FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 28, 2003
( ) 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.
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 x No o
Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
The number of shares of common stock, $0.01 par value, of the Registrant outstanding as of December 28, 2003 was 9,504,937.
TABLE OF CONTENTS
FORM 10-Q CROWN CRAFTS, INC. AND SUBSIDIARIES
PART 1 — FINANCIAL INFORMATIONITEM 1 – CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETSDecember 28, 2003 and March 30, 2003(Unaudited)
See notes to unaudited condensed consolidated financial statements.
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Crown Crafts, Inc. and SubsidiariesCONSOLIDATED BALANCE SHEETSDecember 28, 2003 and March 30, 2003(Unaudited)
* The Consolidated Balance Sheet at March 30, 2003 has been derived from the audited balance sheet at that date.
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Crown Crafts, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)For The Three and Nine-Month Periods Ended December 28, 2003 and December 29, 2002(UNAUDITED)
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Crown Crafts, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF CASH FLOWSFor the Nine-Month Periods ended December 28, 2003 and December 29, 2002(UNAUDITED)
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CROWN CRAFTS, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSAT AND FOR THE THREE AND NINE-MONTH PERIODS ENDED DECEMBER 28, 2003 AND DECEMBER 29, 2002
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Notes Payable and Other Credit Facilities: At December 28, 2003 and March 30, 2003, long-term debt consisted of:
At December 28, 2003, the Company’s credit facilities included the following:
Revolving Credit of up to $19 million including a $3 million sub-limit for letters of credit. The interest rate is prime plus 1.00% (5.00% at December 28, 2003) for base rate borrowings and LIBOR plus 2.75% (3.89% at December 28, 2003) for Euro-dollar borrowings. The maturity date is June 30, 2005. The facility is secured by a first lien on all assets. The balance was $0 at December 28, 2003. The Company had $11.8 million available at December 28, 2003. As of December 28, 2003, letters of credit of $1.35 million were outstanding under the revolving credit facility.
Senior Notes of $8.5 million with a fixed interest rate of 10% plus additional interest contingent upon cash flow availability of 3%. The maturity date is June 30, 2006 and the notes are secured by a first lien on all assets. Minimum principal payments of $500,000 are due at the end of each calendar quarter. In the event that required debt service exceeds 85% of free cash flow (EBITDA (as hereinafter defined) less capital expenditures and cash taxes paid), the excess of contingent interest and principal amortization over 85% will be deferred until maturity of the Senior Notes in June 2006. Contingent interest plus additional principal payments will be due annually up to 85% of free cash flow. The Company made an excess cash flow payment of $1.4 million on September 30, 2003.
Senior Subordinated Notes of $16 million with a fixed interest rate of 10% plus an additional 1.65% payable by delivery of a promissory note due July 23, 2007. The maturity date is July 23, 2007, and the notes are secured by a second lien on all assets. In addition to principal and interest, a payment of $8 million is due on the earliest of (i) maturity of the notes, (ii) prepayment of the notes, or (iii) the sale of the Company. The original issue discount of $4.1 million on this non-interest bearing note at a market interest rate of 12% is being amortized over the life of the notes. The remaining balance of $2.8 million is included in the Consolidated Balance Sheet as of December 28, 2003.
These credit facilities contain covenants regarding minimum levels of Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”), maximum total debt to EBITDA, maximum senior debt to EBITDA, minimum EBITDA to cash interest and minimum shareholders’ equity. Certain covenants included in the credit facilities were amended in conjunction with the liquidation of Burgundy, as discussed in Note 4, in order to account for the recording of the related restructuring charge. The Company is in compliance with its covenants at December 28, 2003. The bank facilities also place restrictions on the amounts the Company may expend on acquisitions and purchases of treasury stock and currently prohibit the payment of dividends.
Minimum annual maturities are as follows: (in thousands)
* Includes $8 million non-interest bearing note issued at an original issue discount of $4.1 million.
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ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company operates indirectly through its subsidiaries, Crown Crafts Infant Products, Inc., Hamco, Inc. and Churchill Weavers, Inc., primarily in the Infant Products segment within the Consumer Products industry. The Company’s offices are located in Huntington Beach and Compton, California; Gonzales, Louisiana; Berea, Kentucky; Rogers, Arkansas and Lynne Haven, Florida.
The Infant Products segment consists of infant bedding, bibs, infant soft goods and accessories. The infant products are marketed under a variety of Company-owned trademarks, under trademarks licensed from others, without trademarks as unbranded merchandise and with customers’ private labels. The products are produced primarily by foreign contract manufacturers, then warehoused and shipped from facilities in Compton, California and Gonzales, Louisiana. Sales are generally made directly to retailers, primarily mass merchants, large chain stores and gift stores.
The Company also produces hand-woven adult throws, adult scarves and infant blankets. Sales are generally made to major department stores, specialty shops and designer showrooms.
The infant consumer products industry is highly competitive. The Company competes with a variety of distributors and manufacturers and believes that it is the largest producer of infant bed coverings and bibs, enjoying approximately one-third of infant bedding
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market share and one-half of the infant bib market share within these segments. The Company competes on the basis of quality, design, price, service and packaging.
RESULTS OF OPERATIONS
THREE-MONTH PERIOD ENDED DECEMBER 28, 2003 COMPARED TO THE THREE-MONTH PERIOD ENDED DECEMBER 29, 2002
Total net sales for the third quarter of fiscal year 2004 decreased by $919,000, or 4.2%, to $20.7 million from $21.6 million for the third quarter of fiscal year 2003. Net sales of throws increased $24,000, or 2.8%, to $895,000. Net sales of infant and juvenile products decreased by $943,000, or 4.5%, to $19.8 million primarily as a result of decreased bedding sales as compared to the prior year. The Company shipped initial sets of several new bedding collections in the third quarter of the prior year; these were not repeated at the same levels in the current year. Also contributing to the decrease in sales of infant and juvenile products was a decline in the Company’s Pillow Buddies® business. Sales of these products continued to be slow in the third quarter of fiscal year 2004 as the Company chose not to renew certain existing licenses or enter into new licenses because of the financial commitment required by such licenses.
During the third quarter of fiscal year 2004, cost of sales decreased to 78.3% of net sales from 78.7% for the same period in fiscal year 2003. Although the Company’s gross margin has benefited in the current fiscal year from improvements attributable to its sourcing efforts, most of the savings was passed on to customers as a result of pricing pressure.
Marketing and administrative expenses increased by $39,000, or 1.4%, in the third quarter of fiscal year 2004 compared to the same quarter in the prior year and were 13.9% of net sales for such quarter compared to 13.1% for the corresponding quarter of the prior year. For the third quarter of fiscal year 2004, the Company achieved reductions in commissions, advertising and tradeshow expenditures and compensation. However, these savings were offset by costs incurred in such quarter related to the Company’s Delaware reincorporation of approximately $105,000.
As discussed in Note 4 to the Company’s Consolidated Financial Statements, the Company recorded a $1.8 million restructuring charge in the quarter ended December 29, 2002. In December 2002, the Company adopted a formal plan to change its sourcing strategy for certain products and close its Mexican manufacturing facility operated by its majority-owned subsidiary, Burgundy Interamericana (“Burgundy”). This decision was based on extensive research by management which indicated that, due to lower wages and the elimination of the quota on bibs, outsourcing the supply of products then being manufactured by Burgundy to Asian manufacturers was more cost effective and competitive than maintaining operations in Mexico.
Interest expense for the third quarter of fiscal year 2004 decreased by $136,000 compared to the third quarter of fiscal year 2003 because of a lower average debt balance and reduced interest rates. Long-term debt was $30.3 million at December 28, 2003 compared to $33.6 million at December 29, 2002. Included in the balance in the prior fiscal year was revolving credit of $1.1 million, whereas there was no revolving credit balance outstanding at December 28, 2003.
Income tax benefit for the quarter ended December 28, 2003 includes a credit of $130,000 for a revision of federal alternative minimum taxes and an expense for state and local income taxes of $37,000. For the quarter ended December 29, 2002, the Company recorded income tax expense of $37,000 related to federal alternative minimum taxes and $129,000 related to estimated state and local taxes. Income tax expense for both periods was reduced by the utilization of a portion of the Company’s net operating loss carryforwards. The remaining net operating loss carryforwards of $15.7 million are set to expire in 2021.
NINE-MONTH PERIOD ENDED DECEMBER 28, 2003 COMPARED TO THE NINE-MONTH PERIOD ENDED DECEMBER 29, 2002
Total net sales for the nine months ended December 28, 2003 decreased by $6.8 million, or 10.0%, to $61.2 million from $68.0 million for the same period in fiscal year 2003. Net sales of throws decreased by $184,000, or 8.7%, to $1.9 million, as sales volumes of high-end luxury throws were negatively impacted for the first six months of the current year by the recent downturn in the economy. Net sales of infant and juvenile products decreased by $6.6 million, or 10.0%, to $59.2 million. This decline in sales, which occurred primarily in the second quarter of fiscal year 2004, is attributable to changes in buying patterns by several customers, some of whom lowered on-hand inventory levels in response to the sluggish economy, and changes in internal business strategies. Also, during the second and third quarters of fiscal year 2003, the Company shipped several new product placements to key
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customers; these were not repeated at the same levels in the current year. The Company’s Pillow Buddies® business has been comparatively weaker in the current year because retail dollars have not been allocated to the product and increased competition for character licenses has driven royalty commitments higher than management is comfortable guaranteeing. In addition, a marketing decision by Disney Consumer Products to take one of its brands direct to retail beginning in early 2004 has caused the retailers currently offering this brand to begin reducing their purchase volumes.
During the nine months ended December 28, 2003, cost of sales remained level at 77.9%. Although the Company’s gross margin has benefited in the current fiscal year from improvements attributable to its sourcing efforts, most of the savings was passed on to customers as a result of pricing pressure.
Marketing and administrative expenses decreased by $590,000, or 6.2%, for the first nine months of fiscal year 2004 compared to the first nine months of fiscal year 2003 and were 14.5% of net sales for the current year period compared to 13.9% of net sales for the corresponding period of the prior year. For the first nine months of fiscal year 2004, the Company achieved reductions in labor and commissions expenses. However, these savings were partially offset by costs related to the Company’s Delaware reincorporation of approximately $380,000 for the nine months ended December 28, 2003.
As discussed above and in Note 4 to the Company’s Consolidated Financial Statements, the Company recorded a $1.8 million restructuring charge in the quarter ended December 29, 2002 related to the closure of Burgundy.
Interest expense for the nine months ended December 28, 2003 decreased by $430,000 compared to the nine months ended December 29, 2002 because of a lower average debt balance and reduced interest rates. Long-term debt was $30.3 million at December 28, 2003 compared to $33.6 million at December 29, 2002. Included in the balance in the prior fiscal year was revolving credit of $1.1 million, whereas there was no revolving credit balance outstanding at December 28, 2003.
Income tax expense for the nine months ended December 28, 2003 includes a benefit for a revision of federal alternative minimum taxes of $99,000 and an expense for state and local income taxes of $174,000. For the nine months ended December 29, 2002, the Company recorded income tax expense of $75,000 related to federal taxes, including alternative minimum taxes, and $195,000 related to estimated state and local taxes. Income tax expense for both periods was reduced by the utilization of a portion of the Company’s net operating loss carryforwards.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $4.7 million for the nine months ended December 28, 2003 compared to net cash provided by operating activities of $6.3 million for the nine months ended December 29, 2002. The decrease in cash provided by operating activities was primarily due to the receipt of a one-time income tax refund of $1.8 million in the prior fiscal year. Net cash used in investing activities was $31,000 for the nine months ended December 28, 2003 compared to net cash used in investing activities of $0.3 million in the prior year period. The decrease in cash used in investing activities was due in large part to net proceeds from the sale of assets disposed of in connection with the closure of Burgundy in the current fiscal year of $244,000, whereas the Company had no proceeds from the sale of assets in the prior fiscal year. Net cash used in financing activities was $3.5 million compared to net cash used in financing activities of $6.2 million in the prior year period. The decrease in cash used in financing activities was due to a lower net payment of long-term debt in the current fiscal year as compared to the prior fiscal year. A portion of the long-term debt reduction in the prior fiscal year resulted from the use of the tax refund discussed above to reduce the Company’s revolver.
The Company’s ability to make scheduled payments of principal, to pay the interest on or to refinance its maturing indebtedness, to fund capital expenditures or to comply with its debt covenants will depend upon future performance. 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 cash flow from operations together with revolving credit availability will be adequate to meet liquidity needs.
To reduce its exposure to credit losses and to enhance its cash flow, the Company factors the majority of its trade accounts receivable. The Company’s factor establishes customer credit lines and accounts for and collects receivable balances. The factor remits payment to the Company on the average due dates of the factored invoices. The factor assumes all responsibility for credit losses on sales within approved credit lines, but may deduct from its remittances to the Company the amounts of customer deductions for returns, allowances, disputes and discounts. The Company’s factor at any time may terminate or limit its approval of shipments to a particular
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customer. If such a termination occurs, the Company may either assume the credit risks for shipments after the date of such termination or cease shipments to such customer.
FORWARD-LOOKING INFORMATION
This Form 10-Q contains forward-looking statements within the meaning of 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” and variations of such words and similar expressions 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, changing competition, 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 and the Company’s dependence upon licenses from third parties.
ITEM 3 – QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates on debt, changes in commodity prices, the concentration of the Company’s customers and the Company’s reliance upon licenses. The Company’s exposure to interest rate risk relates to the Company’s floating rate debt, of which no balance was outstanding at December 28, 2003, compared to an outstanding balance of $1.8 million at March 30, 2003. Each 1.0 percentage point increase in interest rates would have no impact on pretax earnings at the Company’s debt level of December 28, 2003, but would have an impact of $18,000 at its debt level of March 30, 2003. The Company’s exposure to commodity price risk primarily relates to changes in the price of cotton, which is a principal raw material used in a substantial number of the Company’s products. Additionally, the Company’s top three customers represent approximately 74% of net sales, and 39% of the Company’s net sales is of licensed products. The Company could be materially impacted by the loss of one or more of these customers or 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report, as required by paragraph (b) of Rule 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 in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic filings under the Exchange Act.
PART II — OTHER INFORMATION
Item 1 — Legal Proceedings
From time to time, the Company is involved in various legal 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 legal proceeding the outcome of which, individually or in the aggregate, is expected to have a material adverse effect on the Company’s financial condition or results of operations.
Item 2 — Changes in Securities and Use of Proceeds
None
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Item 3 — Defaults Upon Senior Securities
Item 4 — Submission of Matters to a Vote of Security Holders
Item 5 — Other Information
Item 6 — Exhibits and Reports on Form 8-K
The Company filed the following Current Reports on Form 8-K during the quarter ended December 28, 2003:
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SIGNATURES
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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Index to Exhibits
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