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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:

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Business Overview

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Results of Operations - an analysis and comparison of our consolidated results of operations for the fiscal years ended May 27, 2023, May 28, 2022 and May 29, 2021, as reflected in our Consolidated Statements of Comprehensive Income.

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Liquidity, Financial Position and Capital Resources - a discussion of our primary sources and uses of cash for the fiscal years ended May 27, 2023, May 28, 2022 and May 29, 2021, and a discussion of changes in our financial position.

Business Overview

Richardson Electronics, Ltd. is a leading global manufacturer of engineered solutions, power grid and microwave tubes and related consumables; power conversion and RF and microwave components; high-value replacement parts, tubes and service training for diagnostic imaging equipment; and customized display solutions. Nearly 60% of our products are manufactured in LaFox, Illinois, Marlborough, Massachusetts or Donaueschingen, Germany, or by one of our manufacturing partners throughout the world. All our partners manufacture to our strict specifications and per our supplier code of conduct. We serve customers in the alternative energy, healthcare, aviation, broadcast, communications, industrial, marine, medical, military, scientific and semiconductor markets. The Company’s strategy is to provide specialized technical expertise and “engineered solutions” based on our core engineering and manufacturing capabilities. The Company provides solutions and adds value through design-in support, systems integration, prototype design and manufacturing, testing, logistics and aftermarket technical service and repair through its global infrastructure.

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.

The Company began reporting the results for its new Green Energy Solutions ("GES") segment in the first quarter of fiscal 2023 due to its focus on power applications that support the green energy market. The GES segment has been carved out of our existing Power and Microwave Technologies (“PMT”) segment. Accordingly, the Company is reporting its financial performance based on four operating and reportable segments. The results for fiscal 2022 and fiscal 2021 presented herein were adjusted to reflect the presentation of the new GES segment separately from the PMT segment.

The Company's four operating and reportable segments for fiscal 2023, fiscal 2022 and fiscal 2021 are defined as follows:

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

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

Results of Operations

Overview - Fiscal Year Ended May 27, 2023

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Fiscal 2023 and fiscal 2022 both contained 52 weeks.

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Net sales during fiscal 2023 were $262.7 million, up 16.9%, compared to net sales of $224.6 million during fiscal 2022.

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Gross margin was 31.9% of net sales during fiscal 2023, compared to 31.9% of net sales during fiscal 2022.

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Selling, general and administrative expenses were $58.7 million, or 22.4% of net sales, during fiscal 2023, compared to $55.7 million, or 24.8% of net sales, during fiscal 2022.

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Operating income during fiscal 2023 was $25.0 million, compared to an operating income of $16.0 million during fiscal 2022.

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Other income during fiscal 2023 was less than $0.1 million, compared to other expense of $0.2 million during fiscal 2022.

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Net income during fiscal 2023 was $22.3 million, compared to a net income of $17.9 million during fiscal 2022.

Net Sales and Gross Profit Analysis

Net sales by segment and percent change for fiscal 2023, fiscal 2022 and fiscal 2021 were as follows (in thousands):

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.

During fiscal 2022, consolidated net sales increased by 26.9% compared to fiscal 2021. Sales for PMT increased by 20.5%, GES sales increased by 172.4%, Canvys sales increased by 20.0% and Healthcare sales increased by 10.1%. The increase in PMT was mainly due to strong growth from our Power and Microwave Group (PMG) technology partners in various applications including power management and 5G infrastructure, and increased revenue from our Semiconductor Wafer Fabrication Equipment customers buying engineered solutions. We also had strong growth in various Electron Device (EDG) product lines. The increase in GES was primarily due to components for power management applications and niche products for wind turbines. The increase in Canvys was primarily due to strong sales in the European and North American markets. The increase in Healthcare was primarily due to strong part sales and increase in demand for the ALTA750TM tubes.

Gross profit by segment and percent of segment net sales for fiscal 2023, fiscal 2022 and fiscal 2021 were as follows (in thousands):

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 $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.

Consolidated gross profit was $71.7 million during fiscal 2022, compared to $58.8 million during fiscal 2021. Consolidated gross margin as a percentage of net sales decreased to 31.9% during fiscal 2022, from 33.2% during fiscal 2021, primarily due to unfavorable product mix for PMT, favorable product mix for GES, higher freight costs and foreign exchange effects for Canvys and increased component scrap expenses for Healthcare. Gross margin during fiscal 2022 included expense related to inventory provisions for PMT of $0.4 million and $0.1 million for Healthcare.

Power and Microwave Technologies

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.

Net sales for PMT increased 20.5% to $155.4 million during fiscal 2022 from $129.0 million during fiscal 2021. The increase was mainly due to strong growth from our Power and Microwave Group (PMG) technology partners in various applications including power management and 5G infrastructure, and increased revenue from our Semiconductor Wafer Fabrication Equipment customers buying engineered solutions. We also had strong growth in various Electron Device (EDG) product lines. Gross margin as a percentage of net sales decreased to 32.7% during fiscal 2022 as compared to 33.8% during fiscal 2021, primarily due to product mix.

Green Energy Solutions

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.

Net sales for GES increased 172.4% to $22.6 million during fiscal 2022 from $8.3 million during fiscal 2021. Sales increased primarily due to components for power management applications and niche products for wind turbines. Gross margin as a percentage of net sales increased to 32.0% during fiscal 2022 as compared to 29.0% during fiscal 2021, primarily due to product mix.

Canvys

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.

Net sales for Canvys increased 20.0% to $35.2 million during fiscal 2022, from $29.3 million during fiscal 2021. Sales increased primarily due to strong sales in the European and North American markets. Gross margin as a percentage of net sales decreased to 32.0% during fiscal 2022 as compared to 35.0% during fiscal 2021 mainly due to increasing freight costs resulting from the COVID-19 pandemic and foreign currency effects.

Healthcare

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.

Net sales for Healthcare increased 10.1% to $11.4 million during fiscal 2022, from $10.3 million during fiscal 2021. The increase in sales was primarily due to strong parts sales and an increase in demand for the ALTA 750DTM tubes. Gross margin as a percentage of net sales decreased to 21.2% during fiscal 2022, compared to 25.1% during fiscal 2021. The decrease was primarily due to increased component scrap expenses.

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 2023, fiscal 2022 and fiscal 2021 were as follows (in thousands):

Gross profit by geographic area and percent of geographic net sales for fiscal 2023, fiscal 2022 and fiscal 2021 were as follows (in thousands):

(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 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.

Selling, general and administrative expenses decreased during fiscal 2022 to $55.7 million from $55.9 million during fiscal 2021. However, when considering the non-recurrence of the $1.6 million legal settlement in fiscal 2021, the SG&A expense for fiscal 2022 was $1.4 million or 2.6% higher than fiscal 2021. This increase in SG&A expense from fiscal 2021 was mainly due to higher employee compensation expenses including incentive expense, partially offset by lower legal fees. SG&A as a percentage of sales decreased to 24.8% during fiscal 2022 as compared to 31.6% during fiscal 2021.

Legal Settlement – Fiscal 2021

On April 2, 2021, as part of a settlement where the Company did not admit liability, Richardson agreed to pay Varex Imaging Corporation (“Varex”) $1.6 million to settle alleged counts of patent infringement and claims of trade secret misappropriation. This settlement was recorded in selling, general and administrative expenses within the Consolidated Statements of Comprehensive Income for the third quarter of fiscal 2021.

Other Income/Expense

Other income was less than $0.1 million during fiscal 2023, compared to an expense of $0.2 million during fiscal 2022. Fiscal 2023 had $0.3 million of investment income compared to $0.1 million of investment income for fiscal 2022. 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 2023 totaled $0.3 million, unchanged from fiscal 2022. We currently do not utilize derivative instruments to manage our exposure to foreign currency.

Income Tax Provision

Our income tax provision (benefit) during fiscal 2023, fiscal 2022 and fiscal 2021 was $2.7 million, ($2.2 million) and $0.7 million, respectively. The effective income tax rates during fiscal 2023, fiscal 2022 and fiscal 2021 were 10.8%, (13.7%) and 28.3%, respectively. The difference between the effective income tax rates as compared to the U.S. federal statutory rate of 21.0% during fiscal 2023, fiscal 2022 and fiscal 2021 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 tax credits in fiscal 2023.

The Inflation Reduction Act (the "IRA"), signed into law by President Biden on August 16, 2022, has several key corporate tax-related provisions, including a 15% creditable book minimum taxon adjusted financial statement income (“AFSI”) of applicable corporations, clean energy tax incentives and 1% excise tax on certain corporate stock buybacks. The Company did not rise to the level of AFSI to be subject to the 15% creditable book minimal tax. The Company did not have a material impact from the IRA. The Creating Helpful Incentives to Produce Semiconductors Act of 2022 (the "CHIPS Act") was signed into law by President Biden on August 9, 2022, which created a new 25% investment tax credit for qualified property placed in service for semiconductor manufacturing. This production credit was not applicable to the Company.

During the fourth quarter of fiscal 2023, the Company recorded research and development (“R&D”) tax credits of $0.9 million. These credits represent the expected U.S. federal and state credits to be claimed for fiscal 2020 through fiscal 2023. The Company has not previously recorded any benefit from an R&D tax credit due to the fact that the Company did not believe it was economically prudent to pursue these credits in prior years.

For taxable years beginning after December 31, 2021, taxpayers are required to capitalize certain R&D expenses and amortize them over five or fifteen years under IRC Section 174. This provision increased our taxable income for the year ended May 27, 2023, and resulted in additional cash tax payments for U.S. federal and state income taxes. This provision also generated a deferred tax asset for the year ended May 27, 2023.

As of May 27, 2023 and May 28, 2022 we have utilized all net deferred tax assets related to federal net operating loss (“NOL”) carryforwards. Net deferred tax assets related to domestic state NOL carryforwards at May 27, 2023 amounted to approximately $2.1 million, compared to $2.4 million at May 28, 2022. Net deferred tax assets related to foreign NOL carryforwards was $0.2 million as of May 27, 2023 compared to $0.4 million as of May 28, 2022, with various or indefinite expiration dates. We released the valuation allowance and have utilized $1.8 million of domestic net deferred tax asset related to foreign tax credit carryforwards as of May 27, 2023.

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 2023 and fiscal 2022.

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to support a more likely than not assertion that its deferred tax assets will be realized. A significant component of objective evidence evaluated was the cumulative income or loss incurred in each jurisdiction over the three-year period ended May 27, 2023. We considered other positive evidence in determining the need for a valuation allowance in the U.S. including the subpart F and GILTI inclusions of our foreign earnings, the changes in our business performance in recent years and the utilization of federal NOLs. The weight of this positive evidence is sufficient to outweigh other negative evidence in evaluating our need for a valuation allowance in the U.S. federal jurisdiction. As a result of the positive evidence outweighing the negative evidence for the year ended May 28, 2022, we released the full valuation allowance on the U.S. federal and state deferred tax items. In addition, in the year ended May 28, 2022, we partially released the valuation allowance on the state NOL deferred tax item, based on the amount of the NOLs that management believed it is more likely than not to realize. As of May 27, 2023, we have released $1.8 million of the valuation allowance on the deferred tax asset related to foreign tax credits based on positive evidence that arose during the fourth quarter of fiscal 2023 related to the foreign tax credit limitation calculation.

As of May 27, 2023, a valuation allowance of $1.4 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 28, 2022 was $3.5 million. The remaining valuation allowance relates to state NOLs ($0.2 million) and deferred tax assets in foreign jurisdictions where historical taxable losses have been incurred ($1.3 million). The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are increased, or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth.

Income taxes paid, including foreign estimated tax payments, were $4.8 million, $1.5 million and $0.1 million, during fiscal 2023, fiscal 2022 and fiscal 2021, respectively.

In the normal course of business, we are subject to examination by taxing authorities throughout the world. Generally, years prior to fiscal 2017 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 were under examination for fiscal 2015 through fiscal 2018 in Germany. The audit was settled in the fourth quarter of fiscal 2022. In the second quarter of fiscal 2023, the Company paid the audit assessment for the fiscal 2015 through fiscal 2018 years.The Company recorded a tax expense of less than $0.1 million due to receiving the final assessment for the German audit. The $0.1 million of uncertain tax positions recorded in prior quarters has been fully utilized as of May 27, 2023. Our primary foreign tax jurisdictions are Germany and the Netherlands. We have tax years open in Germany beginning in fiscal 2019 and the Netherlands beginning in fiscal 2021.

The Company did not record any uncertain tax positions as of May 27, 2023 as compared to $0.1 million as of May 28, 2022. The reserve for the German audits was reversed in fiscal 2023. We record penalties and interest related to uncertain tax positions in the income tax expense line item within the Consolidated Statements of Comprehensive Income. 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 27, 2023 or May 28, 2022.

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 $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. 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, cash equivalents and investments were $40.5 million at May 28, 2022. Cash, cash equivalents and investments by geographic area at May 28, 2022 consisted of $25.7 million in North America, $6.0 million in Europe, $1.5 million in Latin America and $7.3 million in Asia/Pacific. We repatriated a total of $1.5 million to the United States in fiscal 2022 from our foreign entities. This amount includes $0.7 million in the first quarter from our entity in China, $0.3 million in the second quarter from our entity in Taiwan and $0.5 million in the third quarter from our entity in Japan.

Management continues to monitor the global situation on its financial condition, liquidity, operations, suppliers, industry and workforce. Our ability to predict and respond to future changes resulting from the Covid pandemic is uncertain. Even after the Covid pandemic fully subsides, there may be long-term effects on our business practices and customers in economies in which we operate that could severely disrupt our operations and could have a material adverse effect on our business, results of operations, cash flows and financial condition. As we cannot predict the duration, scope or severity of the Covid pandemic, the negative financial impact to our results cannot be reasonably estimated and could be material.

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 sub-facility 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. As of 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 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.

Operating activities provided $1.9 million of cash during fiscal 2022. We had net income of $17.9 million during fiscal 2022, which included non-cash stock-based compensation expense of $0.7 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 $3.4 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 $16.5 million during fiscal 2022, primarily due to the increase in inventories of $20.6 million, an increase in accounts receivable of $6.2 million and an increase in prepaid expenses of $0.2 million. These uses of cash were partially offset by the increase in our accounts payable and accrued liabilities of $10.1 million. The majority of the inventory increase was to support our manufacturing, Canvys and PMG businesses. The increase in accounts receivable was primarily due to the sales increase in fiscal 2022. The increase in our accounts payable was due to higher inventory levels to support sales growth, and the increase in accrued liabilities was due to the higher employee compensation expenses and payroll taxes as well as increased deferred revenue.

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 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.

Cash used by investing activities of $8.1 million during fiscal 2022 was mainly attributed to the $5.0 million purchase of a Certificate of Deposit (CD) and $3.1 million in capital expenditures. Capital expenditures were primarily related to our manufacturing, Healthcare business and IT systems.

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 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.

Cash used in financing activities of $0.4 million during fiscal 2022 resulted primarily from the $3.2 million used to pay dividends to shareholders, 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.

Contractual Obligations

Contractual obligations are presented in the table below as of May 27, 2023 (in thousands):

Less than 1 year 1 - 3years 4 - 5years More than5 years Less Interest Total

(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”) 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 policies and 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:

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Allowance for Doubtful Accounts

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Revenue Recognition

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Inventories, net

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Intangible and Long-Lived Assets

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Loss Contingences

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Income Taxes

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.

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.

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 represent the fair value for trade name, customer relationships, non-compete agreements and technology acquired in connection with the acquisitions. 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.

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.

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 will adopt in the first quarter of fiscal 2024 and the expected impact on the consolidated financial statements is not material.

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 2023, fiscal 2022 or fiscal 2021.

Had the U.S. dollar changed unfavorably 10% against various foreign currencies, foreign denominated net sales would have been lower by an estimated $12.2 million during fiscal 2023, an estimated $12.1 million during fiscal 2022 and an estimated $10.0 million during fiscal 2021. Total assets would have declined by an estimated $4.3 million as of the fiscal year ended May 27, 2023 and an estimated $4.2 million as of the fiscal year ended May 28, 2022, while the total liabilities would have decreased by an estimated $1.1 million as of the fiscal year ended May 27, 2023 and an estimated $1.0 million as of the fiscal year ended May 28, 2022.

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 is 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

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 27, 2023 and May 28, 2022, the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended May 27, 2023, 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 27, 2023 and May 28, 2022, and the results of its operations and its cash flows for each of the three years in the period ended May 27, 2023, 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 27, 2023, 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 July 31, 2023 expressed an unqualified opinion thereon.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Estimationof 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 27, 2023 was $110.4 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 stock rotation privileges, obsolescence, the exiting of certain markets and assumptions about future demand and market conditions. A number of products in the PMT segment represent trailing edge technology. PMT often buys products ahead of supplier price increases and extended lead times which can create higher levels of inventory. As technologies evolve and customers replace their equipment, the market for and resulting net realizable value of PMT's products may decline.

We have identified the Company's estimation of inventory reserve for the PMT segment as a critical audit matter due to the significant judgments required by management in estimating net realizable value for certain inventory items. The Company's estimation of its’ inventory reserve, performed on an item-by-item basis, requires inputs from operations personnel and an assessment of current market conditions and future industry trends, which can be difficult to predict given evolving technologies and the declining market for some products. Auditing this matter involved especially challenging auditor judgment due to the nature and extent of audit effort needed to evaluate the reasonableness of the assumptions and judgments made by management.

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

•

Testing the design, implementation, and operating effectiveness of controls over the development of the Company’s estimation of inventory reserve.

•

Assessing the reasonableness of management's estimate by (i) inquiring of operations personnel as to their assessment as to viability of aged and slow-moving inventory, (ii) evaluating historical customer ordering trends and current uses, and (iii) for certain products, evaluating stock rotation privileges.

•

Evaluating the reasonableness of management's estimates by performing a retrospective comparison of prior period inventory on hand for certain products to current period sales, write-offs, and inventory consumption.

/s/BDO USA, P.A.

We have served as the Company's auditor since 2015.

Chicago, Illinois

July 31, 2023

Richardson Electronics, Ltd.

Consolidated Balance Sheets

(in thousands, except per share amounts)

Assets

Current assets:

Prepaid expenses and other assets 2,633 2,448

Investments - current — 5,000

Non-current assets:

Non-current deferred income taxes 4,526 4,398

Other non-current assets 267 —

Liabilities and Stockholders’ Equity

Current liabilities:

Non-current liabilities:

Non-current deferred income tax liabilities 98 85

Other non-current liabilities 612 766

Total non-current liabilities 2,139 2,766

Stockholders’ Equity

Preferred stock, $1.00 par value, no shares issued and outstanding — —

Accumulated other comprehensive income 615 800

Total liabilities and stockholders’ equity $ 198,048 $ 179,819

Richardson Electronics, Ltd.

Consolidated Statements of Comprehensive Income

(in thousands, except per share amounts)

Fiscal Year Ended

(Gain) loss on disposal of assets (7 ) 20 13

Other (income) expense:

Investment/interest income (295 ) (80 ) (76 )

Total other (income) expense (47 ) 198 579

Foreign currency translation (loss) gain, net of tax (185 ) (4,093 ) 3,403

Net income per share:

Class B common shares - Diluted 1.40 1.18 0.11

Weighted average number of shares:

Dividends per share:

Dividends per common share $ 0.24 $ 0.24 $ 0.24

Dividends per Class B common share 0.22 0.22 0.22

Richardson Electronics, Ltd.

Consolidated Statements of Cash Flows

(in thousands)

Fiscal Year Ended

Operating activities:

(Gain) loss on disposal of assets (7 ) 20 13

Deferred income taxes (138 ) (4,042 ) (1 )

Change in assets and liabilities:

Prepaid expenses and other assets (519 ) (228 ) 103

Net cash (used in) provided by operating activities (8,199 ) 1,911 832

Investing activities:

Proceeds from the sale of assets 194 — —

Proceeds from maturity of investments 5,000 — 25,000

Purchases of investments — (5,000 ) (9,000 )

Net cash (used in) provided by investing activities (2,184 ) (8,120 ) 13,368

Financing activities:

Net cash provided by (used in) financing activities 389 (352 ) (3,014 )

(Decrease) increase in cash and cash equivalents (10,514 ) (7,821 ) 12,781

Supplemental Disclosure of Cash Flow Information:

Cash paid during the fiscal year for:

Richardson Electronics, Ltd.

Consolidated Statements of Stockholders’ Equity

(in thousands, except per share amounts)

Comprehensive income

Foreign currency translation — — — — — 3,403 3,403

Share-based compensation:

Restricted stock — — — 483 — — 483

Stock options — — — 192 — — 192

Common stock:

Restricted stock issuance 73 — 4 (4 ) — — —

Dividends paid to:

Class B ($0.22 per share) — — — — (453 ) — (453 )

Comprehensive income

Foreign currency translation — — — — — (4,093 ) (4,093 )

Share-based compensation:

Restricted stock — — — 444 — — 444

Stock options — — — 210 — — 210

Common stock:

Restricted stock issuance 72 — 4 (4 ) — — —

Class B converted to Common 44 (44 ) — — — — —

Dividends paid to:

Class B ($0.22 per share) — — — — (448 ) — (448 )

Comprehensive income

Foreign currency translation — — — — — (185 ) (185 )

Share-based compensation:

Restricted stock — — — 542 — — 542

Stock options — — — 394 — — 394

Common stock:

Restricted stock issuance 49 — 2 (71 ) — — (69 )

Class B converted to Common 1 (1 ) — — — — —

Dividends paid to:

Class B ($0.22 per share) — — — — (443 ) — (443 )

Richardson Electronics, Ltd.

Notes to Consolidated Financial Statements

DESCRIPTION OF THE COMPANY

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 60% of our products are manufactured in LaFox, Illinois, Marlborough, Massachusetts or Donaueschingen, Germany, or by one of our manufacturing partners throughout the world. All our partners manufacture to our strict specifications and per our supplier code of conduct. We serve customers in the alternative energy, healthcare, aviation, broadcast, communications, industrial, marine, medical, military, scientific and semiconductor markets. The Company’s strategy is to provide specialized technical expertise and “engineered solutions” based on our core engineering and manufacturing capabilities. The Company provides solutions and adds value through design-in support, systems integration, prototype design and manufacturing, testing, logistics and aftermarket technical service and repair through its global infrastructure.

Our products include electron tubes and related components, microwave generators, subsystems used in semiconductor manufacturing and visual technology solutions. These products are used to control, switch or amplify electrical power signals, or are used as display devices in a variety of industrial, commercial, medical and communication applications.

The Company's four operating and reportable segments for fiscal 2023, fiscal 2022 and fiscal 2021 are defined as follows:

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

Customer Concentration: One customer represented 20 percent of our total accounts receivable balance as of May 27, 2023. No one customer represented more than 10 percent of our total accounts receivable balance as of May 28, 2022. Sales to one customer in our PMT segment totaling $31.2 million accounted for 12 percent of the Company’s consolidated net sales in fiscal 2023. No one customer represented more than 10 percent the consolidated net sales in fiscal 2022 and fiscal 2021.

Supplier Concentration: One of our suppliers represented 11 percent of our total cost of sales in fiscal 2023, 11 percent in fiscal 2022 and 15 percent in fiscal 2021. The amount owed to this supplier was approximately $0.2 million as of May 27, 2023 and $1.4 million as of May 28, 2022.

BASIS OF PRESENTATION

The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP for all fiscal years presented. The consolidated financial statements include our wholly owned subsidiaries. All intercompany transactions and account balances have been eliminated in consolidation.

Our fiscal year 2023 began on May 29, 2022 and ended on May 27, 2023, our fiscal year 2022 began on May 30, 2021 and ended on May 28, 2022 and our fiscal year 2021 began on May 31, 2020 and ended on May 29, 2021. Unless otherwise noted, all references to a particular year in this document shall mean the fiscal year for such period.

SIGNIFICANT ACCOUNTING POLICIES AND DISCLOSURES

Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management continuously evaluates its critical accounting policies and estimates, including the allowance for doubtful accounts, revenue recognition, inventory obsolescence, intangible assets, loss contingencies and income taxes. Management bases the estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances, however, actual results could differ from those estimates.

Reclassifications: Certain prior period amounts have been reclassified to conform to the current period reporting classifications. The reclassifications had no effect on previously reported net income or cash flows.

Fair Values of Financial Instruments: The fair values of financial instruments are determined based on quoted market prices and market interest rates as of the end of the reporting period. Our financial instruments include investments, accounts receivable, accounts payable and accrued liabilities. The fair values of these financial instruments approximate carrying values at May 27, 2023 and May 28, 2022.

Cash and Cash Equivalents: We consider short-term, highly liquid investments that are readily convertible to known amounts of cash, and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates, and that have a maturity of three months or less, when purchased, to be cash equivalents. The carrying amounts reported in the balance sheet for cash and cash equivalents approximate the fair market value of these assets.

Allowance for Doubtful Accounts: Our allowance for doubtful accounts includes estimated losses that result from uncollectible receivables. The estimates are influenced by the following: continuing credit evaluation of customers’ financial conditions; aging of receivables, individually and in the aggregate; a large number of customers which are widely dispersed across geographic areas; and collectability and delinquency history by geographic area. Significant changes in one or more of these considerations may require adjustments affecting net income and net carrying value of accounts receivable. The allowance for doubtful accounts was approximately $0.2 million as of May 27, 2023 and $0.2 million as of May 28, 2022.

Loss Contingencies: We accrue a liability for loss contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. If we determine that there is at least a reasonable possibility that a loss may have been incurred, we will include a disclosure describing the contingency.

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

The Company’s revenue includes the following streams:

•

Manufacturing /assembly

•

Distribution

•

Services revenue

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.

We record discounts taken based on historical experience. The policy varies by business unit. The Company allows returns with prior written authorization. We estimate returns based on historical experience. The Company maintains a reserve for returns based on historical trends that covers all contracts and revenue streamsusing the expected value method because we have a large number of contracts with similar characteristics, which is considered variable consideration. The reserve for returns creates a refund liability on our balance sheet as a contra trade accounts receivable as well as an asset in inventory. We value the inventory at cost due to there being minimal or no costs to the Company as we generally require the customer to pay freight and we typically do not have costs associated with activities such as relabeling or repackaging. The reserve is considered immaterial at each balance sheet date. Returns for defective product are typically covered by our suppliers’ warranty, thus, returns for defective product are not factored into our reserve.

Principal versus agent guidance was considered for customized products that are provided by our suppliers versus manufactured by the Company. The Company acts as the principal as we are responsible for satisfying the performance obligation. We have primary responsibility for fulfilling the contract, we have inventory risk prior to delivery to our customer, we establish prices, our consideration is not in the form of a commission and we bear the credit risk. The Company recognizes revenue in the gross amount of consideration.

Contracts with customers

A revenue contract exists once a customer purchase order is received, reviewed and accepted. Each accepted purchase order identifies a distinct good or service as the performance obligation. The goods include standard products purchased from a supplier and stocked on our shelves, customized products purchased from a supplier, products that are customized or have value added to them in house prior to shipping to the customer and manufactured products. Prior to accepting a customer purchase order, we review the credit worthiness of the customer. Purchase orders are deemed to meet the collectability criterion once the customer’s credit is approved. The Company receives advance payments or deposits from our customers before revenue is recognized resulting in contract liabilities. Contract liabilities are included in accrued liabilities in the consolidated balance sheets.

Contract Liabilities: Contract liabilities and revenue recognized were as follows (in thousands):

Revenue recognized (5,264 )

Revenue recognized (5,976 )

See Note 10, Segment and Geographic Information, for a disaggregation of revenue by reportable segment and geographic region, which represents how our chief operating decision maker reviews information internally to evaluate our financial performance and to make resource allocation and other decisions for the Company.

Foreign Currency Translation: The functional currency is the local currency at all foreign locations, with the exception of Hong Kong, where the functional currency is the U.S. dollar. Balance sheet items for our foreign entities, included in our consolidated balance sheets, are translated into U.S. dollars at end-of-period spot rates. Gains and losses resulting from translation of foreign subsidiary financial statements are credited or charged directly to accumulated other comprehensive income, a component of stockholders’ equity. Revenues and expenses are translated at the current rate on the date of the transaction. Gains and losses resulting from foreign currency transactions are included in income. Foreign exchange loss reflected in our Consolidated Statements of Comprehensive Income were $0.3 million, $0.3 million and $0.8 million duringfiscal 2023, fiscal 2022 and fiscal 2021, respectively.

Shipping and Handling Fees and Costs: Shipping and handling costs billed to customers are reported as revenue and the related costs are reported as a component of cost of sales.

Inventories, net: Our consolidated inventories are stated at the lower of cost and net realizable value, generally using a weighted-average cost method. Our net inventories include approximately $93.4 million of finished goods, $11.8 million of raw materials and $5.2 million of work-in-progress as of May 27, 2023 as compared to approximately $66.6 million of finished goods, $8.0 million of raw materials and $5.8 million of work-in-progress as of May 28, 2022. The inventory reserve as of May 27, 2023 was $5.9 million compared to $6.1 million as of May 28, 2022.

Provisions for obsolete or slow-moving inventories are recorded based upon regular analysis of stock rotation privileges, obsolescence, the exiting of certain markets and assumptions about future demand and market conditions. If future demand changes in the industry or market conditions differ from management’s estimates, additional provisions may be necessary.

We recorded provisions to our inventory reserves of $0.5 million, $0.5 million and $1.0 million during fiscal 2023, fiscal 2022 and fiscal 2021, respectively, which were included in cost of sales. The provisions were primarily for obsolete and slow-moving parts. The parts were written down to estimated realizable value.

Income Taxes: We recognize deferred tax assets and liabilities based on the differences between financial statement carrying amounts and the tax bases of assets and liabilities. We regularly review our deferred tax assets for recoverability and determine the need for a valuation allowance based on a number of factors, including both positive and negative evidence. These factors include historical taxable income or loss, projected future taxable income or loss, the expected timing of the reversals of existing temporary differences and the implementation of tax planning strategies. In circumstances where we, or any of our affiliates, have incurred three years of cumulative losses which constitute significant negative evidence, positive evidence of equal or greater significance is needed to overcome the negative evidence before a tax benefit is recognized for deductible temporary differences and loss carryforwards.

Investments: We liquidated our investments during the third quarter and accordingly had no investments at the end of fiscal 2023. As of May 28, 2022, we had $5.0 million invested in a Certificate of Deposit (level 1 classification), which matured in less than twelve months.

Intangible Assets: Intangible assets are initially recorded at their fair market values determined by quoted market prices in active markets, if available, or recognized valuation models. Intangible assets that have finite useful lives are amortized over their useful lives either on a straight-line basis or over their projected future cash flows and are tested for impairment when events or changes in circumstances occur that indicate possible impairment. Our intangible assets represent the fair value for trade name, customer relationships, non-compete agreements and technology acquired in connection with the acquisitions.

Property, Plant and Equipment: Property, plant and equipment are stated at cost, net of accumulated depreciation. Improvements and replacements are capitalized while expenditures for maintenance and repairs are charged to expense as incurred. Provisions for depreciation are computed using the straight-line method over the estimated useful life of the asset. Depreciation expense was approximately $3.4 million, $3.2 million and $3.2 million during fiscal 2023, fiscal 2022 and fiscal 2021, respectively.

Property, plant and equipment consist of the following (in thousands):

Computer, communications equipment and software 11,692 11,186

Property, plant, and equipment, net $ 20,823 $ 16,961

Construction in progress at May 27, 2023 includes $2.2 million for facilities, $1.6 million for manufacturing facilities and $0.6 million for IT systems. All projects are expected to be completed before the end of fiscal 2024.

Supplemental disclosure information of the estimated useful life of the assets:

Land improvements 10 years

Buildings and improvements 10 - 30 years

Computer, communications equipment and software 3 - 10 years

Machinery and other equipment 3 - 20 years

If adverse events do occur, our impairment review is based on an undiscounted cash flow analysis at the lowest level at which cash flows of the long-lived assets are largely independent of other groups of our assets and liabilities. This analysis requires management judgment with respect to changes in technology, the continued success of product lines and future volume, revenue and expense growth rates. We conduct annual reviews for idle and underutilized equipment and review business plans for possible impairment. Impairment occurs when the carrying value of the assets exceeds the future undiscounted cash flows expected to be earned by the use of the asset or asset group. When impairment is indicated, the estimated future cash flows are then discounted to determine the estimated fair value of the asset or asset group and an impairment charge is recorded for the difference between the carrying value and the estimated fair value.

Additionally, we also evaluate the remaining useful life of each reporting period to determine whether events and circumstances warrant a revision to the remaining period of depreciation or amortization. If the estimate of a long-lived asset’s remaining useful life is changed, the remaining carrying amount of the asset is amortized prospectively over that revised remaining useful life.

Accrued Liabilities: Accrued liabilities consist of the following (in thousands):

Compensation and payroll taxes $ 4,422 $ 5,519

Warranties: We offer warranties for the limited number of specific products we manufacture.

We estimate the cost to perform under the warranty obligation and recognize this estimated cost at the time of the related product sale. We record expense related to our warranty obligations as cost of sales in our Consolidated Statements of Comprehensive Income. Each quarter, we assess actual warranty costs incurred on a product-by-product basis and compare the warranty costs to our estimated warranty obligation. With respect to new products, estimates are based generally on knowledge of the products and warranty experience.

Warranty reserves are established for costs that are expected to be incurred after the sale and delivery of products under warranty. Warranty reserves are included in accrued liabilities on our consolidated balance sheets. The warranty reserves are determined based on known product failures, historical experience and other available evidence.

Changes in the warranty reserve during fiscal 2023 and fiscal 2022 were as follows (in thousands):

WarrantyReserve

Accruals for products sold 160

Utilization (32 )

Accruals for products sold 91

Utilization (42 )

Other Non-Current Liabilities: Other non-current liabilities of $0.6 million at May 27, 2023 and $0.8 million at May 28, 2022, primarily represent employee-benefits obligations in various non-U.S. locations.

Share-Based Compensation: We measure and recognize share-based compensation cost at fair value for all share-based payments, including stock options and restricted stock awards. We estimate fair value using the Black-Scholes option-pricing model, which requires assumptions such as expected volatility, risk-free interest rate, expected life and dividends. We account for the forfeitures of stock-based compensation in the period in which they occur. Compensation cost is recognized using a graded vesting schedule over the applicable vesting period. Share-based compensation expense totaled approximately $0.9 million during fiscal 2023, $0.7 million during fiscal 2022 and $0.7 million during fiscal 2021.

Stock options granted generally vest over a period of five years and have contractual terms to exercise of 10 years. A summary of stock option activity is as follows (in thousands, except option prices and years):

(1)

Includes only those options that were in-the-money as of May 27, 2023. Stock options for which the exercise price exceeded the market price have been omitted. Fluctuations in the intrinsic value of both outstanding and exercisable options may result from changes in underlying stock price and timing and volume of option grants, exercises and forfeitures.

There were 440,480 stock options exercised during fiscal 2023, with cash received of $3.8 million. The total intrinsic value of options exercised was $4.7 million during fiscal 2023, $1.9 million for fiscal 2022 and $0.1 million for fiscal 2021. The weighted average fair value of stock option grants was $5.44 during fiscal 2023, $1.50 during fiscal 2022 and $0.49 during fiscal 2021. As of May 27, 2023, total unrecognized compensation costs related to unvested stock options and restricted stock awards was approximately $1.8 million, which is expected to be recognized over the remaining weighted average period of approximately two to four years. The total grant date fair value of stock options vested during fiscal 2023 was $0.3 million.

The fair value of stock options is estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:

Fiscal Year Ended

The expected volatility assumptions are based on historical experience commensurate with the expected term. The risk-free interest rate is based on the yield of a treasury note with a remaining term equal to the expected life of the stock option. The expected stock option life assumption is based on the Securities and Exchange Commission’s (“SEC”) guidance in Staff Accounting Bulletin (“SAB”) No. 107 (“SAB No. 107”). For stock options granted during fiscal 2022 and fiscal 2021 the simplified method was used as we believed that our historical stock option experience did not provide a reasonable basis upon which to estimate expected term.

The following table summarizes information about stock options outstanding at May 27, 2023 (in thousands, except option prices and years):

Outstanding Vested

As of May 27, 2023, a summary of restricted stock award transactions was as follows (in thousands):

UnvestedRestrictedShares

Vested (71 )

Vested (73 )

Compensation effects arising from issuing stock awards have been charged against income and recorded as additional paid-in-capital in the consolidated statements of stockholders’ equity during fiscal 2023, fiscal 2022 and fiscal 2021.

The Employees’ Amended and Restated 2011 Long-Term Incentive Compensation Plan (the “Plan”) authorizes the issuance of up to 3,500,000 shares as incentive stock options, non-qualified stock options or stock awards. Under this plan, 1,028,000 shares are reserved for future issuance. The Plan authorizes the granting of stock options at the fair market value at the date of grant. Generally, these options become exercisable over five years and expire up to 10 years from the date of grant. Restricted stock awards vest on the anniversary of the grant date in three equal installments.

Earnings per Share: We have authorized 17,000,000 shares of common stock and 3,000,000 shares of Class B common stock. The Class B common stock has 10 votes per share and has transferability restrictions; however, Class B common stock may be converted into common stock on a share-for-share basis at any time. With respect to dividends and distributions, shares of common stock and Class B common stock rank equally and have the same rights, except that Class B common stock cash dividends are limited to 90% of the amount of Class A common stock cash dividends.

Our Class B common stock is considered a participating security requiring the use of the two-class method for the computation of basic and diluted earnings per share. The two-class computation method for each period reflects the cash dividends paid per share for each class of stock, plus the amount of allocated undistributed earnings per share computed using the participation percentage which reflects the dividend rights of each class of stock. Basic and diluted earnings per share were computed using the two-class method. The shares of Class B common stock are considered to be participating convertible securities since the shares of Class B common stock are convertible on a share-for-share basis into shares of common stock and may participate in dividends with common stock according to a predetermined formula which is 90% of the amount of Class A common stock cash dividends.

The earnings per share (“EPS”) presented in our Consolidated Statements of Comprehensive Income are based on the following (in thousands, except per share amounts):

For the Fiscal Year Ended

Basic Diluted Basic Diluted Basic Diluted

Numerator for Basic and Diluted EPS:

Less dividends:

Denominator for Basic and Diluted EPS:

Effect of dilutive securities

Net income per share:

Note: There were nocommon stock options that were anti-dilutive for fiscal 2023, fiscal 2022 and fiscal 2021.

New Accounting Pronouncements

REVOLVING CREDIT FACILITY

The Company entered into a Revolving Credit Facility with PNC Bank N.A. on March 20, 2023. Borrowings under the Company’s Revolving Credit Facility, including the Swingline Loan and Letter of Credit sub-facility extended to the Company thereunder, are secured by (i) a continuing first priority lien on and security interest in and to substantially all of the assets of the Company and its domestic subsidiaries and (ii) a continuing first priority pledge of the Pledged Collateral of the Company and the Guarantors identified in the Security Agreement and the Pledge Agreement executed in connection with the Credit Agreement. The combined maximum borrowings under the Revolving Credit Facility are $30,000,000. Proceeds of borrowings will be used for working capital and general corporate purposes.

The Credit Agreement provides that the Company must maintain compliance with a maximum consolidated leverage ratio covenant and a minimum consolidated fixed charge coverage ratio, each as determined in accordance with the Credit Agreement. The Credit Agreement also contains affirmative, negative and financial covenants customary for financings of this type, including, among other things, limitations on certain other indebtedness, loans and investments, liens, mergers, asset sales, and transactions with affiliates, as well as customary events of default for financings of this type. The Company was in full compliance with all covenants as May 27, 2023.

Borrowings under the Revolving Credit Facility will bear interest at a rate per annum selected by the Company from the following options: (a) Term SOFR Rate (for the applicable Interest Period) plus the SOFR Adjustment (for the applicable Interest Period) plus 1.25%; (b) Base Rate plus 0.25% or (c) Daily Simple RFR (for Euros) plus the RFR Adjustment plus 1.25%. Letters of Credit issued under the Letter of Credit sub-facility will have a letter of credit fee equal to 1.25% per annum. The fee for the unused portion of the credit line is 0.10%.

There was no amount outstanding under the Revolving Credit Facility as of May 27, 2023.

5. RELATED PARTY TRANSACTION

On June 15, 2015, the Company entered into a lease agreement for the IMES facility with LDL, LLC. That lease agreement was extended for five years in fiscal 2021. The Company shall be entitled to extend the term of the lease for a period of an additional five years by notifying the landlord in writing of its intention to do so within six months of the expiration of the term. The Executive Vice President of IMES, Lee A. McIntyre III (former owner of IMES), has an ownership interest in LDL, LLC. Mr. McIntyre departed from the Company in fiscal year 2023, effective as of September 24, 2022. The lease agreement provides for monthly payments over five years with total future minimum lease payments of $0.3 million. Rental expense related to this lease amounted to $0.2 million for the fiscal year ended May 27, 2023, $0.2 million for fiscal year ended May 28, 2022 and $0.1 million for fiscal year ended May 29, 2021.

6. INTANGIBLE ASSETS

Intangible assets are initially recorded at their fair market values determined by quoted market prices in active markets, if available, or recognized valuation models. Intangible assets that have finite useful lives are amortized over their useful lives and are tested for impairment when events or changes in circumstances occur that indicate possible impairment. No impairment was recognized in fiscal 2023, fiscal 2022 or fiscal 2021.

Our intangible assets represent the fair value for customer relationships and technology acquired in connection with our acquisitions. Intangible assets subject to amortization were as follows (in thousands):

Gross Amounts:

Accumulated Amortization:

Total Accumulated Amortization $ 1,876 $ 1,613

(1)

Change from prior periods reflect impact of foreign currency translation.

Companies must perform the annual test for impairment for indefinite life intangible assets, for which the Company has none, as well as test definite life assets for impairment in the event of a “trigger event” such as adverse changes in the business climate or market which might negatively impact the value of a reporting unit. We determined that the intangible assets were not impaired as of May 27, 2023 on the basis that no adverse events or changes in circumstances were identified that could indicate that the carrying amounts of such assets may not be recoverable.

The amortization expense associated with the intangible assets subject to amortization for the next five years is presented in the following table (in thousands):

Fiscal Year AmortizationExpense

Total amortization expense $ 1,892

The amortization expense associated with the intangible assets totaled approximately $0.3 million during fiscal 2023 and $0.2 million during fiscal 2022 and fiscal 2021. The weighted average number of years of amortization expense remaining is 10.6 years.

LEASE OBLIGATIONS AND OTHER COMMITMENTS

The Company leases real and personal property in the normal course of business under various operating and financing leases. The Company uses operating leases for facility space and automobiles. Most of the leased facility space is for sales and general office use. Automobile leases are used throughout the Company. Financing leases were used for computer servers.

Several leases include renewal clauses which vary in length and may not include specific rent renewal amounts. The Company will revise the value of the right of use assets and associated lease liabilities when the Company determines it is reasonably certain of renewal.

The gross amounts of assets and liabilities related to both operating and financing leases at May 27, 2023 and May 28, 2022 were as follows (in thousands):

Operating lease ROU asset $ 2,457 $ 3,024

Financing lease ROU asset — 215

Operating lease liability current $ 1,028 $ 1,109

Financing lease liability current — —

Total lease liability current $ 1,028 $ 1,109

Operating lease liability non-current $ 1,429 $ 1,915

Financing lease liability non-current — —

Total lease liability non-current $ 1,429 $ 1,915

The components of lease costs for fiscal 2023 and fiscal 2022 were as follows (in thousands):

Consolidated operating lease expense Operating expenses $ 1,721 $ 1,781

Consolidated financing lease amortization Operating expenses — 92

Consolidated financing lease interest Interest expense — 3

Consolidated financing lease expense — 95

Rent expense for fiscal 2023, fiscal 2022 and fiscal 2021 was $1.5 million, $1.6 million, and $1.7 million, respectively.

Our future lease commitments for minimum rentals, including common area maintenance charges and property taxes during the next five years are as follows (in thousands):

Fiscal Year Operating Leases

Thereafter 12

Total lease payments 2,575

Lease inputted interest 118

Net minimum lease payments $ 2,457

The weighted average remaining lease terms and interest rates of leases held by the Company as of May 27, 2023 were as follows:

Operating leases 2.6 4.0%

The cash outflows of the leasing activity of the Company as lessee for fiscal 2023 and fiscal 2022 were as follows (in thousands):

Fiscal Year Ended

Operating cash flows from operating leases Operating activities $ 566 $ 747

Operating cash flows from financing leases Operating activities — 148

Finance cash flows from financing leases Financing activities — 151

INCOME TAXES

Income before income taxes included the following components (in thousands):

Fiscal Year Ended

The provision (benefit) for income taxes for fiscal 2023, fiscal 2022 and fiscal 2021 consisted of the following (in thousands):

Fiscal Year Ended

Current:

Deferred:

Federal — — —

The differences between income taxes at the U.S. federal statutory income tax rate of 21.0% for fiscal 2023, fiscal 2022 and fiscal 2021 and the reported income tax provision for fiscal 2023, fiscal 2022 and fiscal 2021, are summarized as follows:

Fiscal Year Ended

Effect of:

State income taxes, net of federal tax benefit 3.6 5.5 21.6

Foreign taxes at other rates 0.9 4.5 10.5

Permanent tax differences 0.1 (2.0 ) 18.3

Change in valuation allowance for deferred tax assets (7.0 ) (43.1 ) (49.7 )

Return to provision adjustments (0.7 ) 0.2 2.2

R&D credit (3.7 ) — —

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Our deferred tax assets and liabilities reflect operations as of May 27, 2023 and May 28, 2022. Significant components were as follows (in thousands):

Fiscal Year Ended

Deferred tax assets:

NOL carryforwards - foreign and domestic $ 2,324 $ 2,796

Valuation allowance - foreign and domestic (1,375 ) (3,474 )

Net deferred tax assets after valuation allowance 7,275 7,264

Deferred tax liabilities:

Accelerated depreciation (2,441 ) (2,406 )

Tax on undistributed earnings (24 ) (24 )

Other (1 ) (1 )

Income taxes paid, including foreign estimated tax payments, were $4.8 million, $1.5 million and $0.1 million, during fiscal 2023, fiscal 2022 and fiscal 2021, respectively.

The Company did not record any uncertain tax positions as of May 27, 2023, as compared to $0.1 million as of May 28, 2022. The reserve for the German audits was reversed in fiscal 2023. We record penalties and interest related to uncertain tax positions in the income tax expense line item within the Consolidated Statements of Comprehensive Income. 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 27, 2023 or May 28, 2022.

The following table summarizes the activity related to the unrecognized tax benefits (in thousands):

Fiscal Year Ended

Unrecognized tax benefits, beginning of period $ 125 $ 142

Currency translation adjustment (4 ) (17 )

Release German reserve (121 ) —

Unrecognized tax benefits, end of period $ — $ 125

EMPLOYEE BENEFIT PLANS

The employee profit sharing plan is a defined contribution profit sharing plan. The profit sharing plan has a 401(k) provision whereby we match 50% of employee contributions up to 6.0% of pay for fiscal 2023 and fiscal 2022. The Company matched contributions up to 4.0% of pay for fiscal 2021. Charges to expense for matching contributions to this plan were $1.0 million, $0.8 million and $0.6 million, during fiscal 2023, fiscal 2022 and fiscal 2021, respectively.

10.

SEGMENT AND GEOGRAPHIC INFORMATION

As described in Note 1, Description of the Company and Note 2, Basis of Presentation, the Company began reporting the results for its new Green Energy Solutions ("GES") segment in the first quarter of fiscal 2023 due to its focus on power applications that support the green energy market. The GES segment has been carved out of our existing Power and Microwave Technologies (“PMT”) segment. Accordingly, the Company is reporting its financial performance based on four operating and reportable segments. The results for fiscal 2022 and fiscal 2021 presented herein were adjusted to reflect the presentation of the new GES segment separately from the PMT segment.

The Company's fouroperating and reportable segments for fiscal 2023, fiscal 2022 and fiscal 2021 were defined as follows:

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.

The CEO, who is the chief operating decision maker, evaluates performance and allocates resources primarily based on the gross profit of each segment.

Operating results by segment are summarized in the following table (in thousands):

Fiscal Year Ended

PMT

GES

Canvys

Healthcare

A reconciliation of assets to the relevant consolidated amount is as follows (in thousands):

Investments - current — 5,000

Net property, plant and equipment 14,124 9,435

Financing lease ROU asset — 215

Other non-current assets 267 —

Other assets - non-current deferred income taxes 4,526 4,398

(1)

Other current assets include miscellaneous receivables and prepaid expenses.

Assets are not disclosed by reportable segment as the Company does not track assets by reportable segment and certain assets are not specific to any reportable segment.

Capital expenditures for our Healthcare segment during fiscal 2023 and fiscal 2022 were approximately $0.6 million and $1.0 million, respectively. In addition, we also had capital expenditures during fiscal 2023 and fiscal 2022 related to the Company’s ERP system as well as facilities that were not specific to any particular reportable segment.

Geographic net sales information is primarily grouped by customer destination into five areas: North America; Asia/Pacific; Europe; Latin America; and Other.

Net sales and gross profit by geographic region are summarized in the following table (in thousands):

Fiscal Year Ended

Net Sales

Gross Profit

(1)

Other includes primarily net sales not allocated to a specific geographical region, unabsorbed value-add cost andother unallocated expenses.

Net assets by geographic region are summarized in the following table (in thousands):

Fiscal Year Ended

Net Assets

The Company had long-lived assets of $22.7 million as of May 27, 2023 and $19.0 million as of May 28, 2022. The long-lived assets, which include our fixed assets and intangibles, were primarily in the U.S. There were approximately $0.3 million of long-lived assets that belong to our foreign affiliates as of May 27, 2023 and $0.4 million as of May 28, 2022.

The Company had depreciation and amortization expense of $3.7 million, $3.4 million and $3.4 million for fiscal 2023, fiscal 2022 and fiscal 2021, respectively. The depreciation and amortization, which includes our fixed assets and intangibles, were primarily in the U.S. Depreciation and amortization expense that belongs to our foreign affiliates was approximately $0.1 million for fiscal 2023, $0.1 million for fiscal 2022 and $0.3 million for fiscal 2021, respectively.

11.

RISKS AND UNCERTAINTIES

While the immediate impacts of the COVID-19 pandemic have been assessed, the long-term effects of the disruption, including supply chain disruption, and resulting impact on the global economy and capital markets remain unpredictable, and depend on future developments, such as the possible resurgence of the virus, variant strains of the virus, vaccine availability and effectiveness, and future government actions in response to the crisis. The residual impact of the COVID-19 pandemic and its effects on supply chains and general economic conditions continues to evolve. The COVID-19 pandemic and its residual negative impact on general economic conditions has had and continues to have a negative effect on our business, results of operations, cash flows, gross margins as a percentage of net sales (particularly within our Canvys segment). While the Company did not experience sales declines during fiscal year 2023 as a direct result of the pandemic, the residual economic impact from the pandemic continued to negatively impacted our gross margins as a percentage of net sales in our Canvys segment.

It is likely that the pandemic will continue to affect our business for an indeterminable period of time due to the impact on the global economy, including with respect to transportation networks and supply chains, the availability of raw materials, production efforts and customer demand for our products. We have experienced and continue to experience component delays which negatively impact our product development schedule.

Management continues to monitor the impact of global economic factors on its financial condition, liquidity, operations, suppliers, industry and workforce. Our ability to predict and respond to future changes resulting from the Covid pandemic is uncertain. Even after the Covid pandemic fully subsides, there may be continued long-term effects on our business practices and customers in economies in which we operate that could severely disrupt our operations and could have a material adverse effect on our business, results of operations, cash flows and financial condition. As we cannot predict the duration, scope or severity of the Covid pandemic, the negative financial impact to our results cannot be reasonably estimated and could be material.

12.

VALUATION AND QUALIFYING ACCOUNTS

The following table presents the valuation and qualifying account activity for fiscal years ended May 27, 2023, May 28, 2022 and May 29, 2021, (in thousands):

Allowance for doubtful accounts $ 186 $ 50 (1) $ (45 ) (2) $ 191

Notes:

(1)

Charges to bad debt expense.

(2)

Uncollectible amounts written off, net of recoveries and foreign currency translation.

(3)

Charges to cost of sales. Included in fiscal 2023 were inventory write-downs of $0.3 million for PMT, $0.1 million for Canvys and $0.1 million for Healthcare.

(4)

Inventory disposed or sold, net of foreign currency translation.

13.

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (in thousands, except per share amounts):

Description FirstQuarter SecondQuarter ThirdQuarter FourthQuarter

Net income per share:

ITEM 9A.Controls and Procedures

(a)

Evaluation of Disclosure Controls and Procedures

Management of the Company, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of May 27, 2023.

Disclosure controls and procedures are intended to provide reasonable assurance that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of May 27, 2023 at a reasonable assurance level.

(b)

Management’s Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision of the Chief Executive Officer and Chief Financial Officer, management conducted an assessment of the effectiveness of our internal control over financial reporting as of May 27, 2023 based on the framework in the Internal Control-Integrated Framework (2013) published by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on that assessment, management has concluded that the Company’s internal control over financial reporting was effective as of May 27, 2023.

Management’s assessment of the effectiveness of our internal control over financial reporting as of May 27, 2023 has been audited by BDO USA, P.A., an independent registered public accounting firm, as stated in their report, which is included herein.

(c)

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Richardson Electronics, Ltd. RELL US Equity

RELL · 10-K · period ended 2023-05-27

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

ITEM 8. Financial Statements and Supplementary Data

ITEM 9A.Controls and Procedures

Richardson Electronics, Ltd. RELL US Equity☆

RELL · 10-K · period ended 2023-05-27

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

ITEM 8. Financial Statements and Supplementary Data

ITEM 9A.Controls and Procedures

Richardson Electronics, Ltd. RELL US Equity