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. 10 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 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 Change Nine-Month Periods Ended Change December 29, 2024 December 31, 2023 $ % December 29, 2024 December 31, 2023 $ % Net sales by category: Bedding and diaper bags $ 11,184 $ 8,996 $ 2,188 24.3 % $ 29,431 $ 24,345 $ 5,086 20.9 % Bibs, toys and disposable products 12,167 14,805 (2,638 ) -17.8 % 34,592 40,708 (6,116 ) -15.0 % Total net sales 23,351 23,801 (450 ) -1.9 % 64,023 65,053 (1,030 ) -1.6 % Cost of products sold 17,253 17,367 (114 ) -0.7 % 47,002 47,281 (279 ) -0.6 % Gross profit 6,098 6,434 (336 ) -5.2 % 17,021 17,772 (751 ) -4.2 % % of net sales 26.1 % 27.0 % 26.6 % 27.3 % Marketing and administrative expenses 4,397 4,107 290 7.1 % 14,108 12,189 1,919 15.7 % % of net sales 18.8 % 17.3 % 22.0 % 18.7 % Interest (expense) income - net (391 ) (208 ) (183 ) 88.0 % (840 ) (560 ) (280 ) 50.0 % Other (expense) income - net (35 ) 75 (110 ) -146.7 % (57 ) 49 (106 ) -216.3 % Income tax expense 382 492 (110 ) -22.4 % 585 1,182 (597 ) -50.5 % Net income 893 1,702 (809 ) -47.5 % 1,431 3,890 (2,459 ) -63.2 % % of net sales 3.8 % 7.2 % 2.2 % 6.0 % Net Sales: 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 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 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 $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 $1.9 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. 11 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 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 $4.1 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 $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 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. 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 $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. 12 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.