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Item 2. Management’s Discussion and Analysis

2025-02-12 compared with 2024-11-12 · 42 added, 25 removed, 57 unchanged (54% of the section changed)

24 unchanged sentences

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.

KNOWN TRENDS AND UNCERTAINTIES

The Company sources its products primarily from foreign contract manufacturers, with the largest concentration being in China.

On February 1, 2025, President Trump issued executive orders directing the United States to impose new tariffs on imports from several nations, including China, effective February 4, 2025.

The new tariffs likely will increase the cost of products the Company sources from China and affect future shipments from the Company's Chinese-based suppliers.

The Company is currently evaluating the potential impact of the imposition of the new tariffs on imports from China to the Company's business and financial condition.

The actual impact of the new tariffs is uncertain because it is subject to a number of factors, including duration of such tariffs, changes in the amount, scope and nature of the tariffs in the future, any countermeasures that China may take and any mitigating actions that may become available.

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):

The following table contains the results of operations for the three- and nine-month periods ended December 29, 2024 and December 31, 2023 and the dollar and percentage changes for those periods (in thousands, except percentages):

Three-Month Periods Ended

Six-Month Periods Ended

September 29,

Nine-Month Periods Ended

December 29, 2024

December 31, 2023

December 29, 2024

December 31, 2023

Net sales by category:

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% of 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 decreased to $23.3 million for the three months ended December 29, 2024, compared with $23.8 million for the three months ended December 31, 2023, a decrease of $450,000, or 1.9%.

Sales of bedding and diaper bags increased by $2.2 million, and sales of bibs, toys and disposable products decreased by $2.6 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.

Sales increased due to the impact of the Acquisition, which added $3.8 million in net sales of bedding and diaper bags during the three months ended December 29, 2024.

This increase was primarily offset by a decrease in online toy sales as well as the loss of a program at a major retailer.

Sales decreased to $64.0 million for the nine months ended December 29, 2024, compared with $65.1 million for the nine months ended December 31, 2023, a decrease of $1.0 million, or 1.6%.

Sales of bedding and diaper bags increased by $5.1 million due to the impact of the Acquisition, which added $7.2 million net sales for the nine months ended December 29, 2024, and sales of bibs, toys and disposable products decreased by $6.1 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.

Gross profit decreased in amount by $336,000 and decreased from 27.0% of net sales for the three-month period ended December 31, 2023 to 26.1% of net sales for the three-month period ended December 29, 2024.

This decrease is considered to be materially consistent with the prior period and resulted from minor changes in product mix and increases in rent at our Compton facility.

Gross profit decreased in amount by $751,000 and decreased from 27.3% of net sales for the nine-month period ended December 31, 2023 to 26.6% of net sales for the nine-month period ended December 29, 2024.

The decrease in the gross profit percentage is considered to be materially consistent with the prior period and primarily 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.

Marketing and administrative expenses increased by $290,000 and increased from 17.3% of net sales for the three-month period ended December 31, 2023 to 18.8% of net sales for the three-month period ended December 29, 2024.

The current year period includes $186,000 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.

Marketing and administrative expenses increased by $1.9 million and increased from 18.7% of net sales for the nine-month period ended December 31, 2023 to 22.0% of net sales for the nine-month period ended December 29, 2024.

The current year period includes $244,000 associated with the closure of the Company’s subsidiary in the United Kingdom and $1.1 million 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.

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.

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 nine-month period ended December 29, 2024, as compared with an estimated annual ETR from continuing operations of 21.4% for the nine-month period ended December 31, 2023.

As a result of the consideration of relevant information regarding its income tax provision, the Company recorded discrete reserves for unrecognized tax liabilities of $46,000 and $9,000 during the three-month period ended December 29, 2024 and December 31, 2023, respectively, and $49,000 and $34,000 during the nine-month period ended December 29, 2024, and December 31, 2023, respectively, in the unaudited condensed consolidated statements of income.

The Company recorded discrete income tax charges of $34,000 and $43,000 during the nine-month periods ended December 29, 2024 and December 31, 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.

The Company recorded discrete income tax charges of $50,000 and $19,000 during the nine-month periods ended December 29, 2024 and December 31, 2023, respectively, to reflect adjustments to prior year tax provisions.

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 29.0% and 23.3% for the nine-month periods ended December 29, 2024 and December 31, 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 provided by operating activities increased from $4.1 million for the nine-month period ended December 31, 2023 to $7.0 million for the nine-month period ended December 29, 2024.

The increase in the current year was partially the result of an increase in accounts payable in the current year that was $3.7 million higher than the decrease in the prior year and an increase in accrued liabilities in the current year that was $800,000 higher than the increase in the prior year.

This increase was partially offset by a decrease in net income of $2.5 million from the prior year to the current year.

Net cash used in investing activities increased from $69,000 in the prior year to $17.0 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.

Net cash used in financing activities was $5.1 million for the nine-month period ended December 31, 2023 compared with $10.2 million in cash provided by financing activities for the nine-month period ended December 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.

As of December 29, 2024, the balance on the revolving line of credit was $13.7 million, there was no letter of credit outstanding and $15.3 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 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.

Factoring fees, which are included in marketing and administrative expenses in the accompanying unaudited condensed consolidated statements of income, amounted to $115,000 and $106,000 for the three-month periods ended December 29, 2024 and December 31, 2023, respectively, and amounted to $283,000 and $265,000 for the nine-month periods ended December 29, 2024 and December 31, 2023, respectively.

On January 2, 2025, the Company and its subsidiaries entered into a letter agreement with CIT with respect to the financing agreement, pursuant to which CIT waived the Company's non-compliance with the fixed charge coverage ratio required under the financing agreement with respect to the Company's fiscal quarters ended September 29, 2024 and December 29, 2024.

In addition, the letter agreement modified the financing agreement by changing the Excess Availability (as defined in the Financing Agreement) required to be maintained by the Company with respect to its revolving credit line under the financing agreement to $7,000,000 (from 50% of the outstanding balance of the Company's term loan under the financing agreement).

Upon notice to the Company, CIT may reverse such modification.

On February 10, 2025, the Company and CIT amended the Company's financing agreement with CIT to:

(i) waive, with respect to the fiscal year ending March 30, 2025, and through the fiscal year ending March 29, 2026, the Company's obligation to comply with the fixed charge coverage ratio;

and (ii) increase the Excess Availability (as defined in the financing agreement) required to be maintained by the Company with respect to its revolving line of credit under the financing agreement from $7,000,000 to $7,500,000, until further notice to the Company by CIT.

After such notice, the Excess Availability shall be 50% of the outstanding balance of the Company's term loan under the financing agreement.

The Company’s future performance is, to a certain extent, subject to general economic, financial, competitive, legislative, regulatory and other factors beyond its control.

1 unchanged sentence

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.

What changed 10-Q

Item 2. Management’s Discussion and Analysis