Crown Crafts(CRWS) - 2022 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION This part presents the unaudited condensed consolidated financial statements, management's discussion, market risk, and controls ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited condensed consolidated financial statements, including balance sheets, income, equity, cash flows, and explanatory notes Condensed Consolidated Balance Sheets This section provides a snapshot of the Company's financial position, detailing assets, liabilities, and shareholders' equity Condensed Consolidated Balance Sheets (in thousands) | ASSETS | Sep 26, 2021 | Mar 28, 2021 | | :-------------------- | :----------- | :----------- | | Cash and cash equivalents | $1,904 | $613 | | Total current assets | $45,339 | $41,470 | | Total Assets | $60,576 | $58,082 | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | Total current liabilities | $12,542 | $12,946 | | Total non-current liabilities | $2,434 | $3,271 | | Total shareholders' equity | $45,600 | $41,865 | | Total Liabilities and Shareholders' Equity | $60,576 | $58,082 | Unaudited Condensed Consolidated Statements of Income This statement presents the Company's revenues, expenses, and net income for the three-month and six-month periods Unaudited Condensed Consolidated Statements of Income (in thousands, except per share) | | Three-Month Ended Sep 26, 2021 | Three-Month Ended Sep 27, 2020 | Six-Month Ended Sep 26, 2021 | Six-Month Ended Sep 27, 2020 | | :------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Net sales | $20,220 | $21,659 | $38,932 | $37,864 | | Gross profit | $6,068 | $7,094 | $10,724 | $12,117 | | Income from operations | $2,904 | $3,292 | $4,194 | $4,935 | | Gain on extinguishment of debt | - | - | $1,985 | - | | Net income | $2,386 | $2,487 | $5,051 | $3,702 | | Earnings per share - basic and diluted | $0.24 | $0.24 | $0.50 | $0.36 | Unaudited Condensed Consolidated Statements of Changes in Shareholders' Equity This statement details changes in common stock, paid-in capital, treasury stock, and retained earnings for the six-month period Unaudited Condensed Consolidated Statements of Changes in Shareholders' Equity (in thousands) | | Balances - Mar 28, 2021 | Issuance of shares | Stock-based compensation | Acquisition of treasury stock | Net income | Dividend declared | Balances - Sep 26, 2021 | | :------------- | :---------------------- | :----------------- | :----------------------- | :---------------------------- | :--------- | :---------------- | :---------------------- | | Common Stock | $128 | $1 | - | - | - | - | $129 | | Add. Paid-in Cap. | $54,748 | $247 | $340 | - | - | - | $55,335 | | Treasury Stock | $(15,202) | - | - | $(296) | - | - | $(15,498) | | Retained Earnings | $2,191 | - | - | - | $5,051 | $(1,608) | $5,634 | | Total Equity | $41,865 | $248 | $340 | $(296) | $5,051 | $(1,608) | $45,600 | Unaudited Condensed Consolidated Statements of Cash Flows This statement summarizes cash flows from operating, investing, and financing activities for the six-month periods Unaudited Condensed Consolidated Statements of Cash Flows (in thousands) | | Six-Month Ended Sep 26, 2021 | Six-Month Ended Sep 27, 2020 | | :------------- | :--------------------------- | :--------------------------- | | Net cash provided by operating activities | $3,194 | $8,288 | | Net cash used in investing activities | $(253) | $(312) | | 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 end of period | $1,904 | $6,832 | Notes to Unaudited Condensed Consolidated Financial Statements These notes provide detailed explanations of accounting policies, significant transactions, and specific financial statement line items Note 1 – Interim Financial Statements This note details the basis of presentation for interim financial statements, fiscal year definition, and impact of accounting standards - The Company's fiscal year ends on the Sunday nearest to or on March 31, with fiscal year 2022 being a 53-week period ending April 3, 2022[23] - The Company adopted ASU No. 2019-12 (Income Taxes) effective March 29, 2021, with no significant impact on financial position or results[26] - The Company intends to adopt ASU No. 2016-13 (Credit Losses) effective April 3, 2023, and anticipates no significant impact due to factoring agreements[25] Note 2 – Advertising Costs This note explains the accounting for advertising costs, recognized straight-line, which decreased in the current periods Advertising Expense (in thousands) | | Three-Month Ended Sep 26, 2021 | Three-Month Ended Sep 27, 2020 | Six-Month Ended Sep 26, 2021 | Six-Month Ended Sep 27, 2020 | | :------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Advertising expense | $129 | $314 | $350 | $659 | Note 3 – Other Accrued Liabilities This note details the composition of other accrued liabilities, including unearned revenue from customer prepayments Other Accrued Liabilities (in thousands) | | Sep 26, 2021 | Mar 28, 2021 | | :--------------------------------------- | :----------- | :----------- | | Total other accrued liabilities | $152 | $215 | | Unearned revenue | $63 | $85 | Note 4 – Segment and Related Information This note details the Company's single operating segment and provides a breakdown of net sales by product category Net Sales by Product (in thousands) | | Three-Month Ended Sep 26, 2021 | Three-Month Ended Sep 27, 2020 | Six-Month Ended Sep 26, 2021 | Six-Month Ended Sep 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 This note describes the Company's licensing agreements, which require royalty payments based on sales, and details royalty expense Royalty Expense (in thousands) | | Three-Month Ended Sep 26, 2021 | Three-Month Ended Sep 27, 2020 | Six-Month Ended Sep 26, 2021 | Six-Month Ended Sep 27, 2020 | | :---------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Royalty expense | $1,400 | $1,600 | $2,700 | $2,800 | Note 6 – Income Taxes This note details the Company's income tax positions, including open tax years, unrecognized tax liabilities, and discrete tax benefits - Tax years open to federal or state audit as of September 26, 2021, include fiscal years ended March 28, 2021, March 29, 2020, March 31, 2019, April 1, 2018, and April 2, 2017[33] Unrecognized Tax Liabilities (in thousands) | | Three-Month Ended Sep 26, 2021 | Three-Month Ended Sep 27, 2020 | Six-Month Ended Sep 26, 2021 | Six-Month Ended Sep 27, 2020 | | :------------------------------------------ | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Discrete reserves | $22 | $20 | $45 | $33 | | Accrued interest and penalties | $12 | $14 | $26 | $31 | Discrete Income Tax (Benefits)/Charges (in thousands) | | Three-Month Ended Sep 26, 2021 | Three-Month Ended Sep 27, 2020 | Six-Month Ended Sep 26, 2021 | Six-Month Ended Sep 27, 2020 | | :---------------------------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Excess tax benefits from stock options/non-vested stock | $(28) | $4 | $(72) | $4 | Note 7 – Carousel Designs This note details the closure of Carousel Designs subsidiary due to persistent losses, resulting in gross losses and related charges - Carousel Designs, a subsidiary manufacturing infant and toddler bedding, ceased operations on May 21, 2021, due to high costs, declining sales, and operating/cash flow losses[39] Carousel Designs Gross Loss (in thousands) | | Three-Month Ended Sep 26, 2021 | Six-Month Ended Sep 26, 2021 | | :----------------------------------------- | :----------------------------- | :--------------------------- | | Gross loss | $41 | $688 | | Charges for supplier settlement | - | $334 | | Charges for inventory liquidation | - | $265 | Note 8 – Financing Arrangements This note describes the Company's factoring agreements, revolving credit facility, and the gain from PPP Loan forgiveness - The Company assigns most trade accounts receivable to CIT under factoring agreements to reduce credit exposure[41] - The credit facility with CIT is a revolving line of credit up to $26.0 million, secured by a first lien on all assets, with maturity extended to July 11, 2025[43][45] - As of September 26, 2021, there was no balance owed on the revolving line of credit, and $26.0 million was available[46] - The PPP Loan of $1,963,800 was fully forgiven on May 20, 2021, resulting in a $1,985,000 gain on extinguishment of debt[50] Note 9 – Goodwill This note defines goodwill, outlines the impairment testing process, and confirms no impairment was found in the latest annual test - Goodwill amounted to $30.0 million gross, with a net reported balance of $7.1 million after accumulated impairment charges of $22.9 million[51] - The Company performs annual goodwill impairment measurements on the first day of its fiscal year and additional interim measurements if circumstances suggest impairment[53] - The annual impairment measurement on March 29, 2021, found no impairment of goodwill[54] Note 10 – Other Intangible Assets This note details the Company's other intangible assets, primarily customer relationships, and their associated amortization expense Other Intangible Assets (in thousands) | | Gross Amount Sep 26, 2021 | Accumulated Amortization Sep 26, 2021 | Amortization Expense (3-month Sep 26, 2021) | Amortization Expense (6-month Sep 26, 2021) | | :------------------------------------- | :------------------------ | :------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Tradename and trademarks | $2,567 | $1,807 | $42 | $85 | | Patents | $1,601 | $977 | $14 | $27 | | Customer relationships | $7,374 | $5,856 | $72 | $144 | | Total other intangible assets | $11,640 | $8,736 | $130 | $259 | Note 11 – Inventories This note provides a breakdown of the Company's inventory by major classes, highlighting changes in finished goods Inventory (in thousands) | | Sep 26, 2021 | Mar 28, 2021 | | :----------------------- | :----------- | :----------- | | Raw Materials | $27 | $453 | | Work in Process | - | $19 | | Finished Goods | $24,207 | $19,863 | | Total inventory | $24,234 | $20,335 | Note 12 – Leases This note details cash payments for operating leases, lease terms, discount rates, and the classification of operating lease costs Operating Lease Payments (in thousands) | | Three-Month Ended Sep 26, 2021 | Three-Month Ended Sep 27, 2020 | Six-Month Ended Sep 26, 2021 | Six-Month Ended Sep 27, 2020 | | :-------------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Cash payments | $487 | $403 | $984 | $811 | - As of September 26, 2021, operating leases have a weighted-average remaining lease term of 2.2 years and a weighted-average discount rate of 3.6%[57] Operating Lease Costs (in thousands) | | Three-Month Ended Sep 26, 2021 | Three-Month Ended Sep 27, 2020 | Six-Month Ended Sep 26, 2021 | Six-Month Ended Sep 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 | Note 13 – Stock-based Compensation This note details the Company's stock-based compensation plans, including expense, stock option activity, and non-vested stock grants Stock-based Compensation Expense (in thousands) | | Three-Month Ended Sep 26, 2021 | Three-Month Ended Sep 27, 2020 | Six-Month Ended Sep 26, 2021 | Six-Month Ended Sep 27, 2020 | | :---------------------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Total stock-based compensation expense | $208 | $100 | $340 | $186 | Stock Option Activity (Six-Month Periods) | | Sep 26, 2021 (Number of Options) | Sep 26, 2021 (Weighted-Avg Exercise Price) | Sep 27, 2020 (Number of Options) | Sep 27, 2020 (Weighted-Avg Exercise Price) | | :---------------------------------------- | :------------------------------- | :----------------------------------------- | :------------------------------- | :----------------------------------------- | | Outstanding at Beginning of Period | 567,500 | $6.84 | 517,500 | $6.86 | | Granted | 158,000 | $7.98 | 110,000 | $4.92 | | Exercised | (50,000) | $4.96 | - | - | | Forfeited | (5,000) | $4.92 | - | - | | Outstanding at End of Period | 670,500 | $7.26 | 627,500 | $6.52 | | Exercisable at End of Period | 387,500 | $7.30 | 455,000 | $7.15 | - Total unrecognized stock option compensation expense was $303,000 as of September 26, 2021, to be recognized over a weighted-average period of 15.0 months[66] Non-vested Stock Grants to Directors | | Number of Shares | Fair Value per Share | Grant Date | Vesting Period (Years) | | :----------------------------------- | :--------------- | :------------------- | :--------------- | :--------------------- | | August 11, 2021 | 40,165 | $7.47 | August 11, 2021 | One | | August 12, 2020 | 41,452 | $5.79 | August 12, 2020 | Two | | August 14, 2019 | 46,512 | $5.16 | August 14, 2019 | Two | - Total unrecognized compensation expense related to non-vested stock grants was $570,000 as of September 26, 2021, with an aggregate weighted-average vesting term of 10.2 months[69] Note 14 – Subsequent Events This note confirms that no material subsequent events requiring disclosure were identified up to the financial statement issuance date - No material subsequent events requiring disclosure were identified between September 26, 2021, and the financial statement issuance date[70] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's analysis of financial performance, liquidity, and capital resources, including forward-looking statements Forward-Looking Information This subsection outlines forward-looking statements and the various risks and uncertainties that could materially affect future results - Forward-looking statements are subject to risks including COVID-19 impact, economic conditions, changing competition, supply chain disruptions, and dependence on third-party suppliers and licenses[72] Description of Business This section describes Crown Crafts, Inc.'s operations in infant and juvenile products, including its subsidiary closure and manufacturing reliance - The Company operates in the infant, toddler, and juvenile products segment through NoJo Baby & Kids, Inc. and Sassy Baby, Inc[73] - Carousel Designs, a wholly-owned subsidiary, ceased operations on May 21, 2021, due to high costs, declining sales, and operating losses[74] - Most products are produced by foreign contract manufacturers, with the largest concentration in China[77] Results of Operations This section provides a detailed analysis of the Company's financial performance, including net sales, gross profit, and expenses Net Sales Net sales decreased for the three-month period but increased for the six-month period, influenced by product category shifts and the Carousel closure Net Sales (in thousands) | | Three-Month Ended Sep 26, 2021 | Three-Month Ended Sep 27, 2020 | Change ($) | Change (%) | | :----------------------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Total net sales | $20,220 | $21,659 | $(1,439) | -6.6% | | Bedding, blankets and accessories | $11,101 | $13,042 | $(1,941) | -14.9% | | Bibs, bath, developmental toy, feeding, baby care and disposable products | $9,119 | $8,617 | $502 | 5.8% | Net Sales (in thousands) | | Six-Month Ended Sep 26, 2021 | Six-Month Ended Sep 27, 2020 | Change ($) | Change (%) | | :----------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- | | Total net sales | $38,932 | $37,864 | $1,068 | 2.8% | | Bedding, blankets and accessories | $21,058 | $23,059 | $(2,001) | -8.7% | | Bibs, bath, developmental toy, feeding, baby care and disposable products | $17,874 | $14,805 | $3,069 | 20.7% | - The closure of Carousel contributed to a $1.5 million decrease in bedding, blankets, and accessories sales for the three-month period and a $2.3 million decrease for the six-month period[81] Gross Profit Gross profit and margin declined for both periods, primarily due to the Carousel closure and increased ocean freight costs Gross Profit (in thousands) | | Three-Month Ended Sep 26, 2021 | Three-Month Ended Sep 27, 2020 | Change ($) | Change (%) | | :-------------------------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Gross profit | $6,068 | $7,094 | $(1,026) | -14.5% | | % of net sales | 30.0% | 32.8% | | | Gross Profit (in thousands) | | Six-Month Ended Sep 26, 2021 | Six-Month Ended Sep 27, 2020 | Change ($) | Change (%) | | :-------------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- | | Gross profit | $10,724 | $12,117 | $(1,393) | -11.5% | | % of net sales | 27.5% | 32.0% | | | - The closure of Carousel resulted in a $1.9 million decrease in gross profit for the six-month period, including $334,000 for supplier settlement and $265,000 for inventory liquidation[82] - Increases in ocean-going freight costs impacted gross profit in both periods[82] Marketing and Administrative Expenses Marketing and administrative expenses decreased in both periods, largely due to reduced charges from the Carousel subsidiary closure Marketing and Administrative Expenses (in thousands) | | Three-Month Ended Sep 26, 2021 | Three-Month Ended Sep 27, 2020 | Change ($) | Change (%) | | :--------------------------------------------------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Expenses | $3,164 | $3,802 | $(638) | -16.8% | | % of net sales | 15.6% | 17.6% | | | Marketing and Administrative Expenses (in thousands) | | Six-Month Ended Sep 26, 2021 | Six-Month Ended Sep 27, 2020 | Change ($) | Change (%) | | :--------------------------------------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- | | Expenses | $6,530 | $7,182 | $(652) | -9.1% | | % of net sales | 16.8% | 19.0% | | | - The decrease in expenses included lower charges from Carousel of $547,000 for the three-month period and $807,000 for the six-month period[83] Gain on extinguishment of debt The full forgiveness of the PPP Loan resulted in a significant gain on extinguishment of debt for the six-month period - A gain on extinguishment of debt of $1,985,000 was recorded for the six-month period ended September 26, 2021, due to the full forgiveness of the PPP Loan[84] Income Tax Expense The estimated annual effective tax rate for fiscal year 2022 is 19.6%, influenced by PPP Loan forgiveness and discrete tax benefits - Estimated annual effective tax rate (ETR) from continuing operations is 19.6% for the six-month period ended September 26, 2021[86] - The PPP Loan forgiveness is expected to lower the estimated annual ETR for fiscal year 2022 by approximately four percentage points[86] Income Tax Expense (in thousands) | | Three-Month Ended Sep 26, 2021 | Three-Month Ended Sep 27, 2020 | Six-Month Ended Sep 26, 2021 | Six-Month Ended Sep 27, 2020 | | :-------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Income tax expense | $592 | $803 | $1,201 | $1,228 | | Discrete reserves for unrecognized tax liabilities | $22 | $20 | $45 | $33 | | Discrete income tax benefits (stock options/non-vested stock) | $(28) | $4 | $(72) | $4 | - The overall provision for income taxes was 19.2% for the six-month period ended September 26, 2021, compared to 24.9% in the prior year[89] Financial Position, Liquidity and Capital Resources Operating cash flow decreased, while financing cash flow increased, yet the Company maintains strong liquidity with $26.0 million available credit - Net cash provided by operating activities decreased from $8.3 million (Sep 27, 2020) to $3.2 million (Sep 26, 2021), primarily due to changes in accounts payable and inventory, and the non-cash gain on PPP Loan forgiveness[91] - Net cash used in financing activities increased from $1.4 million (Sep 27, 2020) to $1.7 million (Sep 26, 2021), driven by higher dividends paid and the absence of PPP Loan proceeds received in the prior year[93] - As of September 26, 2021, there was no balance owed on the revolving line of credit, and $26.0 million was available[94] - The Company believes its anticipated cash flow from operations and available credit are sufficient to fund requirements for at least the next 12 months, despite COVID-19 uncertainties[99][100] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section discusses the Company's exposure to market risks, including interest rate, commodity rate, and market concentration risks Interest Rate Risk The Company has potential interest rate risk from floating rate debt, but currently has no outstanding balance - The Company had no outstanding balance on its floating rate debt as of September 26, 2021, limiting interest rate risk exposure[102] Commodity Rate Risk Commodity price risk primarily arises from cotton, oil, and labor costs in China, alongside potential currency fluctuations - Primary commodity price risk relates to changes in prices of cotton, oil, and labor in China[103] - A strengthening Chinese currency against the U.S. dollar could increase finished goods costs, which may not be offset by price increases to customers[103] Market Concentration Risk Significant market concentration risk exists due to reliance on top two customers and licensed products, particularly from Walt Disney Company affiliates - Top two customers represented approximately 68% of gross sales in fiscal year 2021[105] - 41% of gross sales in fiscal year 2021 were from licensed products, with 34% from Walt Disney Company affiliates[105] ITEM 4. CONTROLS AND PROCEDURES Disclosure controls and procedures were effective, with no material changes to internal control over financial reporting identified - Disclosure controls and procedures were deemed effective as of September 26, 2021[106] - No material changes in internal control over financial reporting (ICFR) occurred during the three-month period ended September 26, 2021[107] PART II - OTHER INFORMATION This part includes disclosures on legal proceedings, risk factors, equity sales, defaults, mine safety, and a list of exhibits ITEM 1. LEGAL PROCEEDINGS No legal or regulatory proceedings are expected to materially affect the Company's financial condition, operations, or cash flow - No legal or regulatory proceedings are expected to have a material adverse effect on the Company's financial condition, results of operations, or cash flow[108] ITEM 1A. RISK FACTORS No material changes to the risk factors previously disclosed in the annual report on Form 10-K - No material changes to risk factors from the annual report on Form 10-K for the year ended March 28, 2021[109] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS No unregistered sales of equity securities or use of proceeds were reported for the period - None[110] ITEM 3. DEFAULTS UPON SENIOR SECURITIES No defaults upon senior securities were reported for the period - None[111] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to the Company's operations - Not applicable[112] ITEM 5. OTHER INFORMATION No other information is required to be reported under this item - None[113] ITEM 6. EXHIBITS This section lists the exhibits filed with the Quarterly Report, including corporate documents, certifications, and iXBRL data files - Exhibits include Amended and Restated Certificate of Incorporation, Bylaws, Rule 13a-14(a)/15d-14(a) Certifications, Section 1350 Certifications, and Interactive Data Files (iXBRL) for financial statements and notes[115][116]