UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
| | 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.
| Crown Crafts, Inc. |
| (Exact name of registrant as specified in its charter) |
| (State or other jurisdiction of incorporation) | (I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
| ( |
| (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 |
| | | |
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.
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).
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 | ☐ |
| ☑ | 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
The number of shares of common stock, $0.01 par value, of the registrant outstanding as of August 8, 2024 was
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
| CROWN CRAFTS, INC. AND SUBSIDIARIES |
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| CONDENSED CONSOLIDATED BALANCE SHEETS |
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| JUNE 30, 2024 (UNAUDITED) AND MARCH 31, 2024 |
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| (amounts in thousands, except share and per share amounts) |
| June 30, 2024 | March 31, 2024 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable (net of allowances of $ at June 30, 2024 and $ at March 31, 2024): | ||||||||
| Due from factor | ||||||||
| Other | ||||||||
| Inventories | ||||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Operating lease right of use assets | ||||||||
| Property, plant and equipment - at cost: | ||||||||
| Leasehold improvements | ||||||||
| Machinery and equipment | ||||||||
| Furniture and fixtures | ||||||||
| Property, plant and equipment - gross | ||||||||
| Less accumulated depreciation | ||||||||
| Property, plant and equipment - net | ||||||||
| Finite-lived intangible assets - at cost: | ||||||||
| Customer relationships | ||||||||
| Other finite-lived intangible assets | ||||||||
| Finite-lived intangible assets - gross | ||||||||
| Less accumulated amortization | ||||||||
| Finite-lived intangible assets - net | ||||||||
| Goodwill | ||||||||
| Deferred income taxes | ||||||||
| Other | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued wages and benefits | ||||||||
| Accrued royalties | ||||||||
| Dividends payable | ||||||||
| Operating lease liabilities, current | ||||||||
| Other accrued liabilities | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities: | ||||||||
| Long-term debt | ||||||||
| Operating lease liabilities, noncurrent | ||||||||
| Reserve for unrecognized tax liabilities | ||||||||
| Total non-current liabilities | ||||||||
| Shareholders' equity: | ||||||||
| Common stock - $ par value per share; Authorized shares at June 30, 2024 and March 31, 2024; Issued shares at June 30, 2024 and March 31, 2024 | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock - at cost - shares at June 30, 2024 and March 31, 2024 | ( | ) | ( | ) | ||||
| Retained Earnings | ||||||||
| Total shareholders' equity | ||||||||
| Total Liabilities and Shareholders' Equity | $ | $ | ||||||
See notes to unaudited condensed consolidated financial statements.
| CROWN CRAFTS, INC. AND SUBSIDIARIES | |||||
| UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | |||||
| THREE-MONTH PERIODS ENDED JUNE 30, 2024 AND JULY 2, 2023 |
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| (amounts in thousands, except per share amounts) |
| Three-Month Periods Ended | ||||||||
| June 30, 2024 | July 2, 2023 | |||||||
| Net sales | $ | $ | ||||||
| Cost of products sold | ||||||||
| Gross profit | ||||||||
| Marketing and administrative expenses | ||||||||
| (Loss) income from operations | ( | ) | ||||||
| Other (expense) income: | ||||||||
| Interest expense - net of interest income | ( | ) | ( | ) | ||||
| Other income (expense) - net | ( | ) | ||||||
| (Loss) income before income tax expense | ( | ) | ||||||
| Income tax (benefit) expense | ( | ) | ||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Weighted average shares outstanding: | ||||||||
| Basic | ||||||||
| Effect of dilutive securities | ||||||||
| Diluted | ||||||||
| Basic (loss) earnings per share | $ | ( | ) | $ | ||||
| Diluted (loss) earnings per share | $ | ( | ) | $ | ||||
See notes to unaudited condensed consolidated financial statements.
| CROWN CRAFTS, INC. AND SUBSIDIARIES |
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| UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY |
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| THREE-MONTH PERIODS ENDED JUNE 30, 2024 AND JULY 2, 2023 |
| Common Shares | Treasury Shares | Additional | Total | |||||||||||||||||||||||||
| Number of Shares | Amount | Number of Shares | Amount | Paid-in Capital | Retained Earnings | Shareholders' Equity | ||||||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||||||||||
| Balances - April 2, 2023 | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||
| Dividend declared on common stock - $ per share | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balances - July 2, 2023 | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||
| Balances - March 31, 2024 | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Dividends declared on common stock - $ per share | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balances - June 30, 2024 | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||
See notes to unaudited condensed consolidated financial statements.
| CROWN CRAFTS, INC. AND SUBSIDIARIES |
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| UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
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| THREE-MONTH PERIODS ENDED JUNE 30, 2024 AND JULY 2, 2023 |
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| (amounts in thousands) |
| Three-Month Periods Ended | ||||||||
| June 30, 2024 | July 2, 2023 | |||||||
| Operating activities: | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||
| Depreciation of property, plant and equipment | ||||||||
| Amortization of intangibles | ||||||||
| Reduction in the carrying amount of right of use assets | ||||||||
| Deferred income taxes | ( | ) | ( | ) | ||||
| Reserve for unrecognized tax liabilities | ||||||||
| Stock-based compensation | ||||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses | ||||||||
| Other assets | ( | ) | ||||||
| Lease liabilities | ( | ) | ( | ) | ||||
| Accounts payable | ||||||||
| Accrued liabilities | ( | ) | ( | ) | ||||
| Net cash provided by operating activities | ||||||||
| Investing activities: | ||||||||
| Capital expenditures for property, plant and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing activities: | ||||||||
| Repayments under revolving line of credit | ( | ) | ( | ) | ||||
| Borrowings under revolving line of credit | ||||||||
| Dividends paid | ( | ) | ( | ) | ||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Net increase (decrease) in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental cash flow information: | ||||||||
| Income taxes paid | $ | $ | ||||||
| Interest paid | ||||||||
| Noncash activities: | ||||||||
| Property, plant and equipment purchased but unpaid | ( | ) | ( | ) | ||||
| Dividends declared but unpaid | ( | ) | ( | ) | ||||
See notes to unaudited condensed consolidated financial statements.
CROWN CRAFTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED JUNE 30, 2024 AND JULY 2, 2023
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 unaudited condensed consolidated financial statements contained herein include all adjustments necessary to present fairly the financial position of the Company as of June 30, 2024 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-months ended June 30, 2024 are not necessarily indicative of the results that may be expected by the Company for its fiscal year ending March 30, 2025. For further information, refer to the Company’s consolidated financial statements and notes thereto for the fiscal year ended March 31, 2024, included in the Company’s Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (the “SEC”).
Fiscal Year: The Company’s fiscal year ends on the Sunday that is nearest to or on March 31. References herein to “fiscal year 2025” or “2025” represent the 52-week period ending March 30, 2025 and references herein to “fiscal year 2024” or “2024” represent the 52-week period ended March 31, 2024.
Recently-Issued Accounting Standards: In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280) – Improvements to Reportable Segment Disclosures, the objective of which is to improve the disclosures about a public entity’s reportable segments by providing more detailed information about a reportable segment’s expenses. For disclosures associated with annual and interim periods, the amendments in ASU No. 2023-07 are required to be adopted for fiscal years beginning after December 15, 2023 and December 15, 2024, respectively, and early adoption is permitted. Upon adoption, a public entity must apply the amendments in ASU No. 2023-07 retrospectively to disclosures of all prior periods presented. The Company has adopted ASU No. 2023-07 effective as of April 1, 2024 and is evaluating the guidance of the ASU against its existing disclosures related to segment reporting
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740) – Improvements to Income Tax Disclosures, the objective of which is to enhance the transparency and decision usefulness of income tax disclosures. The amendments in ASU No. 2023-09 are required to be adopted for fiscal years beginning after December 15, 2024 and early adoption is permitted. The Company is evaluating the guidance of the ASU No. 2023-09 against its existing disclosures related to income tax disclosures.
The Company has determined that all other ASUs issued which had become effective as of June 30, 2024, or which will become effective at some future date, are not expected to have a material impact on the Company’s consolidated financial statements.
Earnings (Loss) Per Share: Due to the net loss incurred by the Company in the three-month period ended June 30, 2024, diluted shares used in the calculation of the diluted loss per share represented basic shares because the inclusion of the potentially dilutive effect of the exercisable stock options would have resulted in anti-dilution.
Note 2 – Advertising Costs
Advertising expense is included in marketing and administrative expenses in the accompanying unaudited condensed consolidated statements of operations and amounted to $
Note 3 – Segment and Related Information
The Company operates primarily in principal segment, infant, toddler and juvenile products. These products consist of infant and toddler bedding, blankets, accessories, bibs, toys and disposable products. Net sales of bedding, blankets and accessories and net sales of bibs, toys and disposable products for the three months ended June 30, 2024 and July 2, 2023 are as follows (in thousands):
| Three-Month Periods Ended | ||||||||
| June 30, 2024 | July 2, 2023 | |||||||
| Bedding, blankets and accessories | $ | $ | ||||||
| Bibs, toys and disposable products | ||||||||
| Total net sales | $ | $ | ||||||
Note 4 – 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 condensed consolidated statements of operations and amounted to $
Note 5 – 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 examination or other adjustment as of June 30, 2024 were the fiscal years ended March 31, 2024, April 2, 2023, April 3, 2022, March 28, 2021, and March 29, 2020.
Although management believes that the calculations and positions taken on its filed income tax returns are reasonable and justifiable, the outcome of an examination could result in an adjustment to the position that the Company took on such income tax returns. Such adjustment could also lead to adjustments to one or more other state income tax returns, or to income tax returns for subsequent fiscal years, or both. To the extent that the Company’s reserve for unrecognized tax liabilities is not adequate to support the cumulative effect of such adjustments, the Company could experience a material adverse impact on its future results of operations. Conversely, to the extent that the calculations and positions taken by the Company on the filed income tax returns under examination are sustained, the reversal of all or a portion of the Company’s reserve for unrecognized tax liabilities could result in a favorable impact on its future results of operations.
Note 6 – Inventories
As of June 30, 2024 and March 31, 2024, the Company’s balances of inventory were $
Note 7 – Financing Arrangements
Factoring Agreements: To reduce its exposure to credit losses, the Company assigns the majority of its trade accounts receivable to The CIT Group/Commercial Services, Inc. ("CIT"), a subsidiary of First Citizens Bank, 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 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 operations, amounted to $
Credit Facility: The Company’s credit facility as of June 30, 2024 consisted of a revolving line of credit under a financing agreement with CIT of up to $
At June 30, 2024 and March 31, 2024, the balances on the revolving line of credit were $
Credit Concentration: The Company’s accounts receivable at June 30, 2024 amounted to $
Note 8 – 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 reporting units: one that produces and markets infant and toddler bedding, blankets and accessories and another that produces and markets infant and toddler bibs, toys and disposable products. The Company’s reporting units have recognized goodwill as of June 30, 2024 and March 31, 2024 of $
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 April 1, 2024, the Company performed a qualitative assessment to determine if it is more likely than not that the fair values of the Company’s reporting units are less than their carrying values by evaluating relevant events and circumstances, including financial performance, market conditions and share price. Based on this assessment, the Company concluded that the goodwill for each of the Company’s reporting units was not considered at risk of impairment.
Note 9 – Subsequent Events
On July 19, 2024 (the “Closing Date”), NoJo Baby & Kids, Inc. ("NoJo"), a wholly-owned subsidiary of the Company, acquired substantially all of the assets, and assumed certain specified liabilities, of Baby Boom Consumer Products, Inc. (the “Baby Boom Acquisition”), for a purchase price of $
The Company and CIT also on July 19, 2024 amended the financing agreement to (i) provide for the $
The Company is in the process of obtaining all relevant information relating to the Baby Boom Acquisition. As a result, the Company is not able to provide certain disclosures required by FASB ASC Topic 805. The initial accounting for the acquisition was incomplete at the time of the financial statements.
The Company has evaluated all other events which have occurred between June 30, 2024 and the date that the accompanying unaudited condensed consolidated financial statements were issued, and has determined that there are no other 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,” “estimates,” “predicts,” “forecasts,” “plans,” “projects,” “targets,” “should,” “potential,” “continue,” “aims,” “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, 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 SEC 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 its three wholly-owned subsidiaries, NoJo Baby & Kids, Inc., Sassy Baby, Inc. and Manhattan Toy Europe Limited 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, disposables, toys and feeding products.
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 infant, toddler and juvenile consumer products industry is highly competitive. The Company competes with a variety of distributors and manufacturers (both branded and private label), including large infant, toddler and juvenile product companies and specialty infant, toddler 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.
The Company’s products are warehoused and distributed domestically from leased facilities located in Compton, California and Eden Valley, Minnesota and internationally from third-party logistics warehouses in Belgium and England.
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 condensed 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-month periods ended June 30, 2024 and July 2, 2023 and the dollar and percentage changes for those periods (in thousands, except percentages):
| Three-Month Periods Ended |
Change |
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| June 30, 2024 |
July 2, 2023 |
$ |
% |
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| Net sales by category: |
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| Bedding, blankets and accessories |
$ | 6,251 | $ | 5,573 | $ | 678 | 12.2 | % | ||||||||
| Bibs, toys and disposable products |
9,961 | 11,550 | (1,589 | ) | -13.8 | % | ||||||||||
| Total net sales |
16,212 | 17,123 | (911 | ) | -5.3 | % | ||||||||||
| Cost of products sold |
12,246 | 12,381 | (135 | ) | -1.1 | % | ||||||||||
| Gross profit |
3,966 | 4,742 | (776 | ) | -16.4 | % | ||||||||||
| % of net sales |
24.5 | % | 27.7 | % | ||||||||||||
| Marketing and administrative expenses |
4,263 | 4,046 | 217 | 5.4 | % | |||||||||||
| % of net sales |
26.3 | % | 23.6 | % | ||||||||||||
| Interest (expense) income - net |
(101 | ) | 188 | (289 | ) | -153.7 | % | |||||||||
| Other (expense) income - net |
12 | (2 | ) | 14 | -700.0 | % | ||||||||||
| Income tax (benefit) expense |
(64 | ) | 140 | (204 | ) | -145.7 | % | |||||||||
| Net income (loss) |
(322 | ) | 366 | (688 | ) | -188.0 | % | |||||||||
| % of net sales |
-2.0 | % | 2.1 | % | ||||||||||||
Net Sales: Sales decreased to $16.2 million for the three months ended June 30, 2024, compared with $17.1 million for the three months ended July 2, 2023, a decrease of $911,000, or 5.3%. Sales of bedding, blankets and accessories increased by $678,000, and sales of bibs, toys and disposable products decreased by $1.6 million. The decline in sales is primarily due to a major retailer reducing inventory levels and the loss of a program at another major retailer.
Gross Profit: Gross profit decreased in amount by $776,000 and decreased from 27.7% of net sales for the three-month period ended July 2, 2023 to 24.5% of net sales for the three-month period ended June 30, 2024. The reduction in gross profit relates to the timing of purchases, causing an unfavorable change in the absorption of costs into inventory.
Marketing and Administrative Expenses: Marketing and administrative expenses increased by $217,000 and increased from 23.6% of net sales for the three-month period ended July 2, 2023 to 26.3% of net sales for the three-month period ended June 30, 2024. The current year period includes $244,000 associated with the closure of the Company’s subsidiary in the United Kingdom and $116,000 in costs associated with the Baby Boom Acquisition.
Income Tax Expense: The Company’s provision for income taxes is based upon an estimated annual effective tax rate (“ETR”) from continuing operations of 21.8% for the three-month period ended June 30, 2024, as compared with an estimated annual ETR from continuing operations of 21.5% for the three-month period ended July 2, 2023.
As a result of the consideration of the relevant information regarding the state portion of its income tax provision, the Company did not record a discrete reserve for unrecognized tax liabilities during the three-month period ended June 30, 2024, and recorded a discrete reserve for unrecognized tax liabilities of $5,000 during the three-month period ended July 2, 2023 in the unaudited condensed consolidated statements of operations. The Company also recorded discrete income tax charges of $20,000 and $27,000 during the three months ended June 30, 2024 and July 2, 2023, respectively, to reflect the effects of the tax shortfalls arising from the forfeiture and expiration 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 16.6% and 27.7% for the three-month periods ended June 30, 2024 and July 2, 2023, respectively.
Although the Company does not anticipate a material change to the ETR from continuing operations for the remainder of fiscal year 2025, 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 increased from $6.3 million for the three-month period ended July 2, 2023 to $8.0 million for the three-month period ended June 30, 2024. The increase in the current year was partially the result of an increase in inventory in the current year that was $2.6 million lower than the increase in the prior year and an increase in accounts payable in the current year that was $542,000 higher than the increase in the prior year. This increase was partially offset by a decrease in accounts receivable in the current year that was $435,000 lower than the decrease in the prior year and a $688,000 decrease in net income from the prior year to the current year.
Net cash used in investing activities decreased from $355,000 in the prior year to $284,000 in the current year. The decrease in the current year is due to a decrease of $71,000 in capital expenditures for property, plant and equipment.
Net cash used in financing activities, which were primarily associated with net repayments under the revolving line of credit, increased by $484,000 from the prior year to the current year.
As of June 30, 2024, the balance on the revolving line of credit was $1.5 million, there was no letter of credit outstanding and $17.6 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 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 operations, amounted to $74,000 and $67,000 for the three-month periods ended June 30, 2024 and July 2, 2023, respectively.
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 31, 2024.
INTEREST RATE RISK
As of June 30, 2024, the Company had $1.5 million of indebtedness that bears interest at a variable rate, comprised of borrowings under the revolving line of credit. Based upon this level of outstanding debt, the Company’s annual net income would decrease by approximately $11,000 for each increase of one percentage point in the interest rate applicable to the debt.
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, a 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 61% of the Company’s gross sales in fiscal year 2024. In addition, 40% of the Company’s gross sales in fiscal year 2024 consisted of licensed products, which included 24% of sales associated with the Company’s license agreements with affiliated companies of the Walt Disney Company (“Disney”). 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 Quarterly 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 Quarterly Report, the Company’s disclosure controls and procedures are effective.
During the three-month period ended June 30, 2024, 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 31, 2024.
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
During the three-month period ended June 30, 2024, of the Company’s directors or officers informed the Company of the adoption, modification or termination of a “Rule 10-b5-1 trading arrangement” or “non-Rule 10-b5-1 trading arrangement,” as those terms are defined in Item 408(a) of Regulation S-K.
ITEM 6. EXHIBITS
Exhibits required to be filed by Item 601 of Regulation S-K are included as Exhibits to this Quarterly Report are listed below.
The agreements included as Exhibits to this Quarterly Report are included to provide information regarding the terms of these agreements and are not intended to provide any other factual or disclosure information about the Company or its subsidiaries, our business or the other parties to these agreements. These agreements may contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
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should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; |
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may have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement; |
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may apply standards of materiality in a way that is different from what may be viewed as material to our investors; and |
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were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments. |
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time, and should not be relied upon by investors.
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Certain schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementally to the SEC a copy of any omitted schedules upon request; provided, however, that the Company may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. |
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Incorporated herein by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 28, 2003. |
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Incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated August 9, 2011. |
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Incorporated herein by reference to Exhibit 3.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended October 1, 2023. |
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| (4) | Incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 22, 2024. |
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| (5) | Incorporated herein by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K filed July 22, 2024. | |
| (6) | 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.
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CROWN CRAFTS, INC. |
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| Date: August 14, 2024 |
/s/ Craig J. Demarest |
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CRAIG J. DEMAREST |
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Vice President and Chief Financial Officer |
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| (Principal Financial Officer and Principal Accounting Officer) |