FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 29, 1996
( ) 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.
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(Exact name of registrant as specified in its charter)
Georgia 58-0678148
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1600 Riveredge Parkway, Suite 200, Atlanta, Georgia 30328
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(Address of principal executive offices)
(770) 644-6400
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(Registrant's telephone number, including area code)
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 _X_ No ___
The number of shares of common Stock, $1.00 par value, of the Registrant
outstanding as of February 7, 1997 was 7,944,201.
FORM 10-Q
CROWN CRAFTS, INC. AND SUBSIDIARIES
PART 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
DECEMBER 29, 1996 (UNAUDITED) AND MARCH 31, 1996
December 29, March 31,
(dollars in thousands) 1996 1996
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 565 $ 517
Accounts receivable, net:
Due from factor 19,343 27,943
Other 7,056 12,901
Inventories 57,412 47,269
Deferred income taxes 1,487 1,510
Other current assets 2,867 3,474
-------- --------
Total Current Assets 88,730 93,614
-------- --------
PROPERTY, PLANT AND EQUIPMENT - at cost:
Land, buildings and improvements 45,638 44,274
Machinery and equipment 66,276 65,782
Furniture and fixtures 1,570 1,544
-------- --------
113,484 111,600
Less accumulated depreciation 39,640 34,265
-------- --------
Property, Plant and Equipment - net 73,844 77,335
-------- --------
OTHER ASSETS
Goodwill 13,104 13,526
Other 1,527 1,223
-------- --------
Total Other Assets 14,631 14,749
-------- --------
TOTAL $177,205 $185,698
======== ========
See notes to interim consolidated financial statements.
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FORM 10-Q
CROWN CRAFTS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS (continued)
CONSOLIDATED BALANCE SHEETS
DECEMBER 29, 1996 (UNAUDITED) AND MARCH 31, 1996
December 29, March 31,
(dollars in thousands) 1996 1996
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 8,175 $ 1,180
Accounts payable 15,034 12,480
Income taxes payable 1,643 46
Accrued wages and benefits 4,359 3,607
Other accrued liabilities 5,611 3,332
Current maturities of long-term debt 100 5,100
--------- ---------
Total Current Liabilities 34,922 25,745
--------- ---------
NON-CURRENT LIABILITIES
Long-term debt 50,300 69,300
Deferred income taxes 6,937 6,936
Other 741 700
--------- ---------
Total Non-Current Liabilities 57,978 76,936
--------- ---------
SHAREHOLDERS' EQUITY:
Common stock - par value $1.00 per share;
50,000,000 shares authorized;
9,050,636 shares issued 9,051 9,051
Paid-in capital 34,438 34,438
Retained earnings 55,615 54,327
Less:
1,106,435 shares of common
stock held in treasury (14,799) (14,799)
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Total Shareholders' Equity 84,305 83,017
--------- ---------
TOTAL $ 177,205 $ 185,698
========= =========
See notes to interim consolidated financial statements.
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FORM 10-Q
CROWN CRAFTS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS (Continued)
CONSOLIDATED STATEMENTS OF EARNINGS
DECEMBER 29, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
(dollars in thousands, except Dec. 29, Dec. 31, Dec. 29, Dec. 31,
per share data) 1996 1995 1996 1995
- --------------------------------------------------------------------------------------------
NET SALES $ 72,887 $ 62,209 $ 192,135 $ 158,746
COST OF PRODUCTS SOLD 58,121 48,921 155,078 125,664
----------- ----------- ----------- -----------
GROSS PROFIT 14,766 13,288 37,057 33,082
MARKETING AND
ADMINISTRATIVE EXPENSES 10,463 8,296 29,437 22,492
----------- ----------- ----------- -----------
EARNINGS FROM OPERATIONS 4,303 4,992 7,620 10,590
OTHER INCOME (EXPENSE):
Interest expense (1,203) (1,307) (3,770) (2,520)
Cotton futures transactions (283) (847)
Other - net (35) 215 257 504
----------- ----------- ----------- -----------
EARNINGS BEFORE INCOME
TAXES 3,065 3,617 4,107 7,727
PROVISIONS FOR INCOME
TAXES 1,640 1,522 2,104 3,058
----------- ----------- ----------- -----------
NET EARNINGS $ 1,425 $ 2,095 $ 2,003 $ 4,669
=========== =========== =========== ===========
NET EARNINGS PER SHARE $ 0.18 $ 0.26 $ 0.25 $ 0.57
=========== =========== =========== ===========
AVERAGE SHARES
OUTSTANDING 7,944,201 7,944,094 7,944,201 8,185,330
=========== =========== =========== ===========
DIVIDENDS DECLARED PER
SHARE $ 0.03 $ 0.03 $ 0.09 $ 0.09
=========== =========== =========== ===========
See notes to interim consolidated financial statements.
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FORM 10-Q
CROWN CRAFTS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS (continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED DECEMBER 29, 1996 AND
DECEMBER 31, 1995
(UNAUDITED)
December 29, December 31,
(dollars in thousands) 1996 1995
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net earnings $ 2,003 $ 4,669
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization of property,
plant and equipment 7,342 6,589
Amortization of goodwill 473 244
Deferred income taxes 24 2
Gain on disposal of property, plant and equipment (97) (118)
Changes in assets and liabilities:
Accounts receivable 14,579 9,256
Inventories (10,033) (8,052)
Other current assets 607 (896)
Other assets (304) 3
Accounts payable 2,492 (5,438)
Income taxes payable 1,597 964
Accrued liabilities 3,028 1,245
Other liabilities 41 38
-------- --------
Net Cash Provided by Operating Activities 21,752 8,506
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (3,930) (21,528)
Acquisitions, net of cash acquired (226) (19,124)
Proceeds from sale of property, plant and equipment 341 433
-------- --------
Net Cash Used for Investing Activities (3,815) (40,219)
-------- --------
FINANCING ACTIVITIES:
Payment of long-term debt (5,000) (7,144)
Decrease in bank revolving credit (19,000)
Long-term borrowings 65,669
Increase (decrease) in notes payable 6,825 (18,802)
Purchase of common stock for treasury (7,536)
Exercise of stock options 508
Cash dividends (714) (734)
-------- --------
Net Cash Provided (Used for) by Financing Activities (17,889) 31,961
-------- --------
NET INCREASE IN CASH
(carried forward) $ 48 $ 248
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10-Q
CROWN CRAFTS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS (continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED DECEMBER 29, 1996 AND
DECEMBER 31, 1995
(UNAUDITED)
December 29, December 31,
(dollars in thousands) 1996 1995
- ----------------------------------------------------------------------
NET INCREASE IN CASH
(brought forward) $ 48 $ 248
CASH, beginning of period 517 567
------ ------
CASH, end of period $ 565 $ 815
====== ======
Supplemental Cash Flow Information:
Income taxes paid $1,075 $2,115
====== ======
Interest paid net of amounts capitalized $3,681 $2,035
====== ======
See notes to interim consolidated financial
-5-
FORM 10-Q
CROWN CRAFTS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
applicable to interim financial information and the rules and regulations
of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and disclosures required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, such interim consolidated financial statements
contain all adjustments necessary to present fairly the Company's
financial position as of December 29, 1996 and the results of its
operations and its cash flows for the periods ended December 29, 1996 and
December 31, 1995. Such adjustments include normal recurring accruals and
a pro rata portion of certain estimated annual expenses.
2. The computations of net earnings per share for the three-month and
nine-month periods ended December 29, 1996 and December 31, 1995 are based
on the simple average shares outstanding. Stock options outstanding did
not have a material dilutive effect during any of the periods presented.
3. In the quarter ended December 29, 1996, the Company recorded a pretax
charge of $1.9 million for the projected costs associated with a
nationwide voluntary recall of furniture products manufactured by its
51-percent owned subsidiary, Hans Benjamin Furniture, Inc., and the
discontinuance of certain product lines through the closing of two small
subsidiaries.
The product recall was the result of a notification received October 28,
1996 from the California Bureau of Home Furnishings and Thermal Insulation
which stated that a line of juvenile foam-filled furniture manufactured by
Hans Benjamin did not comply with a California flammability standard. On
the same day, Hans Benjamin received a letter from the Office of the
District Attorney in Sacramento, California, stating that these products
also appeared to be mislabeled and that the law allows the state to bring
a lawsuit for an injunction and civil penalties. An internal investigation
revealed that some Hans Benjamin juvenile furniture products as well as
other Hans Benjamin products (wood frame stools, benches, ottomans, and
similar products) shipped to locations other than California were
similarly mislabeled. Hans Benjamin responded by announcing a nationwide
voluntary recall of all furniture products it manufactured.
Hans Benjamin has settled the matter of civil penalties with the District
Attorney's office and the penalties assessed are included in the charge
recorded in the current year quarter.
Subsequent to announcing the recall, the Company decided to discontinue
certain product lines, including products manufactured by Hans Benjamin.
The discontinued products accounted for less than one and one-half percent
of the Company's consolidated net sales for the nine month periods ended
December 29, 1996 and December 31, 1995. All estimated losses and other
costs associated with the discontinued product lines are included in the
charge recorded in the current year quarter.
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4. Major classes of inventory were as follows (in thousands):
Dec. 29, March 31,
1996 1996
---- ----
Raw materials $30,110 $23,076
Work in process 2,034 2,916
Finished goods 25,268 21,277
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$57,412 $47,269
======= =======
5. Operating results of interim periods are not necessarily indicative of
results to be expected for the year.
6. Certain reclassifications have been made to the December 31, 1995
financial statements to conform to the December 29, 1996 presentation
-7-
FORM 10-Q
CROWN CRAFTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
On October 28, 1996, Hans Benjamin Furniture, Inc., a 51-percent owned
subsidiary of the Company, was notified by the California Bureau of Home
Furnishings and Thermal Insulation that a line of foam furniture it
manufactured did not comply with a California flammability standard. On the
same day, Hans Benjamin received a letter from the Office of the District
Attorney in Sacramento, California, stating that the products also appear to be
mislabeled and stating that the law allows the state to bring a lawsuit for an
injunction and civil penalties. An internal investigation revealed that some
Hans Benjamin juvenile furniture products as well as other Hans Benjamin
products (wood frame stools, benches, ottomans, and similar products) shipped
to locations other than California were similarly mislabeled.
Hans Benjamin responded by announcing a nationwide voluntary recall of all
furniture products it manufactured. Subsequent to announcing this recall, the
Company decided to discontinue certain product lines through the closing of Hans
Benjamin and another small subsidiary. The discontinued products accounted for
less than one and one-half percent of the Company's consolidated net sales for
the nine month periods ended December 29, 1996 and December 31, 1995.
For the quarter ended December 29, 1996, the Company recorded a pretax charge of
$1.9 million for the projected costs associated with the product recall and the
closing of the subsidiaries. This charge includes a settlement reached with the
District Attorney's Office for civil penalties.
This charge, which is referred to herein as the Third Quarter Reserve, is
reflected in the Consolidated Statements of Earnings for the three and
nine-month periods ended December 29, 1996 as follows:
Reduction in net sales $ 677,000
Increase in cost of products sold 969,000
Increase in marketing and administrative expenses 217,000
Increase in other expense-net 74,000
----------
Reduction in earnings before income taxes 1,937,000
Reduction in provisions for income taxes 449,000
----------
Reduction in net earnings $1,488,000
==========
THREE MONTHS ENDED DECEMBER 29, 1996 COMPARED TO THE THREE MONTHS ENDED DECEMBER
31, 1995
Consolidated net sales increased $10.7 million, or 17.2%, to $72.9 million in
the current year quarter. The increase was primarily attributable to incremental
net sales of $8.1 million from businesses acquired by the Company during and
subsequent to the end of the comparable prior year quarter, and from increases
in net sales of throws and adult bedcovering products.
-8-
Gross profit as a percentage of net sales declined to 20.3% for the quarter
ended December 29, 1996 from 21.4% for the quarter ended December 31, 1995,
primarily due to charges associated with the Third Quarter Reserve. Without
these charges, gross margin for the quarter would have been 22.3%, reflecting an
improved product mix.
Marketing and administrative expenses increased $2.2 million or 26.1% in the
current year quarter compared to the same quarter of last year. The incremental
marketing and administrative expenses of acquired businesses accounted for $0.9
million of the increase. The remainder of the increase was primarily
attributable to increased promotion, sales employee costs, and legal fees.
Interest costs incurred decreased to $1.2 million in the current year quarter
from $1.3 million (including capitalized interest of $19,000) in the prior year
quarter. The decrease is primarily due to a decrease in the overall level of
debt outstanding compared to the same period last year.
The effective income tax rate increased to 53.5% for the three month period
ended December 29, 1996 from 42.1% for the three month period ended December
31, 1995. This increase is attributable to nondeductible expenses associated
with the Third Quarter Reserves, an increase of $45,000 in financial statement
expenses for nondeductible amortization of goodwill, and higher state and local
income tax rates applicable to acquired companies.
NINE MONTHS ENDED DECEMBER 29, 1996 COMPARED TO THE NINE MONTHS ENDED DECEMBER
31, 1995
Consolidated net sales increased $33.4 million, or 21.0%, to $192.1 million in
the nine months ended December 29, 1996. The increase was primarily attributable
to incremental net sales of $30.4 million from businesses acquired by the
Company during and subsequent to the end of the same nine month period in the
prior year and from an increase in net sales of throws.
Gross profit as a percentage of net sales declined to 19.3% for the nine months
ended December 29, 1996 from 20.8% for the same nine months last year, primarily
due to underutilization of production capacity at the Company's primary
manufacturing facilities and charges associated with the Third Quarter Reserve.
Excluding the effect of the Third Quarter Reserves, gross margin would have been
20.1%. The underutilization of manufacturing facilities resulted from
particularly weak demand for throws and bedcovering products in the first
quarter of the fiscal year. Capacity utilization at the Company's throw
manufacturing facilities improved dramatically in the second and third fiscal
quarters as demand strengthened. However, while demand for comforters and
accessories products improved in the second and third quarters, the demand was
not enough to fully utilize the Company's manufacturing facilities for these
products.
Marketing and administrative expenses increased $6.9 million or 30.9% to $29.4
million in the current year nine month period. The incremental marketing and
administrative expenses of the businesses acquired accounted for $4.3 million of
the increase. The remainder of the increase was primarily attributable to
increased promotion, bad debts, sales employee costs, rent, depreciation, and
legal fees.
-9-
Interest costs incurred increased to $3.8 million in the current year nine month
period from $2.9 million (including capitalized interest of $400,000) in the
same period of the prior year. This increase was due to higher levels of debt
outstanding during the first and second quarters of the fiscal year. The higher
debt levels were attributable to fiscal 1996 capital expenditures of $23.7
million, acquisitions of $20.5 million and purchases of treasury stock of $7.5
million. The Company has expended a total of only $4.2 million in these three
areas during the first nine months of the current fiscal year, contributing to a
reduction in total debt to levels below those of last year in the most recent
quarter.
The effective income tax rate increased to 51.2% for the nine month period
ended December 29, 1996 from 39.6% for the nine month period ended December 31,
1995. This increase is attributable to nondeductible expenses associated with
the Third Quarter Reserves, an increase of $228,000 in financial statement
expenses for nondeductible amortization of goodwill, and higher state and local
income tax rates applicable to acquired companies,
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
The Company maintains uncommitted lines of credit totaling $40 million with two
banks at floating interest rates. Total borrowings outstanding under these lines
at December 29, 1996 were $8.2 million. The Company also has unsecured committed
revolving credit agreements totaling $30 million with two banks at interest
rates based on the London Interbank Offered Rate (LIBOR). There were no
borrowings outstanding under these agreements at December 29, 1996.
Total debt outstanding decreased to $58.6 million at December 29, 1996 from
$75.6 million at March 31, 1996. The ratio of debt to equity was 0.69:1 at
December 29, 1996 compared to 0.91:1 at March 31, 1996. The decrease in total
debt was attributable to cash flow provided by operating activities partially
offset by expenditures for property, plant, and equipment. Despite the reduction
in total debt outstanding, working capital decreased to $53.8 million at
December 29, 1996 from $67.9 million at March 31, 1996. The decrease in working
capital resulted primarily from an increase of $7.0 million in notes payable and
$4.6 million in accrued liabilities. To take advantage of lower interest rates,
the Company increased the amount borrowed on its uncommitted lines which are
classified as current liabilities to repay amounts outstanding on its committed
revolving credit facilities which are classified as long-term liabilities.
Total inventories increased $10.1 million to $57.4 million at December 29, 1996
from the $47.3 million at March 31, 1996. The increase is partially attributable
to an increase of $2.9 million in infant bedding products inventory needed to
support sales growth. The remainder of the increase is primarily because the
Company's inventories are generally relatively low at fiscal year end because
the first fiscal quarter of each year is the slowest sales period of the year.
-10-
OTHER MATTERS
In March 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
SFAS No. 121 addresses issues surrounding the measurement and recognition of
losses when the value of certain assets has been deemed to be permanently
impaired. This Statement was effective for the Company beginning April 1, 1996
and had no impact on the Company's financial position as of December 29, 1996,
or results of operations for the nine month period then ended.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which was effective for the Company beginning April 1, 1996. SFAS
No. 123 establishes a method of accounting for stock compensation plans based on
fair value, but also permits companies to continue to account for stock options
under the intrinsic value method established by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees. The Company will
continue to account for stock-based compensation following the intrinsic value
method. SFAS No. 123 requires disclosure in the notes to financial statements of
pro forma net income and earnings per share as if the alternative method
established in SFAS No. 123 had been used to measure compensation cost. The
Company will disclose the required pro forma information in the notes to its
financial statements for the year ended March 30, 1997.
-11-
FORM 10-Q
CROWN CRAFTS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1- Legal Proceedings
As reported in the Company's Form 10-Q for the quarter ended September
29, 1996, Hans Benjamin Furniture, Inc., a 51-percent owned subsidiary
of the Company, was notified on October 28, 1996 by the California
Bureau of Home Furnishings and Thermal Insulation that a line of its
juvenile foam furniture products had been tested and found not to
comply with California flammability standards for upholstered
furniture. On the same day, Hans Benjamin received a letter from the
Office of the District Attorney in Sacramento, California stating that
the products also appeared to be mislabeled and that the law allows the
state to bring a lawsuit for an injunction and civil penalties.
An internal investigation revealed that some Hans Benjamin juvenile
furniture products as well as other Hans Benjamin products (wood frame
stools, benches, ottomans, and similar products) shipped to states
other than California were similarly mislabeled. Hans Benjamin
responded by notifying the U.S. Consumer Product Safety Commission that
the labeling on its products may be inaccurate, and by announcing a
nationwide recall of all furniture products it manufactured. The U.S.
Consumer Products Safety Commission notified Hans Benjamin that it did
not intend to take any action against them concerning this matter. Hans
Benjamin reached a settlement with the Sacramento District Attorney's
office for civil penalties which are included as a charge against
earnings in the quarter ended December 29, 1996.
Item 2- Changes in Securities
None
Item 3- Defaults Upon Senior Securities
None
Item 4- Submission of Matters to Vote of Security Holders
None
Item 5- Other Information
None
Item 6- Exhibits and Reports on Form 8-K
(a) EXHIBIT NUMBER DESCRIPTION OF EXHIBITS
-------------- -----------------------
27 Financial Data Schedule (for SEC use only)
(b) On November 26, 1996, the Company filed one report on Form 8-K covering
Items 5 and 7.
-12-
FORM 10-Q
CROWN CRAFTS, INC. AND SUBSIDIARIES
DECEMBER 29, 1996
SIGNATURES
Pursuant to the requirements of the securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CROWN CRAFTS, INC.
------------------
Date: February 12, 1997 /s/ Robert E. Schnelle
----------------- -----------------------
ROBERT E. SCHNELLE
Treasurer
(Chief Accounting Officer)
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