3,124
|
|
11
The weighted average remaining lease terms and interest rates of leases held by the Company as of August 29, 2020 were as follows:
Lease Type
|
|
Weighted Average Remaining
Lease Term in Years
|
|
Weighted Average Interest Rate
|
|
Operating leases
|
|
3.3
|
|
4.6%
|
|
Financing leases
|
|
1.6
|
|
4.6%
|
|
The cash outflows of the leasing activity of the Company as lessee for the three months ending August 29, 2020 were as follows (in thousands):
Cash Flow Source
|
|
Classification
|
|
Amount
|
|
Operating cash flows from operating leases
|
|
Operating activities
|
|
$
|
261
|
|
Operating cash flows from financing leases
|
|
Operating activities
|
|
|
42
|
|
Finance cash flows from financing leases
|
|
Financing activities
|
|
|
45
|
|
9. INCOME TAXES
We recorded an income tax provision of $0.1 million and $0.2 million for the first three months of fiscal 2021 and the first three months of fiscal 2020, respectively. The effective income tax rate during the first three months of fiscal 2021 was a tax provision of (12.1)% as compared to a tax provision of 53.0% during the first three months of fiscal 2020. The difference in rate during the first three months of fiscal 2021 as compared to the first three months of fiscal 2020 reflects changes in our geographical distribution of income (loss). The (12.1)% 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 2015 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 Thailand (fiscal 2008 through 2011). 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 2018.
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. The deferred tax liability on the outside basis difference is now primarily withholding tax on future dividend distributions. We have provided a deferred tax liability of less than $0.1 million as of both August 29, 2020 and as of May 30, 2020.
As of August 29, 2020 and as of May 30, 2020, our worldwide liability for uncertain tax positions related to continuing operations was $0.1 million, excluding interest and penalties. We record penalties and interest related to uncertain tax positions in the income tax expense line item within the consolidated statements of comprehensive income (loss).
The valuation allowance against the net deferred tax assets that will more likely than not be realized was $12.7 million as of August 29, 2020. The valuation allowance against the net deferred tax assets was $12.3 million as of May 30, 2020 as no material additional domestic federal and state net deferred tax assets were generated during the first quarter of fiscal 2021 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.
12
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 income (loss) were based on the following amounts (in thousands, except per share amounts):
|
|
Three Months Ended
|
|
|
|
August 29, 2020
|
|
|
August 31, 2019
|
|
|
|
Basic
|
|
|
Diluted
|
|
|
Basic
|
|
|
Diluted
|
|
Numerator for Basic and Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(1,147
|
)
|
|
$
|
(1,147
|
)
|
|
$
|
157
|
|
|
$
|
157
|
|
Less dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
667
|
|
|
|
667
|
|
|
|
662
|
|
|
|
662
|
|
Class B common stock
|
|
|
113
|
|
|
|
113
|
|
|
|
113
|
|
|
|
113
|
|
Undistributed losses
|
|
$
|
(1,927
|
)
|
|
$
|
(1,927
|
)
|
|
$
|
(618
|
)
|
|
$
|
(618
|
)
|
Common stock undistributed losses
|
|
$
|
(1,646
|
)
|
|
$
|
(1,646
|
)
|
|
$
|
(527
|
)
|
|
$
|
(527
|
)
|
Class B common stock undistributed losses
|
|
|
(281
|
)
|
|
|
(281
|
)
|
|
|
(91
|
)
|
|
|
(91
|
)
|
Total undistributed losses
|
|
$
|
(1,927
|
)
|
|
$
|
(1,927
|
)
|
|
$
|
(618
|
)
|
|
$
|
(618
|
)
|
Denominator for Basic and Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock weighted average shares
|
|
|
11,070
|
|
|
|
11,070
|
|
|
|
10,990
|
|
|
|
10,990
|
|
Class B common stock weighted average shares, and
shares under if-converted method for diluted EPS
|
|
|
2,097
|
|
|
|
2,097
|
|
|
|
2,097
|
|
|
|
2,097
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive stock options
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
Denominator for diluted EPS adjusted for weighted
average shares and assumed conversions
|
|
|
|
|
|
|
13,167
|
|
|
|
|
|
|
|
13,087
|
|
Net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
$
|
(0.09
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
Class B common stock
|
|
$
|
(0.08
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
Note: Common stock options that were anti-dilutive and not included in diluted earnings per common share for the first quarter of fiscal 2021 and fiscal 2020 were 1,593 and 1,502, respectively.
11. SEGMENT REPORTING
In accordance with ASC 280-10, Segment Reporting, we have identified three reportable segments as follows:
PMT combines our core engineered solutions capabilities, power grid and microwave tube business with new disruptive RF, Wireless and Power technologies. As a designer, 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.
13
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-One computers, specialized cabinet finishes, 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, repairs, refurbishes and distributes high value replacement parts and equipment 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; pre-owned CT systems; 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 help our customers improve efficiency and deliver better clinical outcomes while lowering the cost of healthcare delivery.
The CEO, who is the chief operating decision maker, 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
|
|
|
|
August 29, 2020
|
|
|
August 31, 2019
|
|
PMT
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
30,252
|
|
|
$
|
30,567
|
|
Gross Profit
|
|
|
9,971
|
|
|
|
9,679
|
|
Canvys
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
6,712
|
|
|
$
|
7,277
|
|
Gross Profit
|
|
|
2,284
|
|
|
|
2,321
|
|
Healthcare
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
1,848
|
|
|
$
|
2,809
|
|
Gross Profit
|
|
|
104
|
|
|
|
951
|
|
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
|
|
|
|
August 29, 2020
|
|
|
August 31, 2019
|
|
Net Sales
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
16,129
|
|
|
$
|
17,234
|
|
Asia/Pacific
|
|
|
10,035
|
|
|
|
8,523
|
|
Europe
|
|
|
10,687
|
|
|
|
12,924
|
|
Latin America
|
|
|
1,927
|
|
|
|
1,978
|
|
Other (1)
|
|
|
34
|
|
|
|
(6
|
)
|
Total
|
|
$
|
38,812
|
|
|
$
|
40,653
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
6,017
|
|
|
$
|
6,307
|
|
Asia/Pacific
|
|
|
3,078
|
|
|
|
2,593
|
|
Europe
|
|
|
3,356
|
|
|
|
4,131
|
|
Latin America
|
|
|
662
|
|
|
|
700
|
|
Other (1)
|
|
|
(754
|
)
|
|
|
(780
|
)
|
Total
|
|
$
|
12,359
|
|
|
$
|
12,951
|
|
(1)
|
Other includes primarily net sales not allocated to a specific geographical region, unabsorbed value-add costs and other unallocated expenses.
|
14
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. RISKS AND UNCERTAINTIES
Litigation
On October 15, 2018, Varex Imaging Corporation (“Varex”) filed its original Complaint (Case No. 1:18-cv-06911) against Richardson Electronics Ltd. (“Richardson”) in the Northern District of Illinois, which was subsequently amended on November 27, 2018. Varex alleged counts of infringement of U.S. Patent Nos. 6,456,692 and 6,519,317. Subsequently, on October 24, 2018, Varex filed a motion for preliminary injunction to stop the sale of Richardson’s ALTA750 TM product. Richardson filed an opposition to the preliminary injunction. In January 2019, the Court took evidence on the preliminary injunction issue. On September 30, 2019, the Court denied Varex’s Motion for Preliminary Injunction. On August 6, 2020, Varex amended its Complaint to add claims of trade secret misappropriation and Richardson moved to dismiss that Amended Complaint on September 9, 2020. Richardson believes the lawsuit to be without merit and a loss is not probable or estimable based on the information at the time the financial statements were issued.
Company Response to COVID-19
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally.
In March 2020, the WHO classified the COVID-19 outbreak as a pandemic based on the rapid increase in global exposure. Thereafter, most U.S. states imposed “shelter in place” directives on their populations to stem the spread of COVID-19. Of specific interest to the Company, shelter in place directives were imposed in the states of Illinois, Massachusetts and South Carolina.
The shelter in place directives generally required the closure of businesses that did not provide essential functions. The Company was considered a critical supplier of products to healthcare and critical infrastructure businesses. Several of our largest customers mandated that we continue to supply parts so as not to disrupt the supply chain and their ability to serve critical industries. As such, the Company qualified as an “Essential Business”. Essential Businesses were allowed to continue to operate during shelter in place directives. We continued our manufacturing and distribution operations even when a shelter in place directive was issued. We limited the number of people in any one of our facilities by requiring only employees who could not perform their work remotely to physically work in a Company US-based facility. The Company advised all other employees that could perform their job functions remotely to do so. As such, the Company’s operations remained operational.
The impact of the COVID-19 outbreak continues to evolve. As such, the full magnitude that the pandemic will have on the Company’s financial condition, liquidity and future results of operations is uncertain. Management is actively monitoring the global situation on its financial condition, liquidity, operations, suppliers, industry and workforce. As the spread of COVID-19 continues, our ability to meet customer demands for products may be impaired or, similarly, our customers may experience adverse business consequences due to COVID-19. Reduced demand for products or impaired ability to meet customer demand (including disruptions at our transportation service providers or vendors) could have a material adverse effect on our business, operations and financial performance. Some of the decline in the first three months of fiscal 2021 PMT and Canvys sales and the decrease in Healthcare sales was primarily due to the COVID-19 global pandemic. While we had some COVID-19 related component delays impacting new product development schedules, we did not experience a major interruption in our supply chain. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not presently able to estimate the effects of COVID-19 on its results of operations, financial condition or liquidity for fiscal year 2021.
Company Response to CARES Act
On March 27, 2020, Congress enacted the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act to provide certain relief as a result of the COVID-19 outbreak. The CARES Act includes provisions relating to refundable payroll tax credits, deferral of employer-side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, increased limitations on qualified charitable contributions and technical corrections to tax depreciation methods for qualified improvement property. As of August 29, 2020, the Company deferred $0.5 million of employer-side social security tax payments. The Company has estimated and recorded the overall effects of the CARES Act and does not anticipate a material change.
15
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, an entity is required to develop its own assumptions.
As of August 29, 2020, we held an investment that was required to be measured at fair value on a recurring basis. Our investment consisted of a CD where face value was equal to fair value.
Investments measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 as of August 29, 2020 and May 30, 2020 were as follows (in thousands):
|
|
Level 1
|
|
August 29, 2020
|
|
|
|
|
CD
|
|
$
|
9,000
|
|
Total
|
|
$
|
9,000
|
|
May 30, 2020
|
|
|
|
|
CDs
|
|
$
|
16,000
|
|
Total
|
|
$
|
16,000
|
|
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 (former owner of IMES), has an ownership interest in LDL, LLC. The lease agreement has been extended as detailed in Exhibit 10.2, filed with our Annual Report on Form 10-K for the year ended May 30, 2020, filed August 3, 2020. The lease agreement provides for monthly payments over five years with total future minimum lease payments of $0.7 million. Rental expense related to this lease amounted to less than $0.1 million for the three months ended August 29, 2020 and for the three months ended August 31, 2019.
16