Item 8. Financial Statements and Supplementary Data
ITEM 8. Financial Statements and Supplementary Data
31
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Richardson Electronics, Ltd.
LaFox, Illinois
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Richardson Electronics, Ltd. (the “Company”) as of May 28, 2022 and May 29, 2021, the related consolidated statements of comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended May 28, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at May 28, 2022 and May 29, 2021, and the results of its operations and its cash flows for each of the three years in the period ended May 28, 2022 , in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of May 28, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated August 1, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
32
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Estimation of Inventory Reserve - Power and Microwave Technologies ("PMT") Group
As described in Note 3 to the consolidated financial statements, the consolidated inventory balance as of May 28, 2022 was $80.4 million, net of $6.1 million in reserves. Inventories are stated at the lower of cost and net realizable value. Provisions for obsolete or slow-moving inventories are based upon regular analysis of stock rotation privileges, obsolescence, the exiting of certain markets and assumptions about future demand and market conditions. A number of products in the PMT segment represent trailing edge technology. PMT often buys products ahead of supplier price increases and extended lead times which can create higher levels of inventory. As technologies evolve and customers replace their capital equipment, the market for and resulting net realizable value of PMT's products may decline.
We have identified the Company's estimation of inventory reserve for the PMT segment as a critical audit matter due to the significant judgments required by management in estimating net realizable value for each individual inventory item. The Company's estimation of inventory reserve, performed on an item-by-item basis, requires inputs from operations personnel and an assessment of current market conditions and future industry trends, which can be difficult to predict given evolving technologies and the declining market for some products. Auditing this matter involved especially challenging auditor judgment due to the nature and extent of audit effort needed to evaluate the reasonableness of the assumptions and judgments made by management.
The primary procedures we performed to address this critical audit matter included:
•
Assessing the design and implementation of controls over the development of the Company’s estimation of inventory reserve.
•
Assessing the reasonableness of management's estimate by (i) discussing with operations personnel, including product and sales managers, their assessment as to viability of aged and slow-moving inventory, (ii) evaluating historical customer ordering trends and current uses, and (iii) for certain products, evaluating future product designs and stock rotation privileges.
•
Evaluating the reasonableness of management's estimate by performing a retrospective comparison of prior estimates to current period sales, write-offs, and inventory consumptions.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2015.
Chicago, Illinois
August 1, 2022
33
Richardson Electronics, Ltd.
Consolidated Balance Sheets
(in thousands, except per share amounts)
May 28, 2022
May 29, 2021
Assets
Current assets:
Cash and cash equivalents
$
35,495
$
43,316
Accounts receivable, less allowance of $ 186 and $ 202 , respectively
29,878
25,096
Inventories, net
80,390
63,508
Prepaid expenses and other assets
2,448
2,385
Investments - current
5,000
—
Total current assets
153,211
134,305
Non-current assets:
Property, plant and equipment, net
16,961
17,067
Intangible assets, net
2,010
2,270
Lease ROU asset
3,239
2,570
Non-current deferred income taxes
4,398
541
Total non-current assets
26,608
22,448
Total assets
$
179,819
$
156,753
Liabilities
Current liabilities:
Accounts payable
$
23,987
$
16,979
Accrued liabilities
16,110
14,182
Lease liability current
1,109
1,066
Total current liabilities
41,206
32,227
Non-current liabilities:
Non-current deferred income tax liabilities
85
242
Lease liability non-current
1,915
1,358
Other non-current liabilities
766
1,366
Total non-current liabilities
2,766
2,966
Total liabilities
43,972
35,193
Stockholders’ Equity
Common stock, $ 0.05 par value; issued and outstanding 11,649 shares
at May 28, 2022 and 11,160 shares at May 29, 2021
582
558
Class B common stock, convertible, $ 0.05 par value; issued and
outstanding 2,053 shares at May 28, 2022 and 2,097 shares at May 29, 2021
103
105
Preferred stock, $ 1.00 par value, no shares issued
—
—
Additional paid-in-capital
66,331
62,707
Retained earnings
68,031
53,297
Accumulated other comprehensive income
800
4,893
Total stockholders' equity
135,847
121,560
Total liabilities and stockholders’ equity
$
179,819
$
156,753
34
Richardson Electronics, Ltd.
Consolidated Statements of Comprehensive Income (Loss)
(in thousands, except per share amounts)
Fiscal Year Ended
May 28, 2022
May 29, 2021
May 30, 2020
Net sales
$
224,620
$
176,937
$
155,898
Cost of sales
152,920
118,112
106,225
Gross profit
71,700
58,825
49,673
Selling, general and administrative expenses
55,723
55,925
51,327
Loss on disposal of assets
20
13
3
Operating income (loss)
15,957
2,887
( 1,657
)
Other expense (income):
Investment/interest income
( 80
)
( 76
)
( 377
)
Foreign exchange loss (gain)
273
759
( 15
)
Other, net
5
( 104
)
( 51
)
Total other expense (income)
198
579
( 443
)
Income (loss) before income taxes
15,759
2,308
( 1,214
)
Income tax (benefit) provision
( 2,168
)
653
624
Net income (loss)
17,927
1,655
( 1,838
)
Foreign currency translation (loss) gain, net of tax
( 4,093
)
3,403
( 900
)
Comprehensive income (loss)
$
13,834
$
5,058
$
( 2,738
)
Net income (loss) per share:
Common shares - Basic
$
1.35
$
0.13
$
( 0.14
)
Class B common shares - Basic
1.21
0.11
( 0.13
)
Common shares - Diluted
1.31
0.13
( 0.14
)
Class B common shares - Diluted
1.18
0.11
( 0.13
)
Weighted average number of shares:
Common shares - Basic
11,395
11,105
11,026
Class B common shares - Basic
2,080
2,097
2,097
Common shares - Diluted
11,825
11,164
11,026
Class B common shares - Diluted
2,080
2,097
2,097
Dividends per share:
Common share
$
0.24
$
0.24
$
0.24
Class B common share
0.22
0.22
0.22
35
Richardson Electronics, Ltd.
Consolidated Statements of Cash Flows
(in thousands)
Fiscal Year Ended
May 28, 2022
May 29, 2021
May 30, 2020
Operating activities:
Net income (loss)
$
17,927
$
1,655
$
( 1,838
)
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization
3,423
3,424
3,386
Inventory provisions
462
1,041
1,013
Loss on disposal of assets
20
13
3
Share-based compensation expense
654
675
683
Deferred income taxes
( 4,042
)
( 1
)
( 7
)
Change in assets and liabilities:
Accounts receivable
( 6,183
)
( 4,198
)
3,895
Inventories
( 20,571
)
( 4,861
)
( 5,452
)
Prepaid expenses and other assets
( 228
)
103
620
Accounts payable
7,671
( 565
)
631
Accrued liabilities
2,420
3,572
( 889
)
Other
358
( 26
)
( 122
)
Net cash provided by operating activities
1,911
832
1,923
Investing activities:
Capital expenditures
( 3,120
)
( 2,632
)
( 1,776
)
Proceeds from maturity of investments
—
25,000
21,000
Purchases of investments
( 5,000
)
( 9,000
)
( 29,000
)
Net cash (used in) provided by investing activities
( 8,120
)
13,368
( 9,776
)
Financing activities:
Payment of financing lease principal
( 151
)
( 181
)
( 166
)
Proceeds from issuance of common stock
2,992
289
59
Cash dividends paid on Common and Class B Common shares
( 3,193
)
( 3,122
)
( 3,101
)
Net cash used in financing activities
( 352
)
( 3,014
)
( 3,208
)
Effect of exchange rate changes on cash and cash equivalents
( 1,260
)
1,595
( 423
)
(Decrease) increase in cash and cash equivalents
( 7,821
)
12,781
( 11,484
)
Cash and cash equivalents at beginning of period
43,316
30,535
42,019
Cash and cash equivalents at end of period
$
35,495
$
43,316
$
30,535
Supplemental Disclosure of Cash Flow Information:
Cash paid during the fiscal year for:
Income taxes
$
1,484
$
106
$
1,018
36
Richardson Electronics, Ltd.
Consolidated Statements of Stockholders’ Equity
(in thousands, except per share amounts)
Common
Class B
Common
Par
Value
Additional
Paid In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total
Balance June 1, 2019:
10,957
2,097
$
652
$
61,012
$
59,703
$
2,390
$
123,757
Comprehensive income
Net loss
—
—
—
—
( 1,838
)
—
( 1,838
)
Foreign currency translation
—
—
—
—
—
( 900
)
( 900
)
Share-based compensation:
Restricted stock
—
—
—
455
—
—
455
Stock options
—
—
—
228
—
—
228
Common stock:
Options exercised
10
—
1
58
—
—
59
Restricted stock issuance
71
—
4
( 4
)
—
—
—
Dividends paid to:
Common ($ 0.24 per share)
—
—
—
—
( 2,648
)
—
( 2,648
)
Class B ($ 0.22 per share)
—
—
—
—
( 453
)
—
( 453
)
Balance May 30, 2020:
11,038
2,097
$
657
$
61,749
$
54,764
$
1,490
$
118,660
Comprehensive income
Net income
—
—
—
—
1,655
—
1,655
Foreign currency translation
—
—
—
—
—
3,403
3,403
Share-based compensation:
Restricted stock
—
—
—
483
—
—
483
Stock options
—
—
—
192
—
—
192
Common stock:
Options exercised
49
—
2
287
—
—
289
Restricted stock issuance
73
—
4
( 4
)
—
—
—
Dividends paid to:
Common ($ 0.24 per share)
—
—
—
—
( 2,669
)
—
( 2,669
)
Class B ($ 0.22 per share)
—
—
—
—
( 453
)
—
( 453
)
Balance May 29, 2021:
11,160
2,097
$
663
$
62,707
$
53,297
$
4,893
$
121,560
Comprehensive income
Net income
—
—
—
—
17,927
—
17,927
Foreign currency translation
—
—
—
—
—
( 4,093
)
( 4,093
)
Share-based compensation:
Restricted stock
—
—
—
444
—
—
444
Stock options
—
—
—
210
—
—
210
Common stock:
Options exercised
373
—
18
2,974
—
—
2,992
Restricted stock issuance
72
—
4
( 4
)
—
—
—
Class B converted to common
44
( 44
)
—
—
—
—
—
Dividends paid to:
Common ($ 0.24 per share)
—
—
—
—
( 2,745
)
—
( 2,745
)
Class B ($ 0.22 per share)
—
—
—
—
( 448
)
—
( 448
)
Balance May 28, 2022
11,649
2,053
$
685
$
66,331
$
68,031
$
800
$
135,847
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Richardson Electronics, Ltd.
Notes to Consolidated Financial Statements
1.
DESCRIPTION OF THE COMPANY
Richardson Electronics, Ltd. is a leading global manufacturer of engineered solutions, power grid and microwave tubes, and related consumables; power conversion and RF and microwave components; high-value replacement parts, tubes, and service training for diagnostic imaging equipment; and customized display solutions. More than 60 % of our products are manufactured in LaFox, Illinois, Marlborough, Massachusetts, or Donaueschingen, Germany, or by one of our manufacturing partners throughout the world. All our partners manufacture to our strict specifications and per our supplier code of conduct. 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. Starting with our first quarter earnings release in October for fiscal 2023, we will introduce our new Green Energy Solutions (“GES”) segment. This segment is carved out of our existing PMT segment as we continue to focus on power management applications that support the green energy market globally. Accordingly, in the first quarter of fiscal 2023, we will begin reporting on four segments.
The three operating and reportable segments for fiscal 2022, fiscal 2021 and fiscal 2020 are defined as follows:
Power and Microwave Technologies (“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. We partner with both private label manufacturing companies and leading branded hardware vendors to offer the highest quality display and touch solutions and customized computing platforms.
Healthcare manufactures, repairs, refurbishes and distributes high value replacement parts and equipment for the healthcare market including hospitals, medical centers, asset management companies, independent service organizations and multi-vendor service providers. Products include diagnostic imaging replacement parts for CT and MRI systems; replacement CT and MRI tubes; CT service training; MRI coils, cold heads and RF amplifiers; hydrogen thyratrons, klystrons, magnetrons; flat panel detector upgrades; pre-owned CT systems; and additional replacement solutions currently under development for the diagnostic imaging service market. Through a combination of newly developed products and partnerships, service offerings and training programs, we believe we can help our customers improve efficiency while lowering the cost of healthcare delivery.
We currently have operations in the following major geographic regions: North America, Asia/Pacific, Europe and Latin America.
Customer Concentration: No one customer represented more than 10 percent of our total accounts receivable balance as of May 28, 2022 or May 29, 2021. No one customer accounted for more than 10 percent of the Company’s consolidated net sales in fiscal 2022, fiscal 2021 or fiscal 2020.
38
Supplier Concentration: One of our suppliers represented 11 percent of our total cost of sales in fiscal 2022, 15 percent in fiscal 2021 and 16 percent in fiscal 2020. The amount owed to this supplier was approximately $ 1.4 million as of May 28, 2022 and $ 2.1 million as of May 29, 2021.
2.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP for all fiscal years presented. The consolidated financial statements include our wholly owned subsidiaries. All intercompany transactions and account balances have been eliminated in consolidation.
Our fiscal year 2022 began on May 30, 2021 and ended on May 28, 2022, our fiscal year 2021 began on May 31, 2020 and ended on May 29, 2021 and our fiscal year 2020 began on June 2, 2019 and ended on May 30, 2020. Unless otherwise noted, all references to a particular year in this document shall mean our fiscal year.
3.
SIGNIFICANT ACCOUNTING POLICIES AND DISCLOSURES
Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management continuously evaluates its critical accounting policies and estimates, including the allowance for doubtful accounts, revenue recognition, inventory obsolescence, intangible assets, loss contingencies and income taxes. Management bases the estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances, however, actual results could differ from those estimates.
Fair Values of Financial Instruments: The fair values of financial instruments are determined based on quoted market prices and market interest rates as of the end of the reporting period. Our financial instruments include investments, accounts receivable, accounts payable and accrued liabilities. The fair values of these financial instruments approximate carrying values at May 28, 2022 and May 29, 2021.
Cash and Cash Equivalents: We consider short-term, highly liquid investments that are readily convertible to known amounts of cash, and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates, and that have a maturity of three months or less, when purchased, to be cash equivalents. The carrying amounts reported in the balance sheet for cash and cash equivalents approximate the fair market value of these assets.
Allowance for Doubtful Accounts: Our allowance for doubtful accounts includes estimated losses that result from uncollectible receivables. The estimates are influenced by the following: continuing credit evaluation of customers’ financial conditions; aging of receivables, individually and in the aggregate; a large number of customers which are widely dispersed across geographic areas; and collectability and delinquency history by geographic area. Significant changes in one or more of these considerations may require adjustments affecting net income and net carrying value of accounts receivable. The allowance for doubtful accounts was approximately $ 0.2 million as of May 28, 2022 and $ 0.2 million as of May 29, 2021.
Loss Contingencies: We accrue a liability for loss contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. If we determine that there is at least a reasonable possibility that a loss may have been incurred, we will include a disclosure describing the contingency.
Revenue Recognition: 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.
The Company’s revenue includes the following streams:
•
Distribution
•
Manufacturing/assembly
•
Services revenue
Distribution typically includes products purchased from our suppliers, stocked in our warehouses and then sold to our customers. The distribution business does not include a separate service bundled with the product sold or sold on top of the product. 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
39
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.
Manufacturing/assembly typically includes the 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. 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 normally 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. The Company elects 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.
Repair, installation or training activities generate services revenue. 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 record discounts taken based on historical experience. The policy varies by business unit. The Company allows returns with prior written authorization. We estimate returns based on historical experience . The Company maintains a reserve for returns based on historical trends that covers all contracts and revenue streams using the expected value method because we have a large number of contracts with similar characteristics, which is considered variable consideration. The reserve for returns creates a refund liability on our balance sheet as a contra Trade Accounts Receivable as well as an asset in inventory. We value the inventory at cost due to there being minimal or no costs to the Company as we generally require the customer to pay freight and we typically do not have costs associated with activities such as relabeling or repackaging. The reserve is considered immaterial at each balance sheet date. Returns for defective product are typically covered by our suppliers’ warranty, thus, returns for defective product are not factored into our reserve.
Principal versus agent guidance was considered for customized products that are provided by our suppliers versus manufactured by the Company. The Company acts as the principal as we are responsible for satisfying the performance obligation. We have primary responsibility for fulfilling the contract, we have inventory risk prior to delivery to our customer, we establish prices, our consideration is not in the form of a commission and we bear the credit risk. The Company recognizes revenue in the gross amount of consideration.
Contracts with customers
A revenue contract exists once a customer purchase order is received, reviewed and accepted. 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. 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. The Company receives advance payments or deposits from our customers before revenue is recognized resulting in contract liabilities. Contract liabilities are included in accrued liabilities in the consolidated balance sheets.
Contract Liabilities: Contract liabilities and revenue recognized were as follows ( in thousands ):
May 29, 2021
Additions
Revenue
Recognized
May 28, 2022
Contract liabilities (deferred revenue)
$
3,313
$
6,917
$
( 5,264
)
$
4,966
See Note 9, Segment and Geographic Information, for a disaggregation of revenue by reportable segment and geographic region, which represents how our chief operating decision maker reviews information internally to evaluate our financial performance and to make resource allocation and other decisions for the Company.
40
Foreign Currency Translation: The functional currency is the local currency at all foreign locations, with the exception of Hong Kong, where the functional currency is the U.S. dollar. Balance sheet items for our foreign entities, included in our consolidated balance sheets, are translated into U.S. dollars at end-of-period spot rates. Gains and losses resulting from translation of foreign subsidiary financial statements are credited or charged directly to accumulated other comprehensive income, a component of stockholders’ equity. Revenues and expenses are translated at the current rate on the date of the transaction. Gains and losses resulting from foreign currency transactions are included in income. Foreign exchange (gain) loss reflected in our consolidated statements of comprehensive income (loss) were $ 0.3 million loss during fiscal 2022, a $ 0.8 million loss during fiscal 2021 and a small gain during fiscal 2020.
Shipping and Handling Fees and Costs: Shipping and handling costs billed to customers are reported as revenue and the related costs are reported as a component of cost of sales.
Inventories, net: Our consolidated inventories are stated at the lower of cost and net realizable value, generally using a weighted-average cost method. Our net inventories include approximately $ 66.6 million of finished goods, $ 8.0 million of raw materials and $ 5.8 million of work-in-progress as of May 28, 2022 as compared to 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. The inventory reserve as of May 28, 2022 was $ 6.1 million compared to $ 5.9 million as of May 29, 2021.
Provisions for obsolete or slow-moving inventories are recorded based upon regular analysis of stock rotation privileges, obsolescence, the exiting of certain markets and assumptions about future demand and market conditions. If future demand changes in the industry or market conditions differ from management’s estimates, additional provisions may be necessary.
We recorded provisions to our inventory reserves of $ 0.5 million, $ 1.0 million and $ 1.0 million during fiscal 2022, fiscal 2021 and fiscal 2020, respectively, which were included in cost of sales. The provisions were primarily for obsolete and slow-moving parts. The parts were written down to estimated realizable value.
Income Taxes: We recognize deferred tax assets and liabilities based on the differences between financial statement carrying amounts and the tax bases of assets and liabilities. We regularly review our deferred tax assets for recoverability and determine the need for a valuation allowance based on a number of factors, including both positive and negative evidence. These factors include historical taxable income or loss, projected future taxable income or loss, the expected timing of the reversals of existing temporary differences and the implementation of tax planning strategies. In circumstances where we, or any of our affiliates, have incurred three years of cumulative losses which constitute significant negative evidence, positive evidence of equal or greater significance is needed to overcome the negative evidence before a tax benefit is recognized for deductible temporary differences and loss carryforwards.
Investments: As of May 28, 2022, we had $ 5.0 million invested in a Certificate of Deposit (CD), which will mature in less than twelve months. As of May 29, 2021, we had no investments, as we liquidated our investments in the fourth quarter of fiscal 2021.
Intangible Assets: Intangible assets are initially recorded at their fair market values determined by quoted market prices in active markets, if available, or recognized valuation models. Intangible assets that have finite useful lives are amortized over their useful lives either on a straight-line basis or over their projected future cash flows and are tested for impairment when events or changes in circumstances occur that indicate possible impairment. Our intangible assets represent the fair value for trade name, customer relationships, non-compete agreements and technology acquired in connection with the acquisitions.
Property, Plant and Equipment: Property, plant and equipment are stated at cost, net of accumulated depreciation. Improvements and replacements are capitalized while expenditures for maintenance and repairs are charged to expense as incurred. Provisions for depreciation are computed using the straight-line method over the estimated useful life of the asset. Depreciation expense was approximately $ 3.2 million, $ 3.2 million and $ 3.1 million during fiscal 2022, fiscal 2021 and fiscal 2020, respectively.
Property, plant and equipment consist of the following ( in thousands ):
May 28, 2022
May 29, 2021
Land and improvements
$
1,385
$
1,385
Buildings and improvements
23,002
22,837
Computer, communications equipment and software
11,186
11,029
Machinery and other equipment
16,215
14,930
Construction in progress
1,991
1,429
53,779
51,610
Accumulated depreciation
( 36,818
)
( 34,543
)
Property, plant, and equipment, net
$
16,961
$
17,067
41
Construction in progress at May 28, 2022 includes $ 1.0 million for manufacturing facilities, $ 0.5 million for Healthcare initiatives and $ 0.3 million for IT systems. All projects are expected to be completed before the end of fiscal 2023.
Supplemental disclosure information of the estimated useful life of the assets:
Land improvements
10 years
Buildings and improvements
10 - 30 years
Computer, communications equipment and software
3 - 10 years
Machinery and other equipment
3 - 20 years
We review property and equipment, definite-lived intangible assets and other long-lived assets for impairment whenever adverse events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable.
If adverse events do occur, our impairment review is based on an undiscounted cash flow analysis at the lowest level at which cash flows of the long-lived assets are largely independent of other groups of our assets and liabilities. This analysis requires management judgment with respect to changes in technology, the continued success of product lines and future volume, revenue and expense growth rates. We conduct annual reviews for idle and underutilized equipment and review business plans for possible impairment. Impairment occurs when the carrying value of the assets exceeds the future undiscounted cash flows expected to be earned by the use of the asset or asset group. When impairment is indicated, the estimated future cash flows are then discounted to determine the estimated fair value of the asset or asset group and an impairment charge is recorded for the difference between the carrying value and the estimated fair value.
Additionally, we also evaluate the remaining useful life of each reporting period to determine whether events and circumstances warrant a revision to the remaining period of depreciation or amortization. If the estimate of a long-lived asset’s remaining useful life is changed, the remaining carrying amount of the asset is amortized prospectively over that revised remaining useful life.
Accrued Liabilities: Accrued liabilities consist of the following ( in thousands ):
May 28, 2022
May 29, 2021
Compensation and payroll taxes
$
5,519
$
4,945
Accrued severance
678
685
Professional fees
470
533
Deferred revenue
4,966
3,313
Other accrued expenses
4,477
4,706
Accrued Liabilities
$
16,110
$
14,182
Warranties: We offer warranties for the limited number of specific products we manufacture.
We estimate the cost to perform under the warranty obligation and recognize this estimated cost at the time of the related product sale. We record expense related to our warranty obligations as cost of sales in our consolidated statements of comprehensive income (loss). Each quarter, we assess actual warranty costs incurred on a product-by-product basis and compare the warranty costs to our estimated warranty obligation. With respect to new products, estimates are based generally on knowledge of the products and warranty experience.
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.
42
Changes in the warranty reserve during fiscal 2022 and fiscal 2021 were as follows ( in thousands ):
Warranty
Reserve
Balance at May 30, 2020
$
466
Accruals for products sold
121
Utilization
( 39
)
Balance at May 29, 2021
$
548
Accruals for products sold
160
Utilization
( 32
)
Balance at May 28, 2022
$
676
Other Non-Current Liabilities: Other non-current liabilities of $ 0.8 million at May 28, 2022 and $ 1.4 million at May 29, 2021, primarily represent employee-benefits obligations in various non-US locations.
Share-Based Compensation: We measure and recognize share-based compensation cost at fair value for all share-based payments, including stock options and restricted stock awards. We estimate fair value using the Black-Scholes option-pricing model, which requires assumptions such as expected volatility, risk-free interest rate, expected life and dividends. Compensation cost is recognized using a graded vesting schedule over the applicable vesting period. Share-based compensation expense totaled approximately $ 0.7 million during fiscal 2022, $ 0.7 million during fiscal 2021 and $ 0.7 million during fiscal 2020.
Stock options granted generally vest over a period of five years and have contractual terms to exercise of 10 years. A summary of stock option activity is as follows ( in thousands, except option prices and years):
Number of
Options
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life
Aggregate
Intrinsic
Value (1)
Options Outstanding at June 1, 2019
1,364
$
9.08
Granted
187
5.61
Exercised
( 10
)
5.67
Cancelled
( 114
)
6.87
Options Outstanding at May 30, 2020
1,427
$
8.83
Granted
188
4.26
Exercised
( 49
)
5.93
Forfeited
( 7
)
5.96
Cancelled
( 104
)
12.53
Options Outstanding at May 29, 2021
1,455
$
8.08
Granted
185
7.66
Exercised
( 373
)
8.01
Forfeited
( 35
)
6.51
Cancelled
( 84
)
11.65
Options Outstanding at May 28, 2022
1,148
$
7.82
5.7
$
7,082
Options Vested at May 28, 2022
676
$
8.73
4.1
$
3,551
(1)
Includes only those options that were in-the-money as of May 28, 2022. Stock options for which the exercise price exceeded the market price have been omitted. Fluctuations in the intrinsic value of both outstanding and exercisable options may result from changes in underlying stock price and timing and volume of option grants, exercises and forfeitures.
43
There were 373,489 stock options exercised during fiscal 2022, with cash received of $ 3.0 million. The total intrinsic value of options exercised was $ 1.9 million during fiscal 2022, $ 0.1 million for fiscal 2021 and less than $ 0.1 million for fiscal 2020. The weighted average fair value of stock option grants was $ 1.50 during fiscal 2022, $ 0.49 during fiscal 2021 and $ 0.81 during fiscal 2020. As of May 28, 2022, total unrecognized compensation costs related to unvested stock options and restricted stock awards was approximately $ 0.9 million, which is expected to be recognized over the remaining weighted average period of approximately two to four years . The total grant date fair value of stock options vested during fiscal 2022 was $ 0.2 million.
The fair value of stock options is estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:
Fiscal Year Ended
May 28, 2022
May 29, 2021
May 30, 2020
Expected volatility
29.00
%
27.72
%
24.48
%
Risk-free interest rate
0.97
%
0.45
%
1.91
%
Expected lives (years)
6.50
6.50
6.50
Annual cash dividend
$
0.24
$
0.24
$
0.24
The expected volatility assumptions are based on historical experience commensurate with the expected term. The risk-free interest rate is based on the yield of a treasury note with a remaining term equal to the expected life of the stock option. The expected stock option life assumption is based on the Securities and Exchange Commission’s (“SEC”) guidance in Staff Accounting Bulletin (“SAB”) No. 107 (“SAB No. 107”). For stock options granted during fiscal 2022, fiscal 2021 and fiscal 2020, we believe that our historical stock option experience does not provide a reasonable basis upon which to estimate expected term.
The following table summarizes information about stock options outstanding at May 28, 2022 ( in thousands, except option prices and years ):
Outstanding
Vested
Exercise Price Range
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Life
Aggregate
Intrinsic
Value
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Life
Aggregate
Intrinsic
Value
$4.26 to $6.47
389
$
5.11
7.2
$
3,455
152
$
5.38
6.6
$
1,310
$6.90 to $10.01
573
8.44
6.2
3,178
338
8.68
4.8
1,792
$11.14 to $13.76
186
11.57
0.9
449
186
11.57
0.9
449
Total
1,148
$
7.82
5.7
$
7,082
676
$
8.73
4.1
$
3,551
As of May 28, 2022 a summary of restricted stock award transactions was as follows ( in thousands ):
Unvested
Restricted
Shares
Unvested at May 30, 2020
142
Granted
73
Vested
( 71
)
Unvested at May 29, 2021
144
Granted
72
Vested
( 71
)
Unvested at May 28, 2022
145
Compensation effects arising from issuing stock awards have been charged against income and recorded as additional paid-in-capital in the consolidated statements of stockholders’ equity during fiscal 2022, fiscal 2021 and fiscal 2020.
The Employees’ Amended and Restated 2011 Long-Term Incentive Compensation Plan (the “Plan”) authorizes the issuance of up to 3,500,000 shares as incentive stock options, non-qualified stock options or stock awards. Under this plan, 1,302,000 shares are reserved for future issuance. The Plan authorizes the granting of stock options at the fair market value at the date of grant. Generally, these options become exercisable over five years and expire up to 10 years from the date of grant. Restricted stock awards vest on the anniversary of the grant date in three equal installments.
44
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.
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. The shares of Class B common stock are considered to be participating convertible securities since the shares of Class B common stock are convertible on a share-for-share basis into shares of common stock and may participate in dividends with common stock according to a predetermined formula which is 90% of the amount of Class A common stock cash dividends.
The earnings per share (“EPS”) presented in our consolidated statements of comprehensive income (loss) are based on the following ( in thousands, except per share amounts ):
For the Fiscal Year Ended
May 28, 2022
May 29, 2021
May 30, 2020
Basic
Diluted
Basic
Diluted
Basic
Diluted
Numerator for Basic and Diluted EPS:
Net income (loss)
$
17,927
$
17,927
$
1,655
$
1,655
$
( 1,838
)
$
( 1,838
)
Less dividends:
Common stock
2,745
2,745
2,669
2,669
2,648
2,648
Class B common stock
448
448
453
453
453
453
Undistributed earnings (loss)
$
14,734
$
14,734
$
( 1,467
)
$
( 1,467
)
$
( 4,939
)
$
( 4,939
)
Common stock undistributed earnings (loss)
$
12,655
$
12,720
$
( 1,254
)
$
( 1,255
)
$
( 4,217
)
$
( 4,217
)
Class B common stock undistributed earnings (loss)
2,079
2,014
( 213
)
( 212
)
( 722
)
( 722
)
Total undistributed earnings (loss)
$
14,734
$
14,734
$
( 1,467
)
$
( 1,467
)
$
( 4,939
)
$
( 4,939
)
Denominator for Basic and Diluted EPS:
Common stock weighted average shares
11,395
11,395
11,105
11,105
11,026
11,026
Effect of dilutive securities
Dilutive stock options
430
59
—
Denominator for diluted EPS adjusted for
weighted average shares and assumed
conversions
11,825
11,164
11,026
Class B common stock weighted average shares,
and shares under if-converted method for
diluted EPS
2,080
2,080
2,097
2,097
2,097
2,097
Net income (loss) per share:
Common stock
$
1.35
$
1.31
$
0.13
$
0.13
$
( 0.14
)
$
( 0.14
)
Class B common stock
$
1.21
$
1.18
$
0.11
$
0.11
$
( 0.13
)
$
( 0.13
)
Note :
There were no common stock options that were anti-dilutive for fiscal 2022. For fiscal 2021 and fiscal 2020, the common stock options that were anti-dilutive and not included in diluted earnings per common share were 0 and 1,120 , respectively.
45
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.
4 .
RELATED PARTY TRANSACTION
On June 15, 2015, the Company entered into a lease agreement for the IMES facility with LDL, LLC. That lease agreement was extended for five years in fiscal 2021. 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 six months of the expiration of the term. The Executive Vice President of IMES, Lee A. McIntyre III (former owner of IMES), has an ownership interest in LDL, LLC. Mr. McIntyre will be departing from the Company in fiscal year 2023 , effective as of September 24, 2022 . The lease agreement provides for monthly payments over five years with total future minimum lease payments of $ 0.5 million. Rental expense related to this lease amounted to $ 0.2 million for the fiscal year ended May 28, 2022 and $ 0.1 million for fiscal years ended May 29, 2021 and May 30, 2020.
5 .
INTANGIBLE ASSETS
Intangible assets are initially recorded at their fair market values determined by quoted market prices in active markets, if available, or recognized valuation models. Intangible assets that have finite useful lives are amortized over their useful lives and are tested for impairment when events or changes in circumstances occur that indicate possible impairment. No impairment was recognized in fiscal 2022, fiscal 2021 or fiscal 2020.
Our intangible assets represent the fair value for trade name, customer relationships, non-compete agreements and technology acquired in connection with our acquisitions. Intangible assets subject to amortization were as follows (in thousands) :
May 28, 2022
May 29, 2021
Gross Amounts:
Trade Name
$
659
$
659
Customer Relationships (1)
3,393
3,426
Non-compete Agreements
177
177
Technology
230
230
Total Gross Amounts
$
4,459
$
4,492
Accumulated Amortization:
Trade Name
$
659
$
659
Customer Relationships
1,453
1,249
Non-compete Agreements
177
177
Technology
160
137
Total Accumulated Amortization
$
2,449
$
2,222
Net Intangible Assets
$
2,010
$
2,270
(1) Change from prior periods reflect impact of foreign currency translation.
46
Companies must perform the annual test for impairment for indefinite life intangible assets, for which the Company has none, as well as test definite life assets for impairment in the event of a “trigger event” such as adverse changes in the business climate or market which might negatively impact the value of a reporting unit. We determined that the intangible assets were not impaired as of May 28, 2022 on the basis that no adverse events or changes in circumstances were identified that could indicate that the carrying amounts of such assets may not be recoverable.
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
2023
$
245
2024
232
2025
219
2026
185
2027
173
Thereafter
956
Total amortization expense
$
2,010
The amortization expense associated with the intangible assets totaled approximately $ 0.2 million during fiscal 2022, fiscal 2021 and fiscal 2020. The weighted average number of years of amortization expense remaining is 11.6 years.
6 .
LEASE OBLIGATIONS AND OTHER COMMITMENTS
The Company leases real and personal property in the normal course of business under various operating and financing leases. The Company uses operating leases for facility space and automobiles. Most of the leased facility space is for sales and general office use. Automobile leases are used throughout the Company. Financing leases are used for computer servers.
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 determines it is reasonably certain of renewal.
The gross amounts of assets and liabilities related to both operating and financing leases at May 28, 2022 and May 29, 2021 were as follows (in thousands) :
Lease Type
May 28, 2022
May 29, 2021
Operating lease ROU asset
$
3,024
$
2,262
Financing lease ROU asset
215
308
Total Lease ROU asset
$
3,239
$
2,570
Operating lease liability current
$
1,109
$
918
Financing lease liability current
—
148
Total lease liability current
$
1,109
$
1,066
Operating lease liability non-current
$
1,915
$
1,358
Financing lease liability non-current
—
—
Total lease liability non-current
$
1,915
$
1,358
47
The components of lease costs for fiscal 2022 and fiscal 2021 were as follows (in thousands) :
Lease Type
Classification
Fiscal Year Ended
May 28, 2022
Fiscal Year Ended
May 29, 2021
Consolidated operating lease expense
Operating expenses
$
1,781
$
1,939
Consolidated financing lease amortization
Operating expenses
92
92
Consolidated financing lease interest
Interest expense
3
11
Consolidated financing lease expense
95
103
Net lease cost
$
1,876
$
2,042
Rent expense for fiscal 2022, fiscal 2021 and fiscal 2020 was $ 1.6 million, $ 1.7 million, and $ 1.8 million, respectively.
Our future lease commitments for minimum rentals, including common area maintenance charges and property taxes during the next five years are as follows (in thousands) :
Fiscal Year
Operating Leases
2023
$
1,244
2024
872
2025
610
2026
388
2027
75
Thereafter
17
Total lease payments
3,206
Less imputed interest
182
Net minimum lease payments
$
3,024
The weighted average remaining lease terms and interest rates of leases held by the Company as of May 28, 2022 were as follows:
Lease Type
Weighted Average Remaining
Lease Term in Years
Weighted Average
Interest Rate
Operating leases
3.2
4.4 %
The cash outflows of the leasing activity of the Company as lessee for fiscal 2022 and fiscal 2021 were as follows (in thousands) :
Fiscal Year Ended
Cash Flow Source
Classification
May 28, 2022
May 29, 2021
Operating cash flows from operating leases
Operating activities
$
747
$
831
Operating cash flows from financing leases
Operating activities
148
170
Finance cash flows from financing leases
Financing activities
151
181
7 .
INCOME TAXES
Income (loss) before income taxes included the following components ( in thousands ):
Fiscal Year Ended
May 28, 2022
May 29, 2021
May 30, 2020
United States
$
12,299
$
1,077
$
( 3,716
)
Foreign
3,460
1,231
2,502
Income (loss) before income taxes
$
15,759
$
2,308
$
( 1,214
)
48
The provision for income taxes for fiscal 2022, fiscal 2021 and fiscal 2020 consisted of the following ( in thousands ):
Fiscal Year Ended
May 28, 2022
May 29, 2021
May 30, 2020
Current:
Federal
$
( 4,213
)
$
108
$
—
State
950
—
—
Foreign
1,038
665
616
Total current
( 2,225
)
773
616
Deferred:
Federal
—
—
( 88
)
Foreign
57
( 120
)
96
Total deferred
57
( 120
)
8
Income tax (benefit) provision
$
( 2,168
)
$
653
$
624
The differences between income taxes at the U.S. federal statutory income tax rate of 21.0 % for fiscal 2022, fiscal 2021 and fiscal 2020 and the reported income tax provision for fiscal 2022, fiscal 2021 and fiscal 2020, are summarized as follows:
Fiscal Year Ended
May 28, 2022
May 29, 2021
May 30, 2020
Federal statutory rate
21.0
%
21.0
%
21.0
%
Effect of:
State income taxes, net of federal tax benefit
5.5
21.6
6.6
Foreign taxes at other rates
4.5
10.5
( 15.3
)
Permanent tax differences
( 2.0
)
18.3
( 41.1
)
Change in valuation allowance for deferred tax assets
( 43.1
)
( 49.7
)
( 29.8
)
Return to provision adjustments
0.2
2.2
1.4
Other
0.2
4.4
5.8
Effective tax rate
( 13.7
)%
28.3
%
( 51.4
)%
49
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Our deferred tax assets and liabilities reflect operations as of May 28, 2022 and May 29, 2021. Significant components were as follows ( in thousands ):
Fiscal Year Ended
May 28, 2022
May 29, 2021
Deferred tax assets:
NOL carryforwards - foreign and domestic
$
2,796
$
7,362
Inventory valuations
1,571
1,501
Goodwill
1,182
1,286
Foreign tax credits
1,782
1,782
Severance reserve
183
185
Foreign capital loss
1,224
1,261
Other
1,480
1,469
Subtotal
10,218
14,846
Valuation allowance - foreign and domestic
( 3,474
)
( 12,225
)
Net deferred tax assets after valuation allowance
6,744
2,621
Deferred tax liabilities:
Accelerated depreciation
( 2,406
)
( 2,279
)
Tax on undistributed earnings
( 24
)
( 24
)
Other
( 1
)
18
Subtotal
( 2,431
)
( 2,285
)
Net deferred tax assets
$
4,313
$
336
Supplemental disclosure of net deferred tax assets,
excluding valuation allowance:
Domestic
$
6,017
$
10,653
Foreign
1,770
1,913
Total
$
7,787
$
12,566
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.
As of May 28, 2022, we have utilized all net deferred tax assets related to federal net operating loss (“NOL”) carryforwards, compared to $ 3.0 million as of May 29, 2021. Net deferred tax assets related to domestic state NOL carryforwards at May 28, 2022 amounted to approximately $ 2.4 million, compared to $ 3.9 million at May 29, 2021. Net deferred tax assets related to foreign NOL carryforwards as of May 28, 2022 totaled approximately $ 0.4 million with various or indefinite expiration dates. The amount of net deferred tax assets related to foreign NOL carryforwards was $ 0.4 million as of May 29, 2021. We also had a domestic net deferred tax asset of $ 1.8 million of foreign tax credit carryforwards as of both May 28, 2022 and 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 2022 and fiscal 2021.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to support a more likely than not assertion that its deferred tax assets will be realized. A significant component of objective evidence evaluated was the cumulative income or loss incurred in each jurisdiction over the three-year period ended May 28, 2022. 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 changes in our business performance in recent years, and the utilization of federal NOLs. The weight of this positive evidence is sufficient to outweigh other negative evidence in evaluating our need for a valuation allowance in the U.S. federal jurisdiction. As a result of the positive evidence outweighing the negative evidence for the year ended May 28,
50
2022, we have released the full valuation allowance on the U.S. federal and state deferred tax items. In addition, we partially released the valuation allowance on the state NOL deferred tax item, based on the amount of the NOLs that management believes it is more likely than not to realize. We have maintained a full valuation allowance against the foreign tax credit deferred tax asset based on negative evidence relating to the Company’s ability to utilize the foreign tax credit carryforward in the future.
As of May 28, 2022, a valuation allowance of $ 3.5 million was recorded, representing the portion of the deferred tax asset that management does not believe is more likely than not to be realized. The valuation allowance as of May 29, 2021 was $ 12.2 million. The remaining valuation allowance relates to foreign tax credits ($ 1.8 million), state NOLs ($ 0.2 million) and deferred tax assets in foreign jurisdictions where historical taxable losses have been incurred ($ 1.5 million). 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 $ 1.5 million, $ 0.1 million and $ 1.0 million, during fiscal 2022, fiscal 2021 and fiscal 2020, respectively.
In the normal course of business, we are subject to examination by taxing authorities throughout the world. Generally, years prior to fiscal 2016 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 Germany for fiscal 2015 through fiscal 2018. This audit is expected to be closed in the first quarter of fiscal 2023. 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 28, 2022 and May 29, 2021 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 no t recorded a liability for interest and penalties as of May 28, 2022 or May 29, 2021.
The following table summarizes the activity related to the unrecognized tax benefits (in thousands ):
Fiscal Year Ended
May 28, 2022
May 29, 2021
Unrecognized tax benefits, beginning of period
$
142
$
129
Currency translation adjustment
( 17
)
13
Unrecognized tax benefits, end of period
$
125
$
142
8.
EMPLOYEE BENEFIT PLANS
The employee profit sharing plan is a defined contribution profit sharing plan. The profit sharing plan has a 401(k) provision whereby we match 50 % of employee contributions up to 6.0 % of pay. Previously, the Company matched contributions up to 4.0 % of pay for fiscal 2021 and fiscal 2020. Charges to expense for matching contributions to this plan were $ 0.8 million, $ 0.6 million and $ 0.5 million, during fiscal 2022, fiscal 2021 and fiscal 2020, respectively.
9.
SEGMENT AND GEOGRAPHIC INFORMATION
We have three operating and reportable segments. Starting with our first quarter earnings release in October for fiscal 2023, we will introduce our new Green Energy Solutions (“GES”) segment. This segment is carved out of our existing PMT segment as we continue to focus on power management applications that support the green energy market globally. Accordingly, in the first quarter of fiscal 2023, we will begin reporting on four segments.
The reportable segments for fiscal 2022, fiscal 2021 and fiscal 2020 were: PMT, Canvys and Healthcare.
51
Power and Microwave Technologies (“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. We partner with both private label manufacturing companies and leading branded hardware vendors to offer the highest quality display and touch solutions and customized computing platforms.
Healthcare manufactures, repairs, refurbishes and distributes high value replacement parts and equipment for the healthcare market including hospitals, medical centers, asset management companies, independent service organizations and multi-vendor service providers. Products include diagnostic imaging replacement parts for CT and MRI systems; replacement CT and MRI tubes; CT service training; MRI coils, cold heads and RF amplifiers; hydrogen thyratrons, klystrons, magnetrons; flat panel detector upgrades; pre-owned CT systems; and additional replacement solutions currently under development for the diagnostic imaging service market. Through a combination of newly developed products and partnerships, service offerings and training programs, we believe we can help our customers improve efficiency while lowering the cost of healthcare delivery.
The CEO, who is the chief operating decision maker, evaluates performance and allocates resources primarily based on the gross profit of each segment.
Operating results by segment are summarized in the following table ( in thousands ):
Fiscal Year Ended
May 28, 2022
May 29, 2021
May 30, 2020
PMT
Net Sales
$
178,056
$
137,280
$
118,480
Gross Profit
58,041
45,951
38,288
Canvys
Net Sales
$
35,187
$
29,319
$
28,926
Gross Profit
11,252
10,274
9,313
Healthcare
Net Sales
$
11,377
$
10,338
$
8,492
Gross Profit
2,407
2,600
2,072
52
A reconciliation of assets to the relevant consolidated amount is as follows ( in thousands ):
May 28, 2022
May 29, 2021
Segment assets
$
120,696
$
100,638
Cash and cash equivalents
35,495
43,316
Investments - current
5,000
—
Other current assets (1)
2,686
1,918
Net property, plant and equipment
9,435
9,300
Operating lease ROU asset
1,894
732
Financing lease ROU asset
215
308
Other assets - non-current deferred income taxes
4,398
541
Total assets
$
179,819
$
156,753
(1)
Other current assets include miscellaneous receivables and prepaid expenses.
Assets are not disclosed by reportable segment as the Company does not track assets by reportable segment and certain assets are not specific to any reportable segment.
Capital expenditures for our Healthcare segment during fiscal 2022 and fiscal 2021 were approximately $ 1.0 million and $ 1.7 million, respectively. In addition, we also had capital expenditures during fiscal 2022 and fiscal 2021 related to the Company’s ERP system as well as facilities that were not specific to any particular reportable segment.
Geographic net sales information is primarily grouped by customer destination into five areas: North America; Asia/Pacific; Europe; Latin America; and Other.
Net sales and gross profit by geographic region are summarized in the following table ( in thousands ):
Fiscal Year Ended
May 28, 2022
May 29, 2021
May 30, 2020
Net Sales
North America
$
98,527
$
73,625
$
65,259
Asia/Pacific
49,235
40,839
32,979
Europe
64,435
52,549
49,394
Latin America
12,439
9,651
8,308
Other (1)
( 16
)
273
( 42
)
Total
$
224,620
$
176,937
$
155,898
Gross Profit
North America
$
36,548
$
28,639
$
24,494
Asia/Pacific
15,728
13,520
10,629
Europe
19,215
16,958
15,483
Latin America
4,340
3,405
2,804
Other (1)
( 4,131
)
( 3,697
)
( 3,737
)
Total
$
71,700
$
58,825
$
49,673
(1)
Other includes primarily net sales not allocated to a specific geographical region, unabsorbed value-add cost and other unallocated expenses .
During fiscal 2022, fiscal 2021 and fiscal 2020, no one customer accounted for more than 10 percent of the Company’s consolidated net sales. 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.
53
Net assets by geographic region are summarized in the following table ( in thousands ):
Fiscal Year Ended
May 28, 2022
May 29, 2021
Net Assets
North America
$
90,979
$
77,698
Asia/Pacific
11,514
10,547
Europe
30,873
31,289
Latin America
2,481
2,026
Total
$
135,847
$
121,560
The Company had long-lived assets of $ 19.0 million as of May 28, 2022 and $ 19.3 million as of May 29, 2021. The long-lived assets, which include our fixed assets and intangibles, were primarily in the US. There were approximately $ 0.4 million of long-lived assets that belong to our foreign affiliates as of May 28, 2022 and $ 0.4 million as of May 29, 2021.
The Company had depreciation and amortization expense of $ 3.4 million, $ 3.4 million and $ 3.4 million for fiscal 2022, fiscal 2021 and fiscal 2020, respectively. The depreciation and amortization, which includes our fixed assets and intangibles, were primarily in the US. Depreciation and amortization expense that belongs to our foreign affiliates was approximately $ 0.1 million for fiscal 2022, $ 0.3 million for fiscal 2021 and $ 0.3 million for fiscal 2020, respectively.
1 0 .
RISKS AND UNCERTAINTIES
Legal Settlement – Fiscal 2021
On April 2, 2021, as part of a settlement where the Company did not admit liability, Richardson agreed to pay Varex Imaging Corporation (“Varex”) $ 1.6 million to settle alleged counts of patent infringement and claims of trade secret misappropriation. This settlement was recorded in selling, general and administrative expenses within the Consolidated Statements of Comprehensive Income for the third quarter of fiscal 2021.
COVID-19 Update
The impact of the COVID-19 pandemic and its effects continue to evolve. As such, the full magnitude that the pandemic, and the steps taken to prevent, mitigate and/or respond to its spread, will have on the Company’s financial condition, liquidity and future results of operations is uncertain. The extent of the impact of the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the duration and spread of the pandemic, the extent, speed and effectiveness of continued worldwide containment efforts, and other actions taken by governments, businesses and individuals in response to abatement and resurgence of the disease. Our ability to meet customer demands for products may be impaired or, similarly, our customers may experience adverse business consequences due to the continued impact of COVID-19 and its effects.
Reduced demand for products or impaired ability to meet customer demand (including disruptions at our transportation service providers or vendors) could have a material adverse effect on our business, operations and financial performance. There were sales declines during fiscal year 2021, the majority of which were related to the COVID-19 global pandemic. While the Company did not experience sales declines during fiscal year 2022 as a result of the pandemic, the impacts from the pandemic negatively impacted our gross margins as a percentage of net sales in our Canvys and Healthcare segments.
As a result of COVID-19 and its effects, we experienced some COVID-19 related component delays impacting new product development schedules. The global markets have generally suffered, and are continuing to suffer, from material disruptions in the supply chain.
Management continues to monitor the global situation on its financial condition, liquidity, operations, suppliers, industry and workforce. Given the ever-evolving nature of the pandemic and the continued global responses to the ongoing impact of the pandemic as well the cycle of recurrences and the after-effects, the Company is not presently able to fully estimate the effects of COVID-19 on its results of operations, financial condition or liquidity going forward.
54
Company Response to CARES Act
On March 27, 2020, Congress enacted the Coronavirus Aid, Relief and Economic Security (“CARES”) Act to provide certain relief as a result of the COVID-19 outbreak. The CARES Act included provisions relating to refundable payroll tax credits, deferral of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, increased limitations on qualified charitable contributions and technical corrections to tax depreciation methods for qualified, improvement property. As of May 28, 2022, the Company deferred $ 0.4 million of employer-side social security tax payments, which will be made by December 31, 2022. The Company has estimated and recorded the overall effects of the CARES Act and does not anticipate a material change.
1 1.
FAIR VALUE MEASUREMENTS
Investments measured at fair value as of May 28, 2022 and May 29, 2021 were as follows ( in thousands ):
Level 1
Level 2
Level 3
May 28, 2022
CDs
$
5,000
$
—
$
—
Total
$
5,000
$
—
$
—
May 29, 2021
CDs
$
—
$
—
$
—
Total
$
—
$
—
$
—
1 2.
VALUATION AND QUALIFYING ACCOUNTS
The following table presents the valuation and qualifying account activity for fiscal years ended May 28, 2022, May 29, 2021 and May 30, 2020, ( in thousands ):
Description
Balance at
beginning
of period
Charged to
expense
Deductions
Balance at
end
of period
Year ended May 28, 2022
Allowance for doubtful accounts
$
202
$
103
(1)
$
( 119
)
(2)
$
186
Inventory provisions
5,866
462
(3)
( 268
)
(4)
6,060
Year ended May 29, 2021
Allowance for doubtful accounts
$
334
$
149
(1)
$
( 281
)
(2)
$
202
Inventory provisions
5,393
1,041
(3)
( 568
)
(4)
5,866
Year ended May 30, 2020
Allowance for doubtful accounts
$
339
$
349
(1)
$
( 354
)
(2)
$
334
Inventory provisions
4,568
1,013
(3)
( 188
)
(4)
5,393
Notes:
(1)
Charges to bad debt expense.
(2 )
Uncollectible amounts written off, net of recoveries and foreign currency translation.
(3)
Charges to cost of sales. Included in fiscal 2022 were inventory write-downs of $ 0.4 million for PMT and $ 0.1 million for Healthcare .
(4 )
Inventory disposed or sold, net of foreign currency translation.
55
1 3 .
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) ( in thousands, except per share amounts ):
Description
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Fiscal 2022
Net sales
$
53,704
$
53,979
$
55,308
$
61,629
Gross profit
16,297
17,657
17,569
20,177
Net income
2,635
4,122
2,887
8,283
Net income per share:
Common stock - basic
$
0.20
$
0.31
$
0.22
$
0.62
Class B common stock - basic
0.18
0.28
0.19
0.55
Common stock - diluted
0.20
0.30
0.21
0.59
Class B common stock - diluted
0.18
0.27
0.19
0.54
Fiscal 2021
Net sales
$
38,812
$
42,418
$
45,235
$
50,472
Gross profit
12,359
14,343
15,766
16,357
Net (loss) income
( 1,147
)
689
228
1,885
Net (loss) income per share:
Common stock - basic
$
( 0.09
)
$
0.05
$
0.02
$
0.14
Class B common stock - basic
( 0.08
)
0.05
0.02
0.13
Common stock - diluted
( 0.09
)
0.05
0.02
0.14
Class B common stock - diluted
( 0.08
)
0.05
0.02
0.13
56