Notes to 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-One computers, 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, 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 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.
Customer Concentration: No one customer represented more than 10 percent of our total accounts receivable balance as of May 30, 2020 or June 1, 2019. No one customer accounted for more than 10 percent of the Company’s consolidated net sales in either fiscal 2020 or fiscal 2019. LAM Research Corporation individually accounted for 11 percent of the Company’s consolidated net sales in fiscal 2018.
Supplier Concentration: One of our suppliers represented 16 percent of our total cost of sales in fiscal 2020 and 11 percent in fiscal 2019. The amount owed to this supplier was approximately $1.3 million as of May 30, 2020 and $2.2 million as of June 1, 2019.
33
The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP for all fiscal years presented.
The consolidated financial statements include our wholly owned subsidiaries. All intercompany transactions and account balances have been eliminated in consolidation.
Our fiscal year 2020 began on June 2, 2019 and ended on May 30, 2020, our fiscal year 2019 began on June 3, 2018 and ended on June 1, 2019 and our fiscal year 2018 began on May 28, 2017 and ended on June 2, 2018. Unless otherwise noted, all references to a particular year in this document shall mean our fiscal year.
3.
|
SIGNIFICANT ACCOUNTING POLICIES AND DISCLOSURES
|
Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management continuously evaluates its critical accounting policies and estimates, including the allowance for doubtful accounts, revenue recognition, inventory obsolescence, intangible assets, loss contingencies and income taxes. Management bases the estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances, however, actual results could differ from those estimates.
Fair Values of Financial Instruments: The fair values of financial instruments are determined based on quoted market prices and market interest rates as of the end of the reporting period. Our financial instruments include investments, accounts receivable, accounts payable and accrued liabilities. The fair values of these financial instruments approximate carrying values at May 30, 2020 and June 1, 2019.
Cash and Cash Equivalents: We consider short-term, highly liquid investments that are readily convertible to known amounts of cash, and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates, and that have a maturity of three months or less, when purchased, to be cash equivalents. The carrying amounts reported in the balance sheet for cash and cash equivalents approximate the fair market value of these assets.
Allowance for Doubtful Accounts: Our allowance for doubtful accounts includes estimated losses that result from uncollectible receivables. The estimates are influenced by the following: continuing credit evaluation of customers’ financial conditions; aging of receivables, individually and in the aggregate; a large number of customers which are widely dispersed across geographic areas; and collectability and delinquency history by geographic area. Significant changes in one or more of these considerations may require adjustments affecting net income and net carrying value of accounts receivable. The allowance for doubtful accounts was approximately $0.3 million as of both May 30, 2020 and June 1, 2019.
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.
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 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.
34
Prior to the adoption of ASU 2014-09, 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.
Foreign Currency Translation: The functional currency is the local currency at all foreign locations, with the exception of Hong Kong, which the functional currency is the U.S. dollar. Balance sheet items for our foreign entities, included in our consolidated balance sheets, are translated into U.S. dollars at end-of-period spot rates. Gains and losses resulting from translation of foreign subsidiary financial statements are credited or charged directly to accumulated other comprehensive income, a component of stockholders’ equity. Revenues and expenses are translated at the current rate on the date of the transaction. Gains and losses resulting from foreign currency transactions are included in income. Foreign exchange (gain) loss reflected in our consolidated statements of comprehensive (loss) income were less than $0.1 million during fiscal 2020 and fiscal 2019 and a loss of $0.2 million during fiscal 2018.
Shipping and Handling Fees and Costs: Shipping and handling costs billed to customers are reported as revenue and the related costs are reported as a component of cost of sales.
Inventories, net: Our consolidated inventories are stated at the lower of cost and net realizable value, generally using a weighted-average cost method. Our net inventories include 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 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. The inventory reserve as of May 30, 2020 was $5.4 million compared to $4.6 million as of June 1, 2019.
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.
We recorded provisions to our inventory reserves of $1.0 million, $1.1 million and $0.8 million during fiscal 2020, fiscal 2019 and fiscal 2018, respectively, which were included in cost of sales. The provisions were primarily for obsolete and slow moving parts. The parts were written down to estimated realizable value.
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.
Investments: We invested in time deposits and certificates of deposit (“CDs”) in the amount of $16.0 million and $8.0 million as of May 30, 2020 and June 1, 2019, respectively, which mature in less than twelve months.
We liquidated our investments in equity securities in fiscal 2018. Proceeds from the liquidation were $0.9 million with gross realized gains of $0.2 million for fiscal 2018. Prior to the liquidation of our investment in equity securities, our investments in equity securities were classified as available-for-sale and were carried at their fair value based on quoted market prices.
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 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 the acquisitions.
Property, Plant and Equipment: Property, plant and equipment are stated at cost, net of accumulated depreciation. Improvements and replacements are capitalized while expenditures for maintenance and repairs are charged to expense as incurred. Provisions for depreciation are computed using the straight-line method over the estimated useful life of the asset. Depreciation expense was approximately $3.1 million, $2.9 million and $2.6 million during fiscal 2020, fiscal 2019 and fiscal 2018, respectively.
35
Property, plant and equipment consist of the following (in thousands):
|
|
May 30, 2020
|
|
|
June 1, 2019
|
|
Land and improvements
|
|
$
|
1,385
|
|
|
$
|
1,301
|
|
Buildings and improvements
|
|
|
22,525
|
|
|
|
22,986
|
|
Computer, communications equipment and software
|
|
|
10,775
|
|
|
|
9,943
|
|
Construction in progress
|
|
|
750
|
|
|
|
979
|
|
Machinery and other equipment
|
|
|
14,326
|
|
|
|
13,884
|
|
|
|
$
|
49,761
|
|
|
$
|
49,093
|
|
Accumulated depreciation
|
|
|
(32,087
|
)
|
|
|
(29,982
|
)
|
Property, plant, and equipment, net
|
|
$
|
17,674
|
|
|
$
|
19,111
|
|
Construction in progress at May 30, 2020 includes $0.2 million related to our Healthcare growth initiatives. All projects are expected to be completed before the end of fiscal 2021.
Supplemental disclosure information of the estimated useful life of the assets:
Land improvements
|
|
10 years
|
Buildings and improvements
|
|
10 - 30 years
|
Computer, communications equipment and software
|
|
3 - 10 years
|
Machinery and other equipment
|
|
3 - 20 years
|
We review property and equipment, definite-lived intangible assets and other long-lived assets for impairment whenever adverse events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable.
If adverse events do occur, our impairment review is based on an undiscounted cash flow analysis at the lowest level at which cash flows of the long-lived assets are largely independent of other groups of our assets and liabilities. This analysis requires management judgment with respect to changes in technology, the continued success of product lines and future volume, revenue and expense growth rates. We conduct annual reviews for idle and underutilized equipment and review business plans for possible impairment. Impairment occurs when the carrying value of the assets exceeds the future undiscounted cash flows expected to be earned by the use of the asset or asset group. When impairment is indicated, the estimated future cash flows are then discounted to determine the estimated fair value of the asset or asset group and an impairment charge is recorded for the difference between the carrying value and the estimated fair value.
Additionally, we also evaluate the remaining useful life of each reporting period to determine whether events and circumstances warrant a revision to the remaining period of depreciation or amortization. If the estimate of a long lived asset’s remaining useful life is changed, the remaining carrying amount of the asset is amortized prospectively over that revised remaining useful life.
Accrued Liabilities: Accrued liabilities consist of the following (in thousands):
|
|
May 30,
2020
|
|
|
June 1,
2019
|
|
Compensation and payroll taxes
|
|
$
|
3,469
|
|
|
$
|
2,846
|
|
Accrued severance
|
|
|
650
|
|
|
|
520
|
|
Professional fees
|
|
|
471
|
|
|
|
471
|
|
Deferred revenue
|
|
|
1,671
|
|
|
|
2,260
|
|
Other accrued expenses
|
|
|
4,063
|
|
|
|
5,176
|
|
Accrued Liabilities
|
|
$
|
10,324
|
|
|
$
|
11,273
|
|
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) income. 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.
36
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.
Changes in the warranty reserve during fiscal 2020 and fiscal 2019 were as follows (in thousands):
|
|
Warranty
Reserve
|
|
Balance at June 2, 2018
|
|
$
|
149
|
|
Accruals for products sold
|
|
|
185
|
|
Utilization
|
|
|
(39
|
)
|
Balance at June 1, 2019
|
|
$
|
295
|
|
Accruals for products sold
|
|
|
201
|
|
Utilization
|
|
|
(30
|
)
|
Balance at May 30, 2020
|
|
$
|
466
|
|
Other Non-Current Liabilities: Other non-current liabilities of $0.8 million at May 30, 2020 and $0.8 million at June 1, 2019, primarily represent employee-benefits obligations in various non-US locations.
37
Share-Based Compensation: We measure and recognize share-based compensation cost at fair value for all share-based payments, including stock options and restricted stock awards. We estimate fair value using the Black-Scholes option-pricing model, which requires assumptions such as expected volatility, risk-free interest rate, expected life and dividends. Compensation cost is recognized using a graded vesting schedule over the applicable vesting period. Share-based compensation expense totaled approximately $0.7 million during fiscal 2020, $0.7 million during fiscal 2019 and $0.5 million during fiscal 2018.
Stock options granted generally vest over a period of five years and have contractual terms to exercise of 10 years. A summary of stock option activity is as follows (in thousands, except option prices and years):
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Aggregate
Intrinsic
Value (1)
|
|
Options Outstanding at May 27, 2017
|
|
|
1,073
|
|
|
$
|
9.38
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
200
|
|
|
|
6.08
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(16
|
)
|
|
|
5.85
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(11
|
)
|
|
|
8.05
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(51
|
)
|
|
|
9.36
|
|
|
|
|
|
|
|
|
|
Options Outstanding at June 2, 2018
|
|
|
1,195
|
|
|
$
|
8.89
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
279
|
|
|
|
9.02
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(46
|
)
|
|
|
5.61
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(58
|
)
|
|
|
8.10
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(6
|
)
|
|
|
5.03
|
|
|
|
|
|
|
|
|
|
Options Outstanding at June 1, 2019
|
|
|
1,364
|
|
|
$
|
9.08
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
187
|
|
|
|
5.61
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(10
|
)
|
|
|
5.67
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(114
|
)
|
|
|
6.87
|
|
|
|
|
|
|
|
|
|
Options Outstanding at May 30, 2020
|
|
|
1,427
|
|
|
$
|
8.83
|
|
|
|
5.6
|
|
|
$
|
—
|
|
Options Vested at May 30, 2020
|
|
|
931
|
|
|
$
|
9.78
|
|
|
|
4.3
|
|
|
$
|
—
|
|
(1)
|
Includes only those options that were in-the-money as of May 30, 2020. Stock options for which the exercise price exceeded the market price have been omitted. Fluctuations in the intrinsic value of both outstanding and exercisable options may result from changes in underlying stock price and timing and volume of option grants, exercises and forfeitures.
|
There were 10,249 stock options exercised during fiscal 2020, with cash received of $0.1 million. The total intrinsic value of options exercised totaled less than $0.1 million during fiscal 2020, fiscal 2019 and fiscal 2018. The weighted average fair value of stock option grants was $0.81 during fiscal 2020, $1.71 during fiscal 2019 and $0.85 during fiscal 2018. As of May 30, 2020, total unrecognized compensation costs related to unvested stock options and restricted stock awards was approximately $1.1 million, which is expected to be recognized over the remaining weighted average period of approximately two to four years. The total grant date fair value of stock options vested during fiscal 2020 was $0.3 million.
The fair value of stock options is estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:
|
|
Fiscal Year Ended
|
|
|
|
May 30,
2020
|
|
|
June 1,
2019
|
|
|
June 2,
2018
|
|
Expected volatility
|
|
|
24.48
|
%
|
|
|
22.24
|
%
|
|
|
21.92
|
%
|
Risk-free interest rate
|
|
|
1.91
|
%
|
|
|
2.82
|
%
|
|
|
2.22
|
%
|
Expected lives (years)
|
|
|
6.50
|
|
|
|
6.36
|
|
|
|
6.31
|
|
Annual cash dividend
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
The expected volatility assumptions are based on historical experience commensurate with the expected term. The risk-free interest rate is based on the yield of a treasury note with a remaining term equal to the expected life of the stock option.
38
The expected stock option life assumption is based on the Securities and Exchange Commission’s (“SEC”) guidance in Staff Accounting Bulletin (“SAB”) No. 107 (“SAB No. 107”). For stock options granted during fiscal 2020, fiscal 2019 and fiscal 2018, we believe that our historical stock option experience does not provide a reasonable basis upon which to estimate expected term. We utilized the Safe Harbor option, or Simplified Method, to determine the expected term of these options in accordance with SAB No. 107 for options granted. We intend to continue to utilize the Simplified Method for future grants in accordance with SAB No. 110 until such time that we believe that our historical stock option experience will provide a reasonable basis to estimate an expected term.
The following table summarizes information about stock options outstanding at May 30, 2020 (in thousands, except option prices and years):
|
|
Outstanding
|
|
|
Vested
|
|
Exercise Price Range
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Life
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Life
|
|
|
Aggregate
Intrinsic
Value
|
|
$5.49 to $6.47
|
|
|
430
|
|
|
$
|
5.76
|
|
|
|
7.7
|
|
|
$
|
—
|
|
|
|
169
|
|
|
$
|
5.82
|
|
|
|
6.8
|
|
|
$
|
—
|
|
$6.90 to $9.89
|
|
|
490
|
|
|
$
|
8.49
|
|
|
|
7.1
|
|
|
$
|
—
|
|
|
|
254
|
|
|
$
|
8.49
|
|
|
|
6.4
|
|
|
$
|
—
|
|
$9.99 to $13.76
|
|
|
507
|
|
|
$
|
11.75
|
|
|
|
2.4
|
|
|
$
|
—
|
|
|
|
508
|
|
|
$
|
11.75
|
|
|
|
2.4
|
|
|
$
|
—
|
|
Total
|
|
|
1,427
|
|
|
$
|
8.83
|
|
|
|
5.6
|
|
|
$
|
—
|
|
|
|
931
|
|
|
$
|
9.78
|
|
|
|
4.3
|
|
|
$
|
—
|
|
As of May 30, 2020, a summary of restricted stock award transactions was as follows (in thousands):
|
|
Unvested
Restricted
Shares
|
|
Unvested at June 2, 2018
|
|
|
78
|
|
Granted
|
|
|
69
|
|
Vested
|
|
|
(26
|
)
|
Canceled
|
|
|
(5
|
)
|
Unvested at June 1, 2019
|
|
|
116
|
|
Granted
|
|
|
73
|
|
Vested
|
|
|
(47
|
)
|
Unvested at May 30, 2020
|
|
|
142
|
|
Compensation effects arising from issuing stock awards have been charged against income and recorded as additional paid-in-capital in the consolidated statements of stockholders’ equity during fiscal 2020, fiscal 2019 and fiscal 2018.
The Employees’ 2011 Long-Term Incentive Compensation Plan authorizes the issuance of up to 2,500,000 shares as incentive stock options, non-qualified stock options or stock awards. Under this plan, 885,000 shares are reserved for future issuance. The Plan authorizes the granting of stock options at the fair market value at the date of grant. Generally, these options become exercisable over five years and expire up to 10 years from the date of grant. Restricted stock awards vest on the anniversary of the grant date in three equal installments.
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.
39
The earnings per share (“EPS”) presented in our consolidated statements of comprehensive (loss) income are based on the following (in thousands, except per share amounts):
|
|
For the Fiscal Year Ended
|
|
|
|
May 30, 2020
|
|
|
June 1, 2019
|
|
|
June 2, 2018
|
|
|
|
Basic
|
|
|
Diluted
|
|
|
Basic
|
|
|
Diluted
|
|
|
Basic
|
|
|
Diluted
|
|
Numerator for Basic and Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
$
|
(1,838
|
)
|
|
$
|
(1,838
|
)
|
|
$
|
(7,328
|
)
|
|
$
|
(7,328
|
)
|
|
$
|
2,326
|
|
|
$
|
2,326
|
|
Less dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
2,648
|
|
|
|
2,648
|
|
|
|
2,621
|
|
|
|
2,621
|
|
|
|
2,586
|
|
|
|
2,586
|
|
Class B common stock
|
|
|
453
|
|
|
|
453
|
|
|
|
455
|
|
|
|
455
|
|
|
|
462
|
|
|
|
462
|
|
Undistributed losses
|
|
$
|
(4,939
|
)
|
|
$
|
(4,939
|
)
|
|
$
|
(10,404
|
)
|
|
$
|
(10,404
|
)
|
|
$
|
(722
|
)
|
|
$
|
(722
|
)
|
Common stock undistributed losses
|
|
$
|
(4,217
|
)
|
|
$
|
(4,217
|
)
|
|
$
|
(8,866
|
)
|
|
$
|
(8,866
|
)
|
|
$
|
(613
|
)
|
|
$
|
(613
|
)
|
Class B common stock undistributed losses
|
|
|
(722
|
)
|
|
|
(722
|
)
|
|
|
(1,538
|
)
|
|
|
(1,538
|
)
|
|
|
(109
|
)
|
|
|
(109
|
)
|
Total undistributed losses
|
|
$
|
(4,939
|
)
|
|
$
|
(4,939
|
)
|
|
$
|
(10,404
|
)
|
|
$
|
(10,404
|
)
|
|
$
|
(722
|
)
|
|
$
|
(722
|
)
|
Income from discontinued operations
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,496
|
|
|
$
|
1,496
|
|
Less dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
2,648
|
|
|
|
2,648
|
|
|
|
2,621
|
|
|
|
2,621
|
|
|
|
2,586
|
|
|
|
2,586
|
|
Class B common stock
|
|
|
453
|
|
|
|
453
|
|
|
|
455
|
|
|
|
455
|
|
|
|
462
|
|
|
|
462
|
|
Undistributed losses
|
|
$
|
(3,101
|
)
|
|
$
|
(3,101
|
)
|
|
$
|
(3,076
|
)
|
|
$
|
(3,076
|
)
|
|
$
|
(1,552
|
)
|
|
$
|
(1,552
|
)
|
Common stock undistributed losses
|
|
$
|
(2,648
|
)
|
|
$
|
(2,648
|
)
|
|
$
|
(2,621
|
)
|
|
$
|
(2,621
|
)
|
|
$
|
(1,317
|
)
|
|
$
|
(1,318
|
)
|
Class B common stock undistributed losses
|
|
|
(453
|
)
|
|
|
(453
|
)
|
|
|
(455
|
)
|
|
|
(455
|
)
|
|
|
(235
|
)
|
|
|
(234
|
)
|
Total undistributed losses
|
|
$
|
(3,101
|
)
|
|
$
|
(3,101
|
)
|
|
$
|
(3,076
|
)
|
|
$
|
(3,076
|
)
|
|
$
|
(1,552
|
)
|
|
$
|
(1,552
|
)
|
Net (loss) income
|
|
$
|
(1,838
|
)
|
|
$
|
(1,838
|
)
|
|
$
|
(7,328
|
)
|
|
$
|
(7,328
|
)
|
|
$
|
3,822
|
|
|
$
|
3,822
|
|
Less dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
2,648
|
|
|
|
2,648
|
|
|
|
2,621
|
|
|
|
2,621
|
|
|
|
2,586
|
|
|
|
2,586
|
|
Class B common stock
|
|
|
453
|
|
|
|
453
|
|
|
|
455
|
|
|
|
455
|
|
|
|
462
|
|
|
|
462
|
|
Undistributed (losses) income
|
|
$
|
(4,939
|
)
|
|
$
|
(4,939
|
)
|
|
$
|
(10,404
|
)
|
|
$
|
(10,404
|
)
|
|
$
|
774
|
|
|
$
|
774
|
|
Common stock undistributed (losses) income
|
|
$
|
(4,217
|
)
|
|
$
|
(4,217
|
)
|
|
$
|
(8,866
|
)
|
|
$
|
(8,866
|
)
|
|
$
|
657
|
|
|
$
|
657
|
|
Class B common stock undistributed (losses) income
|
|
|
(722
|
)
|
|
|
(722
|
)
|
|
|
(1,538
|
)
|
|
|
(1,538
|
)
|
|
|
117
|
|
|
|
117
|
|
Total undistributed (losses) income
|
|
$
|
(4,939
|
)
|
|
$
|
(4,939
|
)
|
|
$
|
(10,404
|
)
|
|
$
|
(10,404
|
)
|
|
$
|
774
|
|
|
$
|
774
|
|
Denominator for Basic and Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock weighted average shares
|
|
|
11,026
|
|
|
|
11,026
|
|
|
|
10,923
|
|
|
|
10,923
|
|
|
|
10,765
|
|
|
|
10,765
|
|
Class B common stock weighted average shares,
and shares under if-converted method for
diluted EPS
|
|
|
2,097
|
|
|
|
2,097
|
|
|
|
2,106
|
|
|
|
2,106
|
|
|
|
2,137
|
|
|
|
2,137
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive stock options
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
59
|
|
Denominator for diluted EPS adjusted for
weighted average shares and assumed
conversions
|
|
|
|
|
|
|
13,123
|
|
|
|
|
|
|
|
13,029
|
|
|
|
|
|
|
|
12,961
|
|
(Loss) income from continuing operations per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
$
|
(0.14
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
0.18
|
|
|
$
|
0.18
|
|
Class B common stock
|
|
$
|
(0.13
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
0.16
|
|
|
$
|
0.16
|
|
Income from discontinued operations per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.12
|
|
|
$
|
0.12
|
|
Class B common stock
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.11
|
|
|
$
|
0.11
|
|
Net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
$
|
(0.14
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
0.30
|
|
|
$
|
0.30
|
|
Class B common stock
|
|
$
|
(0.13
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
0.27
|
|
|
$
|
0.27
|
|
Note:
|
Common stock options that were anti-dilutive and not included in diluted earnings per common share for fiscal 2020, fiscal 2019 and fiscal 2018 were 1,120, 882 and 0, respectively.
|
40
New Accounting Pronouncements
In May 2014, the FASB issued 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, 2017, 2018 and 2019 the FASB issued additional updates that 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. See Note 4 “Revenue Recognition” of the notes to our consolidated financial statements.
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 financing 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. The new standard was effective for the Company on June 2, 2019. See Note 8 “Lease Obligations and Other Commitments” of the notes to our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 (as amended by ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11 and 2020-02) introduces a new forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. This ASU also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses. The new standard is effective for smaller reporting companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.
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.
41
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
|
|
|
May 30, 2020
|
|
Contract liabilities (deferred revenue)
|
|
$
|
2,260
|
|
|
$
|
2,083
|
|
|
$
|
(2,672
|
)
|
|
$
|
1,671
|
|
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.
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.
42
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 ten 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 suppliers’ 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 3, 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.
|
DISCONTINUED OPERATIONS
|
On September 12, 2017, the Company received an income tax refund from the State of Illinois of approximately $2.0 million, which included interest earned. The refund was a result of the conclusion of the Illinois amended return related to the sale of the RF, Wireless and Power Division in 2011. A net benefit of $1.5 million, which included $0.5 million of professional fee costs incurred to pursue the refund, was recognized in the second quarter of fiscal 2018 in discontinued operations.
6.
|
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 this Annual Report on Form 10-K. The lease agreement provides for monthly payments over five years with total future minimum lease payments of $0.8 million. Rental expense related to this lease amounted to $0.1 million for the fiscal years ended May 30, 2020, June 1, 2019 and June 2, 2018.
7.
|
GOODWILL AND INTANGIBLE ASSETS
|
Goodwill
As a result of the Company’s annual impairment review as of March 3, 2019, and after reviewing the totality of events and circumstances as provided in ASU 2011-08, we determined that it was more likely than not that the fair value for the IMES reporting unit was less than its carrying value. Accordingly, we performed the quantitative impairment test using the income method, which was
43
based on a discounted future cash flow approach that used the significant assumptions of projected revenue, projected operational profit, terminal growth rates and the cost of capital. The Guideline Public Company Method was also considered in the goodwill impairment assessment.
The quantitative impairment test determined that the IMES reporting unit’s carrying value exceeded its fair value by an amount that exceeded the recorded goodwill balance. As a result, in the fourth quarter of fiscal year 2019, the Company recorded a non-cash goodwill impairment charge of $6.3 million for the full amount of the goodwill associated with the IMES reporting unit.
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. No impairment was recognized in fiscal 2020, fiscal 2019 or fiscal 2018.
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):
|
|
May 30, 2020
|
|
|
June 1, 2019
|
|
Gross Amounts:
|
|
|
|
|
|
|
|
|
Trade Name
|
|
$
|
659
|
|
|
$
|
659
|
|
Customer Relationships (1)
|
|
|
3,388
|
|
|
|
3,394
|
|
Non-compete Agreements
|
|
|
177
|
|
|
|
177
|
|
Technology
|
|
|
230
|
|
|
|
230
|
|
Total Gross Amounts
|
|
$
|
4,454
|
|
|
$
|
4,460
|
|
Accumulated Amortization:
|
|
|
|
|
|
|
|
|
Trade Name
|
|
$
|
659
|
|
|
$
|
659
|
|
Customer Relationships
|
|
|
1,000
|
|
|
|
796
|
|
Non-compete Agreements
|
|
|
161
|
|
|
|
139
|
|
Technology
|
|
|
129
|
|
|
|
103
|
|
Total Accumulated Amortization
|
|
$
|
1,949
|
|
|
$
|
1,697
|
|
Net Intangibles
|
|
$
|
2,505
|
|
|
$
|
2,763
|
|
(1)
|
Change from prior periods reflect impact of foreign currency translation.
|
Under ASC 350, companies must perform the annual test for impairment for indefinite life intangible assets, for which the Company has none, as well as test definite life assets for impairment in the event of a “trigger event” such as adverse changes in the business climate or market which might negatively impact the value of a reporting unit. The Company identified an impairment “trigger event” for the IMES reporting unit due to adverse changes in the business climate related to COVID-19. The Company tested the IMES definite life intangible assets and other long lived assets using the undiscounted cash flows of the reporting unit (the asset group) analyzed over a period of ten years, with a residual period, compared to the carrying value of the asset group and determined that the intangible assets and other long lived assets were not impaired as of May 30, 2020. Estimates contain management’s best estimates of economic and market conditions over the projected period, including growth rates in revenue and costs and best estimates of future expected changes in operating margins and capital expenditures. For the remainder of the Company’s intangible assets, we determined that they were not impaired as of May 30, 2020 on the basis that no adverse events or changes in circumstances were identified that could indicate that the carrying amounts of such assets may not be recoverable.
44
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
|
|
2021
|
|
$
|
245
|
|
2022
|
|
|
252
|
|
2023
|
|
|
245
|
|
2024
|
|
|
231
|
|
2025
|
|
|
219
|
|
Thereafter
|
|
|
1,313
|
|
Total amortization expense
|
|
$
|
2,505
|
|
The amortization expense associated with the intangible assets totaled approximately $0.3 million during both fiscal 2020 and fiscal 2019 and $0.4 million during fiscal 2018. The weighted average number of years of amortization expense remaining is 13.3 years.
8.
|
LEASE OBLIGATIONS AND OTHER COMMITMENTS
|
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 financing 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. 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, at May 30, 2020, we recognized operating right-of-use assets of $3.0 million, financing right-of-use assets of $0.4 million, operating lease liabilities of $3.1 million and financing lease liabilities of $0.3 million. 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.
45
The gross amounts of assets and liabilities related to both operating and financing leases at May 30, 2020 were as follows (in thousands):
Lease Type
|
|
Amount
|
|
Operating lease ROU asset
|
|
$
|
3,018
|
|
Financing lease ROU asset
|
|
|
401
|
|
Total Lease ROU asset
|
|
$
|
3,419
|
|
|
|
|
|
|
Operating lease liability current
|
|
$
|
1,329
|
|
Financing lease liability current
|
|
|
156
|
|
Total lease liability current
|
|
$
|
1,485
|
|
|
|
|
|
|
Operating lease liability non-current
|
|
$
|
1,778
|
|
Financing lease liability non-current
|
|
|
163
|
|
Total lease liability non-current
|
|
$
|
1,941
|
|
The components of lease costs were as follows (in thousands):
Lease Type
|
|
Classification
|
|
Fiscal Year Ended
May 30, 2020
|
|
Consolidated operating lease expense
|
|
Operating expenses
|
|
$
|
1,963
|
|
|
|
|
|
|
|
|
Consolidated financing lease amortization
|
|
Operating expenses
|
|
|
62
|
|
Consolidated financing lease interest
|
|
Interest expense
|
|
|
22
|
|
Consolidated financing lease expense
|
|
|
|
|
84
|
|
|
|
|
|
|
|
|
Net lease cost
|
|
|
|
$
|
2,047
|
|
Rent expense for fiscal 2020, fiscal 2019 and fiscal 2018 was $1.8 million, $1.7 million, and $1.8 million, respectively.
Our future lease commitments for minimum rentals, including common area maintenance charges and property taxes during the next five years are as follows (in thousands):
Fiscal Year
|
|
Operating Leases
|
|
|
Financing Leases
|
|
|
Total
|
|
2021
|
|
$
|
1,472
|
|
|
$
|
181
|
|
|
$
|
1,653
|
|
2022
|
|
|
711
|
|
|
|
151
|
|
|
|
862
|
|
2023
|
|
|
488
|
|
|
|
—
|
|
|
|
488
|
|
2024
|
|
|
347
|
|
|
|
—
|
|
|
|
347
|
|
2025
|
|
|
217
|
|
|
|
—
|
|
|
|
217
|
|
Thereafter
|
|
|
116
|
|
|
|
—
|
|
|
|
116
|
|
Total lease payments
|
|
|
3,351
|
|
|
|
332
|
|
|
|
3,683
|
|
Less imputed interest
|
|
|
244
|
|
|
|
13
|
|
|
|
257
|
|
Net minimum lease payments
|
|
$
|
3,107
|
|
|
$
|
319
|
|
|
$
|
3,426
|
|
46
The approximate future minimum lease payments under operating and financing leases at June 1, 2019 were as follows (in thousands):
Fiscal Year (1)
|
|
Payments
|
|
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 May 30, 2020 were as follows:
Lease Type
|
|
Weighted Average Remaining
Lease Term in Years
|
|
Weighted Average
Interest Rate
|
|
Operating leases
|
|
3.4
|
|
4.6%
|
|
Financing leases
|
|
1.9
|
|
4.6%
|
|
The cash outflows of the leasing activity of the Company as lessee for fiscal 2020 were as follows (in thousands):
Cash Flow Source
|
|
Classification
|
|
Amount
|
|
Operating cash flows from operating leases
|
|
Operating activities
|
|
$
|
924
|
|
Operating cash flows from financing leases
|
|
Operating activities
|
|
|
149
|
|
Finance cash flows from financing leases
|
|
Financing activities
|
|
|
166
|
|
(Loss) income from continuing operations before income taxes included the following components (in thousands):
|
|
Fiscal Year Ended
|
|
|
|
May 30,
2020
|
|
|
June 1,
2019
|
|
|
June 2,
2018
|
|
United States
|
|
$
|
(3,716
|
)
|
|
$
|
(9,971
|
)
|
|
$
|
(211
|
)
|
Foreign
|
|
|
2,502
|
|
|
|
3,660
|
|
|
|
4,071
|
|
(Loss) income before income taxes
|
|
$
|
(1,214
|
)
|
|
$
|
(6,311
|
)
|
|
$
|
3,860
|
|
47
The provision for income taxes for fiscal 2020, fiscal 2019 and fiscal 2018 consisted of the following (in thousands):
|
|
Fiscal Year Ended
|
|
|
|
May 30,
2020
|
|
|
June 1,
2019
|
|
|
June 2,
2018
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
33
|
|
|
$
|
—
|
|
State
|
|
|
—
|
|
|
|
3
|
|
|
|
(12
|
)
|
Foreign
|
|
|
616
|
|
|
|
652
|
|
|
|
1,220
|
|
Total current
|
|
$
|
616
|
|
|
$
|
688
|
|
|
$
|
1,208
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(88
|
)
|
|
$
|
(104
|
)
|
|
$
|
124
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Foreign
|
|
|
96
|
|
|
|
433
|
|
|
|
202
|
|
Total deferred
|
|
$
|
8
|
|
|
$
|
329
|
|
|
$
|
326
|
|
Income tax provision
|
|
$
|
624
|
|
|
$
|
1,017
|
|
|
$
|
1,534
|
|
The differences between income taxes at the U.S. federal statutory income tax rate of 21.0% for both fiscal 2020 and fiscal 2019 and 29.2% for fiscal 2018 and the reported income tax provision for fiscal 2020, fiscal 2019 and fiscal 2018 are summarized as follows:
|
|
Fiscal Year Ended
|
|
|
|
May 30,
2020
|
|
|
June 1,
2019
|
|
|
June 2,
2018
|
|
Federal statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
|
|
29.2
|
%
|
Effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal tax benefit
|
|
|
6.6
|
|
|
|
5.4
|
|
|
|
0.3
|
|
Deemed repatriation tax
|
|
|
—
|
|
|
|
—
|
|
|
|
(50.0
|
)
|
Foreign taxes at other rates
|
|
|
(15.3
|
)
|
|
|
(4.1
|
)
|
|
|
(0.1
|
)
|
Permanent tax differences
|
|
|
(41.1
|
)
|
|
|
(16.1
|
)
|
|
|
6.7
|
|
Deferred remeasurement
|
|
|
—
|
|
|
|
—
|
|
|
|
45.1
|
|
Tax reserves
|
|
|
—
|
|
|
|
—
|
|
|
|
3.6
|
|
Additional U.S. tax on undistributed foreign earnings
|
|
|
—
|
|
|
|
—
|
|
|
|
(12.5
|
)
|
Change in valuation allowance for deferred tax assets
|
|
|
(29.8
|
)
|
|
|
(22.8
|
)
|
|
|
15.1
|
|
Return to provision adjustments
|
|
|
1.4
|
|
|
|
(0.5
|
)
|
|
|
0.1
|
|
Closure of foreign audits
|
|
|
—
|
|
|
|
—
|
|
|
|
2.2
|
|
Other
|
|
|
5.8
|
|
|
|
1.0
|
|
|
|
—
|
|
Effective tax rate
|
|
|
(51.4
|
)%
|
|
|
(16.1
|
)%
|
|
|
39.7
|
%
|
48
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Our deferred tax assets and liabilities reflect continuing operations as of May 30, 2020 and June 1, 2019. Significant components were as follows (in thousands):
|
|
Fiscal Year Ended
|
|
|
|
May 30,
2020
|
|
|
June 1,
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
NOL carryforwards - foreign and domestic
|
|
$
|
7,834
|
|
|
$
|
7,458
|
|
Inventory valuations
|
|
|
1,388
|
|
|
|
1,179
|
|
Goodwill
|
|
|
1,390
|
|
|
|
1,578
|
|
Foreign tax credits
|
|
|
1,782
|
|
|
|
1,782
|
|
Severance reserve
|
|
|
165
|
|
|
|
188
|
|
Foreign capital loss
|
|
|
1,167
|
|
|
|
1,129
|
|
Other
|
|
|
1,847
|
|
|
|
1,737
|
|
Subtotal
|
|
$
|
15,573
|
|
|
$
|
15,051
|
|
Valuation allowance - foreign and domestic
|
|
|
(12,322
|
)
|
|
|
(11,706
|
)
|
Net deferred tax assets after valuation allowance
|
|
$
|
3,251
|
|
|
$
|
3,345
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Accelerated depreciation
|
|
$
|
(2,944
|
)
|
|
$
|
(2,908
|
)
|
Tax on undistributed earnings
|
|
|
(24
|
)
|
|
|
(141
|
)
|
Other
|
|
13
|
|
|
21
|
|
Subtotal
|
|
$
|
(2,955
|
)
|
|
$
|
(3,028
|
)
|
Net deferred tax assets
|
|
$
|
296
|
|
|
$
|
317
|
|
Supplemental disclosure of net deferred tax assets,
excluding valuation allowance:
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
10,925
|
|
|
$
|
10,194
|
|
Foreign
|
|
$
|
1,693
|
|
|
$
|
1,829
|
|
Total
|
|
$
|
12,618
|
|
|
$
|
12,023
|
|
As of May 30, 2020, we had approximately $3.7 million of net deferred tax assets related to federal net operating loss (“NOL”) carryforwards, compared to $3.1 million as of June 1, 2019. Net deferred tax assets related to domestic state NOL carryforwards at May 30, 2020 amounted to approximately $3.8 million, compared to $3.9 million at June 1, 2019. Net deferred tax assets related to foreign NOL carryforwards as of May 30, 2020 totaled approximately $0.3 million with various or indefinite expiration dates. The amount of net deferred tax assets related to foreign NOL carryforwards was $0.4 million as of June 1, 2019. We also had a domestic net deferred tax asset of $1.8 million of foreign tax credit carryforwards as of May 30, 2020, compared to $1.8 million as of June 1, 2019. We did not have any alternative minimum tax credit carryforward as of May 30, 2020.
We have historically determined that 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. Accordingly, we have reduced the deferred tax liability related to undistributed earnings of our foreign subsidiaries from $0.2 million in fiscal 2019 to less than $0.1 million in fiscal 2020.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant component of objective evidence evaluated was the cumulative income or loss incurred in each jurisdiction over the three-year period ended May 30, 2020. Such objective evidence limits the ability to consider subjective evidence such as future income projections. We considered other positive evidence in determining the need for a valuation allowance in the U.S. including the subpart F and GILTI inclusions of our foreign earnings. The weight of this positive evidence is not sufficient to outweigh other negative evidence in evaluating our need for a valuation allowance in the U.S. jurisdiction.
As of May 30, 2020, a valuation allowance of $12.3 million was established to record only the portion of the deferred tax asset that will more likely than not be realized. The valuation allowance as of June 1, 2019 was $11.7 million. We recorded a valuation allowance for all domestic federal and state net deferred tax assets considering the significant cumulative losses in the U.S. jurisdiction, the reversal of the deferred tax liability for foreign earnings and no forecast of additional U.S. income. The valuation allowance also related to deferred tax assets in foreign jurisdictions where historical taxable losses have been incurred. 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.
49
Income taxes paid, including foreign estimated tax payments, were $1.0 million, $0.3 million and $0.5 million, during fiscal 2020, fiscal 2019 and fiscal 2018, respectively.
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.
The uncertain tax positions from continuing operations as of both May 30, 2020 and June 1, 2019 were $0.1 million. We record penalties and interest related to uncertain tax positions in the income tax expense line item within the Consolidated Statements of Comprehensive (Loss) Income. Accrued interest and penalties are included within the related tax liability line in the Consolidated Balance Sheets. We have not recorded a liability for interest and penalties as of May 30, 2020 or June 1, 2019. It is not expected that there will be a change in the unrecognized tax benefits due to the expiration of various statutes of limitations within the next 12 months.
The following table summarizes the activity related to the unrecognized tax benefits (in thousands):
|
|
Fiscal Year Ended
|
|
|
|
May 30,
2020
|
|
|
June 1,
2019
|
|
Unrecognized tax benefits, beginning of period
|
|
$
|
130
|
|
|
$
|
138
|
|
Currency translation adjustment
|
|
|
(1
|
)
|
|
|
(8
|
)
|
Unrecognized tax benefits, end of period
|
|
$
|
129
|
|
|
$
|
130
|
|
10.
|
EMPLOYEE BENEFIT PLANS
|
Employee Profit Sharing Plan: The employee profit sharing plan is a defined contribution profit sharing plan. The profit sharing plan has a 401(k) provision whereby we match 50% of employee contributions up to 4.0% of pay. Charges to expense for matching contributions to this plan were $0.5 million, $0.5 million and $0.4 million, during fiscal 2020, fiscal 2019 and fiscal 2018, respectively.
11.
|
SEGMENT AND GEOGRAPHIC INFORMATION
|
In accordance with ASC 280-10, Segment Reporting, we have identified three reportable segments: PMT, Canvys and Healthcare.
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.
50
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.
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):
|
|
Fiscal Year Ended
|
|
|
|
May 30, 2020
|
|
|
June 1, 2019
|
|
|
June 2, 2018
|
|
PMT
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
118,480
|
|
|
$
|
128,902
|
|
|
$
|
128,296
|
|
Gross Profit
|
|
|
38,288
|
|
|
|
40,254
|
|
|
|
43,254
|
|
Canvys
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
28,926
|
|
|
$
|
27,968
|
|
|
$
|
26,683
|
|
Gross Profit
|
|
|
9,313
|
|
|
|
9,085
|
|
|
|
8,410
|
|
Healthcare
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
8,492
|
|
|
$
|
9,782
|
|
|
$
|
8,233
|
|
Gross Profit
|
|
|
2,072
|
|
|
|
2,396
|
|
|
|
3,418
|
|
A reconciliation of assets to the relevant consolidated amount is as follows (in thousands):
|
|
May 30, 2020
|
|
|
June 1, 2019
|
|
Segment assets
|
|
$
|
89,231
|
|
|
$
|
88,470
|
|
Cash and cash equivalents
|
|
|
30,535
|
|
|
|
42,019
|
|
Investments - current
|
|
|
16,000
|
|
|
|
8,000
|
|
Other current assets (1)
|
|
|
2,545
|
|
|
|
3,227
|
|
Net property, plant and equipment
|
|
|
10,267
|
|
|
|
10,772
|
|
Operating lease ROU asset
|
|
|
1,285
|
|
|
|
—
|
|
Financing lease ROU asset
|
|
|
401
|
|
|
|
—
|
|
Other assets - non-current deferred income taxes
|
|
|
456
|
|
|
|
529
|
|
Total assets
|
|
$
|
150,720
|
|
|
$
|
153,017
|
|
(1)
|
Other current assets include miscellaneous receivables and prepaid expenses.
|
Assets are not disclosed by reportable segment as the Company does not track assets by reportable segment and certain assets are not specific to any reportable segment.
Capital expenditures for our Healthcare segment during fiscal 2020 and fiscal 2019 were approximately $0.4 million and $1.2 million, respectively. In addition, we also had capital expenditures during fiscal 2020 and fiscal 2019 related to the Company’s ERP system as well as facilities that were not specific to any particular reportable segment.
Geographic net sales information is primarily grouped by customer destination into five areas: North America; Asia/Pacific; Europe; Latin America; and Other.
51
Net sales and gross profit by geographic region are summarized in the following table (in thousands):
|
|
Fiscal Year Ended
|
|
|
|
May 30, 2020
|
|
|
June 1, 2019
|
|
|
June 2, 2018
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
65,259
|
|
|
$
|
66,228
|
|
|
$
|
67,662
|
|
Asia/Pacific
|
|
|
32,979
|
|
|
|
34,681
|
|
|
|
32,607
|
|
Europe
|
|
|
49,394
|
|
|
|
55,038
|
|
|
|
53,818
|
|
Latin America
|
|
|
8,308
|
|
|
|
10,653
|
|
|
|
9,123
|
|
Other (1)
|
|
|
(42
|
)
|
|
|
52
|
|
|
|
2
|
|
Total
|
|
$
|
155,898
|
|
|
$
|
166,652
|
|
|
$
|
163,212
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
24,494
|
|
|
$
|
24,776
|
|
|
$
|
25,996
|
|
Asia/Pacific
|
|
|
10,629
|
|
|
|
10,905
|
|
|
|
10,794
|
|
Europe
|
|
|
15,483
|
|
|
|
17,425
|
|
|
|
18,071
|
|
Latin America
|
|
|
2,804
|
|
|
|
3,863
|
|
|
|
3,602
|
|
Other (1)
|
|
|
(3,737
|
)
|
|
|
(5,234
|
)
|
|
|
(3,381
|
)
|
Total
|
|
$
|
49,673
|
|
|
$
|
51,735
|
|
|
$
|
55,082
|
|
(1)
|
Other includes primarily net sales not allocated to a specific geographical region, unabsorbed value-add costs and other unallocated expenses.
|
Major Customers
During fiscal 2020 and fiscal 2019, no one customer accounted for more than 10 percent of the Company’s consolidated net sales. During fiscal 2018, LAM Research Corporation (“LAM”) individually accounted for 11 percent of the Company’s consolidated net sales. No other customer accounted for more than 10 percent of the Company’s consolidated net sales in fiscal 2018. LAM sales were included in the PMT segment.
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.
Net assets by geographic region are summarized in the following table (in thousands):
|
|
Fiscal Year Ended
|
|
|
|
May 30, 2020
|
|
|
June 1, 2019
|
|
|
June 2, 2018
|
|
Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
81,533
|
|
|
$
|
74,054
|
|
|
$
|
77,857
|
|
Asia/Pacific
|
|
|
10,370
|
|
|
|
14,889
|
|
|
|
17,254
|
|
Europe
|
|
|
24,973
|
|
|
|
32,807
|
|
|
|
37,911
|
|
Latin America
|
|
|
1,784
|
|
|
|
2,007
|
|
|
|
2,159
|
|
Total
|
|
$
|
118,660
|
|
|
$
|
123,757
|
|
|
$
|
135,181
|
|
The Company had long-lived assets of $20.2 million as of May 30, 2020 and $21.9 million as of June 1, 2019. The long-lived assets, which include our fixed assets and intangibles, were primarily in the US. There were approximately $0.6 million of long-lived assets that belong to our foreign affiliates as of May 30, 2020 and $0.9 million as of June 1, 2019.
The Company had depreciation and amortization expense of $3.4 million, $3.2 million and $3.0 million for fiscal 2020, fiscal 2019 and fiscal 2018, respectively. The depreciation and amortization, which includes our fixed assets and intangibles, were primarily in the US. Depreciation and amortization expense that belong to our foreign affiliates was approximately $0.3 million for fiscal 2020 and $0.2 million and $0.3 for fiscal 2019 and fiscal 2018, respectively.
52
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. 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 fiscal 2020 PMT sales and the decrease in Healthcare sales was primarily due to the COVID-19 global pandemic. While we had some COVID-19 related longer lead times as well as 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. The Company continues to examine how these provisions in the CARES Act will impact its financial position, results of operations and cash flows. In fiscal 2020, the Company deferred $0.2 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.
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.
53
ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists; therefore requiring an entity to develop its own assumptions.
As of May 30, 2020, we held investments that were required to be measured at fair value on a recurring basis. Our investments consist of time deposits and CDs, where face value is equal to fair value.
Investments measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 as of May 30, 2020 and June 1, 2019 were as follows (in thousands):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
May 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits/CDs
|
|
$
|
16,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total
|
|
$
|
16,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
June 1, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits/CDs
|
|
$
|
8,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total
|
|
$
|
8,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
14.
|
VALUATION AND QUALIFYING ACCOUNTS
|
The following table presents the valuation and qualifying account activity for fiscal years ended May 30, 2020, June 1, 2019 and June 2, 2018, (in thousands):
Description
|
|
Balance at
beginning
of period
|
|
|
Charged to
expense
|
|
|
|
Deductions
|
|
|
|
Balance at
end
of period
|
|
Year ended May 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
339
|
|
|
$
|
349
|
|
(1)
|
|
$
|
(354
|
)
|
(2)
|
|
$
|
334
|
|
Inventory provisions
|
|
|
4,568
|
|
|
|
1,013
|
|
(3)
|
|
|
(188
|
)
|
(4)
|
|
|
5,393
|
|
Year ended June 1, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
309
|
|
|
$
|
402
|
|
(1)
|
|
$
|
(372
|
)
|
(2)
|
|
$
|
339
|
|
Inventory provisions
|
|
|
4,027
|
|
|
|
1,076
|
|
(3)
|
|
|
(535
|
)
|
(4)
|
|
|
4,568
|
|
Year ended June 2, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
398
|
|
|
$
|
223
|
|
(1)
|
|
$
|
(312
|
)
|
(2)
|
|
$
|
309
|
|
Inventory provisions
|
|
|
3,456
|
|
|
|
773
|
|
(3)
|
|
|
(202
|
)
|
(4)
|
|
|
4,027
|
|
Notes:
(1)
|
Charges to bad debt expense.
|
(2)
|
Uncollectible amounts written off, net of recoveries and foreign currency translation.
|
(3)
|
Charges to cost of sales. Included in fiscal 2020 were inventory write-downs of $0.6 million for PMT, $0.1 million for Canvys and $0.3 million for Healthcare.
|
(4)
|
Inventory disposed of or sold, net of foreign currency translation.
|
54
15.
|
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
|
Description
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
Fiscal 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
40,653
|
|
|
$
|
39,634
|
|
|
$
|
38,249
|
|
|
$
|
37,362
|
|
|
Gross profit
|
|
|
12,951
|
|
|
|
12,680
|
|
|
|
12,670
|
|
|
|
11,372
|
|
|
Income (loss) from continuing operations
|
|
|
157
|
|
|
|
(622
|
)
|
|
|
(93
|
)
|
|
|
(1,280
|
)
|
|
Net income (loss)
|
|
|
157
|
|
|
|
(622
|
)
|
|
|
(93
|
)
|
|
|
(1,280
|
)
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock - basic
|
|
$
|
0.01
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.10
|
)
|
|
Class B common stock - basic
|
|
$
|
0.01
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.09
|
)
|
|
Common stock - diluted
|
|
$
|
0.01
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.10
|
)
|
|
Class B common stock - diluted
|
|
$
|
0.01
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.09
|
)
|
|
Fiscal 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
44,157
|
|
|
$
|
41,314
|
|
|
$
|
39,018
|
|
|
$
|
42,163
|
|
|
Gross profit
|
|
|
13,953
|
|
|
|
12,971
|
|
|
|
12,299
|
|
|
|
12,512
|
|
|
Income (loss) from continuing operations
|
|
|
431
|
|
|
|
(304
|
)
|
|
|
(1,078
|
)
|
|
|
(6,377
|
)
|
(1)
|
Net income (loss)
|
|
|
431
|
|
|
|
(304
|
)
|
|
|
(1,078
|
)
|
|
|
(6,377
|
)
|
(1)
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock - basic
|
|
$
|
0.03
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.50
|
)
|
|
Class B common stock - basic
|
|
$
|
0.03
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.44
|
)
|
|
Common stock - diluted
|
|
$
|
0.03
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.50
|
)
|
|
Class B common stock - diluted
|
|
$
|
0.03
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.44
|
)
|
|
(1)
|
Includes non-cash impairment of goodwill. Refer to Note 7 “Goodwill and Intangible Assets” of the notes to our consolidated financial statements.
|
55