CROWN CRAFTS INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING INFORMATION Certain of the statements made in this Quarterly Report on Form 10-Q (this “Quarterly Report”) within this Item 2. and elsewhere, including information incorporated herein by reference to other documents, are “forward-looking statements” within the meaning of, and subject to the protections of, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and 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,” “estimates,” “predicts,” “forecasts,” “plans,” “projects,” “targets,” “should,” “potential,” “continue,” “aims,” “intends,” “may,” “will,” “could,” “would” and variations of such words and similar expressions may 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, 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 SEC for additional factors that may impact the Company’s results of operations and financial condition. The Company does not undertake to update the forward-looking statements contained herein to conform to actual results or changes in the Company’s expectations, whether as a result of new information, future events or otherwise. DESCRIPTION OF BUSINESS The Company was originally formed as a Georgia corporation in 1957 and was reincorporated as a Delaware corporation in 2003. The Company operates indirectly through its three wholly-owned subsidiaries, NoJo Baby & Kids, Inc., Sassy Baby, Inc. and Manhattan Toy Europe Limited 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, diaper bags, bibs, disposables, toys and feeding products. The Company’s products are marketed under Company-owned trademarks, under trademarks licensed from others and as private label goods. Sales of the Company’s products are made directly to retailers, such as mass merchants, large chain stores, juvenile specialty stores, value channel stores, grocery and drug stores, restaurants, wholesale clubs and internet-based retailers. The infant, toddler and juvenile consumer products industry is highly competitive. The Company competes with a variety of distributors and manufacturers (both branded and private label), including large infant, toddler and juvenile product companies and specialty infant, toddler and juvenile product manufacturers, on the basis of quality, design, price, brand name recognition, service and packaging. 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. The Company makes sourcing decisions based on quality, timeliness of delivery and price, including the impact of ocean freight and duties. Although the Company maintains relationships with a limited number of suppliers, the Company believes that its products may be readily manufactured by several alternative sources in quantities sufficient to meet the Company's requirements. The Company’s products are warehoused and distributed domestically from leased facilities located in Compton, California and Eden Valley, Minnesota and internationally from third-party logistics warehouses in Belgium and England. 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 condensed consolidated financial statements and related notes included in the preceding sections of this Quarterly Report. 10 RESULTS OF OPERATIONS The following table contains the results of operations for the three- and six-month periods ended September 29, 2024 and October 1, 2023 and the dollar and percentage changes for those periods (in thousands, except percentages): Three-Month Periods Ended Change Six-Month Periods Ended Change September 29, 2024 October 1, 2023 $ % September 29, 2024 October 1, 2023 $ % Net sales by category: Bedding and diaper bags $ 11,996 $ 9,776 $ 2,220 22.7 % $ 18,247 $ 15,349 $ 2,898 18.9 % Bibs, toys and disposable products 12,464 14,353 (1,889 ) -13.2 % 22,425 25,903 (3,478 ) -13.4 % Total net sales 24,460 24,129 331 1.4 % 40,672 41,252 (580 ) -1.4 % Cost of products sold 17,503 17,533 (30 ) -0.2 % 29,749 29,914 (165 ) -0.6 % Gross profit 6,957 6,596 361 5.5 % 10,923 11,338 (415 ) -3.7 % % of net sales 28.4 % 27.3 % 26.9 % 27.5 % Marketing and administrative expenses 5,448 4,036 1,412 35.0 % 9,711 8,082 1,629 20.2 % % of net sales 22.3 % 16.7 % 23.9 % 19.6 % Interest (expense) income - net (348 ) (164 ) (184 ) 112.2 % (449 ) (352 ) (97 ) 27.5 % Other (expense) income - net (34 ) (24 ) (10 ) 42.4 % (22 ) (26 ) 4 -14.6 % Income tax expense 267 550 (283 ) -51.5 % 203 690 (487 ) -70.6 % Net income 860 1,822 (962 ) -52.8 % 538 2,188 (1,650 ) -75.4 % % of net sales 3.5 % 7.6 % 1.3 % 5.3 % Net Sales: Sales increased to $24.5 million for the three months ended September 29, 2024, compared with $24.1 million for the three months ended October 1, 2023, an increase of $331,000, or 1.4%. Sales of bedding and diaper bags increased by $2.2 million, and sales of bibs, toys and disposable products decreased by $1.9 million. Sales increased due to the Acquisition, which generated net sales of $3.4 million of bedding and diaper bags, partially offset by a decline in net sales of bibs, toys and disposable products, due to the loss of a program at a major retailer. Sales decreased to $40.7 million for the six months ended September 29, 2024, compared with $41.3 million for the six months ended October 1, 2023, a decrease of $580,000, or 1.4%. Sales of bedding and diaper bags increased by $2.9 million due to the Acquisition and sales of bibs, toys and disposable products decreased by $3.5 million, primarily due to a major retailer reducing inventory levels and the loss of a program at another major retailer. Gross Profit: Gross profit increased in amount by $361,000 and increased from 27.3% of net sales for the three-month period ended October 1, 2023 to 28.4% of net sales for the three-month period ended September 29, 2024. This increase is considered to be materially consistent with the prior period and resulted from minor changes in product mix offset by increases in rent at our Compton facility. Gross profit decreased in amount by $415,000 and decreased from 27.5% of net sales for the six-month period ended October 1, 2023 to 26.9% of net sales for the six-month period ended September 29, 2024. The decrease is considered to be materially consistent with the prior period and relates to an increase in rent at our Compton facility. Marketing and Administrative Expenses: Marketing and administrative expenses increased by $1.4 million and increased from 16.7% of net sales for the three-month period ended October 1, 2023 to 22.3% of net sales for the three-month period ended September 29, 2024. The current year period includes $788,000 in acquisition costs as well as increased marketing and administrative costs associated with the Acquisition. Marketing and administrative expenses increased by $1.6 million and increased from 19.6% of net sales for the six-month period ended October 1, 2023 to 23.9% of net sales for the six-month period ended September 29, 2024. The current year period includes $244,000 associated with the closure of the Company’s subsidiary in the United Kingdom and $903,000 in costs associated with the Acquisition. Income Tax Expense: The Company’s provision for income taxes is based upon an estimated annual effective tax rate (“ETR”) from continuing operations of 22.4% for the six-month period ended September 29, 2024, as compared with an estimated annual ETR from continuing operations of 21.6% for the six-month period ended October 1, 2023. As a result of the consideration of the relevant information regarding the state portion of its income tax provision, the Company recorded discrete reserves for unrecognized tax liabilities of $3,000 and $20,000 during the three-month period ended September 29, 2024 and October 1, 2023, respectively, and $3,000 and $25,000 during the six-month period ended September 29, 2024, and October 1, 2023, respectively, in the unaudited condensed consolidated statements of income. The Company also recorded discrete income tax charges of $14,000 and $16,000 during the three months ended September 29, 2024 and October 1, 2023, respectively, and $34,000 and $43,000 during the six-month periods ended September 29, 2024 and October 1, 2023, respectively, to reflect the effects of the tax shortfalls and excess tax benefits arising from the forfeiture and expiration of stock options and the vesting of non-vested stock. 11 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 27.3% and 24.0% for the six-month periods ended September 29, 2024 and October 1, 2023, respectively. Although the Company does not anticipate a material change to the ETR from continuing operations for the remainder of fiscal year 2025, 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 Net cash provided by operating activities increased from $4.7 million for the six-month period ended October 1, 2023 to $7.1 million for the six-month period ended September 29, 2024. The increase in the current year was partially the result of an increase in accounts payable in the current year that was $4.0 million higher than the decrease in the prior year and an increase in accrued liabilities in the current year that was $1.2 million higher than the increase in the prior year. This increase was partially offset by a decrease in accounts receivable in the current year that was $710,000 lower than the decrease in the prior year and a $1.6 million decrease in net income from the prior year to the current year. Net cash used in investing activities increased from $51,000 in the prior year to $16.9 million in the current year. The increase in the current year is primarily due to the $16.4 payment made in the current year to complete the Acquisition. Net cash used in financing activities was $4.5 million for the six-month period ended October 1, 2023 compared with $10.9 million in cash provided by financing activities for the six-month period ended September 29, 2024. The Company incurred net borrowings under its revolving line of credit of $8.3 million and a term loan of $8.0 million that did not occur in the prior period, such borrowings primarily being required to fund the Acquisition. As of September 29, 2024, the balance on the revolving line of credit was $13.1 million, there was no letter of credit outstanding and $13.6 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. Under the terms of the factoring agreements, CIT remits customer payments to the Company as such payments are received by CIT. As such, the Company does not take advances on the factoring agreements. CIT bears credit losses 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 $94,000 and $92,000 for the three-month periods ended September 29, 2024 and October 1, 2023, respectively, and amounted to $168,000 and $159,000 for the six-month periods ended September 29, 2024 and October 1, 2023, respectively. The Company’s future performance is, to a certain extent, subject to general economic, financial, competitive, legislative, regulatory and other factors beyond its control. Based upon the current level of operations, the Company believes that its cash flow from operations and funds available under the revolving line of credit will be adequate to meet its liquidity needs.