UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 2, 2017August 31, 2019
OR
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from To
Commission File Number: 0-12906
RICHARDSON ELECTRONICS, LTD.
(Exact name of registrant as specified in its charter)
Delaware | 36-2096643 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
40W267 Keslinger Road, P.O. Box 393
LaFox, Illinois 60147-0393
(Address of principal executive offices)
Registrant’s telephone number, including area code: (630) 208-2200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common stock, $0.05 Par Value | RELL | NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer | ☐ | Accelerated Filer | ☒ | |
Non-Accelerated Filer | ☐ | Smaller Reporting Company | ☒ | |
Emerging Growth Company | ☐ | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As of January 9, 2018,October 8, 2019, there were outstanding 10,789,54411,038,235 shares of Common Stock, $0.05 par value and 2,136,9192,096,919 shares of Class B Common Stock, $0.05 par value, which are convertible into Common Stock of the registrant on a share for share basis.
Page | |||
2 | |||
2 | |||
Unaudited Consolidated Statements of Comprehensive | 3 | ||
4 | |||
5 | |||
6 | |||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17 | ||
21 | |||
21 | |||
22 | |||
22 | |||
22 | |||
22 | |||
23 | |||
23 | |||
24 |
1
ITEM 1. |
Unaudited | Audited | |||||||
December 2, 2017 | May 27, 2017 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 54,453 | $ | 55,327 | ||||
Accounts receivable, less allowance of $373 and $398, respectively | 21,016 | 20,782 | ||||||
Inventories, net | 48,059 | 42,749 | ||||||
Prepaid expenses and other assets | 3,729 | 3,070 | ||||||
Investments - current | 4,136 | 6,429 | ||||||
Total current assets | 131,393 | 128,357 | ||||||
Non-current assets: | ||||||||
Property, plant and equipment, net | 17,275 | 15,813 | ||||||
Goodwill | 6,332 | 6,332 | ||||||
Intangible assets, net | 3,231 | 3,441 | ||||||
Non-current deferred income taxes | 1,069 | 1,102 | ||||||
Investments - non-current | 686 | 2,419 | ||||||
Total non-current assets | 28,593 | 29,107 | ||||||
Total assets | $ | 159,986 | $ | 157,464 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 15,224 | $ | 15,933 | ||||
Accrued liabilities | 8,645 | 8,311 | ||||||
Total current liabilities | 23,869 | 24,244 | ||||||
Non-current liabilities: | ||||||||
Non-current deferred income tax liabilities | 158 | 158 | ||||||
Other non-current liabilities | 903 | 735 | ||||||
Total non-current liabilities | 1,061 | 893 | ||||||
Total liabilities | 24,930 | 25,137 | ||||||
Stockholders’ equity | ||||||||
Common stock, $0.05 par value; issued and outstanding 10,790 shares at December 2, 2017 and 10,712 shares at May 27, 2017 | 535 | 535 | ||||||
Class B common stock, convertible, $0.05 par value; issued and outstanding 2,137 shares at December 2, 2017 and at May 27, 2017 | 107 | 107 | ||||||
Preferred stock, $1.00 par value, no shares issued | — | — | ||||||
Additional paid-in-capital | 59,745 | 59,436 | ||||||
Common stock in treasury, at cost, no shares at December 2, 2017 and at May 27, 2017 | — | — | ||||||
Retained earnings | 69,368 | 69,333 | ||||||
Accumulated other comprehensive income | 5,301 | 2,916 | ||||||
Total stockholders’ equity | 135,056 | 132,327 | ||||||
Total liabilities and stockholders’ equity | $ | 159,986 | $ | 157,464 |
Richardson Electronics, Ltd.
(in thousands, except per share amounts)
|
| Unaudited |
|
| Audited |
| ||
|
| August 31, 2019 |
|
| June 1, 2019 |
| ||
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 46,457 |
|
| $ | 42,019 |
|
Accounts receivable, less allowance of $296 and $339, respectively |
|
| 21,946 |
|
|
| 24,296 |
|
Inventories, net |
|
| 54,137 |
|
|
| 53,232 |
|
Prepaid expenses and other assets |
|
| 2,424 |
|
|
| 3,067 |
|
Investments - current |
|
| — |
|
|
| 8,000 |
|
Total current assets |
|
| 124,964 |
|
|
| 130,614 |
|
Non-current assets: |
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
| 18,640 |
|
|
| 19,111 |
|
Intangible assets, net |
|
| 2,696 |
|
|
| 2,763 |
|
Lease ROU asset |
|
| 4,107 |
|
|
| — |
|
Non-current deferred income taxes |
|
| 579 |
|
|
| 529 |
|
Total non-current assets |
|
| 26,022 |
|
|
| 22,403 |
|
Total assets |
| $ | 150,986 |
|
| $ | 153,017 |
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 12,906 |
|
| $ | 16,943 |
|
Accrued liabilities |
|
| 10,338 |
|
|
| 11,273 |
|
Lease liability current |
|
| 1,541 |
|
|
| — |
|
Total current liabilities |
|
| 24,785 |
|
|
| 28,216 |
|
Non-current liabilities: |
|
|
|
|
|
|
|
|
Non-current deferred income tax liabilities |
|
| 216 |
|
|
| 212 |
|
Lease liability non-current |
|
| 2,678 |
|
|
| — |
|
Other non-current liabilities |
|
| 692 |
|
|
| 832 |
|
Total non-current liabilities |
|
| 3,586 |
|
|
| 1,044 |
|
Total liabilities |
|
| 28,371 |
|
|
| 29,260 |
|
Stockholders’ equity |
|
|
|
|
|
|
|
|
Common stock, $0.05 par value; issued and outstanding 11,029 shares at August 31, 2019 and 10,957 shares at June 1, 2019 |
|
| 551 |
|
|
| 547 |
|
Class B common stock, convertible, $0.05 par value; issued and outstanding 2,097 shares at August 31, 2019 and June 1, 2019 |
|
| 105 |
|
|
| 105 |
|
Preferred stock, $1.00 par value, no shares issued |
|
| — |
|
|
| — |
|
Additional paid-in-capital |
|
| 61,200 |
|
|
| 61,012 |
|
Common stock in treasury, at cost, no shares at August 31, 2019 and June 1, 2019 |
|
| — |
|
|
| — |
|
Retained earnings |
|
| 59,085 |
|
|
| 59,703 |
|
Accumulated other comprehensive income |
|
| 1,674 |
|
|
| 2,390 |
|
Total stockholders’ equity |
|
| 122,615 |
|
|
| 123,757 |
|
Total liabilities and stockholders’ equity |
| $ | 150,986 |
|
| $ | 153,017 |
|
2
Unaudited Consolidated Statements of Comprehensive Income (Loss)Loss
(in thousands, except per share amounts)
Three Months Ended | Six Months Ended | |||||||||||||||
December 2, 2017 | November 26, 2016 | December 2, 2017 | November 26, 2016 | |||||||||||||
Statements of Comprehensive Income (Loss) | ||||||||||||||||
Net sales | $ | 39,082 | $ | 33,827 | $ | 76,077 | $ | 67,200 | ||||||||
Cost of sales | 25,708 | 22,863 | 50,555 | 45,996 | ||||||||||||
Gross profit | 13,374 | 10,964 | 25,522 | 21,204 | ||||||||||||
Selling, general and administrative expenses | 12,602 | 13,368 | 24,926 | 25,695 | ||||||||||||
Gain on disposal of assets | — | — | (191 | ) | — | |||||||||||
Operating income (loss) | 772 | (2,404 | ) | 787 | (4,491 | ) | ||||||||||
Other (income) expense: | ||||||||||||||||
Investment/interest income | (36 | ) | (51 | ) | (170 | ) | (62 | ) | ||||||||
Foreign exchange loss (gain) | 115 | (181 | ) | 316 | 97 | |||||||||||
Other, net | (11 | ) | 17 | (15 | ) | 16 | ||||||||||
Total other expense (income) | 68 | (215 | ) | 131 | 51 | |||||||||||
Income (loss) from continuing operations before income taxes | 704 | (2,189 | ) | 656 | (4,542 | ) | ||||||||||
Income tax provision | 532 | 333 | 596 | 830 | ||||||||||||
Income (loss) from continuing operations | 172 | (2,522 | ) | 60 | (5,372 | ) | ||||||||||
Income from discontinued operations | 1,496 | — | 1,496 | — | ||||||||||||
Net income (loss) | 1,668 | (2,522 | ) | 1,556 | (5,372 | ) | ||||||||||
Foreign currency translation gain (loss), net of tax | 230 | (2,623 | ) | 2,351 | (2,244 | ) | ||||||||||
Fair value adjustments on investments gain | 48 | 6 | 34 | 13 | ||||||||||||
Comprehensive income (loss) | $ | 1,946 | $ | (5,139 | ) | $ | 3,941 | $ | (7,603 | ) | ||||||
Net income (loss) per Common share - Basic: | ||||||||||||||||
Income (loss) from continuing operations | $ | 0.01 | $ | (0.20 | ) | $ | — | $ | (0.43 | ) | ||||||
Income from discontinued operations | 0.12 | — | 0.12 | — | ||||||||||||
Total net income (loss) per Common share - Basic | $ | 0.13 | $ | (0.20 | ) | $ | 0.12 | $ | (0.43 | ) | ||||||
Net income (loss) per Class B common share - Basic: | ||||||||||||||||
Income (loss) from continuing operations | $ | 0.01 | $ | (0.18 | ) | $ | — | $ | (0.38 | ) | ||||||
Income from discontinued operations | 0.11 | — | 0.11 | — | ||||||||||||
Total net income (loss) per Class B common share - Basic | $ | 0.12 | $ | (0.18 | ) | $ | 0.11 | $ | (0.38 | ) | ||||||
Net income (loss) per Common share - Diluted: | ||||||||||||||||
Income (loss) from continuing operations | $ | 0.01 | $ | (0.20 | ) | $ | — | $ | (0.43 | ) | ||||||
Income from discontinued operations | 0.12 | — | 0.12 | — | ||||||||||||
Total net income (loss) per Common share – Diluted | $ | 0.13 | $ | (0.20 | ) | $ | 0.12 | $ | (0.43 | ) | ||||||
Net income (loss) per Class B common share - Diluted: | ||||||||||||||||
Income (loss) from continuing operations | $ | 0.01 | $ | (0.18 | ) | $ | — | $ | (0.38 | ) | ||||||
Income from discontinued operations | 0.11 | — | 0.11 | — | ||||||||||||
Total net income (loss) per Class B common share - Diluted | $ | 0.12 | $ | (0.18 | ) | $ | 0.11 | $ | (0.38 | ) | ||||||
Weighted average number of shares: | ||||||||||||||||
Common shares – Basic | 10,755 | 10,703 | 10,734 | 10,703 | ||||||||||||
Class B common shares – Basic | 2,137 | 2,141 | 2,137 | 2,141 | ||||||||||||
Common shares – Diluted | 10,789 | 10,703 | 10,764 | 10,703 | ||||||||||||
Class B common shares – Diluted | 2,137 | 2,141 | 2,137 | 2,141 | ||||||||||||
Dividends per common share | $ | 0.060 | $ | 0.060 | $ | 0.120 | $ | 0.120 | ||||||||
Dividends per Class B common share | $ | 0.054 | $ | 0.054 | $ | 0.108 | $ | 0.108 |
|
| Three Months Ended |
| |||||
|
| August 31, 2019 |
|
| September 1, 2018 |
| ||
Statements of Comprehensive Loss |
|
|
|
|
|
|
|
|
Net sales |
| $ | 40,653 |
|
| $ | 44,157 |
|
Cost of sales |
|
| 27,702 |
|
|
| 30,204 |
|
Gross profit |
|
| 12,951 |
|
|
| 13,953 |
|
Selling, general and administrative expenses |
|
| 12,847 |
|
|
| 13,099 |
|
Loss on disposal of assets |
|
| 1 |
|
|
| — |
|
Operating income |
|
| 103 |
|
|
| 854 |
|
Other (income) expense: |
|
|
|
|
|
|
|
|
Investment/interest income |
|
| (120 | ) |
|
| (126 | ) |
Foreign exchange (gain) loss |
|
| (110 | ) |
|
| 286 |
|
Other, net |
|
| (1 | ) |
|
| (8 | ) |
Total other (income) expense |
|
| (231 | ) |
|
| 152 |
|
Income before income taxes |
|
| 334 |
|
|
| 702 |
|
Income tax provision |
|
| 177 |
|
|
| 271 |
|
Net income |
|
| 157 |
|
|
| 431 |
|
Foreign currency translation loss, net of tax |
|
| (716 | ) |
|
| (740 | ) |
Comprehensive loss |
| $ | (559 | ) |
| $ | (309 | ) |
Net income per share |
|
|
|
|
|
|
|
|
Common shares - Basic |
| $ | 0.01 |
|
| $ | 0.03 |
|
Class B common shares - Basic |
| $ | 0.01 |
|
| $ | 0.03 |
|
Common shares - Diluted |
| $ | 0.01 |
|
| $ | 0.03 |
|
Class B common shares - Diluted |
| $ | 0.01 |
|
| $ | 0.03 |
|
Weighted average number of shares: |
|
|
|
|
|
|
|
|
Common shares – Basic |
|
| 10,990 |
|
|
| 10,829 |
|
Class B common shares – Basic |
|
| 2,097 |
|
|
| 2,132 |
|
Common shares – Diluted |
|
| 10,990 |
|
|
| 10,982 |
|
Class B common shares – Diluted |
|
| 2,097 |
|
|
| 2,132 |
|
Dividends per common share |
| $ | 0.060 |
|
| $ | 0.060 |
|
Dividends per Class B common share |
| $ | 0.054 |
|
| $ | 0.054 |
|
3
Unaudited Consolidated Statements of Cash Flows
(in thousands)
Three Months Ended | Six Months Ended |
| Three Months Ended |
| ||||||||||||||||||||
December 2, 2017 | November 26, 2016 | December 2, 2017 | November 26, 2016 |
| August 31, 2019 |
|
| September 1, 2018 |
| |||||||||||||||
Operating activities: |
|
|
|
|
|
|
|
| ||||||||||||||||
Net income (loss) | $ | 1,668 | $ | (2,522 | ) | $ | 1,556 | $ | (5,372 | ) | ||||||||||||||
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: | ||||||||||||||||||||||||
Net income |
| $ | 157 |
|
| $ | 431 |
| ||||||||||||||||
Adjustments to reconcile net income to cash used in operating activities: |
|
|
|
|
|
|
|
| ||||||||||||||||
Depreciation and amortization | 735 | 602 | 1,467 | 1,317 |
|
| 833 |
|
|
| 764 |
| ||||||||||||
Inventory provisions | 125 | 66 | 287 | 109 |
|
| 161 |
|
|
| 215 |
| ||||||||||||
Loss (gain) on sale of investments | 1 | 8 | (24 | ) | 6 | |||||||||||||||||||
Gain on disposal of assets | — | — | (191 | ) | — | |||||||||||||||||||
Loss on disposal of assets |
|
| 1 |
|
|
| — |
| ||||||||||||||||
Share-based compensation expense | 208 | 176 | 309 | 279 |
|
| 188 |
|
|
| 165 |
| ||||||||||||
Deferred income taxes | 66 | (151 | ) | 62 | (309 | ) |
|
| (48 | ) |
|
| 58 |
| ||||||||||
Change in assets and liabilities: |
|
|
|
|
|
|
|
| ||||||||||||||||
Accounts receivable | (1,735 | ) | 379 | 312 | 3,934 |
|
| 2,161 |
|
|
| (198 | ) | |||||||||||
Income tax receivable | — | 8 | — | (5 | ) | |||||||||||||||||||
Inventories | (2,021 | ) | 1,115 | (4,634 | ) | 1,483 |
|
| (1,357 | ) |
|
| 77 |
| ||||||||||
Prepaid expenses and other assets | (357 | ) | (1,082 | ) | (615 | ) | (1,041 | ) |
|
| 625 |
|
|
| 37 |
| ||||||||
Accounts payable | 1,757 | (883 | ) | (998 | ) | (3,221 | ) |
|
| (3,955 | ) |
|
| (5,419 | ) | |||||||||
Accrued liabilities | (517 | ) | 2,006 | 209 | 862 |
|
| (876 | ) |
|
| 227 |
| |||||||||||
Other | 264 | 13 | (3 | ) | 18 |
|
| 56 |
|
|
| 13 |
| |||||||||||
Net cash provided by (used in) operating activities | 194 | (265 | ) | (2,263 | ) | (1,940 | ) | |||||||||||||||||
Net cash used in operating activities |
|
| (2,054 | ) |
|
| (3,630 | ) | ||||||||||||||||
Investing activities: |
|
|
|
|
|
|
|
| ||||||||||||||||
Capital expenditures | (1,720 | ) | (1,235 | ) | (2,735 | ) | (3,299 | ) |
|
| (339 | ) |
|
| (1,072 | ) | ||||||||
Proceeds from sale of assets | — | — | 276 | — | ||||||||||||||||||||
Proceeds from maturity of investments | 4,177 | 2,117 | 8,177 | 3,582 |
|
| 8,000 |
|
|
| — |
| ||||||||||||
Purchases of investments | (3,943 | ) | (2,136 | ) | (3,943 | ) | (2,136 | ) |
|
| — |
|
|
| (2,300 | ) | ||||||||
Proceeds from sales of available-for-sale securities | 114 | 59 | 265 | 147 | ||||||||||||||||||||
Purchases of available-for-sale securities | (114 | ) | (59 | ) | (265 | ) | (147 | ) | ||||||||||||||||
Net cash provided by (used in) investing activities |
|
| 7,661 |
|
|
| (3,372 | ) | ||||||||||||||||
Financing activities: |
|
|
|
|
|
|
|
| ||||||||||||||||
Proceeds from issuance of common stock |
|
| — |
|
|
| 192 |
| ||||||||||||||||
Cash dividends paid |
|
| (775 | ) |
|
| (764 | ) | ||||||||||||||||
Payment of financing lease principal |
|
| (30 | ) |
|
| — |
| ||||||||||||||||
Other | (2 | ) | (3 | ) | (5 | ) | (6 | ) |
|
| 4 |
|
|
| — |
| ||||||||
Net cash (used in) provided by investing activities | (1,488 | ) | (1,257 | ) | 1,770 | (1,859 | ) | |||||||||||||||||
Financing activities: | ||||||||||||||||||||||||
Cash dividends paid | (763 | ) | (757 | ) | (1,521 | ) | (1,515 | ) | ||||||||||||||||
Net cash used in financing activities | (763 | ) | (757 | ) | (1,521 | ) | (1,515 | ) |
|
| (801 | ) |
|
| (572 | ) | ||||||||
Effect of exchange rate changes on cash and cash equivalents | 81 | (1,098 | ) | 1,140 | (1,029 | ) |
|
| (368 | ) |
|
| (413 | ) | ||||||||||
Decrease in cash and cash equivalents | (1,976 | ) | (3,377 | ) | (874 | ) | (6,343 | ) | ||||||||||||||||
Increase (decrease) in cash and cash equivalents |
|
| 4,438 |
|
|
| (7,987 | ) | ||||||||||||||||
Cash and cash equivalents at beginning of period | 56,429 | 57,488 | 55,327 | 60,454 |
|
| 42,019 |
|
|
| 60,465 |
| ||||||||||||
Cash and cash equivalents at end of period | $ | 54,453 | $ | 54,111 | $ | 54,453 | $ | 54,111 |
| $ | 46,457 |
|
| $ | 52,478 |
|
4
Unaudited Consolidated Statement of Stockholders’ Equity
(in thousands, except per share amounts)
Common | Class B Common | Par Value | Additional Paid In Capital | Common Stock in Treasury | Retained Earnings | Accumulated Other Comprehensive Income | Total |
| Common |
|
| Class B Common |
|
| Par Value |
|
| Additional Paid In Capital |
|
| Common Stock in Treasury |
|
| Retained Earnings |
|
| Accumulated Other Comprehensive Income |
|
| Total |
| |||||||||||||||||||||||||||||||||
Balance May 27, 2017: | 10,712 | 2,137 | $ | 642 | $ | 59,436 | $ | — | $ | 69,333 | $ | 2,916 | $ | 132,327 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance June 1, 2019: |
|
| 10,957 |
|
|
| 2,097 |
|
| $ | 652 |
|
| $ | 61,012 |
|
| $ | — |
|
| $ | 59,703 |
|
| $ | 2,390 |
|
| $ | 123,757 |
| ||||||||||||||||||||||||||||||||
Comprehensive (loss) income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 1,556 | — | 1,556 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 157 |
|
|
| — |
|
|
| 157 |
| ||||||||||||||||||||||||
Foreign currency translation | — | — | — | — | — | — | 2,351 | 2,351 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (716 | ) |
|
| (716 | ) | ||||||||||||||||||||||||
Fair value adjustments on investments | — | — | — | — | — | — | 34 | 34 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation: |
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Restricted stock | 78 | — | — | 23 | — | — | — | 23 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 99 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 99 |
| ||||||||||||||||||||||||
Stock options | — | — | — | 286 | — | — | — | 286 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 89 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 89 |
| ||||||||||||||||||||||||
Common stock: |
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| ||||||||||||||||||||||||||||||||
Restricted stock issuance |
|
| 72 |
|
|
| — |
|
|
| 4 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4 |
| ||||||||||||||||||||||||||||||||
Dividends paid to: |
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| ||||||||||||||||||||||||||||||||
Common ($0.12 per share) | — | — | — | — | — | (1,290 | ) | — | (1,290 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Class B ($0.108 per share) | — | — | — | — | — | (231 | ) | — | (231 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance December 2, 2017: | 10,790 | 2,137 | $ | 642 | $ | 59,745 | $ | — | $ | 69,368 | $ | 5,301 | $ | 135,056 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Common ($0.060 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (662 | ) |
|
| — |
|
|
| (662 | ) | ||||||||||||||||||||||||||||||||
Class B ($0.054 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (113 | ) |
|
| — |
|
|
| (113 | ) | ||||||||||||||||||||||||||||||||
Balance August 31, 2019: |
|
| 11,029 |
|
|
| 2,097 |
|
| $ | 656 |
|
| $ | 61,200 |
|
| $ | — |
|
| $ | 59,085 |
|
| $ | 1,674 |
|
| $ | 122,615 |
|
5
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE COMPANY
Richardson Electronics, Ltd. is a leading global provider of engineered solutions, power grid and microwave tubes and related consumables; power conversion and RF and microwave components; high value flat panel detector solutions, replacement parts, tubes and service training for diagnostic imaging equipment; and customized display solutions. We serve customers in the alternative energy, healthcare, aviation, broadcast, communications, industrial, marine, medical, military, scientific and semiconductor markets. The Company’s strategy is to provide specialized technical expertise and “engineered solutions” based on our core engineering and manufacturing capabilities. The Company provides solutions and adds value through design-in support, systems integration, prototype design and manufacturing, testing, logistics and aftermarket technical service and repair through its global infrastructure.
Our products include electron tubes and related components, microwave generators, subsystems used in semiconductor manufacturing and visual technology solutions. These products are used to control, switch or amplify electrical power signals, or are used as display devices in a variety of industrial, commercial, medical and communication applications.
We have three operating and reportable segments, which we define as follows:
Power and Microwave Technologies Group (“PMT”) combines our core engineered solutions capabilities, power grid and microwave tube business with new RF, Wireless and disruptive power technologies. As a manufacturer, technology partner and authorized distributor, PMT’s strategy is to provide specialized technical expertise and engineered solutions based on our core engineering and manufacturing capabilities.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 (“OEM”) markets.
Our engineers design, manufacture, source and support a full spectrum of solutions to match the needs of our customers. We offer long term availability and proven custom display solutions that include touch screens, protective panels, custom enclosures, all-in-ones, specialized cabinet finishes and application specific software packages and certification services. We partner with both private label manufacturing companies and leading branded hardware vendors to offer the highest quality display and touch solutions and customized computing platforms.
Healthcare manufactures, refurbishes and distributes high value replacement parts for the healthcare market including hospitals, medical centers, asset management companies, independent service organizations and multi-vendor service providers. Products include Diagnostic Imaging replacement parts for CT and MRI systems; replacement CT and MRI tubes; CT service training; MRI coils, cold heads and RF amplifiers; hydrogen thyratrons, klystrons, magnetrons; flat panel detector upgrades; and additional replacement solutions currently under development for the diagnostic imaging service market. Through a combination of newly developed products and partnerships, service offerings and training programs, we believe we can help our customers improve efficiency and deliver better clinical outcomes while lowering the cost of healthcare delivery.
We currently have operations in the following major geographic regions: North America, Asia/Pacific, Europe and Latin America.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and notes required by GAAP for complete financial statements.
Our fiscal quarter ends on the Saturday nearest the end of the quarter-ending month. The second quarterfirst three months of fiscal 20182020 and fiscal 20172019 both contained 13 weeks. The first six months of fiscal 2018 and fiscal 2017 contained 27 and 26 weeks, respectively.
In the opinion of management, all adjustments, which are of a normal and recurring nature, necessary for a fair presentation of the results of interim periods have been made. All inter-company transactions and balances have been eliminated. The unaudited consolidated financial statements presented herein include the accounts of our wholly owned subsidiaries. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The results of our operations for the three and six months ended December 2, 2017,August 31, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending June 2, 2018.May 30, 2020.
The financial information contained in this report should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended May 27, 2017,June 1, 2019, that we filed on July 31, 2017.August 5, 2019.
6
3. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Inventories, net: Our consolidated inventories arewere stated at the lower of cost or market,and net realizable value, generally using a weighted-average cost method. Our net inventories include approximately $39.9$48.5 million of finished goods, $5.8$4.0 million of raw materials and $2.4$1.6 million of work-in-progress as of December 2, 2017,August 31, 2019, as compared to approximately $36.0$47.2 million of finished goods, $5.3$4.2 million of raw materials and $1.4$1.8 million of work-in-progress as of May 27, 2017.
June 1, 2019.
At this time, we do not anticipate any material risks or uncertainties related to possible future inventory write-downs. Provisions for obsolete or slow moving inventories are recorded based upon regular analysis of stock rotation privileges, obsolescence, the exiting of certain markets and assumptions about future demand and market conditions. If future demand changes in the industry, or market conditions differ from management’s estimates, additional provisions may be necessary. Inventory reserves were approximately $3.6$4.6 million as of December 2, 2017August 31, 2019 and $3.5 million as of May 27, 2017.June 1, 2019.
Revenue Recognition: Our product sales are recognized as revenue upon shipment, when title passes to the customer, when delivery has occurred or services have been rendered and when collectability is reasonably assured. We also record estimated discounts and returns based on our historical experience. Our products are often manufactured to meet the specific design needs of our customers’ applications. Our engineers work closely with customers to ensure that our products will meet their needs. Our customers are under no obligation to compensate us for designing the products we sell.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers, which amends guidance for revenue recognition. ASU 2014-09 is principles based guidance that can be applied to all contracts with customers, enhancing comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. The core principle of the guidance is that entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The guidance details the steps entities should apply to achieve the core principle. In August 2015, the FASB issued an amendment to defer the effective date for all entities by one year. For public entities, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted as of annual reporting periods beginning after December 15, 2016. Companies have the option of using either a full or modified retrospective approach in applying this standard. During fiscal 2016 and 2017, the FASB issued four additional updates which further clarify the guidance provided in ASU 2014-09.
We are evaluatingEffective 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 on ouris the addition of required disclosures within the notes to the financial statements using a three-phase approach (assessment, conversion and implementation). We continue to work through our assessment phase and further evaluation is needed in order to determine whether or not the new revenue recognition standard will have a material impact on our financial statements and related disclosures upon adoption. We have undertaken a detailed analysis of our various contracts with customers and revenue streams. The Company has engaged a third party to assist in evaluating the impact of this new standard on its consolidated financial statements and related disclosures. We will complete the conversion and implementation phases by the end of fiscal year 2018 in conjunction with future interpretative guidance.statements.
Loss Contingencies: We accrue a liability for loss contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. If we determine that there is at least a reasonable possibility that a loss may have been incurred, we will include a disclosure describing the contingency.
Intangible Assets: Intangible assets are initially recorded at their fair market values determined on quoted market prices in active markets, if available, or recognized valuation models. Intangible assets that have finite useful lives are amortized over their useful lives either on a straight-line basis or over their projected future cash flows and are tested for impairment when events or changes in circumstances occur that indicate possible impairment. Our intangible assets represent the fair value for trade name, customer relationships, non-compete agreements and technology acquired in connection with our acquisitions.
Income Taxes: We recognize deferred tax assets and liabilities based on the differences between financial statement carrying amounts and the tax bases of assets and liabilities. We regularly review our deferred tax assets for recoverability and determine the need for a valuation allowance based on a number of factors, including both positive and negative evidence. These factors include historical taxable income or loss, projected future taxable income or loss, the expected timing of the reversals of existing temporary differences and the implementation of tax planning strategies. In circumstances where we, or any of our affiliates, have incurred three years of cumulative losses which constitute significant negative evidence, positive evidence of equal or greater significance is needed to overcome the negative evidence before a tax benefit is recognized for deductible temporary differences and loss carryforwards.
7
In March 2016, the FASB issued ASU No. 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”, a new accounting standard update intended to simplify several aspects of the accounting for share-based payment transactions including: income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. Specifically, the update requires that excess tax benefits and tax deficiencies (the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes) be recognized as income tax expense or benefit in the consolidated statements of comprehensive income (loss), introducing a new element of volatility to the provision for income taxes. This update is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted. The Company adopted the ASU on May 28, 2017. Effective with the adoption of the ASU all share-based awards continue to be accounted for as equity awards, excess tax benefits recognized on stock-based compensation expense are reflected in the consolidated statements of comprehensive income (loss) as a component of the provision for income taxes on a prospective basis, excess tax benefits recognized on stock-based compensation expense are classified as an operating activity in the consolidated statements of cash flows on a prospective basis and the Company has elected to continue to estimate expected forfeitures over the course of a vesting period. The adoption of the ASU had no impact on the retained earnings, other components of equity or net assets as of the beginning of the period of adoption.
Accrued Liabilities: Accrued liabilities consist of the following (in thousands)(in thousands):
December 2, 2017 | May 27, 2017 |
| August 31, 2019 |
|
| June 1, 2019 |
| |||||||||
Compensation and payroll taxes | $ | 3,006 | $ | 3,250 |
| $ | 3,469 |
|
| $ | 2,846 |
| ||||
Accrued severance | 410 | 706 |
|
| 487 |
|
|
| 520 |
| ||||||
Professional fees | 603 | 535 |
|
| 523 |
|
|
| 471 |
| ||||||
Deferred revenue | 1,716 | 1,460 |
|
| 1,750 |
|
|
| 2,260 |
| ||||||
Other accrued expenses | 2,910 | 2,360 |
|
| 4,109 |
|
|
| 5,176 |
| ||||||
Accrued Liabilities | $ | 8,645 | $ | 8,311 |
| $ | 10,338 |
|
| $ | 11,273 |
|
(1) In the second quarter4. REVENUE RECOGNITION
Richardson has a number of fiscal year 2017,defined revenue streams across our reportable segments. For each of these revenue streams, all products are typically sold directly by the Company executedto the end customer. Distribution is the Company’s largest revenue stream. The distribution business does not include a reductionseparate service bundled with the product sold or sold on top of the product. Distribution typically includes products purchased from our suppliers, stocked in headcountour warehouses and then sold to streamline operationsour 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 reduce costsobtain 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 recorded $1.3 millionvary 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 expense included in selling, general and administrative expenses for employee termination costs payable to terminated employees with employment and/services revenue, ASU 2014-09 has an immaterial impact on the timing, amount or separation agreements withcharacterization of services revenue recognized by the Company. The changesservices we provide are relatively short in duration and typically completed in one to two weeks. Therefore, at each reporting date, the amount of unbilled work performed is insignificant. The services revenue has consistently accounted for less than 5% of the Company’s total revenues and is expected to continue at that level.
Contracts with customers
A contract is an agreement between two or more parties that creates enforceable rights and obligations. A revenue contract exists for us once a customer purchase order is received, reviewed and accepted. Prior to accepting a customer purchase order, we review the credit worthiness of the customer. Purchase orders are deemed to meet the collectability criterion once the customer’s credit is approved. Contract assets arise when the Company transfers a good or performs a service in advance of receiving consideration from the customer and contract liabilities arise when the Company receives consideration from its customer in advance of performance.
Contract Liabilities: Contract liabilities and revenue recognized were as follows (in thousands):
|
| June 1, 2019 |
|
| Additions |
|
| Revenue Recognized |
|
| August 31, 2019 |
| ||||
Contract liabilities (deferred revenue) |
| $ | 2,260 |
|
| $ | 581 |
|
| $ | (1,091 | ) |
| $ | 1,750 |
|
The Company receives advance payments or deposits from our customers before revenue is recognized, resulting in contract liabilities. Contract liabilities are included in accrued liabilities in the severance accrualconsolidated balance sheets.
8
Performance obligations and satisfaction of performance obligation in the contract
Each accepted purchase order identifies a distinct good or service as the performance obligation. The goods are generally standard products we purchased from a supplier and stocked on our shelves. They can also be customized products purchased from a supplier or products that are customized or have value added to them in-house prior to shipping to the customer. Our contracts for customized products generally include termination provisions if a customer cancels its order. However, we recognize revenue at a point in time because the termination provisions do not require, upon cancelation, the customer to pay fees that are commensurate with the work performed. Each purchase order explicitly states the goods or service that we promise to transfer to the customer. The promises to the customer are limited only to those goods or service. The performance obligation is our promise to deliver both goods that were produced by the Company and resale of goods that we purchase from our suppliers. Our shipping and handling activities for destination shipments are performed prior to the customer obtaining control. As such, they are not a separate promised service. For shipping point, Richardson is making the election under ASC 606-10-25-18B to account for shipping and handling as activities to fulfill the promise to transfer the goods. The goods we provide to our customers are distinct in that our customers benefit from the goods we sell them through use in their own processes. Our customers are generally not resellers, but rather businesses that incorporate our products into their processes from which they generate an economic benefit. The goods are also distinct in that each item sold to the customer is clearly identified on both the purchase order and resulting invoice. Each product we sell benefits the customer independently of the other products. Each item on each purchase order from the customer can be used by the customer unrelated to any other products we provide to the customer.
Determine the transaction price and variable consideration
The transaction price for each product is the amount invoiced to the customer. Each product on a purchase order is a separate performance obligation with an observable standalone selling price. The transaction price is a fixed price per unit, except for the first six monthsvariable consideration. The Company elects to exclude sales tax from the transaction price. With the exception of fiscal year 2018 included paymentssale with right of $0.3 million.return, variable consideration has been identified only in the form of customer early payment discounts, which are immaterial to the Company’s financial statements. Although there is not a material impact on our financial statements, we will continue to account for customer discounts when they are taken by the customer and address further if they grow.
Recognize revenue when the entity satisfies a performance obligation
4. GOODWILL AND INTANGIBLE ASSETSWe 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 carrying value of goodwill was $6.3 million as of December 2, 2017 and May 27, 2017.
Goodwill is initially recordedCompany maintains a reserve for returns based on the premium paid for acquisitionshistorical trends that covers all contracts and is subsequently tested for impairment,revenue streams using the first dayexpected 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 fourthbalance sheet as a contra Trade Accounts Receivable as well as an asset in inventory. We value the inventory at cost due to there being minimal or no costs to the Company as we generally require the customer to pay freight and we typically do not have costs associated with activities such as relabeling or repackaging.
The reserve is considered immaterial at each balance sheet date for further consideration. Returns for defective product are typically covered by our supplier’s warranty, thus, returns for defective product are not factored into our reserve.
Warranties:
We offer warranties for the limited number of specific products we manufacture. Our warranty terms generally range from one to three years. We estimate the cost to perform under the warranty obligation and recognize this estimated cost at the time of sale. Each quarter, we assess actual warranty costs incurred on a product-by-product basis and compare the warranty costs to our estimated warranty reserve. With respect to new products, estimates are based generally on knowledge of the products and warranty experience, if a sufficient history exists. See Note 7, Warranties, for further information regarding the impact of warranties concerning ASU 2014-09.
9
Principal versus agent considerations:
Principal versus agent guidance was considered for customized products that are provided by our suppliers versus manufactured by the Company. Richardson acts as the measurement date.principal as we are responsible for satisfying the performance obligation. We test goodwillhave primary responsibility for impairment annually and whenever events or circumstances indicates an impairment mayfulfilling the contract, we have occurred, such as a significant adverse changeinventory risk prior to delivery to our customer, we establish prices, our consideration is not in the business climate, loss of key personnel or a decision to sell or disposeform of a reporting unit.commission and we bear the credit risk. The goodwill balanceCompany recognizes revenue in its entirety relatesthe 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 IMES reporting unit which is included in our Healthcare segment.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 onby quoted market prices in active markets, if available, or recognized valuation models. Intangible assets that have finite useful lives are amortized over their useful lives either on a straight-line basis or over their projected future cash flows and are tested for impairment when events or changes in circumstances occur that indicate possible impairment.
Our intangible assets represent the fair value for trade name, customer relationships, non-compete agreements and technology acquired in connection with our acquisitions. Intangible assets subject to amortization arewere as follows (in thousands):
December 2, 2017 | May 27, 2017 |
| August 31, 2019 |
|
| June 1, 2019 |
| |||||||||
Gross Amounts: |
|
|
|
|
|
|
|
| ||||||||
Trade Name | $ | 659 | $ | 659 |
| $ | 659 |
|
| $ | 659 |
| ||||
Customer Relationships(1) | 3,411 | 3,397 |
|
| 3,384 |
|
|
| 3,394 |
| ||||||
Non-compete Agreements | 177 | 177 |
|
| 177 |
|
|
| 177 |
| ||||||
Technology | 230 | 230 |
|
| 230 |
|
|
| 230 |
| ||||||
Total Gross Amounts | $ | 4,477 | $ | 4,463 |
| $ | 4,450 |
|
| $ | 4,460 |
| ||||
Accumulated Amortization: |
|
|
|
|
|
|
|
| ||||||||
Trade Name | $ | 546 | $ | 441 |
| $ | 659 |
|
| $ | 659 |
| ||||
Customer Relationships | 536 | 446 |
|
| 841 |
|
|
| 796 |
| ||||||
Non-compete Agreements | 100 | 84 |
|
| 144 |
|
|
| 139 |
| ||||||
Technology | 64 | 51 |
|
| 110 |
|
|
| 103 |
| ||||||
Total Accumulated Amortization | $ | 1,246 | $ | 1,022 |
| $ | 1,754 |
|
| $ | 1,697 |
| ||||
Net Intangibles | $ | 3,231 | $ | 3,441 | ||||||||||||
Net Intangible Assets |
| $ | 2,696 |
|
| $ | 2,763 |
|
(1) Change from prior periods reflect impact of foreign currency translation.
(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 |
| Amortization Expense |
| ||||
Remaining 2018 | $ | 216 | ||||||
2019 | 245 | |||||||
2020 | 257 | |||||||
Remaining 2020 |
| $ | 192 |
| ||||
2021 | 245 |
|
| 245 |
| |||
2022 | 253 |
|
| 251 |
| |||
2023 |
|
| 245 |
| ||||
2024 |
|
| 231 |
| ||||
Thereafter | 2,015 |
|
| 1,532 |
| |||
Total amortization expense | $ | 3,231 |
| $ | 2,696 |
|
The weighted average number of years of amortization expense remaining is 16.114.3 years.
5.6. INVESTMENTS
As of December 2, 2017,August 31, 2019, we had approximately $4.1no investments.
As of June 1, 2019, we had $8.0 million invested in time deposits and certificates of deposit (“CD”)CDs which mature in less than twelve months. The fair value of these investments iswas equal to the face value of each time deposit and CD.the CDs.
As of May 27, 2017, we had invested in time deposits and certificates of deposit in the amount of $8.2 million. Of this, $6.4 million mature in less than twelve months and $1.8 million mature in greater than twelve months. The fair value of these investments is the face value of each time deposit and CD.10
We also had investments in equity securities, all of which are classified as available-for-sale and are carried at their fair value based on quoted market prices. Our investments, which are included in non-current assets, had a carrying amount of $0.7 million and $0.6 million as of December 2, 2017 and as of May 27, 2017, respectively. Proceeds from the sale of securities were $0.1 million during the second quarter of fiscal 2018 and during the second quarter of fiscal 2017. We reinvested proceeds from the sale of securities, and the cost of the equity securities sold was based on a specific identification method. Gross realized gains on those sales were less than $0.1 million during the second quarter of fiscal 2018 and during the second quarter of fiscal 2017. Net unrealized holding gains of less than $0.1 million during the second quarter of fiscal 2018 and during the second quarter of fiscal 2017 have been included in accumulated other comprehensive income (loss).
We offer warranties for the limited number of specific products we manufacture. We also provide extended warranties for some products we sell that lengthen the period of coverage specified in the manufacturer’s original warranty. Our warranty terms generally range from one to three years.
We estimate the cost to perform under the warranty obligation and recognize this estimated cost at the time of the related product sale. We record expense related to our warranty obligations as cost of sales in our consolidated statements of comprehensive income (loss).loss. Each quarter, we assess actual warranty costs incurred on a product-by-product basis and compare the warranty costs to our estimated warranty obligation. With respect to new products, estimates are based generally on knowledge of the products the extended warranty period and warranty experience.
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 $0.1$0.3 million as of December 2, 2017August 31, 2019 and as of May 27, 2017.June 1, 2019.
7.8. LEASE OBLIGATIONS, OTHER COMMITMENTS AND CONTINGENCIES
In February 2016, the FASB issued ASU 2016-02 (“ASU 2016-02”), Leases (“Topic 842”). ASU 2016-02 establishes a right-of-use (“ROU”) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.
ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company elects the practical expedients (which must be elected as a package and applied consistently to all of our leases) for which we will not reassess: (1) whether any expired or existing contracts are or contains leases, (2) the lease classification for any expired or existing leases and (3) the initial indirect costs for any existing leases. We have also elected the practical expedient to combine lease and non-lease components for all of our leases. We have adopted an accounting policy to not apply the requirements of Topic 842 to leases with a term of 12 months or less, which the Company has within our facility leases. Short-term leases will be reassessed if events occur that disqualify them from short-term status.
The new standard was effective for the Company on June 2, 2019. The FASB issued ASU 2018-11, targeted improvements to Topic 842, which includes an option to not restate comparative periods in transition and elect to use the effective date of Topic 842 as the date of initial application of transition. We adopted the new standard applying the new transition method allowed under ASU 2018-11. As a result of adopting Topic 842, we recognized operating right-of-use assets of $3.6 million, finance right-of-use assets of $0.5 million, operating lease liabilities of $3.8 million and finance lease liabilities of $0.5 million. Existing deferred rent of $0.2 million was recorded as an offset to our gross operating lease right-of-use assets. Several leases include renewal clauses which vary in length and may not include specific rent renewal amounts. The Company will revise the value of the right of use assets and associated lease liabilities when the Company is reasonably certain warehouseit will renew the lease. The standard did not have a material impact on our results of operations or cash flows.
The gross amounts of assets and office facilitiesliabilities related to both operating and office equipment under non-cancelable operating leases. Rentfinance leases at August 31, 2019 were as follows (in thousands):
Lease Type |
| Amount |
| |
Operating lease ROU asset |
| $ | 3,643 |
|
Finance lease ROU asset |
|
| 464 |
|
Total Lease ROU asset |
| $ | 4,107 |
|
|
|
|
|
|
Operating lease liability current |
| $ | 1,390 |
|
Finance lease liability current |
|
| 151 |
|
Total lease liability current |
| $ | 1,541 |
|
|
|
|
|
|
Operating lease liability non-current |
| $ | 2,386 |
|
Finance lease liability non-current |
|
| 292 |
|
Total lease liability non-current |
| $ | 2,678 |
|
11
The components of lease costs were as follows (in thousands):
Lease Type |
| Classification |
| Three Months Ended August 31, 2019 |
| |
Consolidated operating lease expense |
| Operating expenses |
| $ | 478 |
|
|
|
|
|
|
|
|
Consolidated finance lease amortization |
| Operating expenses |
|
| — |
|
Consolidated finance lease interest |
| Interest expense |
|
| 9 |
|
Consolidated finance lease expense |
|
|
|
| 9 |
|
|
|
|
|
|
|
|
Net lease cost |
|
|
| $ | 487 |
|
The Company recorded $0.4 million of lease expense was $0.9 million duringin the first six monthsquarter of fiscal 20182019.
The approximate future minimum lease payments under operating and $1.0 million during the first six months of fiscal 2017. Our future lease commitments for minimum rentals, including common area maintenance charges and property taxes during the next five years arefinance leases at August 31, 2019 were as follows (in thousands):
Fiscal Year | Payments |
| Operating Leases |
|
| Finance Lease |
|
| Total |
| ||||||
Remaining 2018 | $ | 887 | ||||||||||||||
2019 | 1,613 | |||||||||||||||
2020 | 1,162 | |||||||||||||||
Remaining 2020 |
| $ | 1,164 |
|
| $ | 136 |
|
| $ | 1,300 |
| ||||
2021 | 827 |
|
| 1,354 |
|
|
| 181 |
|
|
| 1,535 |
| |||
2022 | 174 |
|
| 598 |
|
|
| 151 |
|
|
| 749 |
| |||
2023 |
|
| 417 |
|
|
| — |
|
|
| 417 |
| ||||
2024 |
|
| 309 |
|
|
| — |
|
|
| 309 |
| ||||
Thereafter | 195 |
|
| 241 |
|
|
| — |
|
|
| 241 |
| |||
Total lease payments |
|
| 4,083 |
|
|
| 468 |
|
|
| 4,551 |
| ||||
Less imputed interest |
|
| 307 |
|
|
| 25 |
|
|
| 332 |
| ||||
Net minimum lease payments |
| $ | 3,776 |
|
| $ | 443 |
|
| $ | 4,219 |
|
8.
The approximate future minimum lease payments under operating and finance leases at June 1, 2019 were as follows (in thousands):
Fiscal Year (1) |
| Operating Leases |
| |
2020 |
| $ | 1,586 |
|
2021 |
|
| 1,367 |
|
2022 |
|
| 509 |
|
2023 |
|
| 340 |
|
2024 |
|
| 289 |
|
Thereafter |
|
| 234 |
|
(1) | On June 2, 2019, the Company elected the modified retrospective method of transition to adopt the new lease standard Topic 842, which resulted in no restatement of prior period results. At June 1, 2019, prior to adoption of the new lease standard, operating lease obligations were not included as a liability on the balance sheet. Therefore, the operating lease obligations were included in the table for comparative purposes only and the total lease liability was not included as it is not applicable. |
The weighted average remaining lease terms and interest rates of leases held by the Company as of August 31, 2019 were as follows:
Lease Type |
| Weighted Average Remaining Lease Term in Years |
| Weighted Average Interest Rate |
|
Operating leases |
| 3.5 |
| 4.6% |
|
Finance lease |
| 2.6 |
| 4.6% |
|
The cash outflows of the leasing activity of the Company as lessee for the three months ending August 31, 2019 were as follows (in thousands):
Cash Flow Source |
| Classification |
| Amount |
| |
Operating cash flows from operating leases |
| Operating activities |
| $ | 256 |
|
Operating cash flows from finance lease |
| Operating activities |
|
| 25 |
|
Finance cash flows from finance lease |
| Financing activities |
|
| 30 |
|
12
9. INCOME TAXES
We recorded an income tax provision from continuing operations of $0.6$0.2 million and $0.8$0.3 million for the first sixthree months of fiscal 20182020 and the first three months of fiscal 2017,2019, respectively. The effective income tax rate from continuing operations during the first sixthree months of fiscal 20182020 was a tax provision of 90.9%53.0% as compared to a tax provision of (18.3%)38.6% during the first sixthree months of fiscal 2017.2019. The difference in rate during the first sixthree months of fiscal 2018,2020 as compared to the first sixthree months of fiscal 2017,2019 reflects the change in the overall loss realized through the second quarter in each respective period, changes in our geographical distribution of income (loss), the recording of provision to return true-ups of various foreign jurisdictions, the accrual of an uncertain tax position with respect to the ongoing German audit and our positions with respect to ASC 740-30, Income Taxes - Other Considerations or Special Areas (“ASC 740-30”). The 90.9%53.0% effective income tax rate differs from the federal statutory rate of 34.0%21% as a result of our geographical distribution of income (loss), and the recordingmovement of athe valuation allowance against the increase in our U.S. state and federal net deferred tax assets and recognition of an uncertain tax position and preliminary tax assessments with respect to the income tax audit in Germany.
assets.
In the normal course of business, we are subject to examination by taxing authorities throughout the world. Generally, years prior to fiscal 20072009 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). We are also under examination in the state of Illinois for fiscal years 2014 and 2015. Our primary foreign tax jurisdictions are Germany and the Netherlands. During the second quarter of fiscal 2018, the examination in Germany of years 2012-2014 resulted in preliminary findings and a tax assessment and additional uncertain tax position reserve for open tax years have been recorded in the amount of $0.2 million. We have tax years open in Germany beginning in fiscal 2015 and the Netherlands beginning in fiscal 2011.
On September 12, 2017, the Company received an income tax refund from the State of Illinois of approximately $2.0 million, which was inclusive of 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 includes $0.5 million of professional fee costs incurred to pursue the refund, was recognized in the second quarter of fiscal 2018 in discontinued operations.
2012.
We have historically determined that certain undistributed earnings of our foreign subsidiaries, to the extent of cash available, will be repatriated to the U.S. Accordingly, weWe have provided a deferred tax liability totaling $5.7$0.2 million as of December 2, 2017, on foreign earnings of $39.5 million.August 31, 2019. As of December 2, 2017, approximately $6.4 million balance of cumulative positive earnings of some of our foreign subsidiaries are still considered permanently reinvested pursuant to ASC 740-30. Due to various tax attributes that are continuously changing, it is not practicable to determine what, if any,June 1, 2019, the deferred tax liability may exist if such earnings were to be repatriated.
totaled $0.2 million.
As of December 2, 2017,August 31, 2019, our worldwide liability for uncertain tax positions related to continuing operations was $0.1 million, excluding interest and penalties as compared to $0.0 as of May 27, 2017. The change to the$0.1 million liabilities for uncertain tax positions foras of June 1, 2019. There was no change in recorded uncertain tax positions during the second quarterfirst three months of fiscal 2018 was as a result of the preliminary German audit assessments and the related exposure for the open years.2020. We record penalties and interest relatingrelated to uncertain tax positions in the income tax expense line item within the unaudited consolidated statements of income (loss). It is not expected that there will be a change to unrecognized tax benefits within the next 12 months.comprehensive loss.
The valuation allowance against the net deferred tax assets has increased to $9.5 million as of December 2, 2017 driven primarily by the Illinois income tax rate increase and the impact on the overall federal and Illinois deferred tax assets as well as additional domestic federal and state net deferred tax assets generated during the first two quarters of fiscal year 2018 due to additional losses in the U.S. jurisdiction. The valuation allowance against the net deferred tax assets that will more likely than not be realized was $8.5$11.7 million as of May 27, 2017.June 1, 2019. The valuation allowance against the net deferred tax assets was $11.7 million as of August 31, 2019 as no material additional domestic federal and state net deferred tax assets were generated during the first quarter of fiscal 2020 from losses in the U.S. jurisdiction. A full valuation allowance on the U.S. and state deferred tax assets will be maintained until sufficient positive evidence related to sources of future taxable income exists to support a reversal of the valuation allowance. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are increased, or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth.
9.10. CALCULATION OF EARNINGS PER SHARE
We have authorized 17,000,000 shares of common stock, and 3,000,000 shares of Class B common stock. The Class B common stock has 10 votes per share and has transferability restrictions; however, Class B common stock may be converted into common stock on a share-for-share basis at any time. With respect to dividends and distributions, shares of common stock and Class B common stock rank equally and have the same rights, except that Class B common stock cash dividends are limited to 90% of the amount of Class A common stock cash dividends.
In accordance with ASC 260-10, Earnings Per Share (“ASC 260”), our Class B common stock is considered a participating security requiring the use of the two-class method for the computation of basic and diluted earnings per share. The two-class computation method for each period reflects the cash dividends paid per share for each class of stock, plus the amount of allocated undistributed earnings per share computed using the participation percentage which reflects the dividend rights of each class of stock. Basic and diluted earnings per share were computed using the two-class method as prescribed in ASC 260. The shares of Class B common stock are considered to be participating convertible securities since the shares of Class B common stock are convertible on a share-for-share basis into shares of common stock and may participate in dividends with common stock according to a predetermined formula which is 90% of the amount of Class A common stock cash dividends.
13
The earnings per share (“EPS”) presented in our unaudited consolidated statements of comprehensive income (loss) areloss were based on the following amounts (in thousands, except per share amounts):
Three Months Ended | ||||||||||||||||
December 2, 2017 | November 26, 2016 | |||||||||||||||
Basic | Diluted | Basic | Diluted | |||||||||||||
Numerator for Basic and Diluted EPS: | ||||||||||||||||
Income (loss) from continuing operations | $ | 172 | $ | 172 | $ | (2,522 | ) | $ | (2,522 | ) | ||||||
Less dividends: | ||||||||||||||||
Common stock | 647 | 647 | 641 | 641 | ||||||||||||
Class B common stock | 116 | 116 | 116 | 116 | ||||||||||||
Undistributed losses | $ | (591 | ) | $ | (591 | ) | $ | (3,279 | ) | $ | (3,279 | ) | ||||
Common stock undistributed losses | $ | (501 | ) | $ | (501 | ) | $ | (2,779 | ) | $ | (2,779 | ) | ||||
Class B common stock undistributed losses | (90 | ) | (90 | ) | (500 | ) | (500 | ) | ||||||||
Total undistributed losses | $ | (591 | ) | $ | (591 | ) | $ | (3,279 | ) | $ | (3,279 | ) | ||||
Income from discontinued operations | $ | 1,496 | $ | 1,496 | $ | — | $ | — | ||||||||
Less dividends: | ||||||||||||||||
Common stock | 647 | 647 | — | — | ||||||||||||
Class B common stock | 116 | 116 | — | — | ||||||||||||
Undistributed earnings | $ | 733 | $ | 733 | $ | — | $ | — | ||||||||
Common stock undistributed earnings | $ | 622 | $ | 622 | — | — | ||||||||||
Class B common stock undistributed earnings | 111 | 111 | — | — | ||||||||||||
Total undistributed earnings | $ | 733 | $ | 733 | $ | — | $ | — | ||||||||
Net income (loss) | $ | 1,668 | $ | 1,668 | $ | (2,522 | ) | $ | (2,522 | ) | ||||||
Less dividends: | ||||||||||||||||
Common stock | 647 | 647 | 641 | 641 | ||||||||||||
Class B common stock | 116 | 116 | 116 | 116 | ||||||||||||
Undistributed earnings (losses) | $ | 905 | $ | 905 | $ | (3,279 | ) | $ | (3,279 | ) | ||||||
Common stock undistributed earnings (losses) | $ | 768 | $ | 768 | $ | (2,779 | ) | $ | (2,779 | ) | ||||||
Class B common stock undistributed earnings (losses) | 137 | 137 | (500 | ) | (500 | ) | ||||||||||
Total undistributed earnings (losses) | $ | 905 | $ | 905 | $ | (3,279 | ) | $ | (3,279 | ) | ||||||
Denominator for basic and diluted EPS: | ||||||||||||||||
Common stock weighted average shares | 10,755 | 10,755 | 10,703 | 10,703 | ||||||||||||
Class B common stock weighted average shares, and shares under if-converted method for diluted EPS | 2,137 | 2,137 | 2,141 | 2,141 | ||||||||||||
Effect of dilutive securities | ||||||||||||||||
Dilutive stock options | 34 | — | ||||||||||||||
Denominator for diluted EPS adjusted for weighted average shares and assumed conversions | 12,926 | 12,844 | ||||||||||||||
Income (loss) from continuing operations per share: | ||||||||||||||||
Common stock | $ | 0.01 | $ | 0.01 | $ | (0.20 | ) | $ | (0.20 | ) | ||||||
Class B common stock | $ | 0.01 | $ | 0.01 | $ | (0.18 | ) | $ | (0.18 | ) | ||||||
Income from discontinued operations per share: | ||||||||||||||||
Common stock | $ | 0.12 | $ | 0.12 | $ | — | $ | — | ||||||||
Class B common stock | $ | 0.11 | $ | 0.11 | $ | — | $ | — | ||||||||
Net income (loss) per share: | ||||||||||||||||
Common stock | $ | 0.13 | $ | 0.13 | $ | (0.20 | ) | $ | (0.20 | ) | ||||||
Class B common stock | $ | 0.12 | $ | 0.12 | $ | (0.18 | ) | $ | (0.18 | ) |
|
| Three Months Ended |
| |||||||||||||
|
| August 31, 2019 |
|
| September 1, 2018 |
| ||||||||||
|
| Basic |
|
| Diluted |
|
| Basic |
|
| Diluted |
| ||||
Numerator for Basic and Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 157 |
|
| $ | 157 |
|
| $ | 431 |
|
| $ | 431 |
|
Less dividends: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
| 662 |
|
|
| 662 |
|
|
| 648 |
|
|
| 648 |
|
Class B common stock |
|
| 113 |
|
|
| 113 |
|
|
| 116 |
|
|
| 116 |
|
Undistributed losses |
| $ | (618 | ) |
| $ | (618 | ) |
| $ | (333 | ) |
| $ | (333 | ) |
Common stock undistributed losses |
| $ | (527 | ) |
| $ | (527 | ) |
| $ | (283 | ) |
| $ | (283 | ) |
Class B common stock undistributed losses |
|
| (91 | ) |
|
| (91 | ) |
|
| (50 | ) |
|
| (50 | ) |
Total undistributed losses |
| $ | (618 | ) |
| $ | (618 | ) |
| $ | (333 | ) |
| $ | (333 | ) |
Denominator for Basic and Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock weighted average shares |
|
| 10,990 |
|
|
| 10,990 |
|
|
| 10,829 |
|
|
| 10,829 |
|
Class B common stock weighted average shares, and shares under if-converted method for diluted EPS |
|
| 2,097 |
|
|
| 2,097 |
|
|
| 2,132 |
|
|
| 2,132 |
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive stock options |
|
|
|
|
|
| — |
|
|
|
|
|
|
| 153 |
|
Denominator for diluted EPS adjusted for weighted average shares and assumed conversions |
|
|
|
|
|
| 13,087 |
|
|
|
|
|
|
| 13,114 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
| $ | 0.01 |
|
| $ | 0.01 |
|
| $ | 0.03 |
|
| $ | 0.03 |
|
Class B common stock |
| $ | 0.01 |
|
| $ | 0.01 |
|
| $ | 0.03 |
|
| $ | 0.03 |
|
Note: Common stock options that were anti-dilutive and not included in diluted earnings per common share for the second quarter of fiscal 2017 was 893.
12
Six Months Ended | ||||||||||||||||
December 2, 2017 | November 26, 2016 | |||||||||||||||
Basic | Diluted | Basic | Diluted | |||||||||||||
Numerator for Basic and Diluted EPS: | ||||||||||||||||
Income (loss) from continuing operations | $ | 60 | $ | 60 | $ | (5,372 | ) | $ | (5,372 | ) | ||||||
Less dividends: | ||||||||||||||||
Common stock | 1,290 | 1,290 | 1,283 | 1,283 | ||||||||||||
Class B common stock | 231 | 231 | 232 | 232 | ||||||||||||
Undistributed losses | $ | (1,461 | ) | $ | (1,461 | ) | $ | (6,887 | ) | $ | (6,887 | ) | ||||
Common stock undistributed losses | $ | (1,239 | ) | $ | (1,239 | ) | $ | (5,836 | ) | $ | (5,836 | ) | ||||
Class B common stock undistributed losses | (222 | ) | (222 | ) | (1,051 | ) | (1,051 | ) | ||||||||
Total undistributed losses | $ | (1,461 | ) | $ | (1,461 | ) | $ | (6,887 | ) | $ | (6,887 | ) | ||||
Income from discontinued operations | $ | 1,496 | $ | 1,496 | $ | — | $ | — | ||||||||
Less dividends: | ||||||||||||||||
Common stock | 1,290 | 1,290 | — | — | ||||||||||||
Class B common stock | 231 | 231 | — | — | ||||||||||||
Undistributed losses | $ | (25 | ) | $ | (25 | ) | $ | — | $ | — | ||||||
Common stock undistributed losses | $ | (21 | ) | $ | (21 | ) | $ | — | $ | — | ||||||
Class B common stock undistributed losses | (4 | ) | (4 | ) | — | — | ||||||||||
Total undistributed losses | $ | (25 | ) | $ | (25 | ) | $ | — | $ | — | ||||||
Net income (loss) | $ | 1,556 | $ | 1,556 | $ | (5,372 | ) | $ | (5,372 | ) | ||||||
Less dividends: | ||||||||||||||||
Common stock | 1,290 | 1,290 | 1,283 | 1,283 | ||||||||||||
Class B common stock | 231 | 231 | 232 | 232 | ||||||||||||
Undistributed earnings (losses) | $ | 35 | $ | 35 | $ | (6,887 | ) | $ | (6,887 | ) | ||||||
Common stock undistributed earnings (losses) | $ | 30 | $ | 30 | $ | (5,836 | ) | $ | (5,836 | ) | ||||||
Class B common stock undistributed earnings (losses) | 5 | 5 | (1,051 | ) | (1,051 | ) | ||||||||||
Total undistributed earnings (losses) | $ | 35 | $ | 35 | $ | (6,887 | ) | $ | (6,887 | ) | ||||||
Denominator for basic and diluted EPS: | ||||||||||||||||
Common stock weighted average shares | 10,734 | 10,734 | 10,703 | 10,703 | ||||||||||||
Class B common stock weighted average shares, and shares under if-converted method for diluted EPS | 2,137 | 2,137 | 2,141 | 2,141 | ||||||||||||
Effect of dilutive securities | ||||||||||||||||
Dilutive stock options | 30 | — | ||||||||||||||
Denominator for diluted EPS adjusted for weighted average shares and assumed conversions | 12,901 | 12,844 | ||||||||||||||
Income (loss) from continuing operations per share: | ||||||||||||||||
Common stock | $ | — | $ | — | $ | (0.43 | ) | $ | (0.43 | ) | ||||||
Class B common stock | $ | — | $ | — | $ | (0.38 | ) | $ | (0.38 | ) | ||||||
Income from discontinued operations per share: | ||||||||||||||||
Common stock | $ | 0.12 | $ | 0.12 | $ | — | $ | — | ||||||||
Class B common stock | $ | 0.11 | $ | 0.11 | $ | — | $ | — | ||||||||
Net income (loss) per share: | ||||||||||||||||
Common stock | $ | 0.12 | $ | 0.12 | $ | (0.43 | ) | $ | (0.43 | ) | ||||||
Class B common stock | $ | 0.11 | $ | 0.11 | $ | (0.38 | ) | $ | (0.38 | ) | ||||||
Note: Common stock options that were anti-dilutive and not included in diluted earnings per common share for the first six monthsquarter of fiscal 2017 was 893.2020 were 1,502.
13
10.11. SEGMENT REPORTING
In accordance with ASC 280-10, Segment Reporting, we have identified three operating and reportable segments as follows:
Power and Microwave Technologies Group (“PMT”)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.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 (“OEM”) markets.
Our engineers design, manufacture, source and support a full spectrum of solutions to match the needs of our customers. We offer long term availability and proven custom display solutions that include touch screens, protective panels, custom enclosures, all-in-ones, specialized cabinet finishes and application specific software packages and certification services. We partner with both private label manufacturing companies and leading branded hardware vendors to offer the highest quality display and touch solutions and customized computing platforms.
Healthcare manufactures, refurbishes and distributes high value replacement parts for the healthcare market including hospitals, medical centers, asset management companies, independent service organizations and multi-vendor service providers. Products include Diagnostic Imaging replacement parts for CT and MRI systems; replacement CT and MRI tubes; CT service training; MRI coils, cold heads and RF amplifiers; hydrogen thyratrons, klystrons, magnetrons; flat panel detector upgrades; and additional replacement solutions currently under development for the diagnostic imaging service market. Through a combination of newly developed products and partnerships, service offerings and training programs, we believe we can help our customers improve efficiency and deliver better clinical outcomes while lowering the cost of healthcare delivery.
14
The CEO evaluates performance and allocates resources primarily based on the gross profit of each segment.
Operating results by segment are summarized in the following table (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
December 2, | November 26, | December 2, | November 26, |
| Three Months Ended |
| ||||||||||||||||||
2017 | 2016 | 2017 | 2016 |
| August 31, 2019 |
|
| September 1, 2018 |
| |||||||||||||||
PMT |
|
|
|
|
|
|
|
| ||||||||||||||||
Net Sales | $ | 30,063 | $ | 25,229 | $ | 59,187 | $ | 50,610 |
| $ | 30,567 |
|
| $ | 34,769 |
| ||||||||
Gross Profit | 10,262 | 8,273 | 19,836 | 15,728 |
|
| 9,679 |
|
|
| 11,007 |
| ||||||||||||
Canvys |
|
|
|
|
|
|
|
| ||||||||||||||||
Net Sales | $ | 6,707 | $ | 5,439 | $ | 12,472 | $ | 10,059 |
| $ | 7,277 |
|
| $ | 7,173 |
| ||||||||
Gross Profit | 2,128 | 1,543 | 3,674 | 2,891 |
|
| 2,321 |
|
|
| 2,313 |
| ||||||||||||
Healthcare |
|
|
|
|
|
|
|
| ||||||||||||||||
Net Sales | $ | 2,312 | $ | 3,159 | $ | 4,418 | $ | 6,531 |
| $ | 2,809 |
|
| $ | 2,215 |
| ||||||||
Gross Profit | 984 | 1,148 | 2,012 | 2,585 |
|
| 951 |
|
|
| 633 |
|
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 | Six Months Ended | |||||||||||||||||||||||
December 2, | November 26, | December 2, | November 26, |
| Three Months Ended |
| ||||||||||||||||||
2017 | 2016 | 2017 | 2016 |
| August 31, 2019 |
|
| September 1, 2018 |
| |||||||||||||||
Net Sales |
|
|
|
|
|
|
|
| ||||||||||||||||
North America | $ | 15,846 | $ | 14,059 | $ | 30,909 | $ | 27,108 |
| $ | 17,234 |
|
| $ | 17,023 |
| ||||||||
Asia/Pacific | 7,457 | 6,621 | 14,467 | 14,276 |
|
| 8,523 |
|
|
| 9,542 |
| ||||||||||||
Europe | 13,615 | 11,204 | 26,115 | 21,468 |
|
| 12,924 |
|
|
| 14,756 |
| ||||||||||||
Latin America | 2,141 | 1,956 | 4,560 | 4,346 |
|
| 1,978 |
|
|
| 2,814 |
| ||||||||||||
Other (1) | 23 | (13 | ) | 26 | 2 |
|
| (6 | ) |
|
| 22 |
| |||||||||||
Total | $ | 39,082 | $ | 33,827 | $ | 76,077 | $ | 67,200 |
| $ | 40,653 |
|
| $ | 44,157 |
| ||||||||
Gross Profit |
|
|
|
|
|
|
|
| ||||||||||||||||
North America | $ | 6,186 | $ | 4,947 | $ | 11,792 | $ | 9,832 |
| $ | 6,307 |
|
| $ | 6,587 |
| ||||||||
Asia/Pacific | 2,545 | 2,369 | 4,925 | 4,927 |
|
| 2,593 |
|
|
| 3,005 |
| ||||||||||||
Europe | 4,484 | 3,747 | 8,589 | 6,776 |
|
| 4,131 |
|
|
| 4,523 |
| ||||||||||||
Latin America | 854 | 777 | 1,818 | 1,694 |
|
| 700 |
|
|
| 1,066 |
| ||||||||||||
Other (1) | (695 | ) | (876 | ) | (1,602 | ) | (2,025 | ) |
|
| (780 | ) |
|
| (1,228 | ) | ||||||||
Total | $ | 13,374 | $ | 10,964 | $ | 25,522 | $ | 21,204 |
| $ | 12,951 |
|
| $ | 13,953 |
|
(1) | Other includes primarily net sales not allocated to a specific geographical region, unabsorbed value-add costs and other unallocated expenses. |
We sell our products to customers in diversified industries and perform periodic credit evaluations of our customers’ financial condition. Terms are generally on open account, payable net 30 days in North America, and vary throughout Asia/Pacific, Europe and Latin America. Estimates of credit losses are recorded in the financial statements based on monthly reviews of outstanding accounts.
11.12. LITIGATION
On December 5, 2017, Steven H. BuschOctober 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 Verified Stockholder Derivative Complaint against Edward J.motion for preliminary injunction to stop the sale of Richardson’s ALTA750TM product. Richardson Paul Plante, Jacques Belin, James Benham, Kenneth Halverson, andfiled an opposition to the Company inpreliminary injunction. In January 2019, the Delaware Court of Chancery, captioned Steven H. Busch v. Edward J.took evidence on the preliminary injunction issue. On September 30, 2019, the Court soundly denied Varex’s Motion for Preliminary Injunction. Richardson et al., C.A. No. 2017-0868-AGB. The lawsuit alleges claims for breach of fiduciary duty by the Company’s directors and challenges the decision of a special committee of the Company’s Board to refuse Mr. Busch’s demand that the Company’s Board, among other things, rescind the Company’s May 2013 repurchase of stock from Mr. Richardson and May 2013 and October 2014 repurchases of Company stock from the Richardson Wildlife Foundation. The Company believes the lawsuit to be without merit and that a loss is not probable or estimable based on the information available at the time the financial statements were issued.
12.15
ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements.
ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists; therefore requiring an entity to develop its own assumptions.
As of December 2, 2017 and May 27, 2017,August 31, 2019, we held no investments that arewere required to be measured at fair value on a recurring basis. Our investments consist of time deposits and CDs, where face value is equal to fair value, and equity securities of publicly traded companies for which market prices are readily available.
Investments measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 as of December 2, 2017 and May 27, 2017, were as follows (in thousands):
Level 1 | ||||
December 2, 2017 | ||||
Time deposits/CDs | $ | 4,136 | ||
Equity securities | 686 | |||
Total | $ | 4,822 | ||
May 27, 2017 | ||||
Time deposits/CDs | $ | 8,226 | ||
Equity securities | 622 | |||
Total | $ | 8,848 |
13. Related Party Transaction
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 provides for monthly payments over five years with total future minimum lease payments of $0.4$0.1 million. Rental expense related to this lease amounted to less than $0.1 million for the sixthree months ended December 2, 2017August 31, 2019 and for the sixthree months ended November 26, 2016.September 1, 2018. The Company shall be entitled to extend the term of the lease for a period of an additional five years by notifying the landlord in writing of its intention to do so within ninesix months of the expiration of the initial term.
16
14. SUBSEQUENT EVENT
On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) enacted significant changes to many elements of the United States Federal Internal Revenue Code. Due to the recent enactment of the TCJA and expected further rulemaking and future regulatory guidance, a comprehensive estimate of the overall tax impact to the Company cannot be made at this time. However, the Company anticipates that in the third quarter of fiscal 2018, the TCJA will potentially result in a discrete tax impact related to revaluing our U.S. federal deferred tax assets and liabilities, a discrete tax impact associated with currently including incremental earnings from our non-U.S. entities in the U.S. federal income tax base and a change to the Company’s fiscal 2018 estimated annual tax rate due to the tax rate reduction. These changes will impact the Company’s fiscal 2018 third quarter deferred income tax assets and liabilities on the Consolidated Balance Sheet. Certain adjustments, but not all, will be offset by an adjustment to the valuation allowance. The impact on the Company’s cash flow from operations cannot be reasonably determined at this time.
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Certain statements in this report may constitute “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. The terms “may,” “should,” “could,” “anticipate,” “believe,” “continues,” “estimate,” “expect,” “intend,” “objective,” “plan,” “potential,” “project” and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. These statements are based on management’s current expectations, intentions or beliefs and are subject to a number of factors, assumptions and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Factors that could cause or contribute to such differences or that might otherwise impact the business include the risk factors set forth in Item 1A, of our Annual Report on Form 10-K filed on July 31, 2017.August 5, 2019. We undertake no obligation to update any such factor or to publicly announce the results of any revisions to any forward-looking statements contained herein whether as a result of new information, future events or otherwise.
In addition, while we do, from time to time, communicate with securities analysts, it is against our policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.
INTRODUCTION
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to assist the reader in better understanding our business, results of operations, financial condition, changes in financial condition, critical accounting policies and estimates and significant developments. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes appearing elsewhere in this filing. This section is organized as follows:
Business Overview – a brief synopsis of our Company for the periods ended August 31, 2019 and September 1, 2018.
Results of Operations – an analysis and comparison of our consolidated results of operations for the three month periods ended August 31, 2019 and September 1, 2018, as reflected in our consolidated statements of comprehensive loss.
Liquidity, Financial Position and Capital Resources – a discussion of our primary sources and uses of cash for the three month periods ended August 31, 2019 and September 1, 2018, and a discussion of changes in our financial position.
Business Overview
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.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.
17
Canvys provides customized display solutions serving the corporate enterprise, financial, healthcare, industrial and medical original equipment manufacturers (“OEM”) 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. Our volume commitments are lower than the large display manufacturers, making us the ideal choice for companies with very specific design requirements. We partner with both private label manufacturing companies and leading branded hardware vendors to offer the highest quality display and touch solutions and customized computing platforms.
Healthcare manufactures, refurbishes and distributes high value replacement parts for the healthcare market including hospitals, medical centers, asset management companies, independent service organizations and multi-vendor service providers. Products include Diagnostic Imaging replacement parts for CT and MRI systems; replacement CT and MRI tubes; CT service training; MRI coils, cold heads and RF amplifiers; hydrogen thyratrons, klystrons, magnetrons; flat panel detector upgrades; and additional replacement solutions currently under development for the diagnostic imaging service market. Through a combination of newly developed products and partnerships, service offerings and training programs, we believe we can help our customers improve efficiency and deliver better clinical outcomes while lowering the cost of healthcare delivery.
We currently have operations in the following major geographic regions: North America, Asia/Pacific, Europe and Latin America.
RESULTS OF CONTINUING OPERATIONS
Financial Summary – Three Months Ended December 2, 2017August 31, 2019
Financial Summary – Six Months Ended December 2, 2017
18 The first three months of fiscal 2020 and fiscal 2019 each contained 13 weeks.
Net sales during the first quarter of fiscal 2020 were $40.7 million, a decrease of 7.9%, compared to net sales of $44.2 million during the first quarter of fiscal 2019.
Gross margin increased to 31.9% during the first quarter of fiscal 2020 compared to 31.6% during the first quarter of fiscal 2019.
Selling, general and administrative expenses were $12.8 million, or 31.6% of net sales, during the first quarter of fiscal 2020 compared to $13.1 million, or 29.7% of net sales, during the first quarter of fiscal 2019.
Operating income during the first quarter of fiscal 2020 was $0.1 million compared to an operating income of $0.9 million during the first quarter of fiscal 2019.
Net income during the first quarter of fiscal 2020 was $0.2 million compared to net income of $0.4 million during the first quarter of fiscal 2019.
Net Sales and Gross Profit Analysis
Net sales by segment and percent change forduring the secondfirst quarter and first six months of fiscal 20182020 and 2017fiscal 2019 were as follows (in thousands):
Net Sales | Three Months Ended | FY18 vs. FY17 | ||||||||||
December 2, 2017 | November 26, 2016 | % Change | ||||||||||
PMT | $ | 30,063 | $ | 25,229 | 19.2 | % | ||||||
Canvys | 6,707 | 5,439 | 23.3 | % | ||||||||
Healthcare | 2,312 | 3,159 | -26.8 | % | ||||||||
Total | $ | 39,082 | $ | 33,827 | 15.5 | % |
Six Months Ended | FY18 vs. FY17 | |||||||||||||||||||||||
Net Sales |
| Three Months Ended |
|
| FY20 vs. FY19 |
| ||||||||||||||||||
December 2, 2017 | November 26, 2016 | % Change |
| August 31, 2019 |
|
| September 1, 2018 |
|
| % Change |
| |||||||||||||
PMT | $ | 59,187 | $ | 50,610 | 16.9 | % |
| $ | 30,567 |
|
| $ | 34,769 |
|
|
| -12.1 | % | ||||||
Canvys | 12,472 | 10,059 | 24.0 | % |
|
| 7,277 |
|
|
| 7,173 |
|
|
| 1.4 | % | ||||||||
Healthcare | 4,418 | 6,531 | -32.4 | % |
|
| 2,809 |
|
|
| 2,215 |
|
|
| 26.8 | % | ||||||||
Total | $ | 76,077 | $ | 67,200 | 13.2 | % |
| $ | 40,653 |
|
| $ | 44,157 |
|
|
| -7.9 | % |
During the secondfirst quarter of fiscal 20182020, consolidated net sales increased 15.5%decreased 7.9% compared to the secondfirst quarter of fiscal 2017.2019. Sales for PMT increased 19.2%decreased 12.1%, sales for Canvys increased 23.3%1.4% and sales for Healthcare decreasedincreased 26.8%. The increasedecrease in PMT was mainly due to sales of power grid tubes as well as specialty products manufactureda continued slowdown in LaFox which are sold into the semiconductor capitalwafer fab equipment market, and salesslightly offset by growth from new technology partners inour power conversion and RF and microwave components. The increase for Canvys was primarily due to increased customer demand in our European market. The decrease in Richardson Healthcare was due to the sale of the PACS display business at the end of fiscal 2017 which was partially offset by higher sales of certified pre-owned CT tubes.
During the first six months of fiscal 2018 consolidated net sales increased 13.2% compared to the first six months of fiscal 2017. Sales for PMT increased 16.9%, sales for Canvys increased 24.0%, and sales for Healthcare decreased 32.4%. The increase in PMT was due to specialty products manufactured in LaFox sold to the semiconductor capital market and new technology partners in power conversion and RF and microwave components. The increase for Canvys was due to increased customer demand in ourits North American and European markets.market. The decreaseincrease in Richardson Healthcare was due to the sale of the PACS display business at the end of fiscal 2017 which was partially offset by higher sales of refurbished equipmentCT tube and certified pre-owned CT tubes.parts sales.
18
Gross profit by segment and percent of net sales for the secondfirst quarter and first six months of fiscal 20182020 and 2017fiscal 2019 were as follows (in thousands):
Gross Profit | Three Months Ended |
| Three Months Ended |
| ||||||||||||||||||||||||||||
December 2, 2017 | % of Net Sales | November 26, 2016 | % of Net Sales |
| August 31, 2019 |
|
| % of Net Sales |
|
| September 1, 2018 |
|
| % of Net Sales |
| |||||||||||||||||
PMT | $ | 10,262 | 34.1 | % | $ | 8,273 | 32.8 | % |
| $ | 9,679 |
|
|
| 31.7 | % |
| $ | 11,007 |
|
|
| 31.7 | % | ||||||||
Canvys | 2,128 | 31.7 | % | 1,543 | 28.4 | % |
|
| 2,321 |
|
|
| 31.9 | % |
|
| 2,313 |
|
|
| 32.2 | % | ||||||||||
Healthcare | 984 | 42.6 | % | 1,148 | 36.3 | % |
|
| 951 |
|
|
| 33.9 | % |
|
| 633 |
|
|
| 28.6 | % | ||||||||||
Total | $ | 13,374 | 34.2 | % | $ | 10,964 | 32.4 | % |
| $ | 12,951 |
|
|
| 31.9 | % |
| $ | 13,953 |
|
|
| 31.6 | % |
Six Months Ended | ||||||||||||||||
December 2, 2017 | % of Net Sales | November 26, 2016 | % of Net Sales | |||||||||||||
PMT | $ | 19,836 | 33.5 | % | $ | 15,728 | 31.1 | % | ||||||||
Canvys | 3,674 | 29.5 | % | 2,891 | 28.7 | % | ||||||||||
Healthcare | 2,012 | 45.5 | % | 2,585 | 39.6 | % | ||||||||||
Total | $ | 25,522 | 33.5 | % | $ | 21,204 | 31.6 | % |
Gross profit reflects the distribution and manufacturing product margin less manufacturing variances, inventory obsolescence charges, customer returns, scrap and cycle count adjustments, engineering costs unabsorbed manufacturing labor and overhead, and other provisions.
Consolidated gross profit increaseddecreased to $13.4$13.0 million during the secondfirst quarter of fiscal 2018,2020 compared to $11.0$14.0 million during the secondfirst quarter of fiscal 2017.2019. Consolidated gross margin as a percentage of net sales increased to 34.2%31.9% during the secondfirst quarter of fiscal 2018,2020 from 32.4%31.6% during the secondfirst quarter of fiscal 2017,2019, primarily due to favorable product mix and manufacturing over absorption for PMT, favorableHealthcare somewhat offset by unfavorable product mix and lower costs on selected productsunfavorable foreign exchange rates for CanvysCanvys.
Power and the sale of the PACS display business, which generated lower margins in our Healthcare business.Microwave Technologies Group
Consolidated gross profit increasedPMT net sales decreased 12.1% to $25.5$30.6 million during the first six monthsquarter of fiscal 2018, compared to $21.22020 from $34.8 million during the first six months of fiscal 2017. Consolidated gross margin as a percentage of net sales increased to 33.5% during the first six months of fiscal 2018, from 31.6% during the first six months of fiscal 2017, primarily due to favorable product mix for PMT, favorable product mix and lower costs on selected products for Canvys and the sale of the PACS display business, which generated lower margins in our Healthcare business.
Power and Microwave Technologies Group
PMT net sales increased 19.2% to $30.1 million during the second quarter of fiscal 2018, from $25.2 million during2019. The decrease was mainly due to a decline in the second quarter of fiscal 2017. The increase included sales of power grid tubes as well as specialty products manufactured in LaFox which are sold primarily into the semiconductor capitalwafer fab equipment market, and salesslightly offset by growth from new technology partners inour power conversion and RF and microwave components. Gross margin as a percentage of net sales increased to 34.1%was 31.7% during the secondfirst quarter of fiscal 2018,2020, the same as compared to 32.8%31.7% during the secondfirst quarter of fiscal 2017, due to product mix and favorable manufacturing results from our LaFox production facility.2019.
Canvys
PMTCanvys net sales increased 16.9%1.4% to $59.2$7.3 million during the first six monthsquarter of fiscal 2018,2020 from $50.6$7.2 million during the first six monthsquarter of fiscal 2017. The increase included2019 due to increased customer demand in its North American market. Gross margin as a percentage of net sales decreased to 31.9% during the first quarter of specialty products manufactured in LaFox which are sold primarily intofiscal 2020 as compared to 32.2% during the semiconductor capital equipment marketfirst quarter of fiscal 2019, due to unfavorable product mix and foreign exchange.
Healthcare
Healthcare net sales increased 26.8% to $2.8 million during the first quarter of fiscal 2020 from new technology partners in power conversion$2.2 million during the first quarter of fiscal 2019 due to higher CT tube and RF and microwave components.parts sales. Gross margin as a percentage of net sales increased to 33.5%33.9% during the first six monthsquarter of fiscal 2018,2020 as compared to 31.1%28.6% during the six months of fiscal 2017, due to favorable product mix.
Canvys
Canvys net sales increased 23.3% to $6.7 million during the secondfirst quarter of fiscal 2018, from $5.4 million during the second quarter of fiscal 2017 primarily due to increased customer demand in our European market. Gross margin as a percentage of net sales increased to 31.7% during the second quarter of fiscal 2018 as compared to 28.4% during the second quarter of fiscal 2017,2019 due to favorable product mix and lower costs on selected products sold.manufacturing over absorption.
Canvys net sales increased 24.0% to $12.5 million during the first six months of fiscal 2018, from $10.1 million during the first six months of fiscal 2017 due to increased customer demand in our North American and European markets. Gross margin as a percentage of net sales increased to 29.5% during the first six months of fiscal 2018 as compared to 28.7% during the first six months of fiscal 2017, due to favorable product mix and lower costs on selected products sold.
Healthcare
Healthcare net sales decreased 26.8% to $2.3 million during the second quarter of fiscal 2018, from $3.2 million during the second quarter of fiscal 2017 due to the sale of the PACS display business at the end of fiscal 2017, partially offset by an increase in the sales of certified pre-owned CT Tubes. Gross margin as a percentage of net sales increased to 42.6% during the second quarter of fiscal 2018 as compared to 36.3% during the second quarter of fiscal 2017 due to the sale of the PACS display business, which generated lower margins.
Healthcare net sales decreased 32.4% to $4.4 million during the first six months of fiscal 2018, from $6.5 million during the first six months of fiscal 2017 due to the sale of the PACS display business at the end of fiscal 2017, partially offset by an increase in the sales of certified pre-owned CT Tubes and Equipment. Gross margin as a percentage of net sales increased to 45.5% during the first six months of fiscal 2018 as compared to 39.6% during the first six months of fiscal 2017 due to the sale of the PACS display business, which generated lower margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A“) decreased to $12.6 million during the second quarter of fiscal 2018 from $13.4 million to the second quarter of fiscal 2017. The decrease was due to a charge of $1.3 million in the second quarter of fiscal 2017 for severance expense related to a reduction in workforce, partially offset by higher research and development expenses as well as increased investment costs to support our growth strategies in PMT and Healthcare. Operating expenses as a percent of sales decreased to 32.2% in the current quarter from 35.7% last year when excluding the severance expense from the second quarter of fiscal 2017.
Selling, general and administrative expenses (“SG&A“) decreased to $24.9$12.8 million during the first six monthsquarter of fiscal 20182020 from $25.7 million during the first six months of fiscal 2017. The decrease was due to a charge of $1.3$13.1 million in the secondfirst quarter of fiscal 2017 for severance expense related2019, primarily due to a reduction in workforce, partially offset by higher researchlower employee benefits, IT and development expenses as well as increased investment costs to support our growth strategies in PMT and Healthcare.bad debt expenses.
Other Income/Expense
Other income/expense was $0.1 million of expense during the second quarter of fiscal 2018, compared to income of $0.2 million during the secondfirst quarter of fiscal 2017.2020, compared to expense of $0.2 million during the first quarter of fiscal 2019. Other income/expense during the secondfirst quarter of fiscal 20182020 included $0.1 million of investment/interest income and $0.1 million of foreign exchange losses.gains. Other incomeincome/expense during the secondfirst quarter of fiscal 20172019 included $0.2$0.3 million of foreign exchange gains.losses and $0.1 million of investment/interest income. Our foreign exchange gains and losses are primarily due to the translation of U.S. dollars held in non-U.S. entities. We currently do not utilize derivative instruments to manage our exposure to foreign currency.
Other income/expense was $0.1 million of expense during the first six months of fiscal 2018, compared to expense of $0.1 million during the first six months of fiscal 2017. Other expense during the first six months of fiscal 2018 included $0.3 million of foreign exchange losses partially offset by $0.2 million of investment/interest income. Other expense during the first six months of fiscal 2017 included $0.1 million of foreign exchange losses. Our foreign exchange gains and losses are primarily due to the translation of U.S. dollars held in non-U.S. entities. We currently do not utilize derivative instruments to manage our exposure to foreign currency.
Income Tax Provision
We recorded an income tax provision from continuing operations of $0.6$0.2 million and $0.8$0.3 million for the first sixthree months of fiscal 20182020 and the first three months of fiscal 2017,2019, respectively. The effective income tax rate from continuing operations during the first sixthree months of fiscal 20182020 was a tax provision of 90.9%53.0% as compared to a tax provision of (18.3%)38.6% during the first sixthree months of fiscal 2017.2019. The difference in rate during the first sixthree months of fiscal 2018,2020 as compared to the first sixthree months of fiscal 2017,2019 reflects the change in the overall loss realized through the second quarter in each respective period, changes in our geographical distribution of income (loss), the recording of provision to return true-ups of various foreign jurisdictions, the accrual of an uncertain tax position with respect to the ongoing German audit and our positions with respect to ASC 740-30, Income Taxes - Other Considerations or Special Areas (“ASC 740-30”). The 90.9%53.0% effective income tax rate differs from the federal statutory rate of 34.0%21% as a result of our geographical distribution of income (loss), and the recordingmovement of athe valuation allowance against the increase in our U.S. state and federal net deferred tax assets and recognition of an uncertain tax position and preliminary tax assessments with respect to the income tax audit in Germany. assets.
In the normal course of business, we are subject to examination by taxing authorities throughout the world. Generally, years prior to fiscal 20072009 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). We are also under examination in the state of Illinois for fiscal years 2014 and 2015. Our primary foreign tax jurisdictions are Germany and the Netherlands. During the second quarter of fiscal 2018, the examination in Germany of years 2012-2014 resulted in preliminary findings and a tax assessment and additional uncertain tax position reserve for open tax years have been recorded in the amount of $0.2 million. We have tax years open in Germany beginning in fiscal 2015 and the Netherlands beginning in fiscal 2011.2012.
Recently Issued Accounting Standards19
In March 2016, the FASB issued ASU No. 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”, a new accounting standard update intended to simplify several aspects of the accounting for share-based payment transactions including: income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. Specifically, the update requires that excess tax benefits and tax deficiencies (the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes) be recognized as income tax expense or benefit in the consolidated statements of comprehensive income (loss), introducing a new element of volatility to the provision for income taxes. This update is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted. The Company adopted the ASU on May 28, 2017. Effective with the adoption of the ASU all share-based awards continue to be accounted for as equity awards, excess tax benefits recognized on stock-based compensation expense are reflected in the consolidated statements of comprehensive income (loss) as a component of the provision for income taxes on a prospective basis, excess tax benefits recognized on stock-based compensation expense are classified as an operating activity in the consolidated statements of cash flows on a prospective basis and the Company has elected to continue to estimate expected forfeitures over the course of a vesting period. The adoption of the ASU had no impact on the retained earnings, other components of equity or net assets as of the beginning of the period of adoption.
Net Income (Loss) and Per Share Data
Net income including income from discontinued operations of $1.5 million, during the secondfirst quarter of fiscal 20182020 was $1.7$0.2 million or $0.13$0.01 per diluted common share and $0.12$0.01 per Class B diluted common share as compared to net lossincome of $2.5$0.4 million during the secondfirst quarter of fiscal 2017,2019 or ($0.20)$0.03 per diluted common share and ($0.18)$0.03 per Class B diluted common share.
Net income, including income from discontinued operations of $1.5 million, during the first six months of fiscal 2018 was $1.6 million, or $0.12 per diluted common share and $0.11 per Class B diluted common share, as compared to net loss of $5.4 million during the first six months of fiscal 2017, or ($0.43) per diluted common share and ($0.38) per Class B diluted common share.
LIQUIDITY, FINANCIAL POSITION AND CAPITAL RESOURCES
Our operations and cash needs have been primarily financed through income from operations and cash on hand.
Cash and cash equivalents were $54.5$46.5 million at December 2, 2017. Investments included CDs and time deposits classified as short-term investments of $4.1 million and long-term investments in equity securities of $0.7 million.August 31, 2019. Cash and investments at December 2, 2017,August 31, 2019 consisted of $8.8$24.5 million in North America, $17.6$14.6 million in Europe, $1.5$0.8 million in Latin America and $31.4$6.6 million in Asia/Pacific.
Cash, and cash equivalents and investments were $55.4$50.0 million at May 27, 2017. Investments included CD’s and time deposits, classified as short-term investments were $6.4 million and long-term investments were $2.4 million including equity securities of $0.6 million.June 1, 2019. Cash, cash equivalents and investments at May 27, 2017,June 1, 2019, consisted of $16.3$21.5 million in North America, $15.5$17.8 million in Europe, $1.5$0.9 million in Latin America and $30.9$9.8 million in Asia/Pacific. DuringWe repatriated $2.3 million total cash from our entities in Japan and Korea in fiscal 2019 and $5.9 million total cash from our entities in Germany and France in fiscal 2019. Although the first quarter of fiscal 2017, we completed aTax Cuts and Jobs Act generally eliminated federal income tax on future cash repatriation to the United States, cash repatriation may be subject to state and local taxes, withholding or similar taxes. See Note 9 “Income Taxes” of $11.3 million, which included a return of capital and dividend from our Chinese entitythe notes to our U.S. parent company.
consolidated financial statements in Part II, Item 8 of our Form 10-K for the year ended June 1, 2019, filed with the SEC on August 5, 2019, for further information.
We believe that the existing sources of liquidity, including current cash, will provide sufficient resources to meet known capital requirements and working capital needs through the next twelve months.
Cash Flows from Operating Activities
The cash used in operating activities primarily resulted from adjustmentsnet income adjusted for non-cash items and changes in our operating assets and liabilities.
Operating activities used $2.3$2.1 million of cash during the first sixthree months of fiscal 2018.2020. We had net income of $1.6$0.2 million during the first sixthree months of fiscal 2018,2020, which included non-cash stock-based compensation expense of $0.3$0.2 million associated with the issuance of stock option and restricted stock awards, $0.2 million for inventory reserve provisions and depreciation and amortization expense of $1.5$0.8 million associated with our property and equipment as well as amortization of our intangible assets. Changes in our operating assets and liabilities resulted in a use of cash of $3.3 million during the first sixthree months of fiscal 2018,2020, net of foreign currency exchange gains and losses, included a decrease of $4.0 million in accounts payable, an increase in inventoriesinventory of $4.6$1.4 million, a decrease in accrued liabilities of $1.0$0.9 million partially offset by a decrease in accounts receivable of $2.2 million and a decrease of $0.6 million in prepaid expenses and other assets. The decrease in our accounts payable was due to timing of payments for some of our larger vendors for both inventory and services. The majority of the inventory increase was to support the continued growth of our RF and Power Technologies group.
Operating activities used $3.6 million of cash during the first three months of fiscal 2019. We had net income of $0.4 million during the first three months of fiscal 2019, which included non-cash stock-based compensation expense of $0.2 million associated with the issuance of stock option and restricted stock awards, $0.2 million for inventory reserve provisions and depreciation and amortization expense of $0.8 million associated with our property and equipment as well as amortization of our intangible assets. Changes in our operating assets and liabilities resulted in a use of cash of $5.3 million during the first three months of fiscal 2019, net of foreign currency exchange gains and losses, included a decrease of $5.4 million in accounts payable and an increase in prepaid expenses and other assetsaccounts receivable of $0.6 million. The inventory increase was due to the ongoing growth of our RF and power technologies business,$0.2 million, partially offset by an increase in raw material and work in process supporting the semiconductor capital equipment market and growth in supplying replacement systems and parts to the Healthcare market.accrued liabilities of $0.2 million. The decrease in our accounts payable was due to timing of payments for some of our larger vendors for both inventory and services.
Operating activities used $1.9 million of cash during the first six months of fiscal 2017. We had net loss of $5.4 million during the first six months of fiscal 2017, which included non-cash stock-based compensation expense of $0.3 million associated with the issuance of stock option awards, deferred income tax credit adjustment of $0.3 million, and depreciation and amortization expense of $1.3 million associated with our property and equipment as well as amortization of our intangible assets. Changes in our operating assets and liabilities during the first six months of fiscal 2017, net of foreign currency exchange gains and losses, included an increase of $1.0 million in prepaid expenses and a decrease of $3.2 million in accounts payable, partially offset by decreases in receivables of $3.9 million, inventories of $1.6 million, and an increase in other accrued liabilities of $0.9 million. The decrease in receivables of $3.9 million was primarily due to the collection of a large receivable during the first quarter of fiscal 2017 that was invoiced during the fourth quarter of fiscal 2016. The inventory decrease was due to decreases in selected electron tubes. The decrease in our accounts payable was due to timing of payments for some of our larger vendors and also the result of shorter payment terms for our Richardson Healthcare vendors.
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Cash Flows from Investing Activities
The cash flow fromprovided by and used in investing activities has consisted primarily of purchases andproceeds from the maturities of investments and capital expenditures.
Cash provided by investing activities of $1.8$7.7 million during the first sixthree months of fiscal 20182020 included proceeds from the maturities of investments of $8.2$8.0 million partially offset by $3.9$0.3 million in capital expenditures. Capital expenditures related primarily to capital used for our IT system and LaFox manufacturing business.
Cash used in investing activities of $3.4 million during the first three months of fiscal 2019 included $2.3 million from purchases of investments and $2.7$1.1 million in capital expenditures. Capital expenditures relatesrelated primarily to our Healthcare growth initiatives, a new roofair conditioner unit for part of our warehousethe building and capital used for our new IT system.
Cash used by investing activities of $1.9 million during the first six months of fiscal 2017, included proceeds from the maturities of investments of $3.6 million, offset by $2.1 million fromOur purchases of investments and $3.3 million in capital expenditures. Capital expenditures relates primarily to our Healthcare growth initiatives and capital used for our new IT system.
Our purchases and proceeds from investments consistconsisted of time deposits and CDs. Purchasing of future investments may vary from period to period due to interest and foreign currency exchange rates.
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Cash Flows from Financing Activities
The cash flow fromused in financing activities consistsconsisted primarily of cash dividends paid.
Cash used in financing activities of $1.5$0.8 million during the first sixthree months of fiscal 20182020 resulted from cash used to pay dividends.
Cash used in financing activities of $1.5$0.6 million during the first sixthree months of fiscal 2017,2019 resulted from $0.8 million of cash used to pay dividends.dividends partially offset by $0.2 million of proceeds from the issuance of common stock from stock option exercises.
Dividend payments for the first six months of fiscal 2018 were approximately $1.5 million. All future payments of dividends are at the discretion of the Board of Directors. Dividend payments will depend on earnings, capital requirements, operating conditions and such other factors that the Board may deem relevant.
ITEM 3. |
Risk Management and Market Sensitive Financial Instruments
We are exposed to many different market risks with the various industries we serve. The primary financial risk we are exposed to is foreign currency exchange, as certain operations, assets and liabilities of ours are denominated in foreign currencies. We manage these risks through normal operating and financing activities.
The interpretation and analysis of these disclosures should not be considered in isolation since such variances in exchange rates would likely influence other economic factors. Such factors, which are not readily quantifiable, would likely also affect our operations. Additional disclosure regarding various market risks are set forth in Part I, Item 1A, “Risk Factors“ of our Annual Report on Form 10-K for the year ended May 27, 2017,June 1, 2019, filed July 31, 2017.August 5, 2019.
(a) | Evaluation of Disclosure Controls and Procedures |
Management of the Company, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 2, 2017.
August 31, 2019.
Disclosure controls and procedures are intended to provide reasonable assurance that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
(b) | Changes in Internal Control over Financial Reporting |
There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the secondfirst quarter of fiscal 20182020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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On December 5, 2017, Steven H. BuschOctober 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 Verified Stockholder Derivative Complaint against Edward J.motion for preliminary injunction to stop the sale of Richardson’s ALTA750TM product. Richardson Paul Plante, Jacques Belin, James Benham, Kenneth Halverson, andfiled an opposition to the Company inpreliminary injunction. In January 2019, the Delaware Court of Chancery, captioned Steven H. Busch v. Edward J.took evidence on the preliminary injunction issue. On September 30, 2019, the Court soundly denied Varex’s Motion for Preliminary Injunction. Richardson et al., C.A. No. 2017-0868-AGB. The lawsuit alleges claims for breach of fiduciary duty by the Company’s directors and challenges the decision of a special committee of the Company’s Board to refuse Mr. Busch’s demand that the Company’s Board, among other things, rescind the Company’s May 2013 repurchase of stock from Mr. Richardson and May 2013 and October 2014 repurchases of Company stock from the Richardson Wildlife Foundation. The Company believes the lawsuit to be without merit and that a loss is not probable or estimable based on the information available at the time the financial statements were issued.
There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended May 27, 2017,June 1, 2019, filed July 31, 2017.August 5, 2019.
Submission of Matters to a Vote of Security Holders
ResultsWe held our annual meeting of Operationstockholders on October 8, 2019. At the annual meeting, our stockholders (i) elected each of the nominees listed below to the Company's Board of Directors to serve for a term expiring at the 2020 Annual Meeting; (ii) ratified the selection of BDO USA, LLP as our independent registered public accounting firm for fiscal year 2020, and Financial Condition and Declaration(iii) approved, on an advisory basis, the compensation of Dividendthe Company's named executive officers.
On January 10, 2018, we issued a press release reportingThe final results for our second quarter ended December 2, 2017, and the declaration of a cash dividend. A copy of the press release is furnished as Exhibit 99.1 to this Form 10-Q and incorporated by reference herein.votes regarding each proposal are set forth below.
1. | The voting results with respect to the election of each director were as follows: |
Nominee |
| For |
|
| Abstain/Withhold |
|
| Broker Non-Votes |
| |||
Edward J. Richardson |
|
| 27,317,192 |
|
|
| 1,312,768 |
|
|
| 1,804,595 |
|
Jacques Belin |
|
| 27,240,643 |
|
|
| 1,389,317 |
|
|
| 1,804,595 |
|
James Benham |
|
| 27,240,643 |
|
|
| 1,389,317 |
|
|
| 1,804,595 |
|
Kenneth Halverson |
|
| 27,240,643 |
|
|
| 1,389,317 |
|
|
| 1,804,595 |
|
Robert H. Kluge |
|
| 27,221,343 |
|
|
| 1,408,617 |
|
|
| 1,804,595 |
|
Paul J. Plante |
|
| 26,851,825 |
|
|
| 1,778,135 |
|
|
| 1,804,595 |
|
3. | The voting results with respect to the approval, on an advisory basis, the compensation of our Named Executive Officers was approved with 27,093,148 votes “FOR”, 1,286,794 votes “AGAINST”, 250,018 votes “ABSTAIN/WITHHOLD” and 1,804,595 broker non-votes. |
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See exhibit index which is incorporated by reference herein.Exhibit Index
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Exhibit Number | Description | |
3.1 | ||
3.2 | ||
10.1 | ||
31.1 | Certification of Edward J. Richardson pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Robert J. Ben pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32 | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101 | The following financial information from our Quarterly Report on Form 10-Q for the first quarter of fiscal 2020, filed with the SEC on October 10, 2019, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Comprehensive Loss, (iii) the Unaudited Consolidated Statements of Cash Flows, (iv) the Unaudited Consolidated Statement of Stockholders’ Equity and (v) Notes to Unaudited Consolidated Financial Statements. |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
RICHARDSON ELECTRONICS, LTD. | |||
Date: | By: | /s/ | Robert J. Ben |
Robert J. Ben Chief Financial Officer and Chief Accounting Officer (on behalf of the Registrant and as Principal Financial Officer) |
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