# RICHARDSON ELECTRONICS, LTD. (RELL) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from RICHARDSON ELECTRONICS, LTD.'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/355948/000095017024090651/rell-20240601.htm
Accession: 0000950170-24-090651
Filing date: 2024-08-05
Report date: 2024-06-01
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/RELL/
All MD&A years: /company/RELL/mda/
Previous year: /company/RELL/mda/fy2023/ (FY 2023)
Next year: /company/RELL/mda/fy2025/ (FY 2025)

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 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 June 1, 2024, May 27, 2023 and May 28, 2022, as reflected in our Consolidated Statements of Comprehensive Income.

•
Liquidity, Financial Position and Capital Resources - a discussion of our primary sources and uses of cash for the fiscal years ended June 1, 2024, May 27, 2023 and May 28, 2022, and a discussion of changes in our financial position.

Business Overview

Richardson Electronics, Ltd. (the "Company," "we," "our") is a leading global manufacturer of engineered solutions, power grid and microwave tubes and related consumables; power conversion and RF and microwave components; high-value replacement parts, tubes and service training for diagnostic imaging equipment; and customized display solutions. Nearly 55% of our products are manufactured at our facilities located in LaFox, Illinois, Marlborough, Massachusetts and Donaueschingen, Germany, or by one of our manufacturing partners throughout the world. 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 imported into the United States. The Office of the United States Trade Representative ("USTR") instituted tariffs on the importation of a number of products into the United States from China. These 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 subject to 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.

22

The Company reports its financial performance based on the operating and reportable segments defined as follows:

Power and Microwave Technologies ("PMT") combines our core engineered solutions capabilities, power grid and microwave tube business with new disruptive RF, Wireless and Power technologies. As a designer, manufacturer, technology partner and authorized distributor, PMT’s strategy is to provide specialized technical expertise and engineered solutions based on our core engineering and manufacturing capabilities on a global basis. We provide solutions and add value through design-in support, systems integration, prototype design and manufacturing, testing, logistics and aftermarket technical service and repair - all through our existing global infrastructure. PMT’s focus is on products for power, RF and microwave applications for customers in 5G, 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.

Green Energy Solutions ("GES") combines our key technology partners and engineered solutions capabilities to design and manufacture innovative products for the fast-growing energy storage market and power management applications. As a designer, manufacturer, technology partner and authorized distributor, GES’s strategy is to provide specialized technical expertise and engineered solutions using our core design 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. GES’s focus is on products for numerous green energy applications such as wind, solar, hydrogen and Electric Vehicles, and other power management applications that support green solutions such as synthetic diamond manufacturing.

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.

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 and RF amplifiers; hydrogen thyratrons, klystrons, magnetrons; flat panel detector upgrades; pre-owned CT systems; and additional replacement solutions currently under development for the diagnostic imaging service market. Through a combination of newly developed products and partnerships, service offerings and training programs, we believe we can help our customers improve efficiency while lowering the cost of healthcare delivery.

We currently operate within the following major geographic regions: North America, Asia/Pacific, Europe and Latin America.

23

Results of Operations

Overview - Fiscal Year Ended June 1, 2024

•
Fiscal 2024 contained 53 weeks and fiscal 2023 contained 52 weeks.

•
Net sales during fiscal 2024 were $196.5 million, down 25.2%, compared to net sales of $262.7 million during fiscal 2023.

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Gross margin was 30.5% of net sales during fiscal 2024, compared to 31.9% of net sales during fiscal 2023.

•
Selling, general and administrative expenses were $59.5 million, or 30.3% of net sales, during fiscal 2024, compared to $58.7 million, or 22.4% of net sales, during fiscal 2023.

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Operating income during fiscal 2024 was $0.3 million, compared to an operating income of $25.0 million during fiscal 2023.

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Other expense during fiscal 2024 was $0.2 million, compared to other income of less than $0.1 million during fiscal 2023.

•
Net income during fiscal 2024 was $0.1 million, compared to a net income of $22.3 million during fiscal 2023.

Net Sales and Gross Profit Analysis

Net sales by segment and percent change for fiscal 2024, fiscal 2023 and fiscal 2022 were as follows (in thousands):

[[GREPCENT_TABLE]]
[["Net Sales","","FY 2024","","","FY 2023","","","FY 2022","","","FY24 vs. FY23 % Change","","","FY23 vs. FY22 % Change"],["PMT","","$","128,697","","","$","164,299","","","$","155,445","","","","(21.7","%)","","","5.7","%"],["GES","","","23,233","","","","47,596","","","","22,611","","","","(51.2","%)","","","110.5","%"],["Canvys","","","32,444","","","","39,331","","","","35,187","","","","(17.5","%)","","","11.8","%"],["Healthcare","","","12,086","","","","11,432","","","","11,377","","","","5.7","%","","","0.5","%"],["Total","","$","196,460","","","$","262,658","","","$","224,620","","","","(25.2","%)","","","16.9","%"]]
[[/GREPCENT_TABLE]]

During fiscal 2024, consolidated net sales decreased by 25.2% compared to fiscal 2023. Sales for PMT decreased by 21.7%, GES sales decreased by 51.2%, Canvys sales decreased by 17.5% and Healthcare sales increased by 5.7%. The decrease in PMT was mainly due to lower sales of semi-wafer fabrication products and RF and microwave products. The decrease in GES was due to the project-based nature of the wind turbine business and lower shipments to EV locomotive customers including a large shipment of battery modules made in fiscal 2023 that did not recur in fiscal 2024. The decrease in Canvys was primarily due to lower sales in the North American market. The increase in Healthcare was primarily due to higher part and CT tube sales.

During fiscal 2023, consolidated net sales increased by 16.9% compared to fiscal 2022. Sales for PMT increased by 5.7%, GES sales increased by 110.5%, Canvys sales increased by 11.8% and Healthcare sales increased by 0.5%. The increase in PMT was mainly due to strong growth in the semi-wafer fabrication industry and the RF and microwave products for various applications. The increase in GES was primarily due to growth in related product sales to the wind turbine industry, as well as EV battery modules. The increase in Canvys was primarily due to strong sales in the North American market. The increase in Healthcare was primarily due to an increase in equipment sales.

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Gross profit by segment and percent of segment net sales for fiscal 2024, fiscal 2023 and fiscal 2022 were as follows (in thousands):

[[GREPCENT_TABLE]]
[["Gross Profit","","FY 2024","","","FY 2023","","","FY 2022"],["PMT","","$","38,717","","","","30.1","%","","$","54,089","","","","32.9","%","","$","50,810","","","","32.7","%"],["GES","","","6,607","","","","28.4","%","","","13,719","","","","28.8","%","","","7,231","","","","32.0","%"],["Canvys","","","10,973","","","","33.8","%","","","12,375","","","","31.5","%","","","11,252","","","","32.0","%"],["Healthcare","","","3,669","","","","30.4","%","","","3,506","","","","30.7","%","","","2,407","","","","21.2","%"],["Total","","$","59,966","","","","30.5","%","","$","83,689","","","","31.9","%","","$","71,700","","","","31.9","%"]]
[[/GREPCENT_TABLE]]

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 $60.0 million during fiscal 2024, compared to $83.7 million during fiscal 2023. Consolidated gross margin as a percentage of net sales was 30.5% for fiscal 2024, compared to the 31.9% during fiscal 2023, primarily due to unfavorable product mix and manufacturing under absorption for PMT, unfavorable product mix for GES, favorable product mix and lower freight costs for Canvys and increased manufacturing under absorption for Healthcare. Gross margin during fiscal 2024 included expense related to inventory provisions of $0.4 million for PMT, $0.1 million for Canvys and $0.1 million for Healthcare.

Consolidated gross profit was $83.7 million during fiscal 2023, compared to $71.7 million during fiscal 2022. Consolidated gross margin as a percentage of net sales was 31.9 % for fiscal 2023, the same as the 31.9% during fiscal 2022, primarily due to favorable product mix for PMT, unfavorable product mix for GES, unfavorable product mix for Canvys and improved manufacturing absorption and decreased component scrap for Healthcare. Gross margin during fiscal 2023 included expense related to inventory provisions of $0.3 million for PMT, $0.1 million for Canvys and $0.1 million for Healthcare.

Power and Microwave Technologies

Net sales for PMT decreased 21.7% to $128.7 million during fiscal 2024 from $164.3 million during fiscal 2023. The decrease was mainly due to lower sales of semi-wafer fabrication products reflecting the cyclical slowdown in that market. RF and Wireless sales were also down due to a slowdown in the infrastructure business in Asia. However, the health of the business continues to be strong as we gain market share with new products and customers. Gross margin as a percentage of net sales decreased to 30.1% during fiscal 2024 as compared to 32.9% during fiscal 2023, primarily due to unfavorable product mix and manufacturing under absorption.

Net sales for PMT increased 5.7% to $164.3 million during fiscal 2023 from $155.4 million during fiscal 2022. The increase was mainly due to strong growth in the semi-wafer fabrication industry for the first nine months and the RF and microwave products for various applications. Gross margin as a percentage of net sales increased to 32.9% during fiscal 2023 as compared to 32.7% during fiscal 2022, primarily due to product mix.

Green Energy Solutions

Net sales for GES decreased 51.2% to $23.2 million during fiscal 2024 from $47.6 million during fiscal 2023. The decrease reflected the project-based nature of the wind turbine business and was mainly due to lower shipments to EV locomotive customers as they struggled with lead-times of other products to complete the locomotives and ship to their end customers for Beta testing. Comparative sales were also impacted by a large shipment of battery modules in fiscal 2023 that did not recur in fiscal 2024. Gross margin as a percentage of net sales decreased to 28.4% during fiscal 2024 as compared to 28.8% during fiscal 2023, primarily due to product mix. However, like PMT we continue to gain market share in this segment.

Net sales for GES increased 110.5% to $47.6 million during fiscal 2023 from $22.6 million during fiscal 2022. The increase was mainly due to growth in related product sales to the wind turbine industry, as well as EV battery modules. Gross margin as a percentage of net sales decreased to 28.8% during fiscal 2023 as compared to 32.0% during fiscal 2022, primarily due to product mix.

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Canvys

Net sales for Canvys decreased 17.5% to $32.4 million during fiscal 2024, from $39.3 million during fiscal 2023. Sales decreased primarily due to lower sales in the North American market resulting from high interest rates negatively impacting our medical OEM customers. Gross margin as a percentage of net sales increased to 33.8% during fiscal 2024 as compared to 31.5% during fiscal 2023 due to product mix and lower freight costs.

Net sales for Canvys increased 11.8% to $39.3 million during fiscal 2023, from $35.2 million during fiscal 2022. Sales increased primarily due to strong sales in the North American market. Gross margin as a percentage of net sales decreased to 31.5% during fiscal 2023 as compared to 32.0% during fiscal 2022 mainly due to product mix.

Healthcare

Net sales for Healthcare increased 5.7% to $12.1 million during fiscal 2024, from $11.4 during fiscal 2023. The increase in sales was primarily due to higher part and CT tube sales. Gross margin as a percentage of net sales decreased slightly to 30.4% during fiscal 2024, compared to 30.7% during fiscal 2023. The decrease was primarily due to increased manufacturing under absorption, offset by an improved product mix.

Net sales for Healthcare increased 0.5% to $11.4 million during fiscal 2023, essentially unchanged from fiscal 2022. The slight increase in sales was primarily due to an increase in equipment sales, partially offset by decreases in part sales and CT tube sales. Gross margin as a percentage of net sales increased to 30.7% during fiscal 2023, compared to 21.2% during fiscal 2022. The increase was primarily due to improved manufacturing absorption and decreased component scrap expenses.

Sales by Geographic Area

Our sales are aggregated by the following geographic regions: North America; Asia/Pacific; Europe; Latin America; and Other.

Net sales by geographic area and percent change for fiscal 2024, fiscal 2023 and fiscal 2022 were as follows (in thousands):

[[GREPCENT_TABLE]]
[["Net Sales","","FY 2024","","","FY 2023","","","FY 2022","","","FY24 vs. FY23 % Change","","","FY23 vs. FY22 % Change"],["North America","","$","77,269","","","$","112,214","","","$","98,527","","","","(31.1","%)","","","13.9","%"],["Asia/Pacific","","","45,264","","","","59,557","","","","49,235","","","","(24.0","%)","","","21.0","%"],["Europe","","","61,476","","","","62,017","","","","64,435","","","","(0.9","%)","","","(3.8","%)"],["Latin America","","","10,908","","","","28,924","","","","12,439","","","","(62.3","%)","","","132.5","%"],["Other (1)","","","1,543","","","","(54",")","","","(16",")","","","2,957.4","%","","","(237.5","%)"],["Total","","$","196,460","","","$","262,658","","","$","224,620","","","","(25.2","%)","","","16.9","%"]]
[[/GREPCENT_TABLE]]

(1)
Primarily includes net sales not allocated to a specific geographical region, unabsorbed value-add costs and other unallocated expenses.

26

Gross profit by geographic area and percent of geographic net sales for fiscal 2024, fiscal 2023 and fiscal 2022 were as follows (in thousands):

[[GREPCENT_TABLE]]
[["","","FY 2024","","","FY 2023","","","FY 2022"],["Gross Profit (Loss)","","Amount","","","% of Net Sales","","","Amount","","","% of Net Sales","","","Amount","","","% of Net Sales"],["North America","","$","29,306","","","","37.9","%","","$","43,580","","","","38.8","%","","$","36,548","","","","37.1","%"],["Asia/Pacific","","","13,682","","","","30.2","%","","","18,775","","","","31.5","%","","","15,728","","","","31.9","%"],["Europe","","","18,516","","","","30.1","%","","","18,760","","","","30.2","%","","","19,215","","","","29.8","%"],["Latin America","","","3,983","","","","36.5","%","","","7,735","","","","26.7","%","","","4,340","","","","34.9","%"],["Other (1)","","","(5,521",")","","","","","","(5,161",")","","","","","","(4,131",")"],["Total","","$","59,966","","","","30.5","%","","$","83,689","","","","31.9","%","","$","71,700","","","","31.9","%"]]
[[/GREPCENT_TABLE]]

(1)
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 1.4% during fiscal 2024 to $59.5 million from $58.7 million during fiscal 2023. This increase in SG&A from fiscal 2023 was mainly due to higher R&D expenses, partially offset by lower incentives due to financial performance. SG&A as a percentage of sales increased to 30.3% during fiscal 2024 as compared to 22.4% during fiscal 2023.

Selling, general and administrative expenses increased during fiscal 2023 to $58.7 million from $55.7 million during fiscal 2022. This increase in SG&A expense from fiscal 2022 was mainly due to higher employee compensation and travel expenses, partially offset by lower legal fees and a lower bad debt expense. SG&A as a percentage of sales decreased to 22.4% during fiscal 2023 as compared to 24.8% during fiscal 2022.

Other Income/Expense

Other expense was $0.2 million during fiscal 2024, compared to other income of less than $0.1 million during fiscal 2023. Fiscal 2024 had $0.3 million of investment income the same as fiscal 2023. 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 2024 totaled $0.4 million compared to $0.3 million for fiscal 2023. We currently do not utilize derivative instruments to manage our exposure to foreign currency.

Income Tax Provision

Our income tax provision (benefit) during fiscal 2024, fiscal 2023 and fiscal 2022 was $0.1 million, $2.7 million and ($2.2 million), respectively. The effective income tax rates during fiscal 2024, fiscal 2023 and fiscal 2022 were 61.4%, 10.8% and (13.7%), respectively. The difference between the effective income tax rates as compared to the U.S. federal statutory rate of 21.0% during fiscal 2024, fiscal 2023 and fiscal 2022 was primarily driven by the impact of valuation allowance changes related to the realizability of our U.S. state and federal net deferred tax assets and changes in our geographical distribution of income (loss). In addition, the Company recognized both foreign tax and research and development ("R&D") tax credits in fiscal 2024.

During the fourth quarter of fiscal 2024, the Company recorded R&D tax credits of $0.5 million. These credits represent the expected U.S. federal credits to be claimed for fiscal 2024.

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Net deferred tax assets related to domestic state NOL carryforwards at June 1, 2024 amounted to approximately $1.8 million, compared to $2.1 million at May 27, 2023. Net deferred tax assets related to foreign NOL carryforwards was $0.1 million as of June 1, 2024, and $0.2 million as of May 27, 2023 with various or indefinite expiration dates. During the fourth quarter of fiscal 2024 we increased the valuation allowance on the state net operating losses by $0.9 million resulting in a total valuation allowance against state net operating losses of $1.1 million.

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 2024 and fiscal 2023.

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to support a more likely than not assertion that its deferred tax assets will be realized. A significant component of objective evidence evaluated was the cumulative income or loss incurred in each jurisdiction over the three-year period ended June 1, 2024. We considered other positive evidence in determining the need for a valuation allowance in the U.S. including the subpart F and GILTI inclusions of our foreign earnings, the changes in our business performance in recent years, and the utilization of federal NOLs. The weight of this positive evidence is sufficient to outweigh other negative evidence in evaluating our need for a valuation allowance in the U.S. federal jurisdiction. As of June 1, 2024, we recorded a $0.9 million valuation allowance on state NOLs as there was more negative evidence which limited the Company’s ability to utilize the state NOLs, including the anticipated expiration of some state NOLs prior to utilization and legislation restrictions for some states.

As of June 1, 2024, a valuation allowance of $2.1 million was recorded, representing the portion of the deferred tax asset that management does not believe is more likely than not to be realized. The valuation allowance as of May 27, 2023 was $1.4 million. The valuation allowance relates to state NOLs ($1.1 million) and deferred tax assets in foreign jurisdictions where historical taxable losses have been incurred ($1.0 million). The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are increased, or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth.

Income taxes paid, net of refunds, including foreign estimated tax payments, were less than $0.1 million, $4.8 million and $1.5 million, during fiscal 2024, fiscal 2023 and fiscal 2022, respectively.

In the normal course of business, we are subject to examination by taxing authorities throughout the world. Years prior to fiscal 2015 are closed for examination under the statute of limitation for U.S. federal and U.S. state. In the Netherlands, years prior to fiscal 2019 are closed for examination. We are under examination in Germany for fiscal years 2019 to 2022. We have no current open audits in the U.S.

The Company recorded a $0.1 million uncertain tax position as of June 1, 2024 as compared to not recording an uncertain tax position as of May 27, 2023. We record interest related to uncertain tax positions in the income tax expense line item within the Consolidated Statements of Comprehensive Income. Accrued interest was included within the related tax liability line in the Consolidated Balance Sheets. We have recorded a liability of less than $0.1 million for interest as of June 1, 2024.

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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 $24.3 million at June 1, 2024. Cash and cash equivalents by geographic area at June 1, 2024 consisted of $7.1 million in North America, $7.3 million in Europe, $1.1 million in Latin America and $8.8 million in Asia/Pacific. We repatriated $0.3 million to the United States in the second quarter of fiscal 2024 from our entity in Mexico. 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 8, 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 and cash equivalents were $25.0 million at May 27, 2023. Cash and cash equivalents by geographic area at May 27, 2023 consisted of $8.1 million in North America, $8.6 million in Europe, $1.5 million in Latin America and $6.8 million in Asia/Pacific. No funds were repatriated to the United States in fiscal 2023 from our foreign entities.

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. Additionally, while our future capital requirements will depend on many factors, including, but not limited to, the economy and the outlook for growth in our markets, we believe our existing sources of liquidity as well as our ability to generate operating cash flows will satisfy our future obligations and cash requirements.

On March 20, 2023, the Company established a senior, secured revolving credit facility agreement with a three-year term in an aggregate principal amount not to exceed $30 million, including a swingline loan and a letter of credit sub-facility (collectively, the "Revolving Credit Facility") with PNC Bank. The Revolving Credit Facility is guaranteed by the Company's domestic subsidiaries. Proceeds of the borrowings under the Revolving Credit Facility are expected to be used for working capital and general corporate purposes of the Company and its subsidiaries. The Company utilized $3.7 million of the credit line to address short-term cash requirements and repaid that $3.7 million during the fiscal 2024. As of the end of fiscal 2024 and the date of this report, no amounts were outstanding under the Revolving Credit Facility.

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 $6.5 million of cash during fiscal 2024. We had net income of $0.1 million during fiscal 2024, which included non-cash stock-based compensation expense of $1.3 million associated with the issuance of stock option awards and restricted stock awards, $0.6 million of inventory provisions and depreciation and amortization expense of $4.3 million associated with our property and equipment as well as amortization of our intangible assets, and a $1.0 million increase in deferred income taxes. Changes in our operating assets and liabilities provided cash of $1.2 million during fiscal 2024, mainly due to a decrease in receivables of $5.3 million, a decrease in accounts payable and accrued liabilities of $4.7 million and a decrease in prepaid expenses of $0.3 million. The majority of the decrease in receivables reflected lower sales revenue compared to the prior year fourth quarter. The decrease in accounts payable and accrued liabilities was due to lower year-end accruals and timing.

Operating activities utilized $8.2 million of cash during fiscal 2023. We had net income of $22.3 million during fiscal 2023, which included non-cash stock-based compensation expense of $0.9 million associated with the issuance of stock option awards and restricted stock awards, $0.5 million of inventory provisions and depreciation and amortization expense of $3.7 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 $35.5 million during fiscal 2023, mainly due to an increase in inventories of $30.5 million, a decrease in accounts payable and accrued liabilities of $4.4 million and an increase in prepaid expenses of $0.5 million. The majority of the inventory increase was to support our Electron tube, PMG, Green Energy Solutions, LaFox manufacturing and Healthcare businesses. The decrease in accounts payable and accrued liabilities was due to revenue recognition and timing.

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Cash Flows from Investing Activities

The cash flow from investing activities consisted primarily of purchases and maturities of investments and capital expenditures.

Cash used by investing activities during fiscal 2024 was due to the $4.0 million of capital expenditures. Those capital expenditures were primarily related to our LaFox manufacturing business and facility renovation and IT systems.

Cash used by investing activities of $2.2 million during fiscal 2023 was mainly attributed to $7.4 million in capital expenditures with a $5.0 million offset for the maturities of a Certificate of Deposit (CD). Capital expenditures were primarily related to our LaFox manufacturing business and facility renovation, IT systems and the Healthcare business.

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 $2.9 million during fiscal 2024 resulted primarily from the $3.4 million used to pay dividends to shareholders with a $0.6 million offset for the proceeds from stock option exercises.

Cash provided by financing activities of $0.4 million during fiscal 2023 resulted primarily from the $3.8 million of proceeds from the issuance of common stock from stock option exercises and the $3.3 million used to pay dividends to shareholders.

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.

Contractual Obligations

Contractual obligations are presented in the table below as of June 1, 2024 (in thousands):

[[GREPCENT_TABLE]]
[["","","Less than 1 year","","","1 - 3 years","","","4 - 5 years","","","More than 5 years","","","Less Interest","","","Total"],["Lease obligations (1)","","$","1,294","","","$","1,505","","","$","142","","","$","\u2014","","","$","(181",")","","$","2,760"]]
[[/GREPCENT_TABLE]]

(1)
Lease obligations are related to certain warehouse and office facilities under non-cancelable operating leases as well as financing leases.

30

Critical Accounting Estimates

The preparation of financial statements in conformity with United States Generally Accepted Accounting Principles (“GAAP”) and pursuant to the rules and regulations of the SEC, we make assumptions, judgments and estimates that affect the reported amounts of assets, liabilities, revenue and expenses and the related disclosures of contingent assets and liabilities. Our assumptions, judgments and estimates are based on historical experience and various other factors deemed relevant. Actual results could be materially different from those estimates under different assumptions or conditions. We evaluate our assumptions, judgments and estimates on a regular basis. We also discuss our critical accounting estimates with the Audit Committee of the Board of Directors.

We believe the assumptions, judgments and estimates involved for the following have the greatest potential impact on our Consolidated Financial Statements:

•
Allowance for Credit Losses

•
Revenue Recognition

•
Inventories, net

•
Intangible and Long-Lived Assets

•
Income Taxes

Allowance for Credit Losses

Our allowance for credit losses 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.

Revenue Recognition

Our customers are generally not resellers, but rather businesses that incorporate our products into their processes from which they generate an economic benefit. The goods are also distinct in that each item sold to the customer is clearly identified on both the purchase order and resulting invoice. Each product we sell benefits the customer independently of the other products. Each item on each purchase order from the customer can be used by the customer unrelated to any other products we provide to the customer.

The Company’s revenue includes the following streams:

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Manufacturing/assembly

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Distribution

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Services revenue

Manufacturing/assembly typically includes the products that are manufactured or assembled in our manufacturing facility. These products can either be built to the customer’s prints/designs or are products that we stock in our warehouse to sell to any customer that places an order. The manufacturing business does not include a separate service bundled with the product sold or sold in addition to the product. Our contracts for customized products generally include termination provisions if a customer cancels its order. However, we recognize revenue at a point in time because the termination provisions normally do not require, upon cancellation, the customer to pay fees that are commensurate with the work performed. Each purchase order explicitly states the goods or service that we promise to transfer to the customer. The promises to the customer are limited only to those goods or service. The performance obligation is our promise to deliver both goods that were produced by the Company and resale of goods that we purchase from our suppliers. Our shipping and handling activities for destination shipments are performed prior to the customer obtaining control. As such, they are not a separate promised service. The Company elects to account for shipping and handling as activities to fulfill the promise to transfer the goods. The goods we provide to our customers are distinct in that our customers benefit from the goods we sell them through use in their own processes.

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Distribution typically includes products purchased from our suppliers, stocked in our warehouses and then sold to our customers. The distribution business does not include a separate service bundled with the product sold or sold on top of the product. Revenue is recognized when control of the promised goods is transferred to our customers, which is simultaneous with the title transferring to the customer, in an amount that reflects the transaction price consideration that we expect to receive in exchange for those goods. Control refers to the ability of the customer to direct the use of, and obtain substantially all of, the remaining benefits 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.

Repair, installation or training activities generate services revenue. The services we provide are relatively short in duration and are 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.

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 finished goods, raw materials and work-in-progress.

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.

Intangible and Long-Lived Assets

Our intangible assets reflect their fair value. Intangible assets are initially recorded at their fair market values determined by quoted market prices in active markets, if available, or recognized valuation models.

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. We conduct annual reviews for idle and underutilized equipment and review business plans for possible impairment. 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.

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

A summary of the New Accounting Pronouncements is provided in Note 3, Significant Accounting Policies and Disclosures.

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