Item 7. Management’s Discussion and Analysis
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and related notes.
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
•
Results of Operations - an analysis and comparison of our consolidated results of operations for the fiscal years ended May 29, 2021, May 30, 2020 and June 1, 2019, as reflected in our consolidated statements of comprehensive income (loss).
•
Liquidity, Financial Position and Capital Resources - a discussion of our primary sources and uses of cash for the fiscal years ended May 29, 2021, May 30, 2020 and June 1, 2019, 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.
Some of the Company's products are manufactured in China and are imported into the United States. The Office of the United States Trade Representative ("USTR") instituted additional 10% to 25% tariffs on the importation of a number of products into the United States from China effective July 6, 2018, with additional products added August 23, 2018 and September 24, 2018. These additional tariffs are a response to what the USTR considers to be certain unfair trade practices by China. A number of the Company's products manufactured in China are now subject to these additional duties of 25% when imported into the United States.
Management continues to work with its suppliers as well as its customers to mitigate the impact of the tariffs on our customers’ markets. However, if the Company is unable to successfully pass through the additional cost of these tariffs, or if the higher prices reduce demand for the Company's products, it will have a negative effect on the Company's sales and gross margins.
We have three operating and reportable segments, which we define as follows:
Power and Microwave Technologies Group (“PMT”) combines our core engineered solutions capabilities, power grid and microwave tube business with new disruptive RF, Wireless and Power technologies. As a designer, manufacturer, technology partner and authorized distributor, PMT’s strategy is to provide specialized technical expertise and engineered solutions based on our core engineering and manufacturing capabilities on a global basis. We provide solutions and add value through design-in support, systems integration, prototype design and manufacturing, testing, logistics and aftermarket technical service and repair—all through our existing global infrastructure. PMT’s focus is on products for power, RF and microwave applications for customers in 5G, alternative energy, aviation, broadcast, communications, industrial, marine, medical, military, scientific and semiconductor markets. PMT focuses on various applications including broadcast transmission, CO2 laser cutting, diagnostic imaging, dielectric and induction heating, high energy transfer, high voltage switching, plasma, power conversion, radar and radiation oncology. PMT also offers its customers technical services for both microwave and industrial equipment.
Canvys provides customized display solutions serving the corporate enterprise, financial, healthcare, industrial and medical original equipment manufacturers markets. Our engineers design, manufacture, source and support a full spectrum of solutions to match the needs of our customers. We offer long term availability and proven custom display solutions that include touch screens, protective panels, custom enclosures, All-In-One computers, specialized cabinet finishes 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.
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Healthcare manufactures, repairs, refurbishes and distributes high value replacement parts and equipment for the healthcare market including hospitals, medical centers, asset management companies, independent service organizations and multi-vendor service providers. Products include diagnostic imaging replacement parts for CT and MRI systems; replacement CT and MRI tubes; CT service training; MRI coils, cold heads and RF amplifiers; hydrogen thyratrons, klystrons, magnetrons; flat panel detector upgrades; pre-owned CT systems; and additional replacement solutions currently under development for the diagnostic imaging service market. Through a combination of newly developed products and partnerships, service offerings and training programs, we believe we can help our customers improve efficiency and deliver better clinical outcomes while lowering the cost of healthcare delivery.
We currently have operations in the following major geographic regions: North America, Asia/Pacific, Europe and Latin America.
Results of Operations
Overview - Fiscal Year Ended May 29, 2021
•
Fiscal 2021 and fiscal 2020 both contained 52 weeks.
•
Net sales during fiscal 2021 were $176.9 million, up 13.5%, compared to net sales of $155.9 million during fiscal 2020.
•
Gross margin was 33.2% of net sales during fiscal 2021, compared to 31.9% of net sales during fiscal 2020.
•
Selling, general and administrative expenses, including the $1.6 million legal settlement, were $55.9 million, or 31.6% of net sales, during fiscal 2021, compared to $51.3 million, or 32.9% of net sales, during fiscal 2020.
•
Operating income during fiscal 2021 was $2.9 million, compared to an operating loss of $1.7 million during fiscal 2020.
•
Other expense during fiscal 2021 was $0.6 million, compared to other income of $0.4 million during fiscal 2020.
•
Net income during fiscal 2021 was $1.7 million, compared to a net loss of $1.8 million during fiscal 2020.
Net Sales and Gross Profit Analysis
Net sales by segment and percent change for fiscal 2021, fiscal 2020 and fiscal 2019 were as follows ( in thousands ):
Net Sales
FY 2021
FY 2020
FY 2019
FY21 vs. FY20
% Change
FY20 vs. FY19
% Change
PMT
$
137,280
$
118,480
$
128,902
15.9
%
(8.1
%)
Canvys
29,319
28,926
27,968
1.4
%
3.4
%
Healthcare
10,338
8,492
9,782
21.7
%
(13.2
%)
Total
$
176,937
$
155,898
$
166,652
13.5
%
(6.5
%)
During fiscal 2021, consolidated net sales increased by 13.5% compared to fiscal 2020. Sales for PMT increased by 15.9%, Canvys sales increased by 1.4% and Healthcare sales increased by 21.7%. During fiscal 2020, consolidated net sales decreased by 6.5% compared to fiscal 2019. Sales for PMT decreased by 8.1%, Canvys sales increased by 3.4% and Healthcare sales decreased by 13.2%.
Gross profit by segment and percent of segment net sales for fiscal 2021, fiscal 2020 and fiscal 2019 were as follows ( in thousands ):
Gross Profit
FY 2021
FY 2020
FY 2019
PMT
$
45,951
33.5
%
$
38,288
32.3
%
$
40,254
31.2
%
Canvys
10,274
35.0
%
9,313
32.2
%
9,085
32.5
%
Healthcare
2,600
25.1
%
2,072
24.4
%
2,396
24.5
%
Total
$
58,825
33.2
%
$
49,673
31.9
%
$
51,735
31.0
%
20
Gross profit reflects the distribution and manufacturing product margin less manufacturing variances, inventory obsolescence charges, customer returns, scrap and cycle count adjustments, engineering costs and other provisions.
Consolidated gross profit was $58.8 million during fiscal 2021, compared to $49.7 million during fiscal 2020. Consolidated gross margin as a percentage of net sales increased to 33.2% during fiscal 2021, from 31.9% during fiscal 2020, primarily due to improved product mix in all business units. Gross margin during fiscal 2021 included expense related to inventory provisions for PMT of $0.6 million, $0.1 million for Canvys and $0.4 million for Healthcare.
Consolidated gross profit was $49.7 million during fiscal 2020, compared to $51.7 million during fiscal 2019. Consolidated gross margin as a percentage of net sales increased to 31.9% during fiscal 2020, from 31.0% during fiscal 2019, primarily due to improved product mix and manufacturing efficiencies for PMT. Gross margin during fiscal 2020 included expense related to inventory provisions for PMT of $0.6 million, $0.1 million for Canvys and $0.3 million for Healthcare.
Power and Microwave Technologies Group
Net sales for PMT increased 15.9% to $137.3 million during fiscal 2021, from $118.5 million during fiscal 2020. This increase was due to strong growth in 5G and power management applications in our Power and Microwave Group (PMG). In addition, sales in the Semiconductor wafer fab market grew significantly due to strong demand along with year over year growth in our MRO Electron Devices products. Gross margin as a percentage of net sales increased to 33.5% during fiscal 2021 as compared to 32.3% during fiscal 2020, primarily due to improved product mix and manufacturing efficiencies.
Net sales for PMT decreased 8.1% to $118.5 million during fiscal 2020, from $128.9 million during fiscal 2019. This decrease was mainly due to a slowdown in the MRO replacement tube market and COVID-19 related market decline but was partially offset by growth in 5G and other RF and Power markets from new technology suppliers in our Power and Microwave Group (PMG). Gross margin as a percentage of net sales increased to 32.3% during fiscal 2020 as compared to 31.2% during fiscal 2019, primarily due to an improved product mix and manufacturing efficiencies.
Canvys – Visual Technology Solutions
Net sales for Canvys increased 1.4% to $29.3 million during fiscal 2021, from $28.9 million during fiscal 2020. Sales increased due to the addition of new customers and programs as well as increased customer demand in North America. The growth in North America was partially offset by lower customer demand in Europe due to the impact from the COVID-19 pandemic. Gross margin as a percentage of net sales increased to 35.0% during fiscal 2021 as compared to 32.2% during fiscal 2020, primarily due to product mix and foreign currency effects.
Net sales for Canvys increased 3.4% to $28.9 million during fiscal 2020, from $28.0 million during fiscal 2019. Sales were up due to the addition of new customers and programs as well as increased customer demand in North America. Gross margin as a percentage of net sales decreased to 32.2% during fiscal 2020 as compared to 32.5% during fiscal 2019 primarily due to product mix and foreign currency effects.
Healthcare
Net sales for Healthcare increased 21.7% to $10.3 million during fiscal 2021, from $8.5 million during fiscal 2020. The increase in sales was primarily due to a significant increase in demand for the ALTA 750D TM tubes. Gross margin as a percentage of net sales was 25.1% during fiscal 2021, compared to 24.4% during fiscal 2020. This increase was primarily due to improved equipment margins as a result of installing ALTA 750D TM tubes in the equipment, offset by under absorbed manufacturing expenses.
Net sales for Healthcare decreased 13.2% to $8.5 million during fiscal 2020, from $9.8 million during fiscal 2019. The decrease in sales was primarily due to the COVID-19 global pandemic. Gross margin as a percentage of net sales was 24.4% during fiscal 2020, nearly flat compared to 24.5% during fiscal 2019. This decrease was primarily due to high scrap expenses associated with CT tube development and lower sales, partially offset by improved manufacturing efficiencies and favorable product mix.
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Sales by Geographic Area
On a geographic basis, our sales are categorized by destination: North America; Asia/Pacific; Europe; Latin America; and Other.
Net sales by geographic area and percent change for fiscal 2021, fiscal 2020 and fiscal 2019 were as follows ( in thousands ):
Net Sales
FY 2021
FY 2020
FY 2019
FY21 vs. FY20
% Change
FY20 vs. FY19
% Change
North America
$
73,625
$
65,259
$
66,228
12.8
%
(1.5
%)
Asia/Pacific
40,839
32,979
34,681
23.8
%
(4.9
%)
Europe
52,549
49,394
55,038
6.4
%
(10.3
%)
Latin America
9,651
8,308
10,653
16.2
%
(22.0
%)
Other (1)
273
(42
)
52
750.0
%
(180.8
%)
Total
$
176,937
$
155,898
$
166,652
13.5
%
(6.5
%)
Gross profit by geographic area and percent of geographic net sales for fiscal 2021, fiscal 2020 and fiscal 2019 were as follows ( in thousands ):
FY 2021
FY 2020
FY 2019
Gross Profit (Loss)
Amount
% of Net Sales
Amount
% of Net Sales
Amount
% of Net Sales
North America
$
28,639
38.9
%
$
24,494
37.5
%
$
24,776
37.4
%
Asia/Pacific
13,520
33.1
%
10,629
32.2
%
10,905
31.4
%
Europe
16,958
32.3
%
15,483
31.3
%
17,425
31.7
%
Latin America
3,405
35.3
%
2,804
33.8
%
3,863
36.3
%
Other (1)
(3,697
)
(3,737
)
(5,234
)
Total
$
58,825
33.2
%
$
49,673
31.9
%
$
51,735
31.0
%
(1)
Other primarily includes 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.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A”) increased during fiscal 2021 to $55.9 million from $51.3 million during fiscal 2020. This increase included the $1.6 million legal settlement which is discussed in the following section. In addition to the $1.6 million legal settlement, SG&A expenses increased due to higher employee compensation expenses and higher legal fees, partially offset by lower travel and consulting expenses. SG&A as a percentage of sales decreased to 31.6% during fiscal 2021 as compared to 32.9% during fiscal 2020.
Selling, general and administrative expenses (“SG&A”) decreased during fiscal 2020 to $51.3 million from $52.2 million during fiscal 2019. SG&A as a percentage of sales increased to 32.9% during fiscal 2020 as compared to 31.3% during fiscal 2019. The decrease in expense was primarily due to lower travel, severance, legal and IT expenses, partially offset by higher employee compensation expenses.
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Legal Settlement
On October 15, 2018, Varex Imaging Corporation (“Varex”) filed its original Complaint (Case No. 1:18-cv-06911) against Richardson Electronics, Ltd. (“Richardson”) in the Northern District of Illinois, which was subsequently amended on November 27, 2018. Varex alleged counts of infringement of U.S. Patent Nos. 6,456,692 and 6,519,317. Subsequently, on October 24, 2018, Varex filed a motion for preliminary injunction to stop the sale of Richardson’s ALTA750 TM product. Richardson filed an opposition to the preliminary injunction. In January 2019, the Court took evidence on the preliminary injunction issue. On September 30, 2019, the Court denied Varex’s Motion for Preliminary Injunction. On August 6, 2020, Varex amended its Complaint to add claims of trade secret misappropriation and Richardson moved to dismiss that Amended Complaint on September 9, 2020. On April 2, 2021, as part of an overall settlement where Richardson did not admit liability but wanted to move forward, Richardson agreed to pay Varex $1.6 million to settle this matter, which was recorded in selling, general and administrative expenses within the Consolidated Statements of Comprehensive Income (Loss).
Other Income/Expense
Other income/expense was an expense of $0.6 million during fiscal 2021, compared to income of $0.4 million during fiscal 2020. Fiscal 2021 had $0.1 million of investment income compared to $0.4 million of investment income for fiscal 2020. Our foreign exchange gains and losses are primarily due to the translation of U.S. dollars held in non-U.S. entities. The foreign exchange loss reported for fiscal 2021 totaled $0.8 million, compared to a slight gain for fiscal 2020. We currently do not utilize derivative instruments to manage our exposure to foreign currency.
Income Tax Provision
Our income tax provision during fiscal 2021, fiscal 2020 and fiscal 2019 was $0.7 million, $0.6 million and $1.0 million, respectively. The effective income tax rates during fiscal 2021, fiscal 2020 and fiscal 2019 were 28.3%, (51.4)% and (16.1)%, respectively. The difference between the effective income tax rates as compared to the U.S. federal statutory rate of 21.0% during fiscal 2021, fiscal 2020 and fiscal 2019 was primarily driven by the impact of recording a valuation allowance against all of our U.S. state and federal net deferred tax assets and changes in our geographical distribution of income (loss).
On December 22, 2017, the U.S. government enacted new tax legislation, Tax Cuts and Jobs Act (the “Act”). The Company was subject to requirements of the Act beginning in fiscal 2019. Provisions include an income inclusion for global intangible low-taxed income (“GILTI”), a tax determined by base erosion and anti-avoidance tax (“BEAT”) related to certain payments between a U.S. corporation and foreign related entities, a limitation of certain executive compensation and a deduction for foreign derived intangible income. The Company has determined its accounting policy to treat the taxes due on GILTI as a period cost. The Company is not subject to the BEAT provision due to the revenue thresholds. During fiscal 2021, final regulations were released that provide taxpayers with a high tax exception (“HTE”) election. Given the Company’s tax profile, the Company intends to make such election with its fiscal 2021 tax return, and the forecasted GILTI inclusion has been estimated assuming the HTE is elected. The Company made this election on its fiscal 2020 tax return, adjusting its NOL and offsetting valuation allowance.
As of May 29, 2021, we had approximately $3.0 million of net deferred tax assets related to federal net operating loss (“NOL”) carryforwards, compared to $3.7 million as of May 30, 2020. Net deferred tax assets related to domestic state NOL carryforwards at May 29, 2021 amounted to approximately $3.9 million, compared to $3.8 million at May 30, 2020. Net deferred tax assets related to foreign NOL carryforwards as of May 29, 2021 totaled approximately $0.4 million with various or indefinite expiration dates. The amount of net deferred tax assets related to foreign NOL carryforwards was $0.3 million as of May 30, 2020. We also had a domestic net deferred tax asset of $1.8 million of foreign tax credit carryforwards as of both May 29, 2021 and May 30, 2020. We did not have any alternative minimum tax credit carryforward as of May 29, 2021.
We have historically determined that undistributed earnings of our foreign subsidiaries, to the extent of cash available, will be repatriated to the U.S. The deferred tax liability on the outside basis difference is now primarily withholding tax on future dividend distributions. The deferred tax liability related to undistributed earnings of our foreign subsidiaries was less than $0.1 million in both fiscal 2021 and fiscal 2020.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant component of objective evidence evaluated was the cumulative income or loss incurred in each jurisdiction over the three-year period ended May 29, 2021. Such objective evidence limits the ability to consider subjective evidence such as future income projections. We considered other positive evidence in determining the need for a valuation allowance in the U.S. including the subpart F and GILTI inclusions of our foreign earnings. The weight of this positive evidence is not sufficient to outweigh other negative evidence in evaluating our need for a valuation allowance in the U.S. jurisdiction.
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As of May 29, 2021, a valuation allowance of $12.2 million was established to record only the portion of the deferred tax asset that will more likely than not be realized. The valuation allowance as of May 30, 2020 was $12.3 million. We recorded a valuation allowance for all domestic federal and state net deferred tax assets considering the significant cumulative losses in the U.S. jurisdiction and the reversal of the deferred tax liability for foreign earnings. The valuation allowance also related to deferred tax assets in foreign jurisdictions where historical taxable losses have been incurred. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are increased, or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth.
Income taxes paid, including foreign estimated tax payments, were $0.1 million, $1.0 million and $0.3 million, during fiscal 2021, fiscal 2020 and fiscal 2019, respectively.
In the normal course of business, we are subject to examination by taxing authorities throughout the world. Generally, years prior to fiscal 2015 are closed for examination under the statute of limitation for U.S. federal, U.S. state and local or non-U.S. tax jurisdictions. We are currently under examination in Thailand (fiscal 2008 through 2011) and Germany (fiscal 2015 through 2018). Our primary foreign tax jurisdictions are Germany and the Netherlands. We have tax years open in Germany beginning in fiscal 2019 and the Netherlands beginning in fiscal 2018.
The uncertain tax positions as of both May 29, 2021 and May 30, 2020 were $0.1 million. We record penalties and interest related to uncertain tax positions in the income tax expense line item within the Consolidated Statements of Comprehensive Income (Loss). Accrued interest and penalties were included within the related tax liability line in the Consolidated Balance Sheets. We have not recorded a liability for interest and penalties as of May 29, 2021 or May 30, 2020. It is not expected that there will be a change in the unrecognized tax benefits due to the expiration of various statutes of limitations within the next twelve months.
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 $43.3 million at May 29, 2021. Cash and cash equivalents at May 29, 2021 consisted of $26.1 million in North America, $8.8 million in Europe, $1.2 million in Latin America and $7.2 million in Asia/Pacific. We repatriated a total of $0.9 million to the United States in fiscal 2021 from several of our foreign entities. This amount includes $0.7 million from our entities in Italy and South Korea in the third quarter of fiscal 2021 and $0.2 million from our entity in France in the fourth quarter of fiscal 2021. Although the Tax 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 7, Income Taxes , of the notes to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information.
Cash, cash equivalents and investments were $46.5 million at May 30, 2020. Cash, cash equivalents and investments at May 30, 2020, consisted of $30.6 million in North America, $8.3 million in Europe, $0.9 million in Latin America and $6.7 million in Asia/Pacific. We repatriated a total of $8.5 million to the United States in fiscal 2020 from several of our foreign entities. This amount includes $4.4 million from our entities in Germany and the Netherlands in the second quarter of fiscal 2020, $1.5 million from our entity in Japan in the third quarter of fiscal 2020 and $1.0 million from our entity in Italy in the fourth quarter of fiscal 2020.
The Company continues to monitor the impact of COVID-19, including the extent, duration and effectiveness of containment actions taken, the speed and extent of vaccination programs, the impact of the pandemic on its supply chain, manufacturing and distribution operations, customers and employees, as well as the U.S. economy in general. However, due to the uncertain and constantly evolving impacts of the COVID-19 pandemic across the globe, the Company cannot currently predict the long-term impact on its operations and financial results. The uncertainties associated with the COVID-19 pandemic and its effects include potential adverse effects on the overall economy, the Company’s supply chain, transportation services, employees and customers. The COVID-19 pandemic and its effects could adversely affect the Company’s revenues, earnings, liquidity and cash flows and may require significant actions in response, including expense reductions. Conditions surrounding COVID-19 change rapidly and additional impacts of which the Company is not currently aware may arise. Based on past performance and current expectations, w e 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.
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Cash Flows from Operating Activities
Cash flow from operating activities primarily resulted from our net income adjusted for non-cash items and changes in our operating assets and liabilities.
Operating activities provided $0.8 million of cash during fiscal 2021. We had net income of $1.7 million during fiscal 2021, which included non-cash stock-based compensation expense of $0.7 million associated with the issuance of stock option awards and restricted stock awards, $1.0 million of inventory provisions and depreciation and amortization expense of $3.4 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 $6.0 million during fiscal 2021, primarily due to the increase in inventories of $4.9 million, an increase in accounts receivable of $4.2 million and a decrease in accounts payable of $0.6 million. These uses of cash were partially offset by the increase in our accrued liabilities of $3.6 million and the decrease in prepaid expenses and other assets of $0.1 million. The majority of the inventory increase was to support our electron tube and PMG businesses. The increase in accounts receivable was primarily due to the sales increase in fiscal 2021. The decrease in our accounts payable was due to timing of payments for some of our larger vendors for both inventory and services and the increase in accrued liabilities was due to the timing of employee compensation and payroll tax payments, as well as increased deferred revenue.
Operating activities provided $1.9 million of cash during fiscal 2020. We had net loss of $1.8 million during fiscal 2020, which included non-cash stock-based compensation expense of $0.7 million associated with the issuance of stock option awards and restricted stock awards, $1.0 million of inventory provisions and depreciation and amortization expense of $3.4 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 $1.3 million during fiscal 2020, primarily due to the increase in inventories of $5.5 million and the decrease in accrued liabilities of $0.9 million. These uses of cash were partially offset by the decrease in accounts receivable of $3.9 million, the increase in our accounts payable of $0.6 million and the decrease in prepaid expenses and other assets of $0.6 million. The majority of the inventory increase was to support our electron tube and Canvys businesses and the impact of COVID-19 on sales. The decrease in accounts receivable was primarily due to the decrease in sales and better collection of receivables. The increase in our accounts payable was due to timing of payments for some of our larger vendors for both inventory and services.
Cash Flows from Investing Activities
The cash flow from investing activities consisted primarily of purchases and maturities of investments and capital expenditures.
Cash provided by investing activities of $13.4 million during fiscal 2021 included the proceeds from the maturities of investments of $25.0 million, partially offset by purchases of investments of $9.0 million and $2.6 million in capital expenditures. Capital expenditures related primarily to capital used for our IT system and Healthcare manufacturing business.
Cash used in investing activities of $9.8 million during fiscal 2020 included purchases of investments of $29.0 million and $1.8 million in capital expenditures, partially offset the proceeds from the maturities of investments of $21.0 million. Capital expenditures related primarily to capital used for our IT system, and Healthcare and LaFox manufacturing businesses.
Our purchases and proceeds from investments consist of time deposits and CDs. Purchasing of future investments may vary from period to period due to interest and foreign currency exchange rates.
Cash Flows from Financing Activities
The cash flow from financing activities primarily consists of cash dividends paid.
Cash used in financing activities of $3.0 million during fiscal 2021 resulted primarily from cash used to pay dividends, partially offset by proceeds from the issuance of common stock from stock option exercises.
Cash used in financing activities of $3.2 million during fiscal 2020 resulted primarily from cash used to pay dividends, partially offset by proceeds from the issuance of common stock from stock option exercises.
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.
25
Contractual Obligations
Contractual obligations are presented in the table below as of May 29, 2021 ( in thousands ):
Less than
1 year
1 - 3
years
4 - 5
years
More than
5 years
Less Interest
Total
Lease obligations (1)
$
1,144
$
1,364
$
38
$
36
$
(158
)
$
2,424
(1)
Lease obligations are related to certain warehouse and office facilities under non-cancelable operating leases as well as financing leases.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with United States Generally Accepted Accounting Principles (“GAAP”) requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management continuously evaluates its critical accounting policies and estimates, including the allowance for doubtful accounts, revenue recognition, inventory obsolescence, intangible assets, loss contingencies and income taxes. Management bases the estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances, however, actual results could differ from those estimates.
The policies discussed below are considered by management to be critical to understanding our financial position and the results of operations. Their application involves significant judgments and estimates in preparation of our consolidated financial statements. For all of these policies, management cautions that future events rarely develop exactly as forecasted, and the best estimates routinely require adjustment.
Allowance for Doubtful Accounts
Our allowance for doubtful accounts includes estimated losses that result from uncollectible receivables. The estimates are influenced by the following: continuing credit evaluation of customers’ financial conditions; aging of receivables, individually and in the aggregate; a large number of customers which are widely dispersed across geographic areas; and collectability and delinquency history by geographic area. Significant changes in one or more of these considerations may require adjustments affecting net income and net carrying value of accounts receivable. The allowance for doubtful accounts was approximately $0.2 million as of May 29, 2021 and $0.3 million as of May 30, 2020.
Revenue Recognition
The Company has a number of defined revenue streams across our reportable segments. Distribution is the Company’s largest revenue stream. The distribution business does not include a separate service bundled with the product sold or sold on top of the product. Distribution typically includes products purchased from our suppliers, stocked in our warehouses and then sold to our customers. Revenue is recognized when control of the promised goods is transferred to our customers, which is simultaneous with the title transferring to the customer, in an amount that reflects the transaction price consideration that we expect to receive in exchange for those goods. Control refers to the ability of the customer to direct the use of, and obtain substantially all of, the remaining benefits from the goods. Our transaction price consideration is fixed, unless otherwise disclosed below as variable consideration. G enerally, our contracts require our customers to pay for goods after we deliver products to them. Terms are generally on open account, payable net 30 days in North America, and vary throughout Asia/Pacific, Europe and Latin America 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. The services we provide are relatively short in duration and typically completed in one or two weeks. Therefore, at each reporting date, the amount of unbilled work is insignificant. The services revenue has consistently accounted for less than 5% of the Company’s total revenues and is expected to continue at that level.
We also record discounts taken and estimate returns based on 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.
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Inventories, net
Our consolidated inventories are stated at the lower of cost and net realizable value, generally using a weighted-average cost method. Our net inventories include approximately $57.0 million of finished goods, $3.9 million of raw materials and $2.6 million of work-in-progress as of May 29, 2021 as compared to approximately $51.8 million of finished goods, $3.6 million of raw materials and $2.1 million of work-in-progress as of May 30, 2020. The inventory reserve as of May 29, 2021 was $5.9 million compared to $5.4 million as of May 30, 2020.
At this time, we do not anticipate any material risks or uncertainties related to possible future inventory write-downs. Provisions for obsolete or slow moving inventories are recorded based upon regular analysis of stock rotation privileges, obsolescence, the exiting of certain markets and assumptions about future demand and market conditions. If future demand changes in an industry or market conditions differ from management’s estimates, additional provisions may be necessary.
We recorded provisions to our inventory reserves of $1.0 million, $1.0 million and $1.1 million during fiscal 2021, fiscal 2020 and fiscal 2019, respectively, which were included in cost of sales. The provisions were primarily for obsolete and slow moving parts. The parts were written down to estimated realizable value.
Intangible and Long-Lived Assets
Intangible assets are initially recorded at their fair market values determined by quoted market prices in active markets, if available, or recognized valuation models. Intangible assets that have finite useful lives are amortized over their useful lives either on a straight-line basis or over their projected future cash flows and are tested for impairment when events or changes in circumstances occur that indicate possible impairment. Our intangible assets represent the fair value for trade name, customer relationships, non-compete agreements and technology acquired in connection with the acquisitions.
We review property and equipment, definite-lived intangible assets and other long-lived assets for impairment whenever adverse events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable.
If adverse events do occur, our impairment review is based on an undiscounted cash flow analysis at the lowest level at which cash flows of the long-lived assets are largely independent of other groups of our assets and liabilities. This analysis requires management judgment with respect to changes in technology, the continued success of product lines and future volume, revenue and expense growth rates. We conduct annual reviews for idle and underutilized equipment and review business plans for possible impairment. Impairment occurs when the carrying value of the assets exceeds the future undiscounted cash flows expected to be earned by the use of the asset or asset group. When impairment is indicated, the estimated future cash flows are then discounted to determine the estimated fair value of the asset or asset group and an impairment charge is recorded for the difference between the carrying value and the estimated fair value.
Additionally, we also evaluate the remaining useful life each reporting period to determine whether events and circumstances warrant a revision to the remaining period of depreciation or amortization. If the estimate of a long-lived asset’s remaining useful life is changed, the remaining carrying amount of the asset is amortized prospectively over that revised remaining useful life.
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.
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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.
New Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 (as amended by ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11 and 2020-02) introduces a new forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. This ASU also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses. The new standard is effective for smaller reporting companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.
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