CROWN CRAFTS INC - Quarter Report: 2019 December (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 29, 2019

 

☐	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.

(Exact name of registrant as specified in its charter)

 

 

Delaware		58-0678148
(State or other jurisdiction of incorporation)		(IRS Employer Identification No.)

 

916 South Burnside Avenue, Gonzales, LA		70737
(Address of principal executive offices)		(Zip Code)

                                                                    

 

(225) 647-9100

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
Common Stock, par value $0.01 per share	CRWS	Nasdaq Capital Market

 

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 ☑     No ☐

 

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).

Yes ☑     No ☐

 

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                              ☐
Non-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 ☐ No ☑

 

The number of shares of common stock, $0.01 par value, of the registrant outstanding as of January 30, 2020 was 10,166,807.

 

 

 

		December 29, 2019				March 31, 2019
ASSETS
Current assets:
Cash and cash equivalents		$	41			$	143
Accounts receivable (net of allowances of $665 at December 29, 2019 and $407 at March 31, 2019):
Due from factor			14,638				17,250
Other			907				522
Inventories			23,640				19,534
Prepaid expenses			2,338				1,230
Total current assets			41,564				38,679
Operating lease right of use assets			5,416				-
Property, plant and equipment - at cost:
Vehicles			246				323
Leasehold improvements			315				282
Machinery and equipment			4,427				4,269
Furniture and fixtures			797				799
Property, plant and equipment - gross			5,785				5,673
Less accumulated depreciation			3,970				3,751
Property, plant and equipment - net			1,815				1,922
Finite-lived intangible assets - at cost:
Tradename and trademarks			3,667				3,667
Customer relationships			7,374				7,374
Other finite-lived intangible assets			3,159				3,159
Finite-lived intangible assets - gross			14,200				14,200
Less accumulated amortization			8,409				7,768
Finite-lived intangible assets - net			5,791				6,432
Goodwill			7,125				7,125
Deferred income taxes			344				524
Other			95				97
Total Assets		$	62,150			$	54,779
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	7,864			$	4,201
Accrued wages and benefits			1,632				1,819
Accrued royalties			896				398
Dividends payable			3,355				810
Other accrued liabilities			272				483
Total current liabilities			14,019				7,711
Non-current liabilities:
Long-term debt			-				4,486
Operating lease liabilities, noncurrent			5,551				-
Reserve for unrecognized tax liabilities			1,017				1,194
Total non-current liabilities			6,568				5,680
Shareholders' equity:
Common stock - $0.01 par value per share; Authorized 40,000,000 shares at December 29, 2019 and March 31, 2019; Issued 12,603,301 shares at December 29, 2019 and 12,546,789 shares at March 31, 2019			126				125
Additional paid-in capital			53,532				53,251
Treasury stock - at cost - 2,436,494 shares at December 29, 2019 and 2,424,231 shares at March 31, 2019			(12,408	)			(12,326	)
Retained Earnings			313				338
Total shareholders' equity			41,563				41,388
Total Liabilities and Shareholders' Equity		$	62,150			$	54,779

		Three-Month Periods Ended								Nine-Month Periods Ended
		December 29, 2019				December 30, 2018				December 29, 2019				December 30, 2018
Net sales		$	18,587			$	18,668			$	53,089			$	54,664
Cost of products sold			12,766				13,071				36,848				38,569
Gross profit			5,821				5,597				16,241				16,095
Marketing and administrative expenses			3,416				3,446				10,344				10,958
Income from operations			2,405				2,151				5,897				5,137
Other income (expense):
Interest expense - net of interest income			(34	)			(62	)			(28	)			(249	)
Gain on sale of property, plant and equipment			6				-				15				-
Other - net			-				2				11				3
Income before income tax expense			2,377				2,091				5,895				4,891
Income tax expense			282				537				942				1,264
Net income		$	2,095			$	1,554			$	4,953			$	3,627
Weighted average shares outstanding:
Basic			10,166				10,098				10,143				10,084
Effect of dilutive securities			11				1				1				2
Diluted			10,177				10,099				10,144				10,086
Earnings per share:
Basic		$	0.21			$	0.15			$	0.49			$	0.36
Diluted		$	0.21			$	0.15			$	0.49			$	0.36

																						(Accumulated
		Common Shares								Treasury Shares								Additional				Deficit)				Total
		Number of Shares				Amount				Number of Shares				Amount				Paid-in Capital				Retained Earnings				Shareholders' Equity
		(Dollar amounts in thousands)
		Three-Month Periods
Balances - September 30, 2018			12,521,789			$	125				(2,424,231	)		$	(12,326	)		$	53,071			$	(991	)		$	39,879
Stock-based compensation																			84								84
Net income																							1,554				1,554
Dividends declared on common stock - $0.08 per share																							(807	)			(807	)
Balances - December 30, 2018			12,521,789			$	125				(2,424,231	)		$	(12,326	)		$	53,155			$	(244	)		$	40,710
Balances - September 29, 2019			12,593,301			$	126				(2,427,434	)		$	(12,343	)		$	53,391			$	1,573			$	42,747
Issuance of shares			10,000				-												62								62
Stock-based compensation																			79								79
Acquisition of treasury stock											(9,060	)			(65	)											(65	)
Net income																							2,095				2,095
Dividends declared on common stock - $0.33 per share																							(3,355	)			(3,355	)
Balances - December 29, 2019			12,603,301			$	126				(2,436,494	)		$	(12,408	)		$	53,532			$	313			$	41,563
		Nine-Month Periods
Balances - April 1, 2018			12,493,789			$	125				(2,408,025	)		$	(12,231	)		$	52,874			$	(1,450	)		$	39,318
Issuance of shares			28,000				-												-								-
Stock-based compensation																			281								281
Acquisition of treasury stock											(16,206	)			(95	)											(95	)
Net income																							3,627				3,627
Dividends declared on common stock - $0.24 per share																							(2,421	)			(2,421	)
Balances - December 30, 2018			12,521,789			$	125				(2,424,231	)		$	(12,326	)		$	53,155			$	(244	)		$	40,710
Balances - March 31, 2019			12,546,789			$	125				(2,424,231	)		$	(12,326	)		$	53,251			$	338			$	41,388
Issuance of shares			56,512				1												62								63
Stock-based compensation																			219								219
Acquisition of treasury stock											(12,263	)			(82	)											(82	)
Net income																							4,953				4,953
Dividends declared on common stock - $0.49 per share																							(4,978	)			(4,978	)
Balances - December 29, 2019			12,603,301			$	126				(2,436,494	)		$	(12,408	)		$	53,532			$	313			$	41,563

 

		Nine-Month Periods Ended
		December 29, 2019				December 30, 2018
Operating activities:
Net income		$	4,953			$	3,627
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, plant and equipment			536				460
Amortization of intangibles			641				628
Amortization of right of use assets			1,110				-
Deferred income taxes			180				173
Gain on sale of property, plant and equipment			(15	)			-
Reserve for unrecognized tax liabilities			(177	)			133
Stock-based compensation			219				281
Changes in assets and liabilities:
Accounts receivable			2,227				3,489
Inventories			(4,106	)			(2,377	)
Prepaid expenses			(1,108	)			(313	)
Other assets			2				23
Lease liabilities			(1,076	)			-
Accounts payable			3,601				3,869
Accrued liabilities			200				522
Net cash provided by operating activities			7,187				10,515
Investing activities:
Capital expenditures for property, plant and equipment			(379	)			(560	)
Proceeds from sale of property, plant and equipment			27				-
Net cash used in investing activities			(352	)			(560	)
Financing activities:
Repayments under revolving line of credit			(35,302	)			(47,080	)
Borrowings under revolving line of credit			30,816				39,487
Purchase of treasury stock			(82	)			(95	)
Issuance of common stock			63				-
Dividends paid			(2,432	)			(2,419	)
Net cash used in financing activities			(6,937	)			(10,107	)
Net decrease in cash and cash equivalents			(102	)			(152	)
Cash and cash equivalents at beginning of period			143				215
Cash and cash equivalents at end of period		$	41			$	63
Supplemental cash flow information:
Income taxes paid		$	1,060			$	900
Interest paid			47				174
Noncash financing activities:
Property, plant and equipment purchased but unpaid			(62	)			(48	)
Dividends declared but unpaid			(3,355	)			(808	)

 

Note 1 – Summary of Significant Accounting Policies

 

Basis of Presentation: The accompanying unaudited consolidated financial statements include the accounts of Crown Crafts, Inc. (the “Company”) and its subsidiaries and have been prepared in accordance with 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 has been established by the FASB as the authoritative source for GAAP to be applied by nongovernmental entities.

 

In the opinion of management, the interim unaudited consolidated financial statements contained herein include all adjustments necessary to present fairly the financial position of the Company as of December 29, 2019 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 and nine-month periods ended December 29, 2019 are not necessarily indicative of the results that may be expected by the Company for its fiscal year ending March 29, 2020. For further information, refer to the Company’s consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended March 31, 2019.

 

Fiscal Year: The Company’s fiscal year ends on the Sunday that is nearest to or on March 31. References herein to “fiscal year 2020” or “2020” represent the 52-week period ending March 29, 2020 and references herein to “fiscal year 2019” or “2019” represent the 52-week period ended March 31, 2019.

 

Reclassifications: The Company has classified certain prior year information to conform to the amounts presented in the current year. None of the changes impact the Company’s previously reported financial position or results of operations.

 

Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed consolidated balance sheets and the reported amounts of revenues and expenses during the periods presented on the unaudited consolidated statements of income and cash flows. Significant estimates are made with respect to the allowances related to accounts receivable for customer deductions for returns, allowances and disputes. The Company also has a certain amount of discontinued finished goods which necessitates the establishment of inventory reserves that are highly subjective. The Company has also established estimated reserves in connection with the uncertainty concerning the amount of income tax recognized. Actual results could differ materially from those estimates.

 

Cash and Cash Equivalents: The Company considers highly-liquid investments, if any, purchased with original maturities of three months or less to be cash equivalents.

 

The Company’s credit facility consists of a revolving line of credit under a financing agreement with The CIT Group/Commercial Services, Inc. (“CIT”), a subsidiary of CIT Group Inc. The Company classifies a negative balance outstanding under this revolving line of credit as cash, as these amounts are legally owed to the Company and are immediately available to be drawn upon by the Company. There are no compensating balance requirements or other restrictions on the transfer of amounts associated with the Company’s depository accounts.

 

Financial Instruments: For short-term instruments such as cash and cash equivalents, accounts receivable and accounts payable, the Company uses carrying value as a reasonable estimate of the fair value.

 

Advertising Costs: The Company’s advertising costs are primarily associated with cooperative advertising arrangements with certain of the Company’s customers and are recognized using the straight-line method based upon aggregate annual estimated amounts for those customers, with periodic adjustments to the actual amounts of authorized agreements. Costs associated with advertising on websites such as Facebook and Google and which are related to the Company’s online business are recorded as incurred. Advertising expense is included in marketing and administrative expenses in the accompanying unaudited condensed consolidated statements of income and amounted to $261,000 and $295,000 for the three months ended December 29, 2019 and December 30, 2018, respectively, and amounted to $805,000 and $968,000 for the nine months ended December 29, 2019 and December 30, 2018, respectively.

 

 

Revenue Recognition: Revenue is recognized upon the satisfaction of all contractual performance obligations and the transfer of control of the products sold to the customer. The majority of the Company’s sales consists of single performance obligation arrangements for which the transaction price for a given product sold is equivalent to the price quoted for the product, net of any stated discounts applicable at a point in time. Each sales transaction results in an implicit contract with the customer to deliver a product as directed by the customer. Shipping and handling costs that are charged to customers are included in net sales, and the Company’s costs associated with shipping and handling activities are included in cost of products sold.

 

A provision for anticipated returns, which are based upon historical returns and claims, is provided through a reduction of net sales and cost of products sold in the reporting period within which the related sales are recorded. Actual returns and claims experienced in a future period may differ from historical experience, and thus, the Company’s provision for anticipated returns at any given point in time may be over-funded or under-funded.

 

The Company recognizes revenue associated with unredeemed store credits and gift certificates at the earlier of their redemption by customers, their expiration or when their likelihood of redemption becomes remote, which is generally two years from the date of issuance.

 

Revenue from sales made directly to consumers is recorded when the shipped products have been received by customers, and excludes sales taxes collected on behalf of governmental entities. Revenue from sales made to retailers is recorded when legal title has been passed to the customer based upon the terms of the customer’s purchase order, the Company’s sales invoice, or other associated relevant documents. Such terms usually stipulate that legal title will pass when the shipped products are no longer under the control of the Company, such as when the products are picked up at the Company’s facility by the customer or by a common carrier. Payment terms can vary from prepayment for sales made directly to consumers and some international sales to payment due in arrears (generally, 60 days of being invoiced) for sales made to retailers. A disaggregation of the Company’s revenue is set forth below under the heading “Segment and Related Information” in this Note 1.

 

Allowances Against Accounts Receivable:     Revenue from sales made to retailers is reported net of allowances for anticipated returns and other allowances, including cooperative advertising allowances, warehouse allowances, placement fees, volume rebates, coupons and discounts. Such allowances are recorded commensurate with sales activity or applying the straight-line method, as appropriate, and the cost of such allowances is netted against sales in reporting the results of operations. The provision for the majority of the Company’s allowances occurs on a per-invoice basis. When a customer requests to have an agreed-upon deduction applied against the customer’s outstanding balance due to the Company, the allowances are correspondingly reduced to reflect such payments or credits issued against the customer’s account balance. The Company analyzes the components of the allowances for customer deductions monthly and adjusts the allowances to the appropriate levels. The timing of funding requests for advertising support can cause the net balance in the allowance account to fluctuate from period to period. The timing of such funding requests should have no impact on the consolidated statements of income since such costs are accrued commensurate with sales activity or using the straight-line method, as appropriate.

 

Uncollectible Accounts:     To reduce the Company’s exposure to credit losses and to enhance the predictability of its cash flows, the Company assigns the majority of its receivables under factoring agreements with CIT. If a factored receivable becomes uncollectible due to customer creditworthiness, then CIT bears the risk of loss. The Company recognizes revenue net of the amount that is expected to be uncollectible on any accounts receivable that are not assigned under the factoring agreements with CIT. The Company’s management makes estimates of the uncollectiblity of its non-factored accounts receivable by specifically analyzing the accounts receivable, historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in its customers’ payment terms.

 

Credit Concentration: The Company’s accounts receivable as of December 29, 2019 amounted to $15.5 million, net of allowances of $665,000. Of this amount, $14.6 million was due from CIT under the factoring agreements and $25,000 was due from CIT as a negative balance outstanding under the revolving line of credit. The combined amount of $14.7 million represents the maximum loss that the Company could incur if CIT failed completely to perform its obligations under the factoring agreements and the revolving line of credit.

 

Other Accrued Liabilities:     An amount of $272,000 was recorded as other accrued liabilities as of December 29, 2019. Of this amount, $119,000 reflected unearned revenue recorded for payments from customers that were received before the products ordered were received by the customers. Other accrued liabilities as of December 29, 2019 also include a reserve for customer returns of $14,000 and unredeemed store credits and gift certificates totaling $12,000.

 

 

Segment and Related Information: The Company operates primarily in one principal segment – infant, toddler and juvenile products. These products consist of infant and toddler bedding, bibs, soft bath products, disposable products and accessories. Net sales of bedding, blankets and accessories and net sales of bibs, bath, developmental toy, feeding, baby care and disposable products for the three and nine-month periods ended December 29, 2019 and December 30, 2018 are as follows (in thousands):

 

 

Inventory Valuation: The preparation of the Company's financial statements requires careful determination of the appropriate value of the Company's inventory balances. Such amounts are presented as a current asset in the accompanying condensed consolidated balance sheets and are a direct determinant of cost of products sold in the accompanying unaudited condensed consolidated statements of income and, therefore, have a significant impact on the amount of net income reported in the accounting periods. The basis of accounting for inventories is cost, which includes the direct supplier acquisition cost, duties, taxes and freight, and the indirect costs to design, develop, source and store the product until it is sold. Once cost has been determined, the Company’s inventory is then stated at the lower of cost or net realizable value, with cost determined using the first-in, first-out ("FIFO") method, which assumes that inventory quantities are sold in the order in which they are acquired, and the average cost method for a portion of the Company’s inventory.

 

The determination of the indirect charges and their allocation to the Company's finished goods inventories is complex and requires significant management judgment and estimates. If management made different judgments or utilized different estimates, then such differences would result in a change in the valuation of the Company's inventories and the amount and timing of the Company's cost of products sold and the resulting net income for the reporting period.

 

On a periodic basis, management reviews its inventory quantities on hand for obsolescence, physical deterioration, changes in price levels and the existence of quantities on hand which may not reasonably be expected to be sold within the Company’s normal operating cycle. To the extent that any of these conditions is believed to exist or the market value of the inventory expected to be realized in the ordinary course of business is otherwise no longer as great as its carrying value, an allowance against the inventory value is established. To the extent that this allowance is established or increased during an accounting period, an expense is recorded in cost of products sold in the Company's consolidated statements of income. Only when inventory for which an allowance has been established is later sold, or is otherwise disposed, is the allowance reduced accordingly. Management judgment is required in determining the amount and adequacy of this allowance. If actual results differ from management's estimates or these estimates and judgments are revised in future periods, then the Company may not fully realize the carrying value of its inventory or may need to establish additional allowances, either of which could materially impact the Company's financial position and results of operations.

 

Royalty Payments: The Company has entered into 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 income and amounted to $1.3 million for each of the three-month periods ended December 29, 2019 and December 30, 2018, and amounted to $3.5 million and $3.7 million for the nine-month periods ended December 29, 2019 and December 30, 2018, respectively.

 

Depreciation and Amortization: The accompanying condensed consolidated balance sheets reflect property, plant and equipment, and certain intangible assets at cost less accumulated depreciation or amortization. The Company capitalizes additions and improvements and expenses maintenance and repairs as incurred. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, which are three to eight years for property, plant and equipment, and five to twenty years for intangible assets other than goodwill. The Company amortizes improvements to its leased facilities over the term of the lease or the estimated useful life of the asset, whichever is shorter.

 

Valuation of Long-Lived Assets and Identifiable Intangible Assets: In addition to the depreciation and amortization procedures set forth above, the Company reviews for impairment long-lived assets and certain identifiable intangible assets whenever events or changes in circumstances indicate that the carrying amount of any asset may not be recoverable. In the event of impairment, the asset is written down to its fair market value.

 

 

Patent Costs: The Company incurs certain legal and related costs in connection with patent applications. The Company capitalizes such costs to be amortized over the expected life of the patent to the extent that an economic benefit is anticipated from the resulting patent or an alternative future use is available to the Company. The Company also capitalizes legal and other costs incurred in the protection or defense of the Company’s patents when it is believed that the future economic benefit of the patent will be maintained or increased and a successful defense is probable. Capitalized patent defense costs are amortized over the remaining expected life of the related patent. The Company’s assessment of future economic benefit of its patents involves considerable management judgment, and a different conclusion could result in a material impairment charge up to the carrying value of these assets.

 

Provision for Income Taxes: The Company’s provision for income taxes includes all currently payable federal, state, local and foreign taxes and is based upon the Company’s estimated annual effective tax rate (“ETR”), which is based on the Company’s forecasted annual pre-tax income, as adjusted for certain expenses within the consolidated statements of income that will never be deductible on the Company’s tax returns and certain charges expected to be deducted on the Company’s tax returns that will never be deducted on the consolidated statements of income, multiplied by the statutory tax rates for the various jurisdictions in which the Company operates. The Company’s provisions for income taxes for the nine-month periods ended December 29, 2019 and December 30, 2018 are based upon an estimated annual ETR from continuing operations of 23.3% and 24.2%, respectively. The Company provides for deferred income taxes based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates that will be in effect when the differences are expected to reverse.

 

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 December 29, 2019 were the tax years ended March 31, 2019, April 1, 2018, April 2, 2017, April 3, 2016, March 29, 2015 and March 30, 2014.

 

Management evaluates items of income, deductions and credits reported on the Company’s various federal and state income tax returns filed and recognizes the effect of positions taken on those income tax returns only if those positions are more likely than not to be sustained. The Company applies the provisions of FASB ASC Sub-topic 740-10-25, which requires a minimum recognition threshold that a tax benefit must meet before being recognized in the financial statements. Recognized income tax positions are measured at the largest amount that has a greater than 50% likelihood of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

 

After considering all relevant information regarding the calculation of the state portion of its income tax provision, the Company believes that the technical merits of the tax position that the Company has taken with respect to state apportionment percentages would more likely than not be sustained. However, the Company also realizes that the ultimate resolution of such tax position could result in a tax charge that is more than the amount realized based upon the application of the tax position taken. Therefore, the Company’s measurement regarding the potential impact of an unfavorable resolution of its tax position related to state apportionment percentages resulted in the Company recording discrete reserves for unrecognized tax liabilities of $29,000 and $7,000 during the three-month periods ended December 29, 2019 and December 30, 2018, respectively, and $71,000 and $66,000 during the nine-month periods ended December 29, 2019 and December 30, 2018, respectively, in the accompanying unaudited condensed consolidated statements of income.

 

The Company’s policy is to accrue interest expense and penalties as appropriate on estimated unrecognized tax liabilities as a charge to interest expense in the Company’s consolidated statements of income. The Company accrued interest and penalties associated with its reserve for unrecognized tax liabilities during the three-month periods ended December 29, 2019 and December 30, 2018 of $18,000 and $22,000, respectively, and during the nine-month periods ended December 29, 2019 and December 30, 2018 of $62,000 and $68,000, respectively, in the accompanying unaudited condensed consolidated statements of income for interest expense and penalties on the unrecognized tax liabilities for which the relevant statute of limitations remained unexpired. No interest expense or penalties are accrued with respect to estimated unrecognized tax liabilities that are associated with state income tax overpayments that remain receivable.

 

In December 2016, the Company was notified by the Franchise Tax Board of the State of California (the “FTB”) of its intention to examine the Company’s claims for refund made in connection with amended consolidated income tax returns that the Company had filed for the fiscal years ended March 30, 2014, March 31, 2013, April 1, 2012 and April 3, 2011. As outlined above, the Company has recorded discrete reserves for unrecognized tax liabilities for these and succeeding fiscal years, and has also accrued interest expense and penalties associated with these unrecognized tax liabilities.

 

 

On July 31, 2019, the FTB notified the Company that it would take no further action with regard to the fiscal years ended March 31, 2013, April 1, 2012 and April 3, 2011. Accordingly, the Company reversed the reserves for unrecognized tax liabilities that it had previously recorded for these fiscal years, which resulted in the recognition of a discrete income tax benefit of $232,000 during the nine-month period ended December 29, 2019 in the accompanying unaudited condensed consolidated statements of income. The Company also reversed the interest expense and penalties that it had accrued in respect of the unrecognized tax liabilities for these fiscal years, which resulted in the recognition of a credit to interest expense of $78,000 during the nine-month period ended December 29, 2019.

 

As of January 30, 2020, the status of the Company’s claim for refund made in connection with the amended consolidated income tax return that the Company filed for the fiscal year ended March 30, 2014 was not resolved. The ultimate resolution of this claim for refund could include administrative or legal proceedings. Although management believes that the calculations and positions taken on the amended consolidated income tax return and all other filed income tax returns are reasonable and justifiable, the outcome of this or any other 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, another 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.

 

During each of the three and nine-month periods ended December 29, 2019, the Company recorded a discrete income tax benefit of $276,000 to reflect the aggregate effect of certain tax credits.

 

During the three and nine-month periods ended December 29, 2019, the Company recorded a discrete income tax benefit of $1,000 and a net discrete income tax charge of $5,000, respectively, to reflect the effects of the excess tax benefits and tax shortfalls arising from the exercise of stock options and the vesting of non-vested stock during the periods. The Company recorded a discrete income tax charge of $12,000 during the nine-month period ended December 30, 2018 to reflect the net effects of the excess tax benefits and tax shortfalls arising from the vesting of non-vested stock during the period.

 

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 16.0% and 25.8% for the nine-month periods ended December 29, 2019 and December 30, 2018, respectively.

 

Earnings Per Share: The Company calculates basic earnings per share by using a weighted average of the number of shares outstanding during the reporting periods. Diluted shares outstanding are calculated in accordance with the treasury stock method, which assumes that the proceeds from the exercise of all exercisable options would be used to repurchase shares at market value. The net number of shares issued after the exercise proceeds are exhausted represents the potentially dilutive effect of the exercisable options, which are added to basic shares to arrive at diluted shares.

 

Recently-Issued Accounting Standards:   In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, the objective of which is to provide financial statement users with more information about the expected credit losses on financial instruments and other commitments to extend credit held by an entity. Current GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable that a loss has been incurred. Because this methodology restricted the recognition of credit losses that are expected, but did not yet meet the “probable” threshold, ASU No. 2016-13 was issued to require the consideration of a broader range of reasonable and supportable information when determining estimates of credit losses.

 

ASU No. 2016-13 is to be applied using a modified retrospective approach, and the ASU could have been early-adopted in the fiscal year that began after December 15, 2018. When issued, ASU No. 2016-13 was required to be adopted no later than the fiscal year beginning after December 15, 2019, but on November 15, 2019, the FASB issued ASU No. 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which provided for the deferral of the effective date of ASU No. 2016-13 for registrants that are a smaller reporting company to the first interim period of the fiscal year beginning after December 15, 2022. Accordingly, the Company intends to adopt ASU No. 2016-13 effective as of April 3, 2023. Although the Company has not determined the full impact of the adoption of ASU No. 2016-13, because the Company assigns the majority of its trade accounts receivable under factoring agreements with CIT, the Company does not believe that the adoption of the ASU will have a significant impact on the Company’s financial position, results of operations and related disclosures.

 

 

The Company has determined that all other ASUs which had become effective as of December 29, 2019, or which will become effective at some future date, are not expected to have a material impact on the Company’s consolidated financial statements.

 

Note 2 – Financing Arrangements

 

Factoring Agreements:     The Company assigns the majority of its trade accounts receivable to CIT 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. Credit losses are borne by CIT 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 income, amounted to $75,000 and $64,000 for the three-month periods ended December 29, 2019 and December 30, 2018, respectively, and amounted to $188,000 and $192,000 for the nine-month periods ended December 29, 2019 and December 30, 2018, respectively.

 

Credit Facility:     The Company’s credit facility at December 29, 2019 consisted of a revolving line of credit under a financing agreement with CIT of up to $26.0 million, which includes a $1.5 million sub-limit for letters of credit, bearing interest at the rate of prime minus 0.50% or LIBOR plus 1.75%. The financing agreement matures on July 11, 2022 and is secured by a first lien on all assets of the Company. As of December 29, 2019, the Company had elected to pay interest on balances owed under the revolving line of credit, if any, under the LIBOR option, which was 3.44% as of December 29, 2019. The financing agreement also provides for the payment by CIT of interest at the rate of prime as of the beginning of the calendar month minus 2.0%, which was 2.75% as of December 29, 2019, on daily negative balances, if any, held at CIT.

 

As of December 29, 2019, there was no balance owed on the revolving line of credit, there was no letter of credit outstanding and $23.7 million was available under the revolving line of credit based on the Company’s eligible accounts receivable and inventory balances. As of March 31, 2019, there was a balance of $4.5 million owed on the revolving line of credit, there was no letter of credit outstanding and $19.4 million was available under the revolving line of credit based on the Company’s eligible accounts receivable and inventory balances.

 

The financing agreement contains usual and customary covenants for agreements of that type, including limitations on other indebtedness, liens, transfers of assets, investments and acquisitions, merger or consolidation transactions, transactions with affiliates, and changes in or amendments to the organizational documents for the Company and its subsidiaries. The Company believes it was in compliance with these covenants as of December 29, 2019.

 

Note 3 – 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 two reporting units: one that produces and markets infant and toddler bedding, blankets and accessories and another that produces and markets infant and toddler bibs, developmental toys, bath care and disposable products. The goodwill of the reporting units of the Company as of December 29, 2019 and March 31, 2019 amounted to $30.0 million, which is reflected in the accompanying condensed consolidated balance sheets net of accumulated impairment charges of $22.9 million, for a net reported balance of $7.1 million.

 

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, 2019, the Company performed the annual measurement for impairment of the goodwill of its reporting units and concluded that the estimated fair value of each of the Company’s reporting units exceeded their carrying values, and thus the goodwill of the Company’s reporting units was not impaired as of that date.

 

 

Note 4 – Other Intangible Assets

 

Other intangible assets as of December 29, 2019 and March 31, 2019 consisted primarily of the fair value of identifiable assets acquired in business combinations other than tangible assets and goodwill. The gross amount and accumulated amortization of the Company’s other intangible assets as of December 29, 2019 and March 31, 2019, the amortization expense for the three and nine-month periods ended December 29, 2019 and December 30, 2018 and the classification of such amortization expense within the accompanying unaudited condensed consolidated statements of income are as follows (in thousands):

 

 

 

Note 5 – Inventories

 

Major classes of inventory were as follows (in thousands):

 

 

 

Note 6 – Leases

 

On April 1, 2019, the Company commenced its initial application of the provisions of FASB ASC Topic 842, Leases (“Topic 842”), under which the Company has capitalized most of its current operating lease obligations as right-of-use assets and recognized corresponding liabilities. The Company has used a modified retrospective transition approach permitted by Topic 842.  The Company elected to use the “package of practical expedients,” which permitted the Company to avoid a reassessment of prior conclusions about lease identification, lease classification and initial direct costs. The Company also elected the practical expedient that permitted the Company to exclude short-term agreements of less than 12 months from capitalization.

 

In its initial application of Topic 842, the Company recognized operating lease liabilities and corresponding right-of-use assets of $1.9 million based on the present value of the remaining minimum rental payments under the Company’s operating leases. In addition to the recognition of operating lease liabilities and right-of-use assets, the Company also reclassified its deferred rent liability as of April 1, 2019 of $99,000 as an offset to the amount of its initial operating lease right-of-use assets.  The recognition of a cumulative-effect adjustment to the opening balance of the Company’s retained earnings was not required as a result of the initial application of Topic 842.

 

The Company is a party to various operating leases for offices, warehousing facilities and certain office equipment. The leases expire at various dates, have varying options to renew and cancel, and may contain escalation provisions. The Company expenses non-variable lease payments ratably over the lease term. The key estimates for the Company’s leases include the discount rate used to discount the unpaid lease payment to present value and the lease term. The Company’s leases generally do not include a readily determinable implicit rate; therefore, management determined the incremental borrowing rate to discount the lease payment based on the information available at lease commencement. For purposes of such estimates, a lease term includes the noncancellable period under the applicable lease.

 

 

Subsequent to the Company’s recognition of operating lease liabilities of $1.9 million on April 1, 2019, the Company made cash payments related to its recognized operating leases of $362,000 and $1.1 million during the three and nine months ended December 29, 2019, respectively. Such payments reduced the operating lease liabilities and were included in the cash flows provided by operating activities in the accompanying unaudited condensed consolidated statements of cash flows.

 

During the three and nine-month periods ended December 29, 2019, the Company classified its operating lease costs within the accompanying unaudited condensed consolidated statements of income as follows (in thousands):

 

 

The Company’s operating leases have a weighted-average remaining lease term of 3.2 years. The weighted-average discount rate for the operating leases is 3.84%.

 

The following table represents the maturities of the Company’s operating lease liabilities as of December 29, 2019 (in thousands):

 

 

The following table represents the Company’s commitment for minimum guaranteed rental payments under its lease agreements as of March 31, 2019 (in thousands):

 

 

 

Note 7 – Stock-based Compensation

 

The Company has two incentive stock plans, the 2006 Omnibus Incentive Plan (the “2006 Plan”) and the 2014 Omnibus Equity Compensation Plan (the “2014 Plan”). As a result of the approval of the 2014 Plan by the Company’s stockholders at the Company’s 2014 annual meeting, grants may no longer be issued under the 2006 Plan.

 

The Company believes that awards of long-term, equity-based incentive compensation will attract and retain directors, officers and employees of the Company and will encourage these individuals to contribute to the successful performance of the Company, which will lead to the achievement of the Company’s overall goal of increasing stockholder value. Awards granted under the 2014 Plan may be in the form of incentive stock options, non-qualified stock options, shares of restricted or unrestricted stock, stock units, stock appreciation rights, or other stock-based awards. Awards may be granted subject to the achievement of performance goals or other conditions, and certain awards may be payable in stock or cash, or a combination of the two. The 2014 Plan is administered by the Compensation Committee of the Company’s Board of Directors (the “Board”), which selects eligible employees, non-employee directors and other individuals to participate in the 2014 Plan and determines the type, amount, duration (such duration not to exceed a term of ten years for grants of options) and other terms of individual awards. As of December 29, 2019, 440,000 shares of the Company’s common stock were available for future issuance under the 2014 Plan, which may be issued from authorized and unissued shares of the Company’s common stock or treasury shares.

 

 

Stock-based compensation is calculated according to FASB ASC Topic 718, Compensation – Stock Compensation, which requires stock-based compensation to be accounted for using a fair-value-based measurement. The Company recorded stock-based compensation expense of $79,000 and $84,000 for the three months ended December 29, 2019 and December 30, 2018, respectively, and recorded $219,000 and $281,000 for the nine months ended December 29, 2019 and December 30, 2018, respectively. The Company records the compensation expense associated with stock-based awards granted to individuals in the same expense classifications as the cash compensation paid to those same individuals. No stock-based compensation costs were capitalized as part of the cost of an asset as of December 29, 2019.

 

Stock Options: The following table represents stock option activity for the nine-month periods ended December 29, 2019 and December 30, 2018:

 

 

As of December 29, 2019, the intrinsic value of the outstanding stock options and the exercisable stock options was $205,000 and $28,000, respectively. The Company did not receive any cash from the exercise of stock options during the three and nine months ended December 29, 2019. Upon the exercise of stock options, participants may choose to surrender to the Company those shares from the option exercise necessary to satisfy the exercise amount and their income tax withholding obligations that arise from the option exercise. The effect on the cash flow of the Company from these “cashless” option exercises is that the Company remits cash on behalf of the participant to satisfy his or her income tax withholding obligations. The Company used cash to remit the required income tax withholding amounts from “cashless” option exercises of $3,000 during each of the three and nine-month periods ended December 29, 2019. There were no options exercised during either of the three or nine-month periods ended December 30, 2018.

 

To determine the estimated fair value of stock options granted, the Company uses the Black-Scholes-Merton valuation formula, which is a closed-form model that uses an equation to estimate fair value. The following table sets forth the assumptions used to determine the fair value of the non-qualified stock options that were awarded to certain employees during the nine-month periods ended December 29, 2019 and December 30, 2018, which options vest over a two-year period, assuming continued service.

 

 

 

During the three-month periods ended December 29, 2019 and December 30, 2018, the Company classified its compensation expense associated with stock options within the accompanying unaudited condensed consolidated statements of income as follows (in thousands):

 

 

During the nine-month periods ended December 29, 2019 and December 30, 2018, the Company classified its compensation expense associated with stock options within the accompanying unaudited condensed consolidated statements of income as follows (in thousands):

 

 

As of December 29, 2019, total unrecognized stock option compensation expense amounted to $48,000, which will be recognized as the underlying stock options vest over a weighted-average period of 9.9 months. The amount of future stock option compensation expense could be affected by any future stock option grants and by the separation from the Company of any individual who has received stock options that are unvested as of such individual’s separation date.

 

Non-vested Stock Granted to Non-employee Directors: The Board granted the following shares of non-vested stock to the Company’s non-employee directors:

 

 

These shares vest over a two-year period, assuming continued service. The fair value of the non-vested stock granted to the Company’s non-employee directors was based on the closing price of the Company’s common stock on the date of each grant. In each of August 2019 and 2018, 28,000 shares that had been granted to the Company’s non-employee directors vested, having an aggregate value of $135,000 and $151,000, respectively.

 

Non-vested Stock Granted to Employees: On January 18, 2019, upon the appointment of Donna Sheridan to serve as the President and Chief Executive Officer of NoJo Baby & Kids, Inc. (formerly known as Crown Crafts Infant Products, Inc.) (“NoJo”), a wholly-owned subsidiary of the Company, the Board granted 25,000 shares of non-vested stock to Ms. Sheridan. These shares will vest on January 18, 2021, assuming continued service. The fair value of these shares of non-vested stock is $5.86 per share, which is based upon the closing price of the Company’s common stock on the date of the grant.

 

Performance Bonus Plan:  The Company maintains a performance bonus plan for certain executive officers that provides for awards of shares of common stock in the event that the aggregate average market value of the common stock during the relevant fiscal year, plus the amount of cash dividends paid in respect of the common stock during such period, increases. These individuals may instead be awarded cash, if and to the extent that insufficient shares of common stock are available for issuance from all stockholder-approved, equity-based plans or programs of the Company in effect. The performance bonus plan also imposes individual limits on awards and provides that shares of common stock that may be awarded will vest over a two-year period. Compensation expense associated with performance bonus plan awards are recognized over a three-year period – the fiscal year in which the award is earned, plus the two-year vesting period.

 

 

No shares were granted in fiscal years 2019 or 2020 in connection with the performance bonus plan. The Company recorded compensation expense during fiscal year 2019 of $116,000 related to shares granted in fiscal year 2018 that were earned in fiscal year 2017.

 

The table below sets forth the vesting of shares granted under the performance bonus plan, as well as the number of shares surrendered to the Company to satisfy the income tax withholding obligations that arose from the vesting of the shares and the taxes remitted to the appropriate taxing authorities on behalf of such individuals.

 

 

For the three-month periods ended December 29, 2019 and December 30, 2018, the Company recorded compensation expense associated with stock grants, which is included in marketing and administrative expenses in the accompanying unaudited condensed consolidated statements of income, as follows (in thousands):

 

 

For the nine-month periods ended December 29, 2019 and December 30, 2018, the Company recorded compensation expense associated with stock grants, which is included in marketing and administrative expenses in the accompanying unaudited condensed consolidated statements of income, as follows (in thousands):

 

 

As of December 29, 2019, total unrecognized compensation expense related to the Company’s non-vested stock grants amounted to $313,000, which will be recognized over the respective vesting terms associated with each block of non-vested stock indicated above, such grants having an aggregate weighted-average vesting term of 12.3 months. The amount of future compensation expense related to the Company’s non-vested stock grants could be affected by any future non-vested stock grants and by the separation from the Company of any individual who has non-vested stock grants as of such individual’s separation date.

 

Note 8 – Subsequent Events

 

On January 7, 2020, the Company’s California consolidated income tax return for the fiscal year ended March 29, 2015 became closed to examination or other adjustment. Accordingly, the Company intends to reverse the reserve for the unrecognized tax liability for that fiscal year, which will result in the recognition of a discrete income tax benefit of $212,000 during the three-month period ending March 29, 2020. The Company also intends to reverse the accumulated interest expense and penalties that it has accrued in respect of the unrecognized tax liability for the fiscal year ended March 29, 2015, which will result in the recognition of a credit to interest expense of $84,000 during the three-month period ending March 29, 2020.

 

 

The Company has evaluated all other events which have occurred between December 29, 2019 and the date that the accompanying consolidated financial statements were issued, and has determined that there are no other material subsequent events that require disclosure.