FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 2004
( ) 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.
916 South Burnside Avenue, Gonzales, Louisiana 70737
(225) 647-9100
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 ( )
Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes ( ) No (X)
The number of shares of common stock, $0.01 par value, of the Registrant outstanding as of September 26, 2004 was 9,504,937.
CROWN CRAFTS, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSSeptember 26, 2004 and March 28, 2004(UNAUDITED)(dollar amounts in thousands, except share and per share amounts)
See notes to unaudited consolidated financial statements.
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Crown Crafts, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOMEFor the Three and Six-Month Periods Ended September 26, 2004 and September 28, 2003(UNAUDITED)(amounts in thousands, except per share amounts)
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Crown Crafts, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF CASH FLOWSFor the Six-Month Periods Ended September 26, 2004 and September 28, 2003(UNAUDITED)(amounts in thousands)
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CROWN CRAFTS, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSAT AND FOR THE THREE AND SIX-MONTH PERIODS ENDED SEPTEMBER 26, 2004 AND SEPTEMBER 28, 2003
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As part of its refinancing in July 2001, the Company issued to its lenders warrants for non-voting common stock that are convertible into common stock equivalent to 65% of the shares of the Company on a fully diluted basis at a price of 11.3 cents per share. The warrants are non-callable and expire six years from their date of issuance. The value of the warrants of $2.4 million using the Black-Scholes option pricing model was credited to additional paid-in capital in the second quarter of fiscal 2002.
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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 and Juvenile Products segments within the Consumer Products industry. The Company’s offices are located in Huntington Beach and Compton, California; Gonzales, Louisiana; Berea, Kentucky and Rogers, Arkansas.
The Infant and Juvenile Products segments consist of bedding, bibs, soft goods, Pillow Buddies® and accessories. The infant and juvenile 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 and juvenile 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 the infant bedding market and one-half of the infant bib market within these segments. The Company competes on the basis of quality, design, price, service and packaging.
RESULTS OF OPERATIONS
THREE-MONTH PERIOD ENDED SEPTEMBER 26, 2004 COMPARED TO THE THREE-MONTH PERIOD ENDED SEPTEMBER 28, 2003
Total net sales for the second quarter of fiscal year 2005 increased by $1.0 million, or 4.7%, to $23.0 million from $22.0 million for the second quarter of fiscal year 2004. This increase is primarily attributable to shipments of modular bedding placements having been made earlier than in the prior year. The increase in bedding sales is offset to a degree by decreased bath shipments as a result of the loss of a bath program. In addition, the transition of the Classic Pooh license to direct-to-retail has had a deflationary effect on sales. Although replacement programs and the direct-to-retail program have been awarded to the Company, the average selling price per unit was lower than in the prior year because of market changes in anticipation of the removal of quotas from several of the Company’s bedding products, which will be effective in January 2005.
During the second quarter of fiscal year 2005, cost of sales increased to 79.9% of net sales from 77.9% for the same period in fiscal year 2004. The lower gross margin is due to the decrease in the average selling price per unit as previously discussed. The lower margins are also a direct result of pricing pressures from customers coupled with demand for enhanced products.
Marketing and administrative expenses decreased by $66,000, or 2.3%, in the second quarter of fiscal year 2005 compared to the same quarter in the prior year and were 12.0% of net sales for such quarter compared to 12.9% of net sales for the corresponding quarter of the prior year. These expenses were greater in the prior year primarily because of legal fees associated with the reincorporation of the Company in Delaware, which was completed in fiscal year 2004.
Interest expense for the second quarter of fiscal year 2005 decreased by $92,000 compared to the second quarter of fiscal year 2004 because of the Company’s lower average debt balance. Long-term debt was $26.5 million at September 26, 2004 compared to $30.9 million at September 28, 2003. Included in the balance in the prior fiscal year was revolving credit of $2.2 million, whereas there was no revolving credit balance outstanding at September 26, 2004.
Income tax expense for the quarter ended September 26, 2004 includes an expense for state and local income taxes of $88,000. Income tax expense for the quarter ended September 28, 2003 included a provision for federal alternative minimum taxes of $18,000 and state and local income taxes of $70,000. The Company has net operating loss carryforwards of $14.6 million that begin to expire in 2021.
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SIX-MONTH PERIOD ENDED SEPTEMBER 26, 2004 COMPARED TO THE SIX-MONTH PERIOD ENDED SEPTEMBER 28, 2003
Total net sales for the first six months of fiscal year 2005 decreased by $0.5 million, or 1.32%, to $39.9 million from $40.5 million for the same period of fiscal year 2004 as a result of a decrease in bib and bath sales of $1.7 million, which was offset in part by an increase in bedding sales of $1.2 million. As previously discussed, the increased bedding sales resulted from additional and new modular placement shipments having been made earlier than in the prior year. The decrease in bath sales is due to the loss of a bath program at a major customer, and the decrease in bib sales is due to inconsistent buying patterns from another major customer.
During the first six months of fiscal year 2005, cost of sales increased to 79.7% of net sales from 77.7% for the same period in fiscal year 2004 primarily as a result of a shift from sales of higher margin blankets and NoJo and Classic Pooh brands to sales of a greater volume of lower margin merchandise. A lower margins are a direct result of pricing pressures from customers coupled with demand for enhanced products and market reaction to the removal of quotas from certain products effective in January 2005.
Marketing and administrative expenses decreased by $604,000, or 10.1%, for the first six months of fiscal year 2005 compared to the same period in the prior year and were 13.5% of net sales for such period compared to 14.8% of net sales for the corresponding period of the prior year. These expenses were greater in the prior year primarily because of legal fees associated with the reincorporation of the Company in Delaware and the closing of the Company’s Mexican production facility, both of which were completed in fiscal year 2004.
Interest expense for the first six months of fiscal year 2005 decreased by $182,000 compared to the first six months of fiscal year 2004 because of the Company’s lower average debt balance. Long-term debt was $26.5 million at September 26, 2004 compared to $30.9 million at September 28, 2003. Included in the balance in the prior fiscal year was revolving credit of $2.2 million, whereas there was no revolving credit balance outstanding at September 26, 2004.
Income tax expense for the six months ended September 26, 2004 includes an expense for state and local income taxes of $112,000. Income tax expense for the six months ended September 28, 2003 included a provision for federal alternative minimum taxes of $31,000 and state and local income taxes of $137,000. The Company has net operating loss carryforwards of $14.6 million that begin to expire in 2021.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $2.7 million for the first six months of fiscal year 2005 compared to net cash provided by operating activities of $280,000 for the first six months of fiscal year 2004. The increase in cash provided by operating activities was primarily due to changes in inventory and receivable balances. Net cash used in investing activities was $0.1 million in the first six months of fiscal year 2005 compared to net cash provided by investing activities of $0.1 million in the prior year period. The decrease in cash provided by investing activities was due in large part to net proceeds of $240,000 from the sale of assets disposed of in connection with the closing of the Company’s Mexican production facility in the prior fiscal year. Net cash used in financing activities was $2.5 million compared to net cash used in financing activities of $0.5 million in the prior year period. The increase in cash used in financing activities was due to a higher net payment of long-term debt in the current fiscal year as compared to the prior fiscal year.
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. If the Company is unable to improve its gross margins, then the Company’s ability to comply with its debt covenants in the future may become impaired.
To reduce its exposure to credit losses and to enhance its cash flow, the Company assigns the majority of its trade accounts receivable to a commercial factor. The Company’s factor establishes customer credit lines and accounts for and collects receivable balances. Under the terms of the factoring agreement, which expires in July, 2005, the factor remits payments to the Company on the average due date of each group of invoices assigned. If a customer fails to pay the factor on the due date, the Company is charged interest at prime minus 0.5% (4.25% at September 26, 2004), until payment is received. The factor bears credit losses with respect to assigned accounts receivable that are within approved credit limits. The Company bears losses resulting from returns, allowances, claims and discounts. The Company’s factor at any time may terminate or limit its approval of shipments to a particular customer. If such a
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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 and unstable foreign currency exchanges, 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, changes in international trade regulations, 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 there was no balance outstanding at September 26, 2004 and a balance outstanding of $1.5 million at March 28, 2004. Each 1.0 percentage point increase in interest rates would impact pretax earnings by $15,000 at the debt level of March 28, 2004. The Company’s exposure to commodity price risk primarily relates to changes in the price of cotton and oil, which are the principal raw materials used in a substantial number of the Company’s products. Also, changes in import quantity allotments can materially impact the availability of the Company’s products and the prices at which those products can be purchased by the Company for resale. Additionally, the Company’s top three customers represent 76% of gross sales, and 43% of the Company’s gross 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. Since such evaluation, there have not been any significant changes in the Company’s internal controls or in other factors that could significantly affect such controls.
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, results of operations or cash flows.
Item 2 — Unregistered Sales of Equity 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
The Annual Meeting of Shareholders of the Company was held on August 10, 2004 at the Company’s corporate headquarters in Gonzales, Louisiana. The proposals set forth below were voted on at the meeting with the following results:
Each of the foregoing proposals was set forth and described in the Notice of Annual Meeting and Proxy Statement of the Company dated July 13, 2004.
Item 5 — Other Information
Item 6 — Exhibits
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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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