| Significant Accounting Policies and Disclosures | 3. SIGNIFICANT ACCOUNTING POLICIES AND DISCLOSURES Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management continuously evaluates its critical accounting policies and estimates, including the allowance for doubtful accounts, revenue recognition, inventory obsolescence, intangible assets, loss contingencies and income taxes. Management bases the estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances, however, actual results could differ from those estimates. 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 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. We record discounts taken based on historical experience. The policy varies by business unit. The Company allows returns with prior written authorization. We estimate returns based on historical experience. The Company maintains a reserve for returns based on historical trends that covers all contracts and revenue streams using the expected value method because we have a large number of contracts with similar characteristics, which is considered variable consideration. The reserve for returns creates a refund liability on our balance sheet as a contra trade accounts receivable as well as an asset in inventory. We value the inventory at cost due to there being minimal or no costs to the Company as we generally require the customer to pay freight and we typically do not have costs associated with activities such as relabeling or repackaging. The reserve is considered immaterial at each balance sheet date. Returns for defective product are typically covered by our suppliers’ warranty, thus, returns for defective product are not factored into our reserve. Principal versus agent guidance was considered for customized products that are provided by our suppliers versus manufactured by the Company. The Company acts as the principal as we are responsible for satisfying the performance obligation. We have primary responsibility for fulfilling the contract, we have inventory risk prior to delivery to our customer, we establish prices, our consideration is not in the form of a commission and we bear the credit risk. The Company recognizes revenue in the gross amount of consideration. Contracts with customers A revenue contract exists once a customer purchase order is received, reviewed and accepted. Each accepted purchase order identifies a distinct good or service as the performance obligation. The goods 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 ):
Balance May 29, 2021 $ 3,313
Additions 6,917
Revenue recognized ( 5,264 )
Balance May 28, 2022 $ 4,966
Additions 4,293
Revenue recognized ( 5,976 )
Balance May 27, 2023 $ 3,283 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 during fiscal 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 ):
May 27, 2023 May 28, 2022
Land and improvements $ 1,532 $ 1,385
Buildings and improvements 24,206 23,002
Computer, communications equipment and software 11,692 11,186
Machinery and other equipment 18,350 16,215
Construction in progress 4,437 1,991
$ 60,217 $ 53,779
Accumulated depreciation ( 39,394 ) ( 36,818 )
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 We review property and equipment, definite-lived intangible assets and other long-lived assets for impairment whenever adverse events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. If adverse events do occur, our impairment review is based on an undiscounted cash flow analysis at the lowest level at which cash flows of the long-lived assets are largely independent of other groups of our assets and liabilities. This analysis requires management judgment with respect to changes in technology, the continued success of product lines and future volume, revenue and expense growth rates. We conduct annual reviews for idle and underutilized equipment and review business plans for possible impairment. Impairment occurs when the carrying value of the assets exceeds the future undiscounted cash flows expected to be earned by the use of the asset or asset group. When impairment is indicated, the estimated future cash flows are then discounted to determine the estimated fair value of the asset or asset group and an impairment charge is recorded for the difference between the carrying value and the estimated fair value. Additionally, we also evaluate the remaining useful life of each reporting period to determine whether events and circumstances warrant a revision to the remaining period of depreciation or amortization. If the estimate of a long-lived asset’s remaining useful life is changed, the remaining carrying amount of the asset is amortized prospectively over that revised remaining useful life. Accrued Liabilities: Accrued liabilities consist of the following ( in thousands ):
May 27, 2023 May 28, 2022
Compensation and payroll taxes $ 4,422 $ 5,519
Accrued severance 486 678
Professional fees 661 470
Deferred revenue 3,283 4,966
Other accrued expenses 3,174 4,477
Accrued Liabilities $ 12,026 $ 16,110 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 ):
Warranty
Balance at May 29, 2021 $ 548
Accruals for products sold 160
Utilization ( 32 )
Balance at May 28, 2022 $ 676
Accruals for products sold 91
Utilization ( 42 )
Balance at May 27, 2023 $ 725 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):
Number of Weighted Weighted Aggregate
Options Outstanding at May 30, 2020 1,427 $ 8.83
Granted 188 4.26
Exercised ( 49 ) 5.93
Forfeited ( 7 ) 5.96
Cancelled ( 104 ) 12.53
Options Outstanding at May 29, 2021 1,455 $ 8.08
Granted 185 7.66
Exercised ( 373 ) 8.01
Forfeited ( 35 ) 6.51
Cancelled ( 84 ) 11.65
Options Outstanding at May 28, 2022 1,148 $ 7.82
Granted 194 15.58
Exercised ( 441 ) 8.58
Forfeited ( 20 ) 8.15
Cancelled ( 25 ) 11.67
Options Outstanding at May 27, 2023 856 $ 9.07 6.4 $ 7,122
Options Vested at May 27, 2023 387 $ 8.24 4.6 $ 3,537 (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
May 27, 2023 May 28, 2022 May 29, 2021
Expected volatility 39.12 % 29.00 % 27.72 %
Risk-free interest rate 3.09 % 0.97 % 0.45 %
Expected lives (years) 5.47 6.50 6.50
Annual cash dividend $ 0.24 $ 0.24 $ 0.24 The expected volatility assumptions are based on historical experience commensurate with the expected term. The risk-free interest rate is based on the yield of a treasury note with a remaining term equal to the expected life of the stock option. The expected stock option life assumption is based on the Securities and Exchange Commission’s (“SEC”) guidance in Staff Accounting Bulletin (“SAB”) No. 107 (“SAB No. 107”). For stock options granted during fiscal 2022 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
Exercise Price Range Shares Weighted Weighted Aggregate Shares Weighted Weighted Aggregate
$4.26 to $6.47 280 $ 5.09 6.2 $ 3,446 135 $ 5.41 5.6 $ 1,615
$6.90 to $10.35 347 8.34 5.7 3,138 194 8.65 4.2 1,694
$11.14 to $16.71 229 15.04 7.7 538 58 13.45 3.3 228
Total 856 $ 9.07 6.4 $ 7,122 387 $ 8.24 4.6 $ 3,537 As of May 27, 2023, a summary of restricted stock award transactions was as follows ( in thousands ):
Unvested
Unvested at May 29, 2021 144
Granted 72
Vested ( 71 )
Unvested at May 28, 2022 145
Granted 53
Vested ( 73 )
Unvested at May 27, 2023 125 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
May 27, 2023 May 28, 2022 May 29, 2021
Basic Diluted Basic Diluted Basic Diluted
Numerator for Basic and Diluted EPS:
Net income $ 22,333 $ 22,333 $ 17,927 $ 17,927 $ 1,655 $ 1,655
Less dividends:
Common stock 2,877 2,877 2,745 2,745 2,669 2,669
Class B common stock 443 443 448 448 453 453
Undistributed earnings (loss) $ 19,013 $ 19,013 $ 14,734 $ 14,734 $ ( 1,467 ) $ ( 1,467 )
Common stock undistributed earnings (loss) $ 16,467 $ 16,573 $ 12,655 $ 12,720 $ ( 1,254 ) $ ( 1,255 )
Class B common stock undistributed earnings (loss) 2,546 2,440 2,079 2,014 ( 213 ) ( 212 )
Total undistributed earnings (loss) $ 19,013 $ 19,013 $ 14,734 $ 14,734 $ ( 1,467 ) $ ( 1,467 )
Denominator for Basic and Diluted EPS:
Common stock weighted average shares 11,943 11,943 11,395 11,395 11,105 11,105
Effect of dilutive securities
Dilutive stock options 599 430 59
Denominator for diluted EPS adjusted for 12,542 11,825 11,164
Class B common stock weighted average shares, 2,052 2,052 2,080 2,080 2,097 2,097
Net income per share:
Common stock $ 1.62 $ 1.55 $ 1.35 $ 1.31 $ 0.13 $ 0.13
Class B common stock $ 1.46 $ 1.40 $ 1.21 $ 1.18 $ 0.11 $ 0.11 Note: There were no common stock options that were anti-dilutive for fiscal 2023, fiscal 2022 and fiscal 2021. 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. |
