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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549 

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended May 29, 2021

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from__________ to

Commission File Number: 0-12906

 

 

(Exact name of registrant as specified in its charter)

 

Delaware

 

36-2096643

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

40W267 Keslinger Road, P.O. Box 393, LaFox, Illinois 60147-0393

(Address of principal executive offices)

Registrant’s telephone number, including area code: (630208-2200

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common stock, $0.05 Par Value

 

RELL

 

NASDAQ Global Select Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes      No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act   Yes      No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit  such files).    Yes      No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

 

 

Accelerated Filer

 

Non-Accelerated Filer

 

 

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of November 28, 2020 was approximately $49.7 million.

As of July 26, 2021, there were outstanding 11,232,060 shares of Common Stock, $0.05 par value and 2,096,919 shares of Class B Common Stock, $0.05 par value, which are convertible into Common Stock of the registrant on a one-for-one basis.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for the Annual Meeting of Stockholders scheduled to be held October 5, 2021, which will be filed pursuant to Regulation 14A, are incorporated by reference in Part III of this report. Except as specifically incorporated herein by reference, the abovementioned Proxy Statement is not deemed filed as part of this report.

 

 

 


 

 

TABLE OF CONTENTS

 

 

 

 

Page

Part I

 

 

3

Item 1.

Business

 

3

Item 1A.

Risk Factors

 

6

Item 1B.

Unresolved Staff Comments

 

14

Item 2.

Properties

 

14

Item 3.

Legal Proceedings

 

15

 

 

 

 

Part II

 

 

16

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities

 

16

 

 

 

 

Item 6.

Selected Financial Data

 

18

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

19

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

 

29

Item 8.

Financial Statements and Supplementary Data

 

29

Item 9A.

Controls and Procedures

 

57

Item 9B.

Other Information

 

57

 

 

 

 

Part III

 

 

58

Item 10.

Directors, Executive Officers and Corporate Governance

 

58

Item 11.

Executive Compensation

 

58

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

58

Item 13.

Certain Relationships and Related Transactions, and Director Independence

 

58

Item 14.

Principal Accountant Fees and Services

 

58

 

 

 

 

Part IV

 

 

59

Item 15.

Exhibits and Financial Statement Schedules

 

59

Item 16.

Form 10-K Summary

 

60

 

 

 

Exhibit Index

 

61

Signatures

 

64

 

 

2


 

 

Forward Looking Statements

Certain statements in this report may constitute “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. The terms “may”, “should”, “could”, “anticipate”, “believe”, “continues”, “estimate”, “expect”, “intend”, “objective”, “plan”, “potential”, “project” and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. These statements are based on management’s current expectations, intentions or beliefs and are subject to a number of factors, assumptions and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Factors that could cause or contribute to such differences or that might otherwise impact the business include the risk factors set forth in Item 1A of this Form 10-K. We undertake no obligation to update any such factor or to publicly announce the results of any revisions to any forward-looking statements contained herein whether as a result of new information, future events or otherwise.

In addition, while we do, from time to time, communicate with securities analysts, it is against our policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.

PART I

ITEM 1. Business

General

Richardson Electronics, Ltd. is a leading global provider of engineered solutions, power grid and microwave tubes and related consumables; power conversion and RF and microwave components; high value flat panel detector solutions, replacement parts, tubes and service training for diagnostic imaging equipment; and customized display solutions. We serve customers in the alternative energy, healthcare, aviation, broadcast, communications, industrial, marine, medical, military, scientific and semiconductor markets. The Company’s strategy is to provide specialized technical expertise and “engineered solutions” based on our core engineering and manufacturing capabilities. The Company provides solutions and adds value through design-in support, systems integration, prototype design and manufacturing, testing, logistics and aftermarket technical service and repair through its global infrastructure.

Our fiscal year 2021 began on May 31, 2020 and ended on May 29, 2021, our fiscal year 2020 began on June 2, 2019 and ended on May 30, 2020 and our fiscal year 2019 began on June 3, 2018 and ended on June 1, 2019. Unless otherwise noted, all references to a particular year in this document shall mean our fiscal year.

Company Response to COVID-19

In March 2020, the World Health Organization classified the outbreak of COVID-19 as a pandemic. Thereafter, most U.S. states imposed “shelter in place” directives on their populations to stem the spread of COVID-19 and similar restrictive measures were taken by governments across the world.

The shelter in place directives generally required the closure of businesses that did not provide essential functions. The Company was considered a critical supplier of products to healthcare and critical infrastructure businesses. Further, several of our largest customers mandated that we continue to supply parts so as not to disrupt the supply chain and their ability to serve critical industries. As such, the Company qualified as an “Essential Business” and the Company continued our manufacturing and distribution operations throughout 2021. Our top priority was ensuring the health and safety of our employees and, accordingly, we undertook measures such as limiting the number of people in any one of our facilities by requiring only employees who could not perform their work remotely to physically work in a Company US-based facility. The Company advised all other employees that could perform their job functions remotely to do so. As such, the Company’s operations remained operational.

The impact of the COVID-19 outbreak and its effects continue to evolve. As such, the full magnitude that the pandemic, and the steps taken to prevent and/or mitigate 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 worldwide containment and vaccination efforts and the impact of these and other factors on our employees, customers and suppliers. Our ability to meet customer demands for products may be impaired or, similarly, our customers may experience adverse business consequences due to 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 was a decline in PMT sales during the first three months of fiscal 2021, a decline in Healthcare sales during the first six months of fiscal 2021 and a decline in Canvys sales during the first nine months of fiscal 2021. The majority of these declines

3


 

in sales were related to the COVID-19 global pandemic. While we had some COVID-19 related component delays impacting new product development schedules, we did not experience a major interruption in our supply chain. 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 curb its spread, the Company is not presently able to fully estimate the effects of COVID-19 on its results of operations, financial condition or liquidity for fiscal year 2022.

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 29, 2021, the Company deferred $0.9 million of employer-side social security tax payments. The Company has estimated and recorded the overall effects of the CARES Act and does not anticipate a material change.

Geography

We currently have operations in the following major geographic regions: North America, Asia/Pacific, Europe and Latin America.

Selected financial data attributable to each segment and geographic region for fiscal 2021, fiscal 2020 and fiscal 2019 is set forth in Note 9, Segment and Geographic Information, of the notes to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.

We have three operating and reportable segments, which we define as follows:

Power and Microwave Technologies Group

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.

PMT represents leading manufacturers of electron tubes and RF, Microwave and power components used in semiconductor manufacturing equipment, RF and wireless and industrial power applications. Among the suppliers PMT supports are Amperex, CDE, CPI, Draloric, Eimac, General Electric, Hitachi, Jennings, L3, MACOM, National, NJRC, Ohmite, Qorvo, Thales, Toshiba and Vishay.

PMT’s inventory levels reflect our commitment to maintain an inventory of a broad range of products for customers who are buying products for replacement of components used in critical equipment and designing in new technologies. PMT also sells a number of products representing trailing edge technology. While the market for these trailing edge technology products is declining, PMT is increasing its market share. PMT often buys products it knows it can sell ahead of any supplier price increases and extended lead times. As manufacturers for these products exit the business, PMT has the option to purchase a substantial portion of their remaining inventory.

PMT has distribution agreements with many of its suppliers; most of these agreements provide exclusive distribution rights that often include global coverage. The agreements are typically long term, and usually contain provisions permitting termination by either party if there are significant breaches that are not cured within a reasonable period. Although some of these agreements allow PMT to return inventory periodically, others do not, in which case PMT may have obsolete inventory that they cannot return to the supplier.

PMT’s suppliers provide warranty coverage for the products and allow return of defective products, including those returned to PMT by its customers. For information regarding the warranty reserves, see Note 3, Significant Accounting Policies and Disclosures, of the notes to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.

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In addition to third party products, we sell proprietary products principally under certain trade names we own including Amperex®, Cetron® and National®. Our proprietary products include thyratrons and rectifiers, power tubes, ignitrons, magnetrons, phototubes, microwave generators, Ultracapacitor modules and liquid crystal display monitors. The materials used in the manufacturing process consist of glass bulbs and tubing, nickel, stainless steel and other metals, plastic and metal bases, ceramics and a wide variety of fabricated metal components. These materials are generally readily available, but some components may require long lead times for production, and some materials are subject to shortages or price fluctuations based on supply and demand.

Canvys – Visual Technology Solutions

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.

We have long-standing relationships with key component and finished goods manufacturers and several key ISO 9001 and ISO 13485 certified Asian display manufacturers that manufacture products to our specifications. We believe supplier relationships, combined with our engineering design and manufacturing capabilities and private label partnerships, allow us to maintain a well-balanced and technologically advanced offering of customer specific display solutions.

Healthcare

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.

Sales and Product Management

We have employees, as well as authorized representatives who are not our employees, selling our products primarily in regions where we do not have a direct sales presence.

We offer various credit terms to qualifying customers as well as cash in advance and credit card terms. We establish credit limits for each customer and routinely review delinquent and aging accounts.

Distribution

We maintain approximately 110,700 part numbers in our product inventory database and we estimate that more than 90% of orders received by 6:00 p.m. local time are shipped complete the same day for stock product. Customers can access our products on our web sites, www.rell.com, www.rellhealthcare.com, www.canvys.com, www.rellpower.com, www.relltubes.com and www.rellaser.com, through electronic data interchange, or by telephone. Customer orders are processed by our regional sales offices and supported primarily by one of our distribution facilities in LaFox, Illinois; Fort Mill, South Carolina; Amsterdam, Netherlands; Marlborough, Massachusetts; Donaueschingen, Germany; or Singapore, Singapore. We also have satellite warehouses in Sao Paulo, Brazil; Shanghai, China; Bangkok, Thailand; and Hook, United Kingdom. Our data processing network provides on-line, real-time interconnection of all sales offices and central distribution operations, 24 hours per day, seven days per week. Information on stock availability, pricing in local currency, cross-reference information, customers and market analyses are obtainable throughout the entire distribution network.

International Sales

During fiscal 2021, we made approximately 59% of our sales outside the U.S. We continue to pursue new international sales to further expand our geographic reach.

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Major Customers

During fiscal 2021, fiscal 2020 and fiscal 2019, no one customer accounted for more than 10 percent of the Company’s consolidated net sales. See Note 9, Segment and Geographic Information, of the notes to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information.

Human Capital Management

The future success of our company depends on our ability to attract, hire, motivate, retain and further develop top talent, including highly-skilled technical, management and sales personnel. The skills, experience and industry knowledge of our employees significantly benefit our operations and performance. Competition for such personnel is intense and the salary, benefits and other costs to employ the right personnel may impact our results and performance.

As of May 29, 2021, we employed 405 individuals, which included 373 full-time individuals and 32 part-time individuals. Of these, 250 full-time and 18 part-time were located in the United States and 123 full-time and 14 part-time were located internationally.  All of our employees are non-union and we consider our relationships with our employees to be good.

The Company offers employees a competitive compensation program, designed to recognize and reward both individual and company performance, which includes a base pay, variable compensation programs, and health, wellbeing and retirement programs to meet the needs of our employees.

The health, safety and wellness of our employees is a priority that was a particular focus in 2021 in light of COVID-19, including having many of our employees work from home whenever possible while implementing additional safety measures for employees continuing critical on-site work.

Website Access to SEC Reports

We maintain an Internet website at www.rell.com. Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 are accessible through our website, free of charge, as soon as reasonably practicable after these reports are filed electronically with the Securities and Exchange Commission. Interactive Data Files pursuant to Rule 405 of Regulation S-T, of these filing dates, formatted in Extensible Business Reporting Language (“XBRL”) are accessible as well. To access these reports, go to our website at www.rell.com. Information relating to our corporate governance, including our Code of Conduct (including any related amendments or waivers) and information concerning our executive officers, directors and Board committees (including committee charters) is also available on our website. The foregoing information regarding our website is provided for convenience and the content of our website is not deemed to be incorporated by reference in this report filed with the Securities and Exchange Commission. Additionally, the SEC maintains an internet site through which our reports, proxy and information statements and our other SEC filings can be located; the address of that site is http://www.sec.gov.

ITEM 1A. Risk Factors

Investors should consider carefully the following risk factors in addition to the other information included and incorporated by reference in this Annual Report on Form 10-K that we believe are applicable to our businesses and the industries in which we operate. While we believe we have identified the key risk factors affecting our businesses, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely affect our results of operations.

Business and Operational Risks

We may not achieve our plan for sales growth and margin targets.

We have established both margin and expense targets to grow our sales with new and existing customers. If we do not achieve our growth objectives, the complexity of our global infrastructure makes it difficult to leverage our fixed cost structure to align with the size of our operations. Factors that could have a significant effect on our ability to achieve these goals include the following:

 

Failure to achieve our sales and margin growth objectives in our product lines and business units;

 

Failure to identify, consummate and successfully integrate acquisitions;

 

Declining gross margin reflecting competitive pricing pressures or product mix; and

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Limitations on our ability to leverage our support-function cost structure while maintaining an adequate structure to achieve our growth objectives.

In addition, the impact of the COVID-19 pandemic resulted in sales declines across our three business units at various times during fiscal 2021. While many regions are seeing a recovery from the outbreak, the situation continues to evolve and the effects of the pandemic could adversely affect the Company’s revenues, earnings, liquidity and cash flows.

We have historically incurred significant charges for inventory obsolescence and may incur similar charges in the future.

We maintain significant inventories in an effort to ensure that customers have a reliable source of supply. Our products generally support industrial machinery powered by tube technology. As technology evolves and companies replace this capital equipment, the market for our products potentially declines. In addition, the market for many of our other products changes rapidly resulting from the development of new technologies, evolving industry standards, frequent new product introductions by some of our suppliers and changing end-user demand, which can contribute to the decline in value or obsolescence of our inventory. We do not have many long-term supply contracts with our customers. If we fail to anticipate the changing needs of our customers or we do not accurately forecast customer demand, our customers may not place orders with us, and we may accumulate significant inventories of products that we may be unable to sell or return to our vendors. This may result in a decline in the value of our inventory.

We face competitive pressures that could have a material adverse effect on our business.

Our overall competitive position depends on a number of factors including price, engineering capability, vendor representation, product diversity, lead times and the level of customer service. There are very few vacuum tube competitors in the markets we serve. There are also a limited number of Chinese manufacturers whose ability to produce vacuum tubes has progressed over the past several years. The most significant competitive risk comes from technical obsolescence. Canvys faces many competitors in the markets we serve. Increased competition may result in price reductions, reduced margins or a loss of market share, any of which could materially and adversely affect our business, operating results and financial condition. As we expand our business and pursue our growth initiatives, we may encounter increased competition from current and/or new competitors. Our failure to maintain and enhance our competitive position could have a material adverse effect on our business.      

We are dependent on a limited number of vendors to supply us with essential products.

The products we supply are currently produced by a relatively small number of manufacturers. One of our suppliers represented 15% of our total cost of sales. Our success depends, in large part, on maintaining current vendor relationships and developing new relationships. To the extent that our significant suppliers are unwilling or unable to continue to do business with us, extend lead times, limit supplies due to capacity constraints or other factors, there could be a material adverse effect on our business.  We experienced some COVID-19 related component delays impacting new product development schedules. Further disruptions to the supply chain because of the COVID-19 pandemic and its impact, or other world or domestic events could materially adversely impact our operations and business.

We rely heavily on information technology systems that, if not properly functioning, could materially adversely affect our business.

We rely on our information technology systems to process, analyze and manage data to facilitate the purchase, manufacture, and distribution of our products, as well as to receive, process, bill and ship orders on a timely basis. A significant disruption or failure in the design, operation, security or support of our information technology systems could significantly disrupt our business.

Our information technology systems may be subject to cyber attacks, security breaches or computer hacking. Experienced computer programmers and hackers may be able to penetrate our security controls and misappropriate or compromise sensitive personal, proprietary or confidential information, create system disruptions or cause shutdowns. They also may be able to develop and deploy viruses, worms and other malicious software programs that attack our systems or otherwise exploit any security vulnerabilities. Additionally, third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our customers’ data or our data, including our intellectual property and other confidential business information, employee information or our information technology systems. Our systems and the data stored on those systems may also be vulnerable to security incidents or security attacks, acts of vandalism or theft, coordinated attacks by activist entities, misplaced or lost data, human errors or other similar events that could negatively affect our systems and its data, as well as the data of our business partners. Further, third parties, such as hosted solution providers, that provide services to us, could also be a source of security risk in the event of a failure of their own security systems and infrastructure.

The costs to mitigate or address security threats and vulnerabilities before or after a cyber incident could be significant. Our remediation efforts may not be successful and could result in interruptions, delays or cessation of service, and loss of existing or

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potential suppliers or customers. In addition, breaches of our security measures and the unauthorized dissemination of sensitive personal, proprietary or confidential information about us, our business partners or other third parties could expose us to significant potential liability and reputational harm. As threats related to cyber attacks develop and grow, we may also find it necessary to make further investments to protect our data and infrastructure, which may impact our profitability. As a global enterprise, we could also be negatively impacted by existing and proposed laws and regulations, as well as government policies and practices related to cybersecurity, privacy, data localization and data protection.

Our products may be found to be defective or our services performed may result in equipment or product damage and, as a result, warranty and/or product liability claims may be asserted against us.

We sell many of our components at prices that are significantly lower than the cost of the equipment or other goods in which they are incorporated. Since a defect or failure in a product could give rise to failures in the equipment that incorporates them, we may face claims for damages that are disproportionate to the revenues and profits we receive from the components involved in the claims. While we typically have provisions in our agreements with our suppliers that hold the supplier accountable for defective products, and we and our suppliers generally exclude consequential damages in our standard terms and conditions, our ability to avoid such liabilities may be limited as a result of various factors, including the inability to exclude such damages due to the laws of some of the countries where we do business. Our business could be adversely affected as a result of a significant quality or performance issues in the components sold by us if we are required to pay for the damages. Although we have product liability insurance, such insurance is limited in coverage and amount.

Substantial defaults by our customers on our accounts receivable or the loss of significant customers could have a significant negative impact on our business.

We extend credit to our customers. The failure of a significant customer or a significant group of customers to timely pay all amounts due could have a material adverse effect on our financial condition and results of operations. The extension of credit involves considerable judgment and is based on management’s evaluation of factors that include such things as a customer’s financial condition, payment history and the availability of collateral to secure customers’ receivables.

Failure to successfully implement our growth initiatives, or failure to realize the benefits expected from these initiatives if implemented, may create ongoing operating losses or otherwise adversely affect our business, operating results and financial condition.

Our growth strategy focuses on expanding our healthcare and our power conversion businesses. In 2015, we acquired certain assets, including inventory, receivables, fixed assets and certain other assets, of International Medical Equipment and Services, Inc. (“IMES”) and launched Power and Microwave Technologies Group (“PMT”), which combines our core engineered solutions, power grid and microwave tube business with new RF and power technologies. We may be unable to implement our growth initiatives or reach profitability in the near future or at all, due to many factors, including factors outside of our control. If our investments in these growth initiatives do not yield anticipated returns for any reason, our business, operating results and financial condition may be adversely affected.

We may not be successful in identifying, consummating and integrating future acquisitions.

As part of our growth strategy, our intent is to acquire additional businesses or assets. We may not be able to identify attractive acquisition candidates or complete the acquisition of identified candidates at favorable prices and upon advantageous terms. Also, acquisitions are accompanied by risks, such as potential exposure to unknown liabilities and the possible loss of key employees and customers of the acquired business. In addition, we may not obtain the expected benefits or cost savings from acquisitions. Acquisitions are subject to risks associated with financing the acquisition, and integrating the operations, personnel and systems of the acquired businesses. If any of these risks materialize, they may result in disruptions to our business and the diversion of management time and attention, which could increase the costs of operating our existing or acquired businesses or negate the expected benefits of the acquisitions.

Economic weakness and uncertainty could adversely affect our revenues and gross margins.

Our revenues and gross profit margins depend significantly on global economic conditions, the demand for our products and services and the financial condition of our customers. Economic weakness and uncertainty have in the past, and may in the future, result in decreased revenues and gross profit margins. Economic uncertainty also makes it more difficult for us to forecast overall supply and demand with a great deal of confidence. Financial turmoil affecting the banking system and financial markets could result in tighter credit markets and lower levels of liquidity in some financial markets. The effects of a tightened credit environment could include the insolvency of key vendors or their inability to obtain credit to finance development and/or manufacture products resulting in product delays as well as the inability of customers to obtain credit to finance operations and/or customer insolvencies. Spending

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and the timing thereof by our customers may have a significant impact on our results and, where such spending is delayed or cancelled, it could have a material negative impact on our operating results. Current global economic conditions remain uncertain and challenging. Weakness in the markets in which we operate could negatively impact our revenue and operating expenses, and consequently have a material adverse effect on our business, financial condition and results of operations.

Our operating results produced net income for fiscal 2021, but operating results for fiscal 2020 and fiscal 2019 reflected a net loss. There can be no assurance that we will continue recovery in the near future; nor is there any assurance that such worldwide economic volatility in connection with the COVID-19 pandemic, its repercussions, actions taken in response to the pandemic and attempts at recovery will not continue.

Our business and results of operations are subject to a broad range of uncertainties arising out of world and domestic events.

Our business and results of operations are subject to uncertainties arising from world and domestic events. These uncertainties may include a global economic slowdown, pandemics and other public health issues (including the COVID-19 pandemic), natural disasters, military action, terrorist activities, political and social turmoil, civil unrest and other crises. Such conditions have impacted and may continue to impact customer demand as well as our suppliers’ ability to supply us with necessary materials and, ultimately, may have an impact on our business, financial condition, results and stock price.

The COVID-19 outbreak was declared a pandemic in March 2020 based on the rapid increase in global exposure. In response, the governments of many countries, states, cities and other geographic regions (including areas in which we have operations) took preventative or protective actions, such as imposing restrictions on business operations and requiring individuals to stay at home. As the impact of the COVID-19 outbreak and responses to the pandemic continue to evolve and be felt, our ability to meet customer demand for products may be impaired or, similarly, our customers may experience adverse business consequences due to COVID-19. During fiscal 2021, the Company experienced decreases in demand for certain products as a result of the impact of COVID-19 on certain customers and in certain regions. A significant reduced demand for products or impaired ability to meet customer demand (including disruptions at our transportation service providers or vendors) could cause a material adverse effect on our business, operations and financial performance.

COVID-19 continues to spread in various regions of the world. The extent to which our business will be impacted will depend on future developments which are highly uncertain and cannot be predicted. These include but not limited to the continued duration and spread of the pandemic, its severity, the effectiveness of actions to vaccinate populations, contain the virus or treat its impact and how quickly and to what extent normal economic and operating conditions resume. The potential effects of COVID-19, the responses to the pandemic and the various recovery initiatives may also impact many of our risk factors described herein; however, as this is an unprecedented and changing situation, the potential impacts to such risk factors remain uncertain. Even after the COVID-19 pandemic subsides, we may experience adverse impacts to our business and financial results due to any economic recession or depression that has occurred, and due to any major public health crises that may occur in the future. This is a very dynamic situation and we cannot at this time reasonably estimate the scope of its impact on our employees, operations, suppliers or customers, or the full extent to which COVID-19 could continue to affect the global economy and our results.

Major disruptions to our logistics capability or to the operations of our key vendors or customers could have a material adverse impact on our operations.

We operate our global logistics services through specialized and centralized distribution centers. We depend on third party transportation service providers for the delivery of products to our customers. A major interruption or disruption in service at any of our distribution centers, or a disruption at the operations of any of our significant vendors or customers, for any reason, including reasons beyond our control (such as natural disasters, pandemics (such as COVID-19), work stoppages, power loss, cyber attacks, incidents of terrorism or other significant disruptions of services from our third party providers) could cause cancellations or delays in a significant number of shipments to customers and, as a result, could have a severe impact on our business, operations and financial performance.

Risks Related to International Operations

A significant portion of our cash, cash equivalents and investments is held by our foreign subsidiaries and could affect future liquidity needs.

As of May 29, 2021, $17.8 million, or approximately 41% of our cash and cash equivalents was held by our foreign subsidiaries. While we intend to use some of the cash held outside the United States to fund our international operations and growth, when we encounter a significant need for liquidity domestically or at a particular location that we cannot fulfill through other internal or external sources, our liquidity requirements could necessitate transfers of existing cash balances between our subsidiaries or to the United States. Some of these subsidiaries are located in jurisdictions that require foreign government approval before a cash repatriation can occur.

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International operations represent a significant percentage of our business and present a variety of risks that could impact our results. 

Because we source and sell our products worldwide, our business is subject to risks associated with doing business internationally. These risks include the costs and difficulties of managing foreign entities, limitations on the repatriation and investment of funds, cultural differences that affect customer preferences and business practices, unstable political or economic conditions, trade protection measures and import or export licensing requirements and changes in tax laws.

We also face exposure to fluctuations in foreign currency exchange rates because we conduct business outside of the United States. Price increases caused by currency exchange rate fluctuations may make our products less competitive or may have an adverse effect on our margins. Our international revenues and expenses generally are derived from sales and operations in currencies other than the U.S. dollar. Accordingly, when the U.S. dollar strengthens in relation to the base currencies of the countries in which we sell our products, our U.S. dollar reported net revenue and income would decrease. We currently do not engage in any currency hedging transactions. We cannot predict whether foreign currency exchange risks inherent in doing business in foreign countries will have a material adverse effect on our operations and financial results in the future. Further, global economic conditions may cause volatility and disruptions in the capital and credit markets. Negative or uncertain financial and macroeconomic conditions may have a significant adverse impact on our sales, profitability and results of operations.

The withdrawal by the United Kingdom from the European Union could have a material adverse effect on our business, financial position, liquidity and results of operations.

We conduct a significant portion of our business in the European Union (“EU”) and the withdrawal of the United Kingdom (“U.K.”) from the EU (also referred to as “Brexit”) could have a material adverse effect on our business, financial position, liquidity and results of operations. In connection with the U.K.’s exit from the EU, the U.K. and the EU struck a bilateral trade and cooperation deal governing the future relationship between the U.K. and the EU, which took effect on May 1, 2021. However, there remains uncertainties and risks to our business related to Brexit and the new relationship between the U.K. and EU, which will continue to be developed and defined, as well as any resulting political and economic instability created by Brexit. The political and economic impact of Brexit has caused and may continue to cause significant volatility in global markets as well as greater restrictions on imports and exports between the U.K. and EU countries, a fluctuation in currency exchange rates and increased regulatory complexities. The impact of the withdrawal of the U.K. may adversely affect business activity, political stability and economic conditions in the U.K., the EU and elsewhere. Such developments and their ultimate impact, or the perception that any of these developments are likely to occur, could have a material adverse effect on economic growth or business activity in the U.K., the Eurozone or the EU, and could result in the relocation of businesses, cause business interruptions, lead to economic recession or depression, inhibit the growth of the European economy, cause greater volatility in all of the global currencies that we currently use to transact business and impact the stability of the financial markets, availability of credit, political systems or financial institutions and the financial and monetary system. Such developments could have a material adverse effect on our business, financial position, liquidity and results of operations.

Financial Risks

We may need to raise additional funds through debt or equity financings in the future to fund our domestic operations and our broader corporate initiatives, which would dilute the ownership of our existing shareholders.

If the cash generated by our domestic operations is not sufficient to fund our domestic operations and our broader corporate initiatives, such as stock repurchases, dividends, acquisitions and other strategic opportunities, we may need to raise additional funds through public or private debt or equity financings, or we may need to obtain new credit facilities to the extent we are unable to, or choose not to, repatriate our overseas cash. Such additional financing may not be available on terms favorable to us, or at all, and any new equity financings or offerings would dilute our current stockholders’ ownership interests in us. Furthermore, lenders may not agree to extend us new, additional or continuing credit. Economic uncertainty or adverse economic conditions resulting from the impacts of and responses to the COVID-19 pandemic could result in significant or sustained disruption of global financial markets, thereby reducing our ability to access capital. In any such case, our business, operating results or financial condition could be adversely impacted.

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There is a possible risk of identifiable intangible asset impairment, which could reduce the value of our assets and reduce our net income in the year in which the write-off occurs.

Our intangible assets could become impaired, which could reduce the value of our assets and reduce our net income in the year in which the write-off occurs. We ascribe value to certain intangible assets which consist of customer lists and trade names resulting from acquisitions. An impairment charge on intangible assets would be incurred in the event that the fair value of the intangible assets are less than their current carrying values. We evaluate whether events have occurred that indicate all, or a portion, of the carrying amount of intangible assets may no longer be recoverable. If this is the case, an impairment charge to earnings would be necessary.

Legal and Regulatory Risks

We may be subject to intellectual property rights claims, which are costly to defend, could require payment of damages or licensing fees, and/or could limit our ability to use certain technologies in the future.

Substantial litigation and threats of litigation regarding intellectual property rights exist in the display systems and electronics industries. From time to time, third parties, including certain companies in the business of acquiring patents with the intention of aggressively seeking licensing revenue from purported infringers, have asserted and may in the future assert patent and/or other intellectual property rights to technologies that are important to our business. In any dispute involving products that we have sold, our customers could also become the target of litigation. We are obligated in many instances to indemnify and defend our customers if the products we sell are alleged to infringe any third party’s intellectual property rights. In some cases, depending on the nature of the claim, we may be able to seek indemnification from our suppliers for our self and our customers against such claims, but there is no assurance that we will be successful in obtaining such indemnification or that we are fully protected against such claims. Any infringement claim brought against us, regardless of the duration, outcome or size of damage award, could result in substantial cost, divert our management’s attention, be time consuming to defend, result in significant damage awards, cause product shipment delays, or require us to enter into royalty or other licensing agreements. See Note 10, Risks and Uncertainties, of the notes to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information regarding specific legal matters related to our patents.

Additionally, if an infringement claim is successful we may be required to pay damages or seek royalty or license arrangements which may not be available on commercially reasonable terms. The payment of any such damages or royalties may significantly increase our operating expenses and harm our operating results and financial condition. Also, royalty or license arrangements may not be available at all. We may have to stop selling certain products or certain technologies, which could affect our ability to compete effectively.

Potential lawsuits, with or without merit, may divert management’s attention, and we may incur significant expenses in our defense. In addition, we may be required to pay damage awards or settlements, become subject to injunctions or other equitable remedies, or determine to abandon certain lines of business, that may cause a material adverse effect on our results of operations, financial position and cash flows.

We may incur substantial operational costs or be required to change our business practices to comply with data privacy and data protection laws and regulations around the world.

We are subject to many privacy and data protection laws and regulations in various jurisdictions, which continue to evolve rapidly. The EU’s General Data Protection Regulation (“GDPR”) includes operational requirements for companies that receive or process personal data of residents of the European Union, including more robust documentation requirements for data protection compliance programs. Specifically, the GDPR imposes numerous privacy-related requirements for companies operating in the EU, including greater control for data subjects, increased data portability for EU consumers and data breach notification requirements.

Complying with the GDPR may cause us to incur substantial operational costs or require us to change our business practices in ways that we cannot currently predict. Despite our efforts to bring our practices into compliance with the GDPR, we may not be successful. Non-compliance could result in proceedings against us by governmental entities, customers, data subjects or others. Fines of up to 20 million euros or up to 4% of the annual global revenue of the noncompliant company, whichever is greater, may be imposed for violations of certain of the GDPR’s requirements.

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In addition, several other jurisdictions in the U.S. and around the world have enacted privacy laws or regulations similar to GDPR. For instance, California enacted the California Consumer Privacy Act (“CCPA”), effective January 1, 2020 which gives consumers many of the same rights as those available under GDPR. Several laws similar to the CCPA have been proposed in the United States at both the federal and state level. The effects of, and costs incurred in connection with complying with, the GDPR, the CCPA and other data privacy laws and regulations may be significant and may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply. Any actual or perceived failures to comply with the GDPR, the CCPA or other data privacy laws or regulations, or related contractual or other obligations, or any perceived privacy rights violation, could lead to investigations, claims and proceedings by governmental entities and private parties, damages for contract breach, and other significant costs, penalties and other liabilities, as well as harm to our reputation and market position.

 

 

Our international sales and operations are subject to applicable laws relating to trade, export controls and foreign corrupt practices, the violation of which could adversely affect our operations.

We are subject to applicable export control laws and regulations of the United States and other countries. United States laws and regulations applicable to us include the Arms Export Control Act, the International Traffic in Arms Regulations (“ITAR”), the Export Administration Regulations (“EAR”) and the trade and trade sanctions laws and regulations administered by the Office of the United States Trade Representative and the United States Department of the Treasury’s Office of Foreign Assets Control. The import and export of our products are subject to international trade agreements, the modification or repeal of which could impact our business. The U.S. government agencies responsible for administering EAR and ITAR have significant discretion in the interpretation and enforcement of these regulations. Violations of these laws or regulations could result in significant additional sanctions including fines, more onerous compliance requirements, more extensive debarments from export privileges, loss of authorizations needed to conduct aspects of our international business and criminal penalties and may harm our ability to enter contracts with customers who have contracts with the U.S. government. A violation of the laws or the regulations enumerated above could materially adversely affect our business, financial condition and results of operations.

Ongoing changes to tariffs and trade relations may adversely affect our business.

Our international operations are subject to changing tariffs and developments in trade relations. The U.S. government has made statements and taken certain actions that have led to, and may in the future lead to, further changes to U.S. and international trade policies, including recently imposed tariffs affecting certain products exported by a number of U.S. trading partners, including China. For example, during 2018, the U.S. and China each imposed new tariffs, and announced further proposed tariffs, on various products imported from China and the U.S., respectively. Between July 2018 and September 2018, the Office of the United States Trade Representative imposed tariffs of 10% and 25% on three product lists totaling approximately $250 billion in Chinese imports.    In May 2019, there was an announcement of the United States government’s imposition of a 25% tariff on a range of products exported from China to the U.S. on or after May 10, 2019. These lists include some of our products.

Subsequently, in January 2020, the U.S. and China signed a “phase one” trade deal, accompanied by a U.S. decision to cancel a plan to increase tariffs on an additional list of Chinese products and to reduce the tariffs imposed on May 13, 2019 from 15% to 7.5% effective February 14, 2020. Currently, the majority of tariff exclusions granted have expired and many of the additional tariffs on Chinese origin goods remain, as do concerns over the stability of bilateral trade relations, particularly given the limited scope of the phase one agreement.

It is possible that further tariffs may be imposed on imports of our products, including by other countries, or that our business will be impacted by changing trade relations among countries. This may cause us to raise prices or make changes to our operations, any of which could adversely impact demand for our products, our costs, customers, suppliers and/or the United States economy or certain sectors thereof and, thus, to adversely impact our businesses and results of operations. Given the evolving nature of trade relations, the impact on our operations and results is uncertain and could be significant. We can provide no assurance that any strategies we implement to mitigate the impact of such tariffs or other trade actions will be successful. To the extent that our supply chain, costs, sales or profitability are negatively affected by the tariffs or other trade actions, our business, financial condition and results of operations may be materially adversely affected.

 

12


 

 

Ownership Risks

 

A single stockholder has voting control over us.

 

As of July 26, 2021, Edward J. Richardson, our Chairman, Chief Executive Officer and President, beneficially owned approximately 98% of the outstanding shares of our Class B common stock, representing approximately 64% of the voting power of the outstanding common stock. This share ownership permits Mr. Richardson to exert control over the outcome of stockholder votes, including votes concerning the election of directors, by-law amendments, possible mergers, corporate control contests and other significant corporate transactions. 

 

General Risk Factors

 

Failure to attract and retain key skilled personnel could hurt operations.

 

Our success depends to a large extent upon the continued services of key management personnel, particularly Mr. Richardson. While we have employment contracts in place with several of our executive officers, we nevertheless cannot be assured that we will retain our key employees and the loss of service of any of these officers or key management personnel could have a material adverse effect on our business growth and operating results.

 

Our future success will require an ability to attract and retain qualified employees. Competition for such key personnel is intense and we cannot be assured that we will be successful in attracting and retaining such personnel. We cannot make assurances that key personnel will not depart in the future. Changes in the cost of providing employee benefits in order to attract and retain personnel, including changes in health care costs, could lead to increased costs in any of our operations.

 

If we fail to maintain an effective system of internal controls or discover material weaknesses in our internal controls over financial reporting, we may not be able to detect fraud or report our financial results accurately or timely.

 

An effective internal control environment is necessary for us to produce reliable financial reports and is an important part of our effort to prevent financial fraud. We are required to periodically evaluate the effectiveness of the design and operation of our internal controls over financial reporting. Based on these evaluations, we may conclude that enhancements, modifications or changes to internal controls are necessary or desirable. While management evaluates the effectiveness of our internal controls on a regular basis, these controls may not always be effective. There are inherent limitations on the effectiveness of internal controls, including fraud, collusion, management override and failure in human judgment. In addition, control procedures are designed to reduce rather than eliminate business risks.

 

If we fail to maintain an effective system of internal controls, or if management or our independent registered public accounting firm discovers material weaknesses in our internal controls, we may be unable to produce reliable financial reports or prevent fraud. In addition, we may be subject to sanctions or investigation by regulatory authorities, such as the Securities and Exchange Commission or NASDAQ. Any such actions could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.

If we are deemed to be an investment company, we will be required to meet burdensome compliance requirements and restrictions on our activities.

We have had significant cash and investments. If we are deemed to be an “investment company” as defined under the Investment Company Act of 1940 (the “Investment Company Act”), the nature of our investments may be subject to various restrictions. We do not believe that our principal activities subject us to the Investment Company Act. If we are deemed to be subject to the Investment Company Act, compliance with required additional regulatory burdens would increase our operating expenses.

Evolving expectations around corporate responsibility practices, specifically related to environmental, social and governance (“ESG”) matters, may expose us to reputational and other risks.

Investors, stockholders, customers, suppliers and other third parties are increasingly focusing on ESG and corporate social responsibility endeavors and reporting. Certain institutional investors, investment funds, other influential investors, customers, suppliers and other third parties are also increasingly focused on ESG practices. Companies that do not adapt to or comply with the evolving investor or stakeholder expectations and standards, or which are perceived to have not responded appropriately, may suffer from reputational damage and result in the business, financial condition and/or stock price of a company being materially and

13


 

adversely affected. Further, this increased focus on ESG issues may result in new regulations and/or third party requirements that could adversely impact our business, or certain shareholders reducing or eliminating their holdings of our stock. Additionally, an allegation or perception that the Company has not taken sufficient action in these areas could negatively harm our reputation.

Our stock price may be volatile.

Our stock price has fluctuated in the past and may experience declines in the future as a result of the volatile nature of the stock market, developments in our business and/or factors outside of our control. Many factors may cause the market price for our common stock to change, including: (i) our operating results as compared to investors’ expectations in any period, (ii) market perceptions concerning our future earnings prospects, (iii) adverse changes in general market conditions or economic trends and (iv) changes or events in our industry or the world, such as market reactions to the COVID-19 pandemic.

ITEM 1B. Unresolved Staff Comments

None.

ITEM 2. Properties

The Company owns one facility and leases 28 facilities. We own our corporate facility and largest distribution center, which is located on approximately 100 acres in LaFox, Illinois and consists of approximately 242,000 square feet of manufacturing, warehouse and office space. We maintain geographically diverse facilities because we believe this provides value to our customers and suppliers, and limits market risk and exchange rate exposure. We believe our properties are well maintained and adequate for our present needs. The extent of utilization varies from property to property and from time to time during the year.

Our facility locations, their primary use and segments served are as follows:

 

Location

 

Leased/Owned

 

Use

 

Segment

Woodland Hills, California

 

Leased

 

Sales

 

PMT

LaFox, Illinois *

 

Owned

 

Corporate/Sales/Distribution/Manufacturing

 

PMT/Canvys/Healthcare

Marlborough, Massachusetts

 

Leased

 

Sales/Distribution/Manufacturing

 

Canvys

Fort Mill, South Carolina

 

Leased

 

Sales/Distribution/Testing/Repair

 

Healthcare

Murray, Utah

 

Leased

 

Sales/Testing/Repair

 

Healthcare

Sao Paulo, Brazil

 

Leased

 

Sales/Distribution

 

PMT

Beijing, China

 

Leased

 

Sales

 

PMT

Nanjing, China

 

Leased

 

Sales

 

PMT

Shanghai, China

 

Leased

 

Sales/Distribution

 

PMT

Shenzhen, China

 

Leased

 

Sales

 

PMT

Brive, France

 

Leased

 

Manufacturing Support/Testing

 

PMT

Paris, France

 

Leased

 

Sales

 

PMT

Donaueschingen, Germany

 

Leased

 

Sales/Distribution/Manufacturing

 

Canvys

Puchheim, Germany

 

Leased

 

Sales

 

PMT

Mumbai, India

 

Leased

 

Sales

 

PMT

Ramat Gan, Israel

 

Leased

 

Sales

 

PMT

Florence, Italy

 

Leased

 

Sales

 

PMT

Milan, Italy

 

Leased

 

Sales

 

PMT

Tokyo, Japan

 

Leased

 

Sales

 

PMT

Mexico City, Mexico

 

Leased

 

Sales

 

PMT

Amsterdam, Netherlands

 

Leased

 

Sales/Distribution/Manufacturing

 

PMT/Healthcare

Singapore, Singapore

 

Leased

 

Sales/Distribution

 

PMT

Gyeonggi-do, South Korea

 

Leased

 

Sales

 

PMT

Madrid, Spain

 

Leased

 

Sales

 

PMT

Taipei, Taiwan

 

Leased

 

Sales

 

PMT/Canvys

Bangkok, Thailand

 

Leased

 

Sales/Distribution

 

PMT

Dubai, United Arab Emirates

 

Leased

 

Sales/Distribution/Testing/Repair

 

PMT

Hook, United Kingdom

 

Leased

 

Sales/Distribution/Testing/Repair

 

PMT

Lincoln, United Kingdom

 

Leased

 

Sales

 

PMT/Canvys

 

*

LaFox, Illinois is also the location of our corporate headquarters.

14


 

 

 

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).

 

 

15


 

 

PART II

ITEM 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Unregistered Sales of Equity Securities

None.

Share Repurchases

There were no share repurchases in fiscal 2021.

Dividends

Our quarterly dividend was $0.06 per common share and $0.054 per Class B common share. Annual dividend payments were approximately $3.1 million for both fiscal 2021 and fiscal 2020. 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.

Common Stock Information

Our common stock is traded on the NASDAQ Global Select Market (“NASDAQ”) under the trading symbol (“RELL”). There is no established public trading market for our Class B common stock. As of July 26, 2021, there were approximately 459 stockholders of record for the common stock and approximately 15 stockholders of record for the Class B common stock.

16


 

Performance Graph

The following graph compares the performance of our common stock for the periods indicated with the performance of the NASDAQ Composite Index and NASDAQ Electronic Components Index. The graph assumes $100 invested on the last day of our fiscal year 2016, in our common stock, the NASDAQ Composite Index and NASDAQ Electronic Components Index. Total return indices reflect reinvestment of dividends at the closing stock prices at the date of the dividend declaration.

 

 

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Richardson Electronics, Ltd., the NASDAQ Composite Index and the NASDAQ Electronic Components Index $250 $200 $150 $100 $50 $0 5/30/15 5/28/16 5/27/17 6/2/18 6/1/19 5/30/20 Richardson Electronics, Ltd. NASDAQ Composite NASDAQ Electronic Components *$100 invested on 5/30/15 in stock or 5/31/15 in index, including reinvestment of dividends. Indexes calculated on month-end basis.

 

17


 

 

ITEM 6. Selected Financial Data

Five-Year Financial Review

This information should be read in conjunction with our consolidated financial statements, accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein.

 

 

 

Fiscal Year Ended (1)

 

 

 

(in thousands, except per share amounts)

 

 

 

May 29,

2021

 

 

May 30,

2020

 

 

June 1,

2019

 

 

June 2,

2018

 

 

May 27,

2017

 

Statements of Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

176,937

 

 

$

155,898

 

 

$

166,652

 

 

$

163,212

 

 

$

136,872

 

Continuing Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before tax

 

$

2,308

 

 

$

(1,214

)

 

$

(6,311

)

 

$

3,860

 

 

$

(6,116

)

Income tax provision

 

 

653

 

 

 

624

 

 

 

1,017

 

 

 

1,534

 

 

 

812

 

Income (loss) from continuing operations

 

$

1,655

 

 

$

(1,838

)

 

$

(7,328

)

 

$

2,326

 

 

$

(6,928

)

Discontinued Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

$

 

 

$

 

 

$

 

 

$

1,496

 

 

$

 

Net income (loss)

 

$

1,655

 

 

$

(1,838

)

 

$

(7,328

)

 

$

3,822

 

 

$

(6,928

)

Per Share Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per Common share - Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

0.13

 

 

$

(0.14

)

 

$

(0.57

)

 

$

0.18

 

 

$

(0.55

)

Income from discontinued operations

 

 

 

 

 

 

 

 

 

 

 

0.12

 

 

 

 

Total net income (loss) per Common share - Basic

 

$

0.13

 

 

$

(0.14

)

 

$

(0.57

)

 

$

0.30

 

 

$

(0.55

)

Net income (loss) per Class B common share - Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

0.11

 

 

$

(0.13

)

 

$

(0.51

)

 

$

0.16

 

 

$

(0.49

)

Income from discontinued operations

 

 

 

 

 

 

 

 

 

 

 

0.11

 

 

 

 

Total net income (loss) per Class B common

   share -  Basic

 

$

0.11

 

 

$

(0.13

)

 

$

(0.51

)

 

$

0.27

 

 

$

(0.49

)

Net income (loss) per Common share - Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

0.13

 

 

$

(0.14

)

 

$

(0.57

)

 

$

0.18

 

 

$

(0.55

)

Income from discontinued operations

 

 

 

 

 

 

 

 

 

 

 

0.12

 

 

 

 

Total net income (loss) per Common share - Diluted

 

$

0.13

 

 

$

(0.14

)

 

$

(0.57

)

 

$

0.30

 

 

$

(0.55

)

Net income (loss) per Class B common share - Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

0.11

 

 

$

(0.13

)

 

$

(0.51

)

 

$

0.16

 

 

$

(0.49

)

Income from discontinued operations

 

 

 

 

 

 

 

 

 

 

 

0.11

 

 

 

 

Total net income (loss) per Class B common

   share - Diluted

 

$

0.11

 

 

$

(0.13

)

 

$

(0.51

)

 

$

0.27

 

 

$

(0.49

)

Cash Dividend Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per common share

 

$

0.24

 

 

$

0.24

 

 

$

0.24

 

 

$

0.24

 

 

$

0.24

 

Dividends per Class B common share (2)

 

$

0.22

 

 

$

0.22

 

 

$

0.22

 

 

$

0.22

 

 

$

0.22

 

Balance Sheet Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

156,753

 

 

$

150,720

 

 

$

153,017

 

 

$

166,329

 

 

$

157,464

 

Stockholders’ equity

 

$

121,560

 

 

$

118,660

 

 

$

123,757

 

 

$

135,181

 

 

$

132,327

 

 

(1)

Our fiscal year ends on the Saturday nearest the end of May. Each of the fiscal years presented contain 52/53 weeks.

(2)

The dividend per Class B common share is 90% of the dividend per Class A common share.

18


 

 

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.

19


 

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 750DTM 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 750DTM 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.

 

21


 

 

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.

22


 

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.

 

 

23


 

 

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, we believe that the existing sources of liquidity, including current cash, will provide sufficient resources to meet known capital requirements and working capital needs through the next twelve months.

24


 

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. Generally, our contracts require our customers to pay for goods after we deliver products to them. Terms are generally on open account, payable net 30 days in North America, and vary throughout Asia/Pacific, Europe and Latin America subject to customary credit checks.

The Company also sells products that are manufactured or assembled in our manufacturing facility. These products can either be built to the customer’s prints/designs or are products that we stock in our warehouse to sell to any customer that places an order. The manufacturing business does not include a separate service bundled with the product sold or sold in addition to the product.

The Company recognizes services revenue when the repair, installation or training is performed. 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.

26


 

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.

27


 

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.

 

28


 

 

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

Risk Management and Market Sensitive Financial Instruments

We are exposed to many different market risks with the various industries we serve. The primary financial risk we are exposed to is foreign currency exchange, as certain operations, assets and liabilities of ours are denominated in foreign currencies. We manage these risks through normal operating and financing activities.

Foreign Currency Exposure

Even though we take into account current foreign currency exchange rates at the time an order is taken, our financial statements, denominated in a non-U.S. functional currency, are subject to foreign exchange rate fluctuations.

Our foreign denominated assets and liabilities are cash and cash equivalents, accounts receivable, inventory, accounts payable and intercompany receivables and payables, as we conduct business in countries of the European Union, Asia/Pacific and, to a lesser extent, Canada and Latin America. We do manage foreign exchange exposures by using currency clauses in certain sales contracts and we also have local debt to offset asset exposures. We have not used any derivative instruments nor entered into any forward contracts in fiscal 2021, fiscal 2020 or fiscal 2019.

Had the U.S. dollar changed unfavorably 10% against various foreign currencies, foreign denominated net sales would have been lower by an estimated $10.0 million during fiscal 2021, an estimated $9.3 million during fiscal 2020 and an estimated $10.5 million during fiscal 2019. Total assets would have declined by an estimated $4.2 million as of the fiscal year ended May 29, 2021  and an estimated $4.3 million as of the fiscal year ended May 30, 2020, while the total liabilities would have decreased by an estimated $1.1 million as of the fiscal year ended May 29, 2021 and an estimated $1.0 million as of the fiscal year ended May 30, 2020.

The interpretation and analysis of these disclosures should not be considered in isolation since such variances in exchange rates would likely influence other economic factors. Such factors, which are not readily quantifiable, would likely also affect our operations. Additional disclosure regarding various market risks are set forth in Part I, Item 1A, Risk Factors, of our Annual Report on this Form 10-K.

ITEM 8. Financial Statements and Supplementary Data

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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 29, 2021 and May 30, 2020, the related consolidated statements of comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended May 29, 2021, 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 29, 2021 and May 30, 2020, and the results of its operations and its cash flows for each of the three years in the period ended May 29, 2021, 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 29, 2021, 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 2, 2021 expressed an unqualified opinion thereon.

Change in the Accounting Method Related to Leases

As discussed in Note 6 to the consolidated financial statements, the Company has changed its method of accounting for leases during the year ended May 30, 2020 due to the adoption of Accounting Standards Codification Topic 842, Leases.

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 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.

 

 

 

 

 

 

 

 

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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 judgements. 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 29, 2021 was $63.5 million, net of $5.9 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 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 surplus 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 future demand for each individual inventory item. The Company's forecasted demand, performed on an item-by-item basis, requires inputs from operations personnel and 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 judgements made by management.  

 

The primary procedures we performed to address this critical audit matter included:

 

 

Assessing the reasonableness of management's estimate of future demand by (i) discussing with operations personnel, including product and sales managers, their assessment as to viability of aged and slow-moving inventory, and (ii) comparing our independently-developed estimates of future demand for slow-moving inventory (using historical customer ordering trends, industry publications, future product designs, and current uses) to management's estimates.

 

Evaluating the reasonableness of management's forecasted demand 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 2, 2021

 

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Richardson Electronics, Ltd. 

Consolidated Balance Sheets

(in thousands, except per share amounts)

 

 

 

May 29, 2021

 

 

May 30, 2020

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

43,316

 

 

$

30,535

 

Accounts receivable, less allowance of $202 and $334, respectively

 

 

25,096

 

 

 

20,197

 

Inventories, net

 

 

63,508

 

 

 

57,492

 

Prepaid expenses and other assets

 

 

2,385

 

 

 

2,442

 

Investments - current

 

 

 

 

 

16,000

 

Total current assets

 

 

134,305

 

 

 

126,666

 

Non-current assets:

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

17,067

 

 

 

17,674

 

Intangible assets, net

 

 

2,270

 

 

 

2,505

 

Lease ROU asset

 

 

2,570