UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 26, 2021
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 1-7604
Crown Crafts, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 58-0678148 | |
| (State or other jurisdiction of incorporation) | (IRS Employer Identification No.) | |
| 916 South Burnside Avenue, Gonzales, LA | 70737 | |
| (Address of principal executive offices) | (Zip Code) |
(225) 647-9100
Registrant’s telephone number, including area code
Former name, former address and former fiscal year, if changed since last report
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | CRWS | Nasdaq Capital Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-Accelerated filer | ☑ | Smaller Reporting Company | ☑ |
| Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The number of shares of common stock, $0.01 par value, of the registrant outstanding as of October 25, 2021 was 10,077,570.
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CROWN CRAFTS, INC. AND SUBSIDIARIES | |||||
CONDENSED CONSOLIDATED BALANCE SHEETS | |||||
SEPTEMBER 26, 2021 (UNAUDITED) AND MARCH 28, 2021 | |||||
(amounts in thousands, except share and per share amounts) |
September 26, 2021 | March 28, 2021 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1,904 | $ | 613 | ||||
Accounts receivable (net of allowances of $1,490 at September 26, 2021 and $723 at March 28, 2021): | ||||||||
Due from factor | 17,221 | 18,604 | ||||||
Other | 1,264 | 734 | ||||||
Inventories | 24,234 | 20,335 | ||||||
Prepaid expenses | 716 | 1,184 | ||||||
Total current assets | 45,339 | 41,470 | ||||||
Operating lease right of use assets | 3,249 | 4,068 | ||||||
Property, plant and equipment - at cost: | ||||||||
Vehicles | 171 | 171 | ||||||
Leasehold improvements | 429 | 425 | ||||||
Machinery and equipment | 3,442 | 3,152 | ||||||
Furniture and fixtures | 345 | 345 | ||||||
Property, plant and equipment - gross | 4,387 | 4,093 | ||||||
Less accumulated depreciation | 2,946 | 2,635 | ||||||
Property, plant and equipment - net | 1,441 | 1,458 | ||||||
Finite-lived intangible assets - at cost: | ||||||||
Customer relationships | 7,374 | 7,374 | ||||||
Other finite-lived intangible assets | 4,266 | 4,266 | ||||||
Finite-lived intangible assets - gross | 11,640 | 11,640 | ||||||
Less accumulated amortization | 8,736 | 8,477 | ||||||
Finite-lived intangible assets - net | 2,904 | 3,163 | ||||||
Goodwill | 7,125 | 7,125 | ||||||
Deferred income taxes | 429 | 706 | ||||||
Other | 89 | 92 | ||||||
Total Assets | $ | 60,576 | $ | 58,082 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 7,499 | $ | 5,539 | ||||
Accrued wages and benefits | 1,207 | 2,216 | ||||||
Accrued royalties | 1,078 | 410 | ||||||
Dividends payable | 806 | 800 | ||||||
Operating lease liabilities, current | 1,800 | 1,802 | ||||||
Other accrued liabilities | 152 | 215 | ||||||
Current maturities of long-term debt | 0 | 1,964 | ||||||
Total current liabilities | 12,542 | 12,946 | ||||||
Non-current liabilities: | ||||||||
Operating lease liabilities, noncurrent | 1,733 | 2,641 | ||||||
Reserve for unrecognized tax liabilities | 701 | 630 | ||||||
Total non-current liabilities | 2,434 | 3,271 | ||||||
Shareholders' equity: | ||||||||
Common stock - $0.01 par value per share; Authorized 40,000,000 shares at September 26, 2021 and March 28, 2021; Issued 12,924,918 shares at September 26, 2021 and 12,809,753 shares at March 28, 2021 | 129 | 128 | ||||||
Additional paid-in capital | 55,335 | 54,748 | ||||||
Treasury stock - at cost - 2,849,846 shares at September 26, 2021 and 2,811,446 shares at March 28, 2021 | (15,498 | ) | (15,202 | ) | ||||
Retained Earnings | 5,634 | 2,191 | ||||||
Total shareholders' equity | 45,600 | 41,865 | ||||||
Total Liabilities and Shareholders' Equity | $ | 60,576 | $ | 58,082 | ||||
See notes to unaudited condensed consolidated financial statements. |
CROWN CRAFTS, INC. AND SUBSIDIARIES | |||||||||||
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME | |||||||||||
THREE AND SIX-MONTH PERIODS ENDED SEPTEMBER 26, 2021 AND SEPTEMBER 27, 2020 | |||||||||||
(amounts in thousands, except per share amounts) |
Three-Month Periods Ended | Six-Month Periods Ended | |||||||||||||||
September 26, 2021 | September 27, 2020 | September 26, 2021 | September 27, 2020 | |||||||||||||
Net sales | $ | 20,220 | $ | 21,659 | $ | 38,932 | $ | 37,864 | ||||||||
Cost of products sold | 14,152 | 14,565 | 28,208 | 25,747 | ||||||||||||
Gross profit | 6,068 | 7,094 | 10,724 | 12,117 | ||||||||||||
Marketing and administrative expenses | 3,164 | 3,802 | 6,530 | 7,182 | ||||||||||||
Income from operations | 2,904 | 3,292 | 4,194 | 4,935 | ||||||||||||
Other (expense) income: | ||||||||||||||||
Interest expense - net of interest income | (3 | ) | (1 | ) | (16 | ) | (5 | ) | ||||||||
Gain on extinguishment of debt | 0 | 0 | 1,985 | 0 | ||||||||||||
Loss on sale of property, plant and equipment | (3 | ) | 0 | (3 | ) | 0 | ||||||||||
Other - net | 80 | (1 | ) | 92 | 0 | |||||||||||
Income before income tax expense | 2,978 | 3,290 | 6,252 | 4,930 | ||||||||||||
Income tax expense | 592 | 803 | 1,201 | 1,228 | ||||||||||||
Net income | $ | 2,386 | $ | 2,487 | $ | 5,051 | $ | 3,702 | ||||||||
Weighted average shares outstanding: | ||||||||||||||||
Basic | 10,053 | 10,208 | 10,028 | 10,189 | ||||||||||||
Effect of dilutive securities | 41 | 6 | 43 | 4 | ||||||||||||
Diluted | 10,094 | 10,214 | 10,071 | 10,193 | ||||||||||||
Earnings per share - basic and diluted | $ | 0.24 | $ | 0.24 | $ | 0.50 | $ | 0.36 | ||||||||
See notes to unaudited condensed consolidated financial statements. |
CROWN CRAFTS, INC. AND SUBSIDIARIES | |||||||||||||
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY | |||||||||||||
THREE AND SIX-MONTH PERIODS ENDED SEPTEMBER 26, 2021 AND SEPTEMBER 27, 2020 |
Common Shares | Treasury Shares | Additional | Total | |||||||||||||||||||||||||
Number of Shares | Amount | Number of Shares | Amount | Paid-in | Retained | Shareholders' | ||||||||||||||||||||||
(Dollar amounts in thousands) | ||||||||||||||||||||||||||||
Three-Month Periods | ||||||||||||||||||||||||||||
Balances - June 28, 2020 | 12,623,301 | $ | 126 | (2,436,494 | ) | $ | (12,408 | ) | $ | 53,696 | $ | 2,323 | $ | 43,737 | ||||||||||||||
Issuance of shares | 41,452 | 1 | - | - | - | - | 1 | |||||||||||||||||||||
Stock-based compensation | - | - | - | - | 100 | - | 100 | |||||||||||||||||||||
Acquisition of treasury stock | - | |||||||||||||||||||||||||||
Net income | - | - | - | 0 | 0 | 2,487 | 2,487 | |||||||||||||||||||||
Dividend declared on common stock - $0.08 per share | - | - | - | - | - | (818 | ) | (818 | ) | |||||||||||||||||||
Balances - September 27, 2020 | 12,664,753 | $ | 127 | (2,436,494 | ) | $ | (12,408 | ) | $ | 53,796 | $ | 3,992 | $ | 45,507 | ||||||||||||||
Balances - June 27, 2021 | 12,864,753 | $ | 129 | (2,834,434 | ) | $ | (15,381 | ) | $ | 55,024 | $ | 4,054 | $ | 43,826 | ||||||||||||||
Issuance of shares | 60,165 | - | - | - | 103 | - | 103 | |||||||||||||||||||||
Stock-based compensation | - | - | - | - | 208 | - | 208 | |||||||||||||||||||||
Acquisition of treasury stock | - | - | (15,412 | ) | (117 | ) | - | - | (117 | ) | ||||||||||||||||||
Net income | - | - | - | - | - | 2,386 | 2,386 | |||||||||||||||||||||
Dividend declared on common stock - $0.08 per share | - | - | - | - | - | (806 | ) | (806 | ) | |||||||||||||||||||
Balances - September 26, 2021 | 12,924,918 | $ | 129 | (2,849,846 | ) | $ | (15,498 | ) | $ | 55,335 | $ | 5,634 | $ | 45,600 | ||||||||||||||
Six-Month Periods | ||||||||||||||||||||||||||||
Balances - March 29, 2020 | 12,603,301 | $ | 126 | (2,436,494 | ) | $ | (12,408 | ) | $ | 53,610 | $ | 1,108 | $ | 42,436 | ||||||||||||||
Issuance of shares | 61,452 | 1 | - | - | - | - | 1 | |||||||||||||||||||||
Stock-based compensation | - | - | - | - | 186 | - | 186 | |||||||||||||||||||||
Net income | - | - | - | - | - | 3,702 | 3,702 | |||||||||||||||||||||
Dividend declared on common stock - $0.08 per share | - | - | - | - | - | (818 | ) | (818 | ) | |||||||||||||||||||
Balances - September 27, 2020 | 12,664,753 | $ | 127 | (2,436,494 | ) | $ | (12,408 | ) | $ | 53,796 | $ | 3,992 | $ | 45,507 | ||||||||||||||
Balances - March 28, 2021 | 12,809,753 | $ | 128 | (2,811,446 | ) | $ | (15,202 | ) | $ | 54,748 | $ | 2,191 | $ | 41,865 | ||||||||||||||
Issuance of shares | 115,165 | 1 | - | - | 247 | - | 248 | |||||||||||||||||||||
Stock-based compensation | - | - | - | - | 340 | - | 340 | |||||||||||||||||||||
Acquisition of treasury stock | - | - | (38,400 | ) | (296 | ) | - | - | (296 | ) | ||||||||||||||||||
Net income | - | - | - | - | - | 5,051 | 5,051 | |||||||||||||||||||||
Dividends declared on common stock - $0.16 per share | - | - | - | - | - | (1,608 | ) | (1,608 | ) | |||||||||||||||||||
Balances - September 26, 2021 | 12,924,918 | $ | 129 | (2,849,846 | ) | $ | (15,498 | ) | $ | 55,335 | $ | 5,634 | $ | 45,600 | ||||||||||||||
See notes to unaudited condensed consolidated financial statements. |
CROWN CRAFTS, INC. AND SUBSIDIARIES | ||||||
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||
SIX-MONTH PERIODS ENDED SEPTEMBER 26, 2021 AND SEPTEMBER 27, 2020 | ||||||
(amounts in thousands) |
Six-Month Periods Ended | ||||||||
September 26, 2021 | September 27, 2020 | |||||||
Operating activities: | ||||||||
Net income | $ | 5,051 | $ | 3,702 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation of property, plant and equipment | 311 | 370 | ||||||
Amortization of intangibles | 259 | 403 | ||||||
Amortization of right of use assets | 893 | 949 | ||||||
Deferred income taxes | 277 | (28 | ) | |||||
Gain on extinguishment of debt | (1,985 | ) | 0 | |||||
Loss on sale of property, plant and equipment | 3 | 0 | ||||||
Reserve for unrecognized tax liabilities | 71 | 64 | ||||||
Stock-based compensation | 340 | 186 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | 853 | (994 | ) | |||||
Inventories | (3,899 | ) | (1,459 | ) | ||||
Prepaid expenses | 468 | 499 | ||||||
Other assets | 3 | 0 | ||||||
Lease liabilities | (984 | ) | (811 | ) | ||||
Accounts payable | 1,916 | 5,041 | ||||||
Accrued liabilities | (383 | ) | 366 | |||||
Net cash provided by operating activities | 3,194 | 8,288 | ||||||
Cash used in investing activities: | ||||||||
Capital expenditures for property, plant and equipment | (273 | ) | (312 | ) | ||||
Proceeds from sale of property, plant and equipment | 20 | 0 | ||||||
Net cash used in investing activities | (253 | ) | (312 | ) | ||||
Financing activities: | ||||||||
Repayments under revolving line of credit | (5,809 | ) | (4,598 | ) | ||||
Borrowings under revolving line of credit | 5,809 | 2,020 | ||||||
Proceeds from long-term debt | 0 | 1,964 | ||||||
Purchase of treasury stock from related parties | (296 | ) | 0 | |||||
Issuance of common stock | 248 | 1 | ||||||
Dividends paid | (1,602 | ) | (813 | ) | ||||
Net cash used in financing activities | (1,650 | ) | (1,426 | ) | ||||
Net increase in cash and cash equivalents | 1,291 | 6,550 | ||||||
Cash and cash equivalents at beginning of period | 613 | 282 | ||||||
Cash and cash equivalents at end of period | $ | 1,904 | $ | 6,832 | ||||
Supplemental cash flow information: | ||||||||
Income taxes paid | $ | 932 | $ | 1,447 | ||||
Interest paid | 6 | 14 | ||||||
Noncash activities: | ||||||||
Property, plant and equipment purchased but unpaid | (44 | ) | (40 | ) | ||||
Dividends declared but unpaid | (806 | ) | (818 | ) | ||||
See notes to unaudited condensed consolidated financial statements. |
CROWN CRAFTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX-MONTH PERIODS ENDED SEPTEMBER 26, 2021 AND SEPTEMBER 27, 2020
Note 1 – Interim Financial Statements
Basis of Presentation: The accompanying unaudited condensed consolidated financial statements include the accounts of Crown Crafts, Inc. (the “Company”) and its subsidiaries and have been prepared pursuant to accounting principles generally accepted in the United States (“GAAP”) applicable to interim financial information as promulgated by the Financial Accounting Standards Board (“FASB”). Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. References herein to GAAP are to topics within the FASB Accounting Standards Codification (the “FASB ASC”), which the FASB periodically revises through the issuance of an Accounting Standards Update (“ASU”) and which has been established by the FASB as the authoritative source for GAAP recognized by the FASB to be applied by nongovernmental entities.
In the opinion of the Company’s management, the interim unaudited consolidated financial statements contained herein include all adjustments necessary to present fairly the financial position of the Company as of September 26, 2021 and the results of its operations and cash flows for the periods presented. Such adjustments include normal, recurring accruals, as well as the elimination of all significant intercompany balances and transactions. Operating results for the three and six-month periods ended September 26, 2021 are not necessarily indicative of the results that may be expected by the Company for its fiscal year ending April 3, 2022. For further information, refer to the Company’s consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended March 28, 2021.
Fiscal Year: The Company’s fiscal year ends on the Sunday that is nearest to or on March 31. References herein to “fiscal year 2022” or “2022” represent the 53-week period ending April 3, 2022 and references herein to “fiscal year 2021” or “2021” represent the 52-week period ended March 28, 2021.
Reclassifications: The Company has classified certain prior year information to conform to the amounts presented in the current year. None of the changes impact the Company’s previously reported financial position or results of operations.
Recently-Issued Accounting Standards: In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, the objective of which is to provide financial statement users with more information about the expected credit losses on financial instruments and other commitments to extend credit held by an entity. Current GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable that a loss has been incurred. Because this methodology restricted the recognition of credit losses that are expected, but did not yet meet the “probable” threshold, ASU No. 2016-13 was issued to require the consideration of a broader range of reasonable and supportable information when determining estimates of credit losses. The ASU is to be applied using a modified retrospective approach, and the ASU could have been early-adopted in the fiscal year that began after December 15, 2018. When issued, ASU No. 2016-13 was required to be adopted no later than the fiscal year beginning after December 15, 2019, but on November 15, 2019, the FASB issued ASU No. 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which provided for the deferral of the effective date of ASU No. 2016-13 for a registrant that is a smaller reporting company to the first interim period of the fiscal year beginning after December 15, 2022. Accordingly, the Company intends to adopt ASU No. 2016-13 effective as of April 3, 2023. Although the Company has not determined the full impact of the adoption of ASU No. 2016-13, because the Company assigns the majority of its trade accounts receivable under factoring agreements with The CIT Group/Commercial Services, Inc. (“CIT”), a subsidiary of CIT Group Inc., the Company does not believe that the adoption of the ASU will have a significant impact on the Company’s financial position, results of operations and related disclosures.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes, the objective of which is to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The ASU amended the FASB ASC in order to improve the consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending the existing guidance. The amendments contained in the ASU are required to be adopted for public entities in the first interim period of the fiscal year beginning after December 15, 2020. Accordingly, the Company adopted ASU No. 2019-12 effective as of March 29, 2021, which did not have a significant impact on the Company’s financial position, results of operations and related disclosures.
The Company has determined that all other ASUs issued which had become effective as of September 26, 2021, or which will become effective at some future date, are not expected to have a material impact on the Company’s consolidated financial statements.
Note 2 – Advertising Costs
The Company’s advertising costs are primarily associated with cooperative advertising arrangements with certain of the Company’s customers and are recognized using the straight-line method based upon aggregate annual estimated amounts for these customers, with periodic adjustments to the actual amounts of authorized agreements. Advertising expense is included in marketing and administrative expenses in the accompanying unaudited condensed consolidated statements of income and amounted to $129,000 and $314,000 for the three months ended September 26, 2021 and September 27, 2020, respectively, and amounted to $350,000 and $659,000 for the six months ended September 26, 2021 and September 27, 2020, respectively.
Note 3 – Other Accrued Liabilities
Amounts of $152,000 and $215,000 were recorded as other accrued liabilities at September 26, 2021 and March 28, 2021, respectively. Of these amounts, $63,000 and $85,000 at September 26, 2021 and March 28, 2021, respectively, reflected unearned revenue recorded for payments from customers that were received before the products ordered were received by the customers.
Note 4 – Segment and Related Information
The Company operates primarily in one principal segment, infant and toddler products. These products consist of infant and toddler bedding, bibs, soft bath products, disposable products, developmental and bath toys and accessories. Net sales of bedding, blankets and accessories and net sales of bibs, bath, developmental toy, feeding, baby care and disposable products for the three and six-month periods ended September 26, 2021 and September 27, 2020 are as follows (in thousands):
Three-Month Periods Ended | Six-Month Periods Ended | |||||||||||||||
September 26, 2021 | September 27, 2020 | September 26, 2021 | September 27, 2020 | |||||||||||||
| Bedding, blankets and accessories | $ | 11,101 | $ | 13,042 | $ | 21,058 | $ | 23,059 | ||||||||
| Bibs, bath, developmental toy, feeding, baby care and disposable products | 9,119 | 8,617 | 17,874 | 14,805 | ||||||||||||
| Total net sales | $ | 20,220 | $ | 21,659 | $ | 38,932 | $ | 37,864 | ||||||||
Note 5 – Licensing Agreements
The Company has entered into licensing agreements that provide for royalty payments based on a percentage of sales with certain minimum guaranteed amounts. These royalty amounts are accrued based upon historical sales rates adjusted for current sales trends by customers. Royalty expense is included in cost of products sold in the accompanying unaudited consolidated statements of income and amounted to $1.4 million and $1.6 million for the three-month periods ended September 26, 2021 and September 27, 2020, respectively, and amounted to $2.7 million and $2.8 million for the six-month periods ended September 26, 2021 and September 27, 2020, respectively.
Note 6 – Income Taxes
The Company files income tax returns in the many jurisdictions in which it operates, including the U.S., several U.S. states and the People’s Republic of China. The statute of limitations varies by jurisdiction; tax years open to federal or state audit or other adjustment as of September 26, 2021 were the fiscal years ended March 28, 2021, March 29, 2020, March 31, 2019, April 1, 2018 and April 2, 2017.
After considering all relevant information regarding the calculation of the state portion of its income tax provision, the Company believes that the technical merits of the tax position that the Company has taken with respect to state apportionment percentages would more likely than not be sustained. However, the Company also realizes that the ultimate resolution of such tax position could result in a tax charge that is more than the amount realized based upon the application of the tax position taken. Therefore, the Company’s measurement regarding the tax impact of the revised state apportionment percentages resulted in the Company recording discrete reserves for unrecognized tax liabilities of $22,000 and $20,000 during the three months ended September 26, 2021 and September 27, 2020, respectively, and $45,000 and $33,000 during the six months ended September 26, 2021 and September 27, 2020, respectively, in the accompanying unaudited condensed consolidated statements of income.
The Company’s policy is to accrue interest expense and penalties as appropriate on any estimated unrecognized tax liabilities as a charge to interest expense in the Company’s consolidated statements of income. The Company accrued interest expense and penalties on the unrecognized tax liabilities for which the relevant statute of limitations remained unexpired of $12,000 and $14,000 during the three-month periods ended September 26, 2021 and September 27, 2020, respectively, and $26,000 and $31,000 during the six-month periods ended September 26, 2021 and September 27, 2020, respectively, in the accompanying unaudited condensed consolidated statements.
In August 2020, the Company was notified by the Franchise Tax Board of the State of California of its intention to examine the Company’s California income tax returns for the fiscal years ended March 31, 2019, April 1, 2018 and April 2, 2017. Further, in February 2021, the Company was notified by the U.S. Internal Revenue Service of its intention to examine the Company’s amended federal income tax return for the fiscal year ended April 2, 2017. The ultimate resolution of these examinations could include administrative or legal proceedings. Although management believes that the calculations and positions taken on these income tax returns and all other filed income tax returns are reasonable and justifiable, the outcome of these or any other examination could result in an adjustment to the position that the Company took on such income tax returns.
The Company recorded discrete income tax benefits of $28,000 and $72,000 during the three and six-month periods ended September 26, 2021, respectively, to reflect the aggregate effect of the excess tax benefits arising from the exercise of stock options and the vesting of non-vested stock. The Company recorded discrete income tax charges of $4,000 during each of the three and six-month periods ended September 27, 2020 to reflect the net effects of the tax shortfalls arising from the exercise of stock options and the vesting of non-vested stock.
Note 7 – Carousel Designs
The accompanying unaudited condensed consolidated statements of income include income, expenses and losses recognized in respect of the operating activities of Carousel Designs, LLC (“Carousel”), a wholly-owned subsidiary that manufactured and marketed infant and toddler bedding directly to consumers online from a facility in Douglasville, Georgia. On May 5, 2021, the Company’s Board of Directors (the “Board”) approved the closure of Carousel due to its high costs, declining sales and operating and cash flow losses, as well as management’s determination that, due to post-COVID-19 competitive pressures in the infant, toddler and juvenile products segment within the consumer products industry, such losses were likely to continue. Accordingly, the operations of Carousel ceased on May 21, 2021.
During the three and six-month periods ended September 26, 2021, Carousel experienced a gross loss of $41,000 and $688,000, respectively. The gross loss was the result of the sale of inventory below cost and, for the three-month period ended June 27, 2021 and the six-month period ended September 26, 2021, the recognition of charges of $334,000 related to the settlement with a supplier of a commitment to purchase fabric and $265,000 associated with the liquidation of Carousel’s remaining inventory upon the closure of the business.
Note 8 – Financing Arrangements
Factoring Agreements: To reduce its exposure to credit losses, the Company assigns the majority of its trade accounts receivable to CIT pursuant to factoring agreements, which have expiration dates that are coterminous with that of the financing agreement described below. Under the terms of the factoring agreements, CIT remits customer payments to the Company as such payments are received by CIT. As such, the Company does not take advances on the factoring agreements.
CIT bears credit losses with respect to assigned accounts receivable from approved shipments, while the Company bears the responsibility for adjustments from customers related to returns, allowances, claims and discounts. CIT may at any time terminate or limit its approval of shipments to a particular customer. If such a termination or limitation occurs, then the Company either assumes (and may seek to mitigate) the credit risk for shipments to the customer after the date of such termination or limitation or discontinues shipments to the customer. Factoring fees, which are included in marketing and administrative expenses in the accompanying unaudited condensed consolidated statements of income, amounted to $85,000 during each of the three-month periods ended September 26, 2021 and September 27, 2020, and $149,000 and $130,000 during the six-month periods ended September 26, 2021 and September 27, 2020, respectively.
Credit Facility: The Company’s credit facility as of September 26, 2021 consisted of a revolving line of credit under a financing agreement with CIT of up to $26.0 million, which includes a $1.5 million sub-limit for letters of credit, bearing interest at the rate of prime minus 1.0% or LIBOR plus 1.5%, and which is secured by a first lien on all assets of the Company. On May 13, 2021, the Company and CIT entered into an agreement whereby CIT’s lien on Carousel’s assets will be automatically released upon the sale of such assets.
The financing agreement was scheduled to mature on July 11, 2022, but on May 31, 2021 the financing agreement was amended to extend the maturity date to July 11, 2025 and to change the interest rates as reflected in the preceding paragraph. The financing agreement was also amended to provide for a transition from the LIBOR reference rate to its replacement at the appropriate time. At September 26, 2021, the Company had elected to pay interest on balances owed under the revolving line of credit, if any, under the LIBOR option, which was 1.58% as of September 26, 2021. The financing agreement also provides for the payment by CIT to the Company of interest at the rate of prime as of the beginning of the calendar month minus 2.0%, which was 1.25% as of September 26, 2021, on daily negative balances, if any, held at CIT.
At September 26, 2021 and March 28, 2021, there was 0 balance owed on the revolving line of credit, there was 0 letter of credit outstanding and $26.0 million was available under the revolving line of credit based on the Company’s eligible accounts receivable and inventory balances.
The financing agreement contains usual and customary covenants for agreements of that type, including limitations on other indebtedness, liens, transfers of assets, investments and acquisitions, merger or consolidation transactions, transactions with affiliates, and changes in or amendments to the organizational documents for the Company and its subsidiaries. The Company believes it was in compliance with these covenants as of September 26, 2021.
Credit Concentration: The Company’s accounts receivable as of September 26, 2021 amounted to $18.5 million, net of allowances of $1.5 million. Of this amount, $17.2 million was due from CIT under the factoring agreements; an additional amount of $1.8 million was due from CIT as a negative balance outstanding under the revolving line of credit. The combined amount of $19.0 million represents the maximum loss that the Company could incur if CIT failed completely to perform its obligations under the factoring agreements and the revolving line of credit. The Company’s accounts receivable at March 28, 2021 amounted to $19.3 million, net of allowances of $723,000. Of this amount, $18.6 million was due from CIT under the factoring agreements; an additional amount of $602,000 was due from CIT as a negative balance outstanding under the revolving line of credit. The combined amount of $19.2 million represented the maximum loss that the Company could have incurred if CIT had failed completely to perform its obligations under the factoring agreements and the revolving line of credit.
Paycheck Protection Program Loan: On April 19, 2020, the Company executed a Note (the “Note”) in connection with a loan made pursuant to the Paycheck Protection Program (the “PPP Loan”), which is administered by the U.S. Small Business Administration (the “SBA”) under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) and the Paycheck Protection Program Flexibility Act of 2020. The Note was entered into with CIT Bank, N.A. (the “Lender”) for the principal amount of $1,963,800 and accrued interest at 1.0% per year.
As authorized by the provisions of the CARES Act, the Company applied to the Lender for forgiveness of all or a portion of the PPP Loan. The Note would have matured on April 20, 2022, but on May 20, 2021, the PPP Loan was forgiven in full and the SBA remitted to the Lender on that date the principal amount of the Note of $1,963,800 and interest of $21,000 that had accrued from the funding date of April 20, 2020 through the forgiveness date of May 20, 2021. During the three months ended June 27, 2021 and the six months ended September 26, 2021, the Company recorded a gain on extinguishment of debt in the amount of $1,985,000 associated with the forgiveness of the PPP Loan, which has been presented below income from operations in the accompanying unaudited condensed consolidated statements of income.
Note 9 – Goodwill
Goodwill represents the excess of the purchase price over the fair value of net identifiable assets acquired in business combinations. For the purpose of presenting and measuring for the impairment of goodwill, the Company has two reporting units: one that produces and markets infant and toddler bedding, blankets and accessories and another that produces and markets infant and toddler bibs, developmental toys, bath care and disposable products. The goodwill of the reporting units of the Company as of September 26, 2021 and March 28, 2021 amounted to $30.0 million, which is reflected in the accompanying condensed consolidated balance sheets net of accumulated impairment charges of $22.9 million, for a net reported balance of $7.1 million.
The Company measures for impairment the goodwill within its reporting units annually as of the first day of the Company’s fiscal year. An additional interim measurement for impairment is performed during the year whenever an event or change in circumstances occurs that suggests that the fair value of either of the reporting units of the Company has more likely than not (defined as having a likelihood of greater than 50%) fallen below its carrying value. The annual or interim measurement for impairment is performed by first assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If such qualitative factors so indicate, then the measurement for impairment is continued by calculating an estimate of the fair value of each reporting unit and comparing the estimated fair value to the carrying value of the reporting unit. If the carrying value exceeds the estimated fair value of the reporting unit, then an impairment charge is calculated as the difference between the carrying value of the reporting unit and its estimated fair value, not to exceed the goodwill of the reporting unit.
On March 29, 2021, the Company performed the annual measurement for impairment of the goodwill of its reporting units and concluded that the estimated fair value of each of the Company’s reporting units exceeded their carrying values, and thus the goodwill of the Company’s reporting units was not impaired as of that date.
Note 10 – Other Intangible Assets
Other intangible assets as of September 26, 2021 and March 28, 2021 consisted primarily of the fair value of identifiable assets acquired in business combinations other than tangible assets and goodwill. The gross amount and accumulated amortization of the Company’s other intangible assets as of September 26, 2021 and March 28, 2021, the amortization expense for the three and six-month periods ended September 26, 2021 and September 27, 2020, and the classification of such amortization expense within the accompanying unaudited condensed consolidated statements of income are as follows (in thousands):
Amortization Expense | ||||||||||||||||||||||||||||||||
Gross Amount | Accumulated Amortization | Three-Month Periods Ended | Six-Month Periods Ended | |||||||||||||||||||||||||||||
September | March | September | March | September | September | September | September | |||||||||||||||||||||||||
26, 2021 | 28, 2021 | 26, 2021 | 28, 2021 | 26, 2021 | 27, 2020 | 26, 2021 | 27, 2020 | |||||||||||||||||||||||||
Tradename and trademarks | $ | 2,567 | $ | 2,567 | $ | 1,807 | $ | 1,722 | $ | 42 | $ | 61 | $ | 85 | $ | 122 | ||||||||||||||||
Developed technology | 0 | 0 | 0 | 0 | 0 | 27 | 0 | 55 | ||||||||||||||||||||||||
Non-compete covenants | 98 | 98 | 96 | 93 | 2 | 20 | 3 | 40 | ||||||||||||||||||||||||
Patents | 1,601 | 1,601 | 977 | 950 | 14 | 13 | 27 | 35 | ||||||||||||||||||||||||
Customer relationships | 7,374 | 7,374 | 5,856 | 5,712 | 72 | 73 | 144 | 151 | ||||||||||||||||||||||||
Total other intangible assets | $ | 11,640 | $ | 11,640 | $ | 8,736 | $ | 8,477 | $ | 130 | $ | 194 | $ | 259 | $ | 403 | ||||||||||||||||
Classification within the accompanying unaudited condensed consolidated statements of income: | ||||||||||||||||||||||||||||||||
Cost of products sold | $ | 2 | $ | 1 | $ | 3 | $ | 3 | ||||||||||||||||||||||||
Marketing and administrative expenses | 128 | 193 | 256 | 400 | ||||||||||||||||||||||||||||
Total amortization expense | $ | 130 | $ | 194 | $ | 259 | $ | 403 | ||||||||||||||||||||||||
Note 11 – Inventories
Major classes of inventory were as follows (in thousands):
September 26, 2021 | March 28, 2021 | |||||||
Raw Materials | $ | 27 | $ | 453 | ||||
Work in Process | 0 | 19 | ||||||
Finished Goods | 24,207 | 19,863 | ||||||
Total inventory | $ | 24,234 | $ | 20,335 | ||||
Note 12 – Leases
The Company made cash payments related to its recognized operating leases of $487,000 and $403,000 during the three months ended September 26, 2021 and September 27, 2020, respectively, and $984,000 and $811,000 during the six months ended September 26, 2021 and September 27, 2020, respectively. Such payments reduced the operating lease liabilities and were included in the cash flows provided by operating activities in the accompanying unaudited condensed consolidated statements of cash flows. As of September 26, 2021, the Company’s operating leases have a weighted-average remaining lease term of 2.2 years and the weighted-average discount rate is 3.6%.
During the three and six-month periods ended September 26, 2021 and September 27, 2020, the Company classified its operating lease costs within the accompanying unaudited condensed consolidated statements of income as follows (in thousands):
Three-Month Periods Ended | Six-Month Periods Ended | |||||||||||||||
September 26, 2021 | September 27, 2020 | September 26, 2021 | September 27, 2020 | |||||||||||||
Cost of products sold | $ | 402 | $ | 424 | $ | 802 | $ | 847 | ||||||||
Marketing and administrative expenses | 44 | 51 | 91 | 102 | ||||||||||||
Total operating lease costs | $ | 446 | $ | 475 | $ | 893 | $ | 949 | ||||||||
The maturities of the Company’s operating lease liabilities as of September 26, 2021 are as follows (in thousands):
Fiscal Year | ||||
2022 | $ | 949 | ||
2023 | 1,896 | |||
2024 | 491 | |||
2025 | 187 | |||
2026 | 158 | |||
Total undiscounted operating lease payments | 3,681 | |||
Less imputed interest | 148 | |||
Operating lease liabilities - net | $ | 3,533 |
Note 13 – Stock-based Compensation
The Company has three incentive stock plans, the 2006 Omnibus Incentive Plan (the “2006 Plan”), the 2014 Omnibus Equity Compensation Plan (the “2014 Plan”) and the 2021 Incentive Plan (the “2021 Plan”). As a result of the approval of the 2014 Plan by the Company’s stockholders at the Company’s 2014 annual meeting and the 2021 Plan by the Company’s stockholders at the Company’s 2021 annual meeting, grants may no longer be issued under either the 2006 Plan or the 2014 Plan. At September 26, 2021, 1,159,835 shares of the Company’s common stock were available for future issuance under the 2021 Plan, which may be issued from authorized and unissued shares of the Company’s common stock or treasury shares. The Company recorded stock-based compensation expense of $208,000 and $100,000 during the three-month periods ended September 26, 2021 and September 27, 2020, respectively, and $340,000 and $186,000 during the six-month periods ended September 26, 2021 and September 27, 2020, respectively. The Company records the compensation expense associated with stock-based awards granted to individuals in the same expense classifications as the cash compensation paid to those same individuals. No stock-based compensation costs were capitalized as part of the cost of an asset as of September 26, 2021.
Stock Options: The following table represents stock option activity for the six-month periods ended September 26, 2021 and September 27, 2020:
Six-Month Periods Ended | ||||||||||||||||
September 26, 2021 | September 27, 2020 | |||||||||||||||
Weighted- | Weighted- | |||||||||||||||
Average | Number of | Average | Number of | |||||||||||||
Exercise | Options | Exercise | Options | |||||||||||||
Price | Outstanding | Price | Outstanding | |||||||||||||
Outstanding at Beginning of Period | $ | 6.84 | 567,500 | $ | 6.86 | 517,500 | ||||||||||
Granted | 7.98 | 158,000 | 4.92 | 110,000 | ||||||||||||
Exercised | 4.96 | (50,000 | ) | 0 | 0 | |||||||||||
Forfeited | 4.92 | (5,000 | ) | 0 | 0 | |||||||||||
Outstanding at End of Period | 7.26 | 670,500 | 6.52 | 627,500 | ||||||||||||
Exercisable at End of Period | 7.30 | 387,500 | 7.15 | 455,000 | ||||||||||||
As of September 26, 2021, the intrinsic value of the outstanding and exercisable stock options was $429,000 and $292,000, respectively. The intrinsic value of the stock options exercised during the three and six months ended September 26, 2021 was $49,000 and $138,000, respectively.
The Company did not receive any cash from the exercise of stock options during either of the three or six-month periods ended September 26, 2021. Upon the exercise of stock options, participants may choose to surrender to the Company those shares from the option exercise necessary to satisfy the exercise amount and their income tax withholding obligations that arise from the option exercise. The effect on the cash flow of the Company from these “cashless” option exercises is that the Company remits cash on behalf of the participant to satisfy his or her income tax withholding obligations. The Company used cash to remit the required income tax withholding amounts from “cashless” option exercises of $14,000 and $48,000 during the three and six-month periods ended September 26, 2021, respectively. There were no stock options exercised during either of the three or six-month periods ended September 27, 2020.
Stock-based compensation is calculated according to FASB ASC Topic 718, Compensation – Stock Compensation, which requires stock-based compensation to be accounted for using a fair-value-based measurement. To determine the estimated fair value of stock options granted, the Company uses the Black-Scholes-Merton valuation formula, which is a closed-form model that uses an equation to estimate fair value. The following table sets forth the assumptions used to determine the fair value of the non-qualified stock options that were awarded to certain employees during the six months ended September 26, 2021 and September 27, 2020, which options vest over a two-year period, assuming continued service.
Six-Month Periods Ended | ||||||||
September 26, 2021 | September 27, 2020 | |||||||
Number of options issued | 158,000 | 110,000 | ||||||
Grant date | June 9, 2021 | June 10, 2020 | ||||||
Dividend yield | 4.00 | % | 6.50 | % | ||||
Expected volatility | 35.00 | % | 30.00 | % | ||||
Risk free interest rate | 0.530 | % | 0.275 | % | ||||
Contractual term (years) | 10.00 | 10.00 | ||||||
Expected term (years) | 4.00 | 4.00 | ||||||
Forfeiture rate | 5.00 | % | 5.00 | % | ||||
Exercise price (grant-date closing price) per option | $ | 7.98 | $ | 4.92 | ||||
Fair value per option | $ | 1.61 | $ | 0.56 | ||||
During the three-month periods ended September 26, 2021 and September 27, 2020, the Company classified its compensation expense associated with stock options within the accompanying unaudited condensed consolidated statements of income as follows (in thousands):
Three-Month Period Ended September 26, 2021 | Three-Month Period Ended September 27, 2020 | |||||||||||||||||||||||
Cost of | Marketing & | Cost of | Marketing & | |||||||||||||||||||||
Products | Administrative | Total | Products | Administrative | Total | |||||||||||||||||||
Options Granted in Fiscal Year | Sold | Expenses | Expense | Sold | Expenses | Expense | ||||||||||||||||||
2020 | $ | 0 | $ | 0 | $ | 0 | $ | 2 | $ | 3 | $ | 5 | ||||||||||||
2021 | 3 | 7 | 10 | 4 | 4 | 8 | ||||||||||||||||||
2022 | 9 | 28 | 37 | 0 | 0 | 0 | ||||||||||||||||||
Total stock option compensation | $ | 12 | $ | 35 | $ | 47 | $ | 6 | $ | 7 | $ | 13 | ||||||||||||
During the six-month periods ended September 26, 2021 and September 27, 2020, the Company classified its compensation expense associated with stock options within the accompanying unaudited condensed consolidated statements of income as follows (in thousands):
Six-Month Period Ended September 26, 2021 | Six-Month Period Ended September 27, 2020 | |||||||||||||||||||||||
Cost of | Marketing & | Cost of | Marketing & | |||||||||||||||||||||
Products | Administrative | Total | Products | Administrative | Total | |||||||||||||||||||
Options Granted in Fiscal Year | Sold | Expenses | Expense | Sold | Expenses | Expense | ||||||||||||||||||
2019 | $ | 0 | $ | 0 | $ | 0 | $ | 3 | $ | 3 | $ | 6 | ||||||||||||
2020 | 3 | 4 | 7 | 5 | 8 | 13 | ||||||||||||||||||
2021 | 7 | 23 | 30 | 4 | 5 | 9 | ||||||||||||||||||
2022 | 11 | 32 | 43 | 0 | 0 | 0 | ||||||||||||||||||
Total stock option compensation | $ | 21 | $ | 59 | $ | 80 | $ | 12 | $ | 16 | $ | 28 | ||||||||||||
As of September 26, 2021, total unrecognized stock option compensation expense amounted to $303,000, which will be recognized as the underlying stock options vest over a weighted-average period of 15.0 months. The amount of future stock option compensation expense could be affected by any future stock option grants and by the separation from the Company of any individual who has received stock options that are unvested as of such individual’s separation date.
Non-vested Stock Granted to Directors: The following shares of non-vested stock were granted to the Company’s directors:
Number of Shares | Fair Value per Share | Grant Date | Vesting Period (Years) | ||||
| 40,165 | $ | 7.47 | August 11, 2021 | One | |||
| 41,452 | 5.79 | August 12, 2020 | Two | ||||
| 46,512 | 5.16 | August 14, 2019 | Two | ||||
| 28,000 | 5.43 | August 8, 2018 | Two | ||||
These shares vest over the periods indicated, assuming continued service. The fair value of the non-vested stock granted to the Company’s directors was based on the closing price of the Company’s common stock on the date of each grant. In August 2021 and August 2020, 43,984 and 37,256 shares that had been granted to the Company’s directors vested, having an aggregate value of $327,000 and $179,000, respectively.
Non-vested Stock Granted to Employees: The following shares of non-vested stock were granted to certain of the Company’s employees:
Number of Shares | Fair Value per Share | Grant Date | Vesting Date | ||||
| 25,000 | $ | 5.86 | January 18, 2019 | January 18, 2021 | |||
| 20,000 | 4.92 | June 10, 2020 | June 10, 2022 | ||||
| 10,000 | 7.60 | February 22, 2021 | February 22, 2023 | ||||
| 25,000 | 7.98 | June 9, 2021 | June 9, 2022 | ||||
During the three and six-month periods ended September 26, 2021 and September 27, 2020, the Company recorded compensation expense associated with stock grants, which is included in marketing and administrative expenses in the accompanying unaudited condensed consolidated statements of income, as follows (in thousands):
Three-Month Periods Ended | Six-Month Periods Ended | |||||||||||||||
Stock Granted in Fiscal Year | September 26, 2021 | September 27, 2020 | September 26, 2021 | September 27, 2020 | ||||||||||||
2019 | $ | 0 | $ | 25 | $ | 0 | $ | 62 | ||||||||
2020 | 10 | 30 | 40 | 60 | ||||||||||||
2021 | 52 | 32 | 104 | 36 | ||||||||||||
2022 | 99 | 0 | 116 | 0 | ||||||||||||
Total stock grant compensation | $ | 161 | $ | 87 | $ | 260 | $ | 158 | ||||||||
As of September 26, 2021, total unrecognized compensation expense related to the Company’s non-vested stock grants amounted to $570,000, which will be recognized over the respective vesting terms associated with each block of non-vested stock indicated above, such grants having an aggregate weighted-average vesting term of 10.2 months. The amount of future compensation expense related to the Company’s non-vested stock grants could be affected by any future non-vested stock grants and by the separation from the Company of any individual who has non-vested stock grants as of such individual’s separation date.
Note 14 – Subsequent Events
The Company has evaluated all events which have occurred between September 26, 2021 and the date that the accompanying unaudited condensed consolidated financial statements were issued, and has determined that there are no material subsequent events that require disclosure.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
Certain of the statements made in this Quarterly Report on Form 10-Q (this “Quarterly Report”) within this Item 2. and elsewhere, including information incorporated herein by reference to other documents, are “forward-looking statements” within the meaning of, and subject to the protections of, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Private Securities Litigation Reform Act of 1995. Such statements are based upon management’s current expectations, projections, estimates and assumptions. Words such as “expects,” “believes,” “anticipates,” “intends,” “may,” “will,” “could,” “would” and variations of such words and similar expressions may identify such forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties that may cause future results to differ materially from those suggested by the forward-looking statements. These risks include, among others, the impact of the COVID-19 pandemic on the Company’s business operations, general economic conditions, including changes in interest rates, in the overall level of consumer spending and in the price of oil, cotton and other raw materials used in the Company’s products, changing competition, changes in the retail environment, the Company’s ability to successfully integrate newly acquired businesses, the level and pricing of future orders from the Company’s customers, the Company’s dependence upon third-party suppliers, including some located in foreign countries with unstable political situations, the Company’s ability to successfully implement new information technologies, customer acceptance of both new designs and newly-introduced product lines, actions of competitors that may impact the Company’s business, disruptions to transportation systems or shipping lanes used by the Company or its suppliers, and the Company’s dependence upon licenses from third parties. Reference is also made to the Company’s periodic filings with the Securities and Exchange Commission for additional factors that may impact the Company’s results of operations and financial condition. The Company does not undertake to update the forward-looking statements contained herein to conform to actual results or changes in the Company’s expectations, whether as a result of new information, future events or otherwise.
DESCRIPTION OF BUSINESS
The Company was originally formed as a Georgia corporation in 1957 and was reincorporated as a Delaware corporation in 2003. The Company operates indirectly through two of its wholly-owned subsidiaries, NoJo Baby & Kids, Inc. and Sassy Baby, Inc., in the infant, toddler and juvenile products segment within the consumer products industry. The infant, toddler and juvenile products segment consists of infant and toddler bedding and blankets, bibs, soft bath products, disposable products, developmental toys and accessories. The Company’s products are marketed under Company-owned trademarks, under trademarks licensed from others and as private label goods. Sales of the Company’s products are made directly to retailers, such as mass merchants, large chain stores, juvenile specialty stores, value channel stores, grocery and drug stores, restaurants, wholesale clubs and internet-based retailers.
The accompanying unaudited condensed consolidated statements of income include income, expenses and losses recognized in respect of the operating activities of Carousel, a wholly-owned subsidiary that manufactured and marketed infant and toddler bedding directly to consumers online from a facility in Douglasville, Georgia. On May 5, 2021, the Board approved the closure of Carousel due to a history of high costs, declining sales and operating and cash flow losses, as well as management’s determination that such losses were likely to continue. Accordingly, the operations of Carousel ceased at the close of business on May 21, 2021.
The Company’s products are marketed to retailers through a national sales force consisting of salaried sales executives and employees located in Compton, California; Gonzales, Louisiana; Grand Rapids, Michigan; and Bentonville, Arkansas and by independent commissioned sales representatives located throughout the United States.
The infant and toddler consumer products industry is highly competitive. The Company competes with a variety of distributors and manufacturers (both branded and private label), including large infant and juvenile product companies and specialty infant and juvenile product manufacturers, on the basis of quality, design, price, brand name recognition, service and packaging. The Company’s ability to compete depends principally on styling, price, service to the retailer and continued high regard for the Company’s products and trade names.
Foreign and domestic contract manufacturers produce most of the Company’s products, with the largest concentration being in China. The Company makes sourcing decisions based on quality, timeliness of delivery and price, including the impact of ocean freight and duties. Although the Company maintains relationships with a limited number of suppliers, the Company believes that its products may be readily manufactured by several alternative sources in quantities sufficient to meet the Company's requirements.
A summary of certain factors that management considers important in reviewing the Company’s results of operations, financial position, liquidity and capital resources is set forth below, which should be read in conjunction with the accompanying consolidated financial statements and related notes included in the preceding sections of this Quarterly Report.
RESULTS OF OPERATIONS
The following table contains the results of operations for the three and six-month periods ended September 26, 2021 and September 27, 2020 and the dollar and percentage changes for those periods (in thousands, except percentages):
Three-Month Periods Ended | Change | Six-Month Periods Ended | Change | |||||||||||||||||||||||||||||
September 26, 2021 | September 27, 2020 | $ | % | September 26, 2021 | September 27, 2020 | $ | % | |||||||||||||||||||||||||
Net sales by category: | ||||||||||||||||||||||||||||||||
Bedding, blankets and accessories | $ | 11,101 | $ | 13,042 | $ | (1,941 | ) | -14.9 | % | $ | 21,058 | $ | 23,059 | $ | (2,001 | ) | -8.7 | % | ||||||||||||||
Bibs, bath, developmental toy, feeding, baby care and disposable products | 9,119 | 8,617 | 502 | 5.8 | % | 17,874 | 14,805 | 3,069 | 20.7 | % | ||||||||||||||||||||||
Total net sales | 20,220 | 21,659 | (1,439 | ) | -6.6 | % | 38,932 | 37,864 | 1,068 | 2.8 | % | |||||||||||||||||||||
Cost of products sold | 14,152 | 14,565 | (413 | ) | -2.8 | % | 28,208 | 25,747 | 2,461 | 9.6 | % | |||||||||||||||||||||
Gross profit | 6,068 | 7,094 | (1,026 | ) | -14.5 | % | 10,724 | 12,117 | (1,393 | ) | -11.5 | % | ||||||||||||||||||||
% of net sales | 30.0 | % | 32.8 | % | 27.5 | % | 32.0 | % | ||||||||||||||||||||||||
Marketing and administrative expenses | 3,164 | 3,802 | (638 | ) | -16.8 | % | 6,530 | 7,182 | (652 | ) | -9.1 | % | ||||||||||||||||||||
% of net sales | 15.6 | % | 17.6 | % | 16.8 | % | 19.0 | % | ||||||||||||||||||||||||
Interest expense - net of interest income | 3 | 1 | 2 | 200.0 | % | 16 | 5 | 11 | 220.0 | % | ||||||||||||||||||||||
Gain on extinguishment of debt | - | - | - | - | 1,985 | - | 1,985 | |||||||||||||||||||||||||
Other expense (income) - net | (77 | ) | 1 | (78 | ) | -7800.0 | % | (89 | ) | - | (89 | ) | ||||||||||||||||||||
Income tax expense | 592 | 803 | (211 | ) | -26.3 | % | 1,201 | 1,228 | (27 | ) | -2.2 | % | ||||||||||||||||||||
Net income | 2,386 | 2,487 | (101 | ) | -4.1 | % | 5,051 | 3,702 | 1,349 | 36.4 | % | |||||||||||||||||||||
% of net sales | 11.8 | % | 11.5 | % | 13.0 | % | 9.8 | % | ||||||||||||||||||||||||
Net Sales: Sales decreased to $20.2 million for the three months ended September 26, 2021, compared with $21.7 million for the three months ended September 27, 2020, a decrease of $1.4 million, or 6.6%. Sales of bedding, blankets and accessories decreased by $1.9 million, which included a decrease of $1.5 million due to the closure of Carousel. These decreases were partially offset by an increase of $502,000 in sales of bibs, bath, developmental toys, feeding, baby care and disposable products. Sales increased to $38.9 million for the six-month period ended September 26, 2021, compared with $37.9 million for the six-month period ended September 27, 2020, an increase of $1.1 million, or 2.8%. Sales of bibs, bath, developmental toys, feeding, baby care and disposable products increased by $3.1 million. This increase was partially offset by a decrease of $2.0 million in sales of bedding, blankets and accessories, which included a decrease of $2.3 million due to the closure of Carousel. The increases in sales during the comparable six-month periods are due to a strong new modular set and higher replenishment orders at a major retailer.
Gross Profit: Gross profit decreased by $1.0 million and decreased from 32.8% of net sales for the three-month period ended September 27, 2020 to 30.0% of net sales for the three-month period ended September 26, 2021. The decrease in gross profit included the effect of the closure of Carousel, which recognized a gross profit of $629,000 in the prior year period. Gross profit decreased by $1.4 million and decreased from 32.0% of net sales for the six-month period ended September 27, 2020 to 27.5% of net sales for the six-month period ended September 26, 2021. The closure of Carousel resulted in a $1.9 million decrease in gross profit, which in the current year period included the sale of inventory below cost and the recognition of charges of $334,000 associated with the settlement with a supplier of a commitment to purchase fabric and $265,000 associated with the liquidation of Carousel’s remaining inventory upon the closure of the business. The Company’s gross profit has also been impacted in both the three and six-month periods of the current year because of increases in ocean-going freight costs.
Marketing and Administrative Expenses: Marketing and administrative expenses decreased by $638,000, and decreased from 17.6% of net sales for the three-month period ended September 27, 2020 to 15.6% of net sales for the three-month period ended September 26, 2021. Marketing and administrative expenses decreased by $652,000, and decreased from 19.0% of net sales for the six months ended September 27, 2020 to 16.8% of net sales for the six months ended September 26, 2021. The decrease in amounts for the current year periods included lower charges incurred by Carousel of $547,000 for the three-month period and $807,000 for the six-month period.
Gain on extinguishment of debt: On May 20, 2021, the PPP Loan was forgiven in full, which resulted in a gain on extinguishment of debt in the amount of $1,985,000 during the three-month period ended June 27, 2021 and the six-month period ended September 26, 2021.
Income Tax Expense: The Company’s provision for income taxes is based upon an estimated annual effective tax rate (“ETR”) from continuing operations of 19.6% for the six-month period ended September 26, 2021. This estimated annual ETR includes no income tax expense from the gain on extinguishment of debt associated with the forgiveness of the PPP Loan, which will be permitted to be excluded from taxable income, the effect of which is expected to lower the estimated annual ETR for fiscal year 2022 by approximately four percentage points.
The Company applies the provisions of FASB ASC Sub-topic 740-10-25, which requires a minimum recognition threshold that a tax benefit must meet before being recognized in the financial statements. Recognized income tax positions are measured at the largest amount that has a greater than 50% likelihood of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. After considering all relevant information regarding the calculation of the state portion of its income tax provision, the Company believes that the technical merits of the tax position that the Company has taken with respect to state apportionment percentages would more likely than not be sustained. However, the Company also realizes that the ultimate resolution of such tax position could result in a tax charge that is more than the amount realized based upon the application of the tax position taken. Therefore, the Company’s measurement regarding the tax impact of the revised state apportionment percentages resulted in the Company recording discrete reserves for unrecognized tax liabilities of $22,000 and $20,000 during the three-month periods ended September 26, 2021 and September 27, 2020, respectively, and $45,000 and $33,000 during the six-month periods ended September 26, 2021 and September 27, 2020, respectively, in the accompanying unaudited condensed consolidated statements of income.
The Company recorded discrete income tax benefits of $28,000 and $72,000 during the three and six-month periods ended September 26, 2021, respectively, to reflect the aggregate effect of the excess tax benefits arising from the exercise of stock options and the vesting of non-vested stock. The Company recorded discrete income tax charges of $4,000 during each of the three and six-month periods ended September 27, 2020 to reflect the net effects of the tax shortfalls arising from the exercise of stock options and the vesting of non-vested stock.
The ETR on continuing operations and the discrete income tax charges and benefits set forth above resulted in an overall provision for income taxes of 19.2% and 24.9% for the six-month periods ended September 26, 2021 and September 27, 2020, respectively.
Although the Company does not anticipate a material change to the ETR from continuing operations for the remainder of fiscal year 2022, several factors could impact the ETR, including variations from the Company’s estimates of the amount and source of its pre-tax income, and the actual ETR for the year could differ materially from the Company’s estimates.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities decreased from $8.3 million for the six-month period ended September 27, 2020 to $3.2 million for the six-month period ended September 26, 2021. The decrease in the current year was the result of an increase in accounts payable in the current year that was $3.1 million lower than the increase in the prior year; an increase of inventory in the current year that was $2.4 million higher than the increase the prior year; and the non-cash gain on extinguishment of debt of $1,985,000 in the current year that was associated with the forgiveness of the PPP Loan. These decreases were offset by an increase in accounts receivable in the current year of $853,000 compared with a decrease in the prior year of $994,000, and an increase in net income of $1.3 million.
Net cash used in investing activities was nearly flat, decreasing from $312,000 in the prior year to $253,000 in the current year.
Net cash used in financing activities increased from $1.4 million in the prior year to $1.7 million in the current year. Financing activities in the prior year included the receipt of $1,964,000 in proceeds from the PPP Loan that were not repeated in the current year. Also, dividends paid in the current year were $789,000 higher than in the prior year. These financing activities were offset by net repayments under the revolving line of credit in the prior year of $2.6 million that were not repeated in the current year.
At September 26, 2021, there was no balance owed on the Company’s revolving line of credit with CIT, there was no letter of credit outstanding and $26.0 million was available under the revolving line of credit based on the Company’s eligible accounts receivable and inventory balances.
To reduce its exposure to credit losses and to enhance the predictability of its cash flow, the Company assigns the majority of its trade accounts receivable to CIT under factoring agreements. Under the terms of the factoring agreements, CIT remits customer payments to the Company as such payments are received by CIT. As such, the Company does not take advances on the factoring agreements.
CIT bears credit losses with respect to assigned accounts receivable from approved customers that are within approved credit limits, while the Company bears the responsibility for adjustments from customers related to returns, allowances, claims and discounts. CIT may at any time terminate or limit its approval of shipments to a particular customer. If such a termination or limitation were to occur, then the Company must choose to either assume the credit risk for shipments after the date of such termination or limitation or discontinue shipments to the customer. Factoring fees, which are included in marketing and administrative expenses in the accompanying unaudited condensed consolidated statements of income, amounted to $85,000 during each of the three-month periods ended September 26, 2021 and September 27, 2020, and $149,000 and $130,000 during the six-month periods ended September 26, 2021 and September 27, 2020, respectively.
The Company continues to monitor the impact of the COVID-19 pandemic on its supply chain, manufacturing and distribution operations, customers and employees, as well as the U.S. economy in general. However, due to the uncertainty as to the duration and widespread nature of the COVID-19 pandemic, the success rates of the vaccines on COVID-19 and the variants thereof, and the extent to which the vaccines will be accepted and effectively administered, the Company cannot currently predict the long-term impact of the COVID-19 pandemic on its operations and financial results.
The uncertainties associated with the COVID-19 pandemic include potential adverse effects on the overall economy, the Company’s supply chain, transportation services, employees and customers, consumer sentiment in general, and traffic within the retail stores that carry the Company’s products. The COVID-19 pandemic could adversely affect the Company’s revenues, earnings, liquidity and cash flows and may require significant actions in response, including employee furloughs, closings of Company facilities, expense reductions or discounts of the pricing of the Company’s products, all in an effort to mitigate such effects. Conditions surrounding COVID-19 change rapidly, and additional impacts of which the Company is not currently aware may arise. Based on past performance and current expectations, the Company believes that its anticipated cash flow from operations and the availability under its revolving line of credit are sufficient to fund the Company’s requirements for working capital and capital expenditures for at least the next 12 months.
The Company’s future performance is, to a certain extent, subject to general economic, financial, competitive, legislative, regulatory and other factors beyond its control. Based upon the current level of operations, the Company believes that its cash flow from operations and funds available under the revolving line of credit will be adequate to meet its liquidity needs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of market risks that could affect the Company, refer to the risk factors disclosed in Item 1A. of Part 1 of the Company’s annual report on Form 10-K for the year ended March 28, 2021.
INTEREST RATE RISK
Although the Company could have an exposure to interest rate risk related to its floating rate debt, there was no balance outstanding on its floating rate debt as of September 26, 2021.
COMMODITY RATE RISK
The Company sources its products primarily from foreign contract manufacturers, with the largest concentration being in China. The Company’s exposure to commodity price risk primarily relates to changes in the prices in China of cotton, oil and labor, which are the principal inputs used in a substantial number of the Company’s products. In addition, although the Company pays its Chinese suppliers in U.S. dollars, an arbitrary strengthening of the rate of the Chinese currency versus the U.S. dollar could result in an increase in the cost of the Company’s finished goods. There is no assurance that the Company could timely respond to such increases by proportionately increasing the prices at which its products are sold to the Company’s customers.
MARKET CONCENTRATION RISK
The Company’s financial results are closely tied to sales to its top two customers, which represented approximately 68% of the Company’s gross sales in fiscal year 2021. In addition, 41% of the Company’s gross sales in fiscal year 2021 consisted of licensed products, which included 34% of sales associated with the Company’s license agreements with affiliated companies of the Walt Disney Company. The Company’s results could be materially impacted by the loss of one or more of these licenses.
ITEM 4. CONTROLS AND PROCEDURES
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report, as required by paragraph (b) of Rules 13a-15 or 15d-15 of the Exchange Act. Based on such evaluation, such officers have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective.
During the three-month period ended September 26, 2021, there were no changes in the Company’s internal control over financial reporting (“ICFR”) identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 of the Exchange Act that has materially affected, or is reasonably likely to materially affect, the Company’s ICFR.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is, from time to time, involved in various legal and regulatory proceedings relating to claims arising in the ordinary course of its business. Neither the Company nor any of its subsidiaries is a party to any such proceeding the outcome of which, individually or in the aggregate, is expected to have a material adverse effect on the Company’s financial condition, results of operations or cash flow.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed in Item 1A of Part 1 of the Company’s annual report on Form 10-K for the year ended March 28, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibits required to be filed by Item 601 of Regulation S-K are included as Exhibits to this Quarterly Report as follows:
Exhibit Number | Description of Exhibit | |
3.1 | Amended and Restated Certificate of Incorporation of the Company (1) | |
3.2 | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company (2) | |
3.3 | Bylaws of the Company, as amended and restated through November 15, 2016 (3) | |
31.1 | Rule 13a-14(a)/15d-14(a) Certification by the Company’s Chief Executive Officer (4) | |
31.2 | Rule 13a-14(a)/15d-14(a) Certification by the Company’s Chief Financial Officer (4) | |
32.1 | Section 1350 Certification by the Company’s Chief Executive Officer (4) | |
32.2 | Section 1350 Certification by the Company’s Chief Financial Officer (4) | |
101 | Interactive data files pursuant to Rule 405 of SEC Regulation S-T in connection with registrant’s Form 10-Q for the quarterly period ended September 26, 2021, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Unaudited Condensed Consolidated Balance Sheets; (ii) Unaudited Condensed Consolidated Statements of Income; (iii) Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity; (iv) Unaudited Condensed Consolidated Statements of Cash Flows; and (v) Notes to Unaudited Condensed Consolidated Financial Statements. | |
104 | Cover page Interactive Data File pursuant to Rule 406 of SEC Regulation S-T formatted in iXBRL (Inline eXtensible Business Reporting Language) and contained in Exhibit 101. |
(1) | Incorporated herein by reference to the registrant’s Quarterly Report on Form 10-Q for the quarter ended December 28, 2003. |
(2) | Incorporated herein by reference to the registrant’s Current Report on Form 8-K dated August 9, 2011. |
(3) | Incorporated herein by reference to the registrant’s Current Report on Form 8-K dated November 16, 2016. |
(4) | Filed herewith. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CROWN CRAFTS, INC. | |||
| Date: November 10, 2021 | /s/ Craig J. Demarest | ||
| CRAIG J. DEMAREST | |||
| Vice President and Chief Financial Officer | |||
| (Principal Financial Officer and Principal Accounting Officer) |