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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.
−Removed: These risks include, among others, general economic conditions, including changes in interest rates, in the overall level of consumer spending and in the price of oil, cotton and other raw materials used in the Company’s products, changing competition, changes in the retail environment, the Company’s ability to successfully integrate newly acquired businesses, 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, customer acceptance of both new designs and newly-introduced product lines, actions of competitors that may impact the Company’s business, disruptions to transportation systems or shipping lanes used by the Company or its suppliers, and the Company’s dependence upon licenses from third parties.
+Added: These risks include, among others, the impact of the COVID-19 pandemic on the Company’s business operations, general economic conditions, including changes in interest rates, in the overall level of consumer spending and in the price of oil, cotton and other raw materials used in the Company’s products, changing competition, changes in the retail environment, the Company’s ability to successfully integrate newly acquired businesses, 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, customer acceptance of both new designs and newly-introduced product lines, actions of competitors that may impact the Company’s business, disruptions to transportation systems or shipping lanes used by the Company or its suppliers, and the Company’s dependence upon licenses from third parties.
Reference is also made to the Company’s periodic filings with the Securities and Exchange Commission for additional factors that may impact the Company’s results of operations and financial condition.
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The Company operates indirectly through its wholly-owned subsidiaries, NoJo, Sassy Baby, Inc.
−Removed: (formerly known as Hamco, Inc.) (“Sassy”) and Carousel Designs, LLC, in the infant, toddler and juvenile products segment within the consumer products industry.
+Added: (“Sassy”) and Carousel Designs, LLC, in the infant, toddler and juvenile products segment within the consumer products industry.
The infant, toddler and juvenile products segment consists of infant and toddler bedding and blankets, bibs, soft bath products, disposable products, developmental toys and accessories.
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Products are also marketed directly to consumers from a Company facility in Douglasville, Georgia.
+Added: The infant and toddler consumer products industry is highly competitive.
+Added: The Company competes with a variety of distributors and manufacturers (both branded and private label), including large infant and juvenile product companies and specialty infant and juvenile product manufacturers, on the basis of quality, design, price, brand name recognition, service and packaging.
+Added: The Company’s ability to compete depends principally on styling, price, service to the retailer and continued high regard for the Company’s products and trade names.
Foreign and domestic contract manufacturers produce most of the Company’s products, with the largest concentration being in China.
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The Company also produces some of its products domestically at a Company facility in Douglasville, Georgia.
−Removed: The Company maintains a foreign representative office located in Shanghai, China, which is responsible for the coordination of production, purchases and shipments, seeking out new vendors and overseeing inspections for social compliance and quality.
A summary of certain factors that management considers important in reviewing the Company’s results of operations, financial position, liquidity and capital resources is set forth below, which should be read in conjunction with the accompanying consolidated financial statements and related notes included in the preceding sections of this report.
RESULTS OF OPERATIONS
−Removed: The following table contains the results of operations for the three and nine-month periods ended December 29, 2019 and December 30, 2018 and the dollar and percentage changes for those periods (in thousands, except percentages):
+Added: The following table contains the results of operations for the three-month periods ended June 28, 2020 and June 30, 2019 and the dollar and percentage changes for those periods (in thousands, except percentages):
Three-Month Periods Ended
−Removed: Nine-Month Periods Ended
−Removed: December 29, 2019
−Removed: December 30, 2018
−Removed: December 29, 2019
−Removed: December 30, 2018
+Added: June 28, 2020
+Added: June 30, 2019
Net sales by category:
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% of net sales
−Removed: Interest (income) expense - net
+Added: Interest expense (income) - net
Income tax expense
% of net sales
−Removed: Sales decreased slightly for the three-month period ended December 29, 2019 compared with the same period in the prior year, primarily due to timing of shipments to certain retailers as well as a program that was discontinued during the second quarter of the current year.
−Removed: Sales decreased by $1.6 million, or 2.9%, for the nine-month period ended December 29, 2019 compared with the same period in the prior year.
−Removed: Sales of bibs, bath, developmental toys, feeding, baby care and disposable products in the current year increased by $616,000 over the prior year, while sales of bedding, blankets and accessories in the current year decreased by $2.2 million.
+Added: Sales increased to $16.2 million for the three-month period ended June 28, 2020, compared with $15.9 million for the three-month period ended June 30, 2019, an increase of $263,000, or 1.6%.
+Added: Sales of bedding, blankets and accessories increased by $2.3 million due to increased sell-through at major retailers, while sales of bibs, bath, developmental toys, feeding, baby care and disposable products decreased by $2.0 million, primarily as a result of certain retailers being impacted by the COVID-19 pandemic.
Gross Profit :
−Removed: Gross profit increased by $224,000 and increased from 30.0% of net sales for the three-month period ended December 30, 2018 to 31.3% of net sales for the three-month period ended December 29, 2019.
−Removed: Gross profit increased by $146,000 and increased from 29.4% of net sales for the nine-month period ended December 30, 2018 to 30.6% of net sales for the nine-month period ended December 29, 2019.
+Added: Gross profit increased by $472,000 and increased from 28.5% of net sales for the three-month period ended June 30, 2019 to 31.0% of net sales for the three-month period ended June 28, 2020.
+Added: The increase in gross profit is due to the increase in net sales as well as a more favorable customer and product mix.
Market ing and Administrative Expenses :
−Removed: Marketing and administrative expenses slightly decreased in amount and were mostly flat at 18.4% of net sales for the three-month period ended December 29, 2019 compared with 18.5% of net sales for the three-month period ended December 30, 2018.
−Removed: Marketing and administrative expenses decreased in amount by $614,000 and decreased from 20.0% of net sales for the nine months ended December 30, 2018 to 19.5% of net sales for the nine months ended December 29, 2019.
−Removed: Contributing to the decrease is the elimination in the current year of $210,000 in charges incurred in the prior year associated with transferring most of the Sassy-branded developmental toy, feeding and baby care product line inventory from Grand Rapids, Michigan to the Company’s distribution facility in Compton, California.
−Removed: In addition, outside services decreased in the current year by $264,000.
+Added: Marketing and administrative expenses decreased slightly in amount and were 20.9% of net sales for the three-month period ended June 28, 2020, compared with 21.7% of net sales for the three-month period ended June 30, 2019.
+Added: The decrease in amount for the current year period is primarily the result of lower overall compensation costs of $175,000, partially offset by higher outside services of $98,000.
Income Tax Expense :
−Removed: The Company’s provision for income taxes is based upon an estimated annual ETR from continuing operations of 23.3% for the nine-month period ended December 29, 2019.
+Added: The Company’s provision for income taxes is based upon an estimated annual ETR from continuing operations of 25.1% for the three-month period ended June 28, 2020.
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.
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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.
−Removed: However, the Company also realizes that the ultimate resolution of the tax position could result in a tax charge that is more than the amount realized based upon the application of the tax position taken.
−Removed: 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.
−Removed: In December 2016, the Company was notified by the FTB of its intention to examine the Company’s claims for refund made in connection with amended California 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.
−Removed: As discussed 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.
−Removed: 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.
−Removed: 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.
−Removed: 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.
−Removed: 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.
−Removed: 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.
−Removed: 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.
−Removed: 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.
+Added: 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.
+Added: Therefore, the Company’s measurement regarding the tax impact of the revised state apportionment percentages resulted in the Company recording discrete reserves for unrecognized tax liabilities during the three-month periods ended June 28, 2020 and June 30, 2019 of $13,000 and $11,000, respectively, in the accompanying unaudited condensed consolidated statements of income.
+Added: In December 2016, the Company was notified by 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 years ended March 30, 2014, March 31, 2013, April 1, 2012 and April 3, 2011.
+Added: On July 31, 2019, the FTB notified the Company that it would take no further action with regard to the returns filed for years ended March 31, 2013, April 1, 2012 and April 3, 2011.
+Added: Accordingly, the Company reversed the reserves for unrecognized tax liabilities that it had previously recorded for those fiscal years, which resulted in the recognition of a discrete income tax benefit of $232,000 during the three-month period ended June 30, 2019 in the accompanying unaudited condensed consolidated statements of income.
+Added: 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 three-month period ended June 30, 2019.
+Added: During the three-month period ended June 30, 2019, the Company recorded a discrete income tax charge of $2,000 to reflect the effects of the tax shortfalls arising from the vesting of non-vested stock during the period.
+Added: There was no such charge recorded during the three-month period ended June 28, 2020.
+Added: 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 25.9% and 5.0% for the three-month periods ended June 28, 2020 and June 30, 2019, respectively.
Although the Company does not anticipate a material change to the ETR from continuing operations for the balance of fiscal year 2021, several factors could impact the ETR, including variations from the Company’s estimates of the amount and source of its pre-tax income, and the actual ETR for the year could differ materially from the Company’s estimates.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
−Removed: Net cash provided by operating activities decreased from $10.5 million for the nine months ended December 30, 2018 to $7.2 million for the nine-month period ended December 29, 2019.
−Removed: The decrease in the current year was the primarily the result of an increase in inventory that was $1.7 million higher than the increase in inventory in the prior year and a decrease in accounts receivable that was $1.3 million lower than the decrease in accounts receivable in the prior year.
−Removed: Net cash used in investing activities decreased from $560,000 in the prior year to $352,000 in the current year primarily due to lower capital expenditures for property, plant and equipment.
−Removed: Net cash used in financing activities decreased from $10.1 million in the prior year to $6.9 million in the current year, primarily due to net repayments under the revolving line of credit that were $3.1 million higher the current year compared with the prior year.
−Removed: At December 29, 2019, there was no balance owed on the Company’s revolving line of credit with CIT, 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.
+Added: Net cash provided by operating activities decreased from $8.7 million for the three-month period ended June 30, 2019 to $7.9 million for the three-month period ended June 28, 2020.
+Added: The decrease in the current year was the primarily the result of a decrease in accounts receivable that was $2.6 million lower than the decrease in accounts receivable in the prior year, partially offset by a decrease in inventory of $402,000 in the current year compared with an increase in inventory of $915,000 in the prior year.
+Added: Net cash used in investing activities was nearly flat at $50,000 in capital expenditures for property, plant and equipment in the current year compared with $55,000 in the prior year.
+Added: Net cash used in financing activities decreased from $5.3 million in the prior year to $1.4 million in the current year, primarily due to net repayments under the revolving line of credit that were $1.9 million lower in the current year compared with the prior year and the receipt of almost $2.0 million in proceeds from the Loan made pursuant to the PPP under the CARES Act as discussed in Note 2 – Financing Arrangements.
+Added: At June 28, 2020, there was no balance owed on the Company’s revolving line of credit with CIT, there was no letter of credit outstanding and $20.6 million was available under the revolving line of credit based on the Company’s eligible accounts receivable and inventory balances.
To reduce its exposure to credit losses and to enhance the predictability of its cash flow, the Company assigns the majority of its trade accounts receivable to CIT under factoring agreements.
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If such a termination were to occur, then the Company must either choose to assume the credit risk for shipments after the date of such termination or limitation or cease shipments to such customer.
−Removed: There were no advances from the factor at either December 29, 2019 or December 30, 2018.
+Added: There were no advances from the factor at either June 28, 2020 or June 30, 2019.
+Added: The Company continues to monitor the impact of the COVID-19 pandemic on its supply chain, manufacturing and distribution operations, customers and employees, as well as the U.S.
+Added: economy in general.
+Added: However, due to the uncertainty as to when governmental restrictions on business will be fully lifted, the impact thereof, and the duration and widespread nature of the COVID-19 pandemic, the Company cannot currently predict the long-term impact on its operations and financial results.
+Added: The uncertainties associated with the COVID-19 pandemic include potential adverse effects on the overall economy, the Company’s supply chain, transportation services, employees and customers, consumer sentiment in general, and traffic within the retail stores that carry the Company’s products.
+Added: The COVID-19 pandemic could adversely affect the Company’s revenues, earnings, liquidity and cash flows and may require significant actions in response, including employee furloughs, closings of Company facilities, expense reductions or discounts of the pricing of the Company’s products, all in an effort to mitigate such effects.
+Added: Conditions surrounding COVID-19 change rapidly, and additional impacts of which the Company is not currently aware may arise.
+Added: Based on past performance and current expectations, the Company believes that its anticipated cash flow from operations and the availability under its revolving line of credit are sufficient to fund the Company’s requirements for working capital, capital expenditures and debt service for at least the next 12 months.
The Company’s future performance is, to a certain extent, subject to general economic, financial, competitive, legislative, regulatory and other factors beyond its control.
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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.