Crown Crafts(CRWS) - 2021 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION This section provides the company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of income, statements of changes in shareholders' equity, and statements of cash flows, along with detailed notes explaining significant accounting policies, financing arrangements, goodwill, intangible assets, inventories, leases, stock-based compensation, related party transactions, and subsequent events Condensed Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and shareholders' equity at specific dates Condensed Consolidated Balance Sheets (in thousands) | Metric | December 27, 2020 (in thousands) | March 29, 2020 (in thousands) | | :---------------------------------- | :------------------------------- | :---------------------------- | | Cash and cash equivalents | $3,658 | $282 | | Accounts receivable (net) | $18,249 | $17,803 | | Inventories | $22,842 | $17,732 | | Total current assets | $46,941 | $37,041 | | Total Assets | $65,806 | $57,173 | | Accounts payable | $8,891 | $2,972 | | Dividends payable | $3,380 | $813 | | Total current liabilities | $17,192 | $6,479 | | Long-term debt | $524 | $2,578 | | Total Liabilities | $23,365 | $14,737 | | Retained Earnings | $2,753 | $1,108 | | Total Shareholders' Equity | $42,441 | $42,436 | Unaudited Condensed Consolidated Statements of Income This section outlines the company's financial performance over periods, including net sales, gross profit, and net income Three-Month Periods Ended (in thousands) | Metric | December 27, 2020 (in thousands) | December 29, 2019 (in thousands) | Change ($k) | Change (%) | | :--------------------------------- | :------------------------------- | :------------------------------- | :---------- | :--------- | | Net sales | $19,476 | $18,587 | $889 | 4.8% | | Cost of products sold | $13,323 | $12,766 | $557 | 4.4% | | Gross profit | $6,153 | $5,821 | $332 | 5.7% | | Marketing and administrative expenses | $3,420 | $3,416 | $4 | 0.1% | | Income from operations | $2,733 | $2,405 | $328 | 13.6% | | Income before income tax expense | $2,723 | $2,377 | $346 | 14.6% | | Income tax expense | $582 | $282 | $300 | 106.4% | | Net income | $2,141 | $2,095 | $46 | 2.2% | | Earnings per share - basic and diluted | $0.21 | $0.21 | $0.00 | 0.0% | Nine-Month Periods Ended (in thousands) | Metric | December 27, 2020 (in thousands) | December 29, 2019 (in thousands) | Change ($k) | Change (%) | | :--------------------------------- | :------------------------------- | :------------------------------- | :---------- | :--------- | | Net sales | $57,340 | $53,089 | $4,251 | 8.0% | | Cost of products sold | $39,070 | $36,848 | $2,222 | 6.0% | | Gross profit | $18,270 | $16,241 | $2,029 | 12.5% | | Marketing and administrative expenses | $10,602 | $10,344 | $258 | 2.5% | | Income from operations | $7,668 | $5,897 | $1,771 | 30.0% | | Income before income tax expense | $7,653 | $5,895 | $1,758 | 29.8% | | Income tax expense | $1,810 | $942 | $868 | 92.1% | | Net income | $5,843 | $4,953 | $890 | 18.0% | | Earnings per share - basic and diluted | $0.57 | $0.49 | $0.08 | 16.3% | Unaudited Condensed Consolidated Statements of Changes in Shareholders' Equity This section details changes in the company's equity, including net income, share issuance, and dividends Shareholders' Equity Changes (Nine-Month Period Ended December 27, 2020, in thousands) | Item | Amount (in thousands) | | :----------------------------------- | :-------------------- | | Balances - March 29, 2020 | $42,436 | | Issuance of shares | $521 | | Stock-based compensation | $289 | | Acquisition of treasury stock | $(2,450) | | Net income | $5,843 | | Dividend declared on common stock | $(4,198) | | Balances - December 27, 2020 | $42,441 | Unaudited Condensed Consolidated Statements of Cash Flows This section summarizes cash inflows and outflows from operating, investing, and financing activities Cash Flow Summary (Nine-Month Periods Ended, in thousands) | Cash Flow Activity | December 27, 2020 (in thousands) | December 29, 2019 (in thousands) | | :--------------------------------- | :------------------------------- | :------------------------------- | | Net cash provided by operating activities | $8,079 | $7,187 | | Net cash used in investing activities | $(528) | $(352) | | Net cash used in financing activities | $(4,175) | $(6,937) | | Net increase (decrease) in cash and cash equivalents | $3,376 | $(102) | | Cash and cash equivalents at beginning of period | $282 | $143 | | Cash and cash equivalents at end of period | $3,658 | $41 | Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations of the company's accounting policies and financial statement items Note 1 – Summary of Significant Accounting Policies This note outlines the company's key accounting principles, fiscal year, revenue recognition, and segment information - The Company's fiscal year ends on the Sunday nearest to or on March 31. Fiscal year 2021 represents the 52-week period ending March 28, 2021[21] - Revenue is recognized upon the satisfaction of all contractual performance obligations and the transfer of control of products to the customer, net of anticipated returns[26][27] - The Company operates primarily in one principal segment: infant and toddler products, which include bedding, bibs, soft bath products, disposable products, developmental and bath toys, and accessories[34] - The Company assigns the majority of its trade accounts receivable to CIT under factoring agreements to reduce credit loss exposure. As of December 27, 2020, $16.9 million was due from CIT under these agreements[30][31] - The Company intends to adopt ASU No. 2016-13 (Financial Instruments – Credit Losses) effective April 3, 2023, but does not anticipate a significant impact due to its factoring agreements[55] Note 2 – Financing Arrangements This note details the company's credit facility and Paycheck Protection Program (PPP) loan arrangements - The Company's credit facility includes a revolving line of credit with CIT of up to $26.0 million, maturing on July 11, 2022. As of December 27, 2020, there was no balance owed, and $26.0 million was available[60][61] - The Company received a $1,963,800 Paycheck Protection Program (PPP) loan on April 19, 2020, at 1.0% interest, maturing April 20, 2022. An application for full forgiveness was submitted on October 15, 2020[63][67] - As of December 27, 2020, $1.4 million of the PPP loan was classified as a current liability, and $524,000 as long-term debt, based on the assumption that monthly installments will commence in February 2021[67] Note 3 – Goodwill This note reports the company's goodwill balance and recent impairment assessment - Goodwill amounted to $7.1 million as of December 27, 2020, net of accumulated impairment charges of $22.9 million[69] - The annual goodwill impairment measurement as of March 30, 2020, concluded that the goodwill of the Company's reporting units was not impaired[71] Note 4 – Other Intangible Assets This note provides a breakdown of the company's intangible assets and associated amortization expenses Other Intangible Assets and Amortization Expense (in thousands) | Category | Gross Amount (Dec 27, 2020, $k) | Accumulated Amortization (Dec 27, 2020, $k) | 3-Month Amortization Expense (Dec 27, 2020, $k) | 9-Month Amortization Expense (Dec 27, 2020, $k) | | :----------------------- | :------------------------------ | :------------------------------------------ | :---------------------------------------------- | :---------------------------------------------- | | Tradename and trademarks | $3,667 | $1,930 | $61 | $183 | | Developed technology | $1,100 | $376 | $28 | $83 | | Non-compete covenants | $458 | $337 | $19 | $59 | | Patents | $1,601 | $937 | $13 | $48 | | Customer relationships | $7,374 | $5,639 | $72 | $223 | | Total | $14,200 | $9,219 | $193 | $596 | Note 5 – Inventories This note details the composition of the company's inventory, including raw materials, work in process, and finished goods Major Classes of Inventory (in thousands) | Category | December 27, 2020 | March 29, 2020 | | :--------------- | :---------------- | :------------- | | Raw Materials | $443 | $597 | | Work in Process | $31 | $23 | | Finished Goods | $22,368 | $17,112 | | Total inventory | $22,842 | $17,732 | Note 6 – Leases This note outlines the company's operating lease costs, remaining lease term, and discount rate Operating Lease Costs (in thousands) | Category | 3-Month Ended Dec 27, 2020 | 3-Month Ended Dec 29, 2019 | 9-Month Ended Dec 27, 2020 | 9-Month Ended Dec 29, 2019 | | :--------------------------------- | :------------------------- | :------------------------- | :------------------------- | :------------------------- | | Cost of products sold | $422 | $382 | $1,269 | $957 | | Marketing and administrative expenses | $50 | $53 | $152 | $153 | | Total operating lease costs | $472 | $435 | $1,421 | $1,110 | - As of December 27, 2020, the weighted-average remaining lease term for operating leases is 2.9 years, and the weighted-average discount rate is 3.67%[75] Note 7 – Stock-based Compensation This note details stock-based compensation expenses, stock option activity, and unrecognized compensation Stock-based Compensation Expense (in thousands) | Period | 3-Month Ended Dec 27, 2020 | 3-Month Ended Dec 29, 2019 | 9-Month Ended Dec 27, 2020 | 9-Month Ended Dec 29, 2019 | | :----------------------- | :------------------------- | :------------------------- | :------------------------- | :------------------------- | | Total Stock-based Compensation Expense | $103 | $79 | $289 | $219 | Stock Option Activity (Nine-Month Periods Ended) | Metric | December 27, 2020 | December 29, 2019 | | :--------------------------- | :---------------- | :---------------- | | Options Outstanding at End of Period | 532,500 | 517,500 | | Weighted-Average Exercise Price | $6.71 | $6.86 | | Options Granted | 110,000 | 125,000 | | Options Exercised | (95,000) | (10,000) | | Options Forfeited | - | (55,000) | - As of December 27, 2020, total unrecognized stock option compensation expense was $58,000, to be recognized over a weighted-average period of 9.3 months[84] - As of December 27, 2020, total unrecognized compensation expense related to non-vested stock grants was $336,000, to be recognized over a weighted-average vesting term of 9.2 months[91] Note 8 – Related Party Transaction This note discloses a common stock repurchase from the company's Chief Executive Officer - On December 16, 2020, the Company purchased 250,000 shares of its common stock from its CEO, E. Randall Chestnut, at a price of $7.5435 per share[92] Note 9 – Subsequent Events This note describes significant events occurring after the reporting period, including a tax benefit - On January 10, 2021, the Company's California consolidated income tax return for fiscal year ended April 3, 2016, became closed to examination. This is expected to result in a discrete income tax benefit of $233,000 and a credit to interest expense of $107,000 in the three-month period ending March 28, 2021[93] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on the company's financial condition, liquidity, capital resources, and results of operations, including forward-looking statements, a description of the business, and a detailed analysis of revenue, gross profit, expenses, and cash flows, with a focus on the impact of the COVID-19 pandemic FORWARD-LOOKING INFORMATION This section highlights risks and uncertainties associated with forward-looking statements, including COVID-19 impacts - Forward-looking statements involve known and unknown risks and uncertainties, including the impact of the COVID-19 pandemic, general economic conditions, changing competition, changes in the retail environment, dependence on third-party suppliers (especially in China), and reliance on third-party licenses[95] DESCRIPTION OF BUSINESS This section describes the company's operations in the infant and toddler products market, sales channels, and competitive landscape - The Company operates in the infant, toddler, and juvenile products segment, marketing products under Company-owned trademarks, licensed trademarks, and as private label goods[97] - Sales are made directly to various retailers (mass merchants, chain stores, specialty stores, online) and directly to consumers through www.babybedding.com[97](index=97&type=chunk) - The industry is highly competitive, with competition based on quality, design, price, brand recognition, service, and packaging[99] - Most products are produced by foreign contract manufacturers, primarily in China, with some domestic production[100] RESULTS OF OPERATIONS This section analyzes the company's net sales, gross profit, expenses, and tax rates for the reported periods Net Sales Performance (in thousands) | Period | Net Sales (in thousands) | Change ($k) | Change (%) | | :--------------------------------- | :----------------------- | :---------- | :--------- | | 3-Month Ended Dec 27, 2020 | $19,476 | $889 | 4.8% | | 3-Month Ended Dec 29, 2019 | $18,587 | | | | 9-Month Ended Dec 27, 2020 | $57,340 | $4,251 | 8.0% | | 9-Month Ended Dec 29, 2019 | $53,089 | | | - The increase in net sales was driven by higher sell-through at major retailers, partially offset by declines at certain retailers impacted by the COVID-19 pandemic[103] Gross Profit Performance (in thousands) | Period | Gross Profit (in thousands) | % of Net Sales | | :--------------------------------- | :-------------------------- | :------------- | | 3-Month Ended Dec 27, 2020 | $6,153 | 31.6% | | 3-Month Ended Dec 29, 2019 | $5,821 | 31.3% | | 9-Month Ended Dec 27, 2020 | $18,270 | 31.9% | | 9-Month Ended Dec 29, 2019 | $16,241 | 30.6% | - Gross profit increased due to higher net sales and a more favorable customer and product mix[104] Marketing and Administrative Expenses (in thousands) | Period | Amount | % of Net Sales | | :--------------------------------- | :----- | :------------- | | 3-Month Ended Dec 27, 2020 | $3,420 | 17.6% | | 3-Month Ended Dec 29, 2019 | $3,416 | 18.4% | | 9-Month Ended Dec 27, 2020 | $10,602 | 18.5% | | 9-Month Ended Dec 29, 2019 | $10,344 | 19.5% | - The nine-month increase in marketing and administrative expenses was primarily due to higher outside services ($318,000) and advertising ($138,000), partially offset by lower travel expenses ($120,000) and amortization ($45,000)[105] - The estimated annual effective tax rate (ETR) from continuing operations was 23.7% for the nine-month period ended December 27, 2020, compared to 16.0% for the prior year period[106][112] FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES This section discusses the company's cash flows, credit facility, and ability to fund future operations - Net cash provided by operating activities increased to $8.1 million for the nine-month period ended December 27, 2020, from $7.2 million in the prior year, driven by higher net income and favorable changes in accounts payable and accrued liabilities[114] - Net cash used in investing activities increased to $528,000 for the nine-month period ended December 27, 2020, primarily due to higher capital expenditures[115] - Net cash used in financing activities decreased to $4.2 million for the nine-month period ended December 27, 2020, from $6.9 million in the prior year, mainly due to lower net repayments under the revolving line of credit and proceeds from the PPP loan, partially offset by higher stock repurchases[116] - As of December 27, 2020, there was no balance owed on the revolving line of credit, with $26.0 million available[117] - The Company continues to monitor the impact of the COVID-19 pandemic but believes its anticipated cash flow from operations and available credit are sufficient to fund requirements for at least the next 12 months[119][120] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section discusses the company's exposure to various market risks, including interest rate risk, commodity rate risk, and market concentration risk, providing qualitative and quantitative disclosures INTEREST RATE RISK This section addresses the company's exposure to interest rate fluctuations on its debt - The Company has exposure to interest rate risk related to its floating rate debt, but there was no outstanding balance on this debt as of December 27, 2020[124] COMMODITY RATE RISK This section discusses risks related to changes in commodity prices and currency exchange rates affecting product costs - The Company's primary commodity price risk relates to changes in the prices of cotton, oil, and labor in China, which are key inputs for its products[125] - A strengthening Chinese currency against the U.S. dollar could increase the cost of finished goods, and the Company may not be able to proportionately increase product prices[125] MARKET CONCENTRATION RISK This section highlights the company's dependence on key customers and licensed products - The Company's financial results are highly dependent on sales to its top two customers, which accounted for approximately 62% of gross sales in fiscal year 2020[126] - Licensed products constituted 40% of gross sales in fiscal year 2020, with 30% associated with license agreements with Walt Disney Company affiliates. The loss of these licenses could materially impact results[126] ITEM 4. CONTROLS AND PROCEDURES This section confirms the effectiveness of the company's disclosure controls and procedures and reports no material changes to internal control over financial reporting during the quarter - The Company's Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective as of December 27, 2020[127] - No changes in internal control over financial reporting were identified during the three-month period ended December 27, 2020, that materially affected or are reasonably likely to materially affect ICFR[128] PART II - OTHER INFORMATION This section includes legal proceedings, risk factors, equity sales, and other required disclosures ITEM 1. LEGAL PROCEEDINGS This section states that the company is involved in routine legal and regulatory proceedings, none of which are expected to have a material adverse effect on its financial condition, results of operations, or cash flow - The Company is involved in various legal and regulatory proceedings in the ordinary course of business, but none are expected to have a material adverse effect on its financial condition, results of operations, or cash flow[130] ITEM 1A. RISK FACTORS This section refers to the company's annual report for a comprehensive discussion of risk factors and confirms that there have been no material changes since the last annual report - 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 29, 2020[131] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section details the company's repurchases of its common stock during the three-month period ended December 27, 2020, specifically noting a purchase from its Chief Executive Officer Issuer Purchases of Equity Securities (Three-Month Period Ended December 27, 2020) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :------------------------------------ | :------------------------------- | :--------------------------- | | November 30, 2020 through December 27, 2020 | 250,000 | $7.5435 | | Total | 250,000 | $7.5435 | - The shares purchased were from E. Randall Chestnut, the Company's Chief Executive Officer, and were not part of publicly announced plans or programs[133] ITEM 3. DEFAULTS UPON SENIOR SECURITIES This section confirms that there were no defaults upon senior securities during the reporting period - There were no defaults upon senior securities[134] ITEM 4. MINE SAFETY DISCLOSURES This section states that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable to the Company[135] ITEM 5. OTHER INFORMATION This section indicates that there is no other information to report under this item - No other information is reported under this item[136] ITEM 6. EXHIBITS This section lists the exhibits filed with the quarterly report, including corporate governance documents, employment agreements, certifications, and interactive data files in XBRL format - Exhibits include Amended and Restated Certificate of Incorporation, Bylaws, Amended and Restated Employment and Severance Protection Agreement with CEO, Rule 13a-14(a)/15d-14(a) Certifications, Section 1350 Certifications, and XBRL formatted financial statements[138] SIGNATURE This section contains the signature of the authorized officer, Olivia W. Elliott, President, Chief Operating Officer, and Chief Financial Officer, confirming the filing of the report - The report was signed by Olivia W. Elliott, President, Chief Operating Officer, and Chief Financial Officer, on February 10, 2021[144]