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 28, 1997
( ) 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.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-0678148
- ----------------------------------- ---------------------------------------
(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 6, 1998 was 8,173,529.
FORM 10-Q
CROWN CRAFTS, INC. AND SUBSIDIARIES
PART 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
DECEMBER 28, 1997 (UNAUDITED) AND MARCH 30, 1997
December 28, March 30,
(in thousands) 1997 1997
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ASSETS
CURRENT ASSETS:
Cash $ 1,310 $ 602
Accounts receivable, net:
Due from factor 20,825 30,866
Other 14,143 7,496
Inventories 80,165 56,860
Deferred income taxes 2,377 2,392
Other current assets 4,137 3,307
-------- --------
Total Current Assets 122,957 101,523
-------- --------
PROPERTY, PLANT AND EQUIPMENT - at cost:
Land, buildings and improvements 45,564 44,903
Machinery and equipment 73,070 68,435
Furniture and fixtures 2,170 1,487
-------- --------
120,804 114,825
Less accumulated depreciation 49,089 41,809
-------- --------
Property, Plant and Equipment - net 71,715 73,016
-------- --------
OTHER ASSETS:
Goodwill 25,310 13,192
Other 1,720 1,825
-------- --------
Total Other Assets 27,030 15,017
-------- -------
TOTAL $221,702 $189,556
======== ========
See notes to interim consolidated financial statements.
1
FORM 10-Q
CROWN CRAFTS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS (continued)
CONSOLIDATED BALANCE SHEETS
DECEMBER 28, 1997 (UNAUDITED) AND MARCH 30, 1997
December 28, March 30,
(in thousands, except par value per share) 1997 1997
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 7,805
Accounts payable 16,295 $ 13,212
Income taxes payable 2,382 1,336
Accrued wages and benefits 3,413 4,312
Accrued royalties 1,869 1,369
Other accrued liabilities 6,417 3,429
Current maturities of long-term debt 30,100 100
-------- --------
Total Current Liabilities 68,281 23,758
-------- --------
NON-CURRENT LIABILITIES:
Long-term debt 50,200 71,200
Deferred income taxes 7,752 7,877
Other 745 1,026
-------- --------
Total Non-Current Liabilities 58,697 80,103
-------- --------
SHAREHOLDERS' EQUITY:
Common stock - par value $1.00 per share;
50,000,000 shares authorized; 9,231,105 and
9,050,636 shares issued 9,231 9,051
Additional paid-in capital 36,465 34,438
Retained earnings 64,009 57,005
Less: 1,120,498 and 1,106,435 shares of common
stock held in treasury (14,981) (14,799)
-------- --------
Total Shareholders' Equity 94,724 85,695
-------- --------
TOTAL $221,702 $189,556
======== ========
See notes to interim consolidated financial statements.
2
FORM 10-Q
CROWN CRAFTS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS (Continued)
CONSOLIDATED STATEMENTS OF EARNINGS
DECEMBER 28, 1997 AND DECEMBER 29, 1996
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
Dec. 28, Dec. 29, Dec. 28, Dec. 29,
(in thousands, except per share data) 1997 1996 1997 1996
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NET SALES $ 103,037 $ 72,887 $ 242,015 $ 192,135
COST OF PRODUCTS SOLD 78,339 58,121 185,896 155,078
----------- ----------- ----------- -----------
GROSS PROFIT 24,698 14,766 56,119 37,057
MARKETING AND
ADMINISTRATIVE EXPENSES 15,584 10,463 38,998 29,437
----------- ----------- ----------- -----------
EARNINGS FROM OPERATIONS 9,114 4,303 17,121 7,620
OTHER INCOME (EXPENSE):
Interest expense (1,903) (1,203) (4,853) (3,770)
Other - net (15) (35) 135 257
------------ ----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES 7,196 3,065 12,403 4,107
PROVISIONS FOR INCOME
TAXES 2,715 1,640 4,676 2,104
------------ ----------- ----------- -----------
NET EARNINGS $ 4,481 $ 1,425 $ 7,727 $ 2,003
=========== =========== =========== ===========
NET EARNINGS PER SHARE
BASIC $ 0.55 $ 0.18 $ 0.96 $ 0.25
DILUTED $ 0.52 $ 0.18 $ 0.93 $ 0.25
AVERAGE SHARES OUTSTANDING
ACTUAL 8,093,345 7,944,201 8,014,290 7,944,201
DILUTED 8,609,518 7,991,109 8,345,369 7,959,846
DIVIDENDS DECLARED PER
SHARE $ 0.03 $ 0.03 $ 0.09 $ 0.09
=========== =========== =========== ===========
See notes to interim consolidated financial statements.
3
FORM 10-Q
CROWN CRAFTS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS (continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED DECEMBER 28, 1997 AND
DECEMBER 29, 1996
(UNAUDITED)
December 28, December 29,
(in thousands) 1997 1996
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OPERATING ACTIVITIES:
Net earnings $ 7,727 $ 2,003
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization of property, plant
and equipment 7,541 7,342
Amortization of goodwill 718 473
Deferred income taxes (50) 24
Gain on disposal of property, plant and equipment (52) (97)
Changes in assets and liabilities:
Accounts receivable 7,561 14,579
Inventories (16,710) (10,033)
Other current assets (454) 607
Other assets (176) (304)
Accounts payable 792 2,492
Income taxes payable 836 1,597
Accrued liabilities 1,448 3,028
Other liabilities 41
----------- -----------
Net Cash Provided By Operating Activities 9,181 21,752
----------- -----------
INVESTING ACTIVITIES:
Capital expenditures (5,287) (3,930)
Acquisitions, net of cash acquired (15,602) (226)
Proceeds from sale of property, plant and
equipment 95 341
----------- -----------
Net Cash Used For Investing Activities (20,794) (3,815)
----------- -----------
FINANCING ACTIVITIES:
Increase in notes payable 3,228 6,825
Increase (decrease) in bank revolving credit 9,000 (19,000)
Payment of long-term debt (209) (5,000)
Exercise of stock options 1,025
Cash dividends (723) (714)
----------- -----------
Net Cash Provided By (Used For) Financing Activities 12,321 (17,889)
----------- -----------
NET INCREASE IN CASH
(carried forward) $ 708 $ 48
4
FORM 10-Q
CROWN CRAFTS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS (continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED DECEMBER 28, 1997 AND
DECEMBER 29, 1996
(UNAUDITED)
December 28, December 29,
(in thousands) 1997 1996
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NET INCREASE (DECREASE) IN CASH
(brought forward) $ 708 $ 48
CASH, beginning of period 602 517
----------- ----------
CASH, end of period $ 1,310 $ 565
=========== ==========
Supplemental Cash Flow Information:
Income taxes paid $ 3,625 $ 1,075
=========== ==========
Interest paid net of amounts capitalized $ 4,735 $ 3,681
=========== ==========
See notes to interim consolidated financial statements.
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 28, 1997 and
the results of its operations and its cash flows for the periods ended
December 28, 1997 and December 29, 1996. Such adjustments include
normal recurring accruals and a pro rata portion of certain estimated
annual expenses.
2. On March 31, 1997, the Company acquired all of the outstanding stock
of Hamco, Inc. ("Hamco"), a manufacturer and marketer of infant soft
goods, for a total purchase price of $7.5 million. On August 18, 1997,
the Company acquired all of the outstanding stock of Noel Joanna,
Inc.("NoJo"), a manufacturer and marketer of infant goods, for a total
purchase price of $9.2 million, consisting of $8.2 million in cash and
$1.0 million in common stock of the Company. Operating results for
Hamco and NoJo from their respective dates of acquisition are included
in the accompanying Consolidated Statements of Earnings for the three
and nine month periods ending December 28, 1997.
Both of these acquisitions were accounted for as purchases.
Accordingly, the net purchase price was allocated based upon the
respective acquisition date fair market values of assets acquired and
liabilities assumed as follows:
(in thousands)
--------------
Assets acquired, other than cash $12,194
Goodwill 12,781
-------
Total assets acquired, other than cash 24,975
Less liabilities assumed 8,428
-------
Purchase price, net of cash acquired 16,547
Less stock issued in acquisition 1,000
-------
Net cash paid for acquisitions $15,547
=======
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
6
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 settled the matter of civil penalties with the District
Attorney's office and the penalties assessed were included in the
charge recorded in the quarter ended December 29, 1996.
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. All estimated losses and other
costs associated with the discontinued product lines were included in
the charge recorded in the quarter ended December 29, 1996.
This charge 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
===========
4. In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share", which changed the method of reporting earnings per share by
requiring a computation of basic and diluted earnings per share. This
statement became effective for the quarter ended December 28, 1997.
Earnings per share information previously reported has been restated
to conform to this new standard.
7
5. Major classes of inventory were as follows (in thousands):
December 28, March 30,
1997 1997
---- ----
Raw materials $32,368 $27,415
Work in process 4,067 1,961
Finished goods 43,730 27,484
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$80,165 $56,860
======= =======
6. Operating results of interim periods are not necessarily indicative of
results to be expected for the full fiscal year.
8
FORM 10-Q
CROWN CRAFTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 28, 1997 COMPARED TO THE THREE MONTHS ENDED
DECEMBER 29, 1996
On March 31, 1997, the Company acquired all of the outstanding stock of Hamco,
Inc. ("Hamco"), a manufacturer and marketer of infant soft goods. On August 18,
1997, the Company acquired all of the outstanding stock of Noel Joanna, Inc.
("NoJo"), a manufacturer and marketer of infant goods. The impact of the Hamco
and NoJo acquisitions on the Company's consolidated results of operations for
the quarter ended December 28, 1997 included net sales of $7.3 million and
earnings before income taxes of $0.1 million.
Excluding NoJo and Hamco, consolidated net sales increased $22.8 million or
31.3% in the current year quarter. The increase was attributable to increased
net sales in all major product categories, adult bedcoverings and accessories,
adult throws and infant/juvenile products.
Gross profit as a percentage of net sales increased to 24.0% for the quarter
ended December 28, 1997 from 20.3% for the quarter ended December 29, 1996 due
to increased sales of higher margin products and the fact that gross profit in
the prior year quarter was depressed due to one-time charges related to a
product recall and the decision to dispose of or liquidate two small
subsidiaries. Without these charges, the prior year gross profit percentage
would have been 22.3%. The addition of Hamco and NoJo plus growth in other
infant/juvenile product lines caused total sales of infant/juvenile products to
comprise approximately 29% of total net sales for the quarter, whereas sales of
this product category represented 18% of total net sales in the year-earlier
quarter. Infant and juvenile products typically earn a higher gross margin than
the Company's adult products, but the Company's infant product subsidiaries
also typically have a higher ratio of operating expenses to net sales.
Excluding NoJo and Hamco, operating expenses increased $3.5 million or 33.4% in
the current year quarter. The increase is primarily due to increased employee
costs, professional fees and bad debt expenses.
Interest expense for the quarter ended December 28, 1997 increased $0.7 million
or 58.2% from the prior year quarter due to increased debt levels and higher
average interest rates.
The effective income tax rate decreased to 37.7% for the quarter ended December
28, 1997 from 53.5% for the quarter ended December 29, 1996. The decrease was
due to nondeductible expenses recorded in the prior year quarter attributable
to the product recall and the decision to discontinue the operations of two
small subsidiaries, and also to lower effective state income tax rates in the
current year as a result of various state employment and investment tax credits
earned.
9
NINE MONTHS ENDED DECEMBER 28, 1997 COMPARED TO THE NINE MONTHS ENDED DECEMBER
29, 1996
The impact of the Hamco and NoJo acquisitions on the Company's consolidated
results of operations for the six month period ended December 28, 1997 included
net sales of $14.9 million and earnings before income taxes of $0.9 million.
Excluding NoJo and Hamco, consolidated net sales increased $35.0 million or
18.2% in the nine month period ending December 28, 1997. The increase was
attributable to increased net sales in all major product categories, adult
bedcoverings and accessories, adult throws and infant/juvenile products.
Gross profit as a percentage of net sales increased to 23.2% for the nine
months ended December 28, 1997 from 19.3% for the corresponding nine months
last year primarily due to increased sales of higher margin products and the
fact that the gross profit in the prior year nine month period was depressed
due to one-time charges related to a product recall and the decision to dispose
of or liquidate two small subsidiaries. Without these charges, the prior year
gross profit percentage would have been 20.1%. During the nine month period,
the addition of Hamco and NoJo plus growth in other infant/juvenile product
lines caused total sales of infant/juvenile products to comprise approximately
29% of total net sales, whereas sales of this product category represented 19%
of total net sales in the first nine months of the previous year. Infant and
juvenile products typically earn a higher gross margin than the Company's adult
products, but the Company's infant product subsidiaries also typically have a
higher ratio of operating expenses to net sales.
Excluding NoJo and Hamco, operating expenses increased $6.6 million or 22.4% in
the current nine month period. The increase is primarily due to increased
employee costs, legal and other professional fees and bad debt expenses.
Interest expense for the nine months ended December 28, 1997 increased $1.1
million or 28.7% from the corresponding prior year period due to increased debt
levels and higher average interest rates.
The effective income tax rate decreased to 37.7% for the nine month period
ended December 28, 1997 from 51.2% for the nine month period ended December 29,
1996. The decrease was due to nondeductible expenses recorded in the prior year
period attributable to the product recall and the decision to discontinue the
operations of two small subsidiaries, and also to lower effective state income
tax rates in the current year as a result of various state employment and
investment tax credits earned.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
The Company maintains unsecured committed revolving credit facilities totaling
$30 million with two commercial banks at interest rates based on the London
Interbank Offered Rate(LIBOR). At December 28, 1997, borrowings of $30.0
million were outstanding under these facilities at a weighted average interest
rate of 6.3 percent. The Company pays facility fees on the unused portions of
these committed credit lines. These credit lines are scheduled to expire on
August 25, 1998; accordingly, such borrowings are included with other current
maturities of long-term debt in the December 28, 1997 balance sheet. The
Company also maintains uncommitted lines of credit totaling $40 million with
two commercial banks at floating interest rates. At December 28, 1997,
borrowings of $7.7 million were outstanding under these lines at a weighted
average interest rate of 6.2 percent. Among other covenants, these bank
facilities contain a requirement
10
that the Company maintain minimum levels of shareholders' equity, one effect of
which is to restrict the payment of cash dividends. At December 28, 1997,
retained earnings of approximately $18.5 million were available for dividend
payments. Other covenants place restrictions on the amounts the Company may
expend on acquisitions and purchases of treasury stock.
On March 31, 1997, the Company acquired all of the outstanding stock of Hamco,
Inc., a manufacturer and marketer of infant soft goods, for a total purchase
price of $7.5 million in cash. On August 18, 1997, the Company acquired all of
the outstanding stock of Noel Joanna, Inc., a manufacturer and marketer of
infant goods, for a total purchase price of $9.2 million, consisting of $8.2
million in cash and $1.0 million in common stock of the Company. The cash
portion of the purchase price for these acquisitions was financed by borrowings
under the Company's revolving credit facilities and uncommitted lines of
credit.
Total debt outstanding increased to $88.1 million at December 28, 1997 from
$71.3 million at March 30, 1997. This increase was primarily attributable to
the Hamco and NoJo acquisitions, purchases of capital assets and growth in
inventories, partially offset by a decrease in accounts receivable. The ratio
of debt to equity was 0.93:1 at December 28, 1997 compared to 0.83:1 at March
30, 1997. Working capital decreased to $54.7 million at December 28, 1997 from
$77.8 million at March 30, 1997. The decrease in working capital was
attributable to the change in classification (from long-term debt to current
maturities of long-term debt) of the $30.0 million outstanding under the
Company's committed revolving credit facilities. The Company presently intends
to negotiate new long-term committed facilities prior to the August 25, 1998
expiration date of the currently effective arrangements.
Total inventories increased to $80.2 million at December 28, 1997 from $56.9
million at March 30, 1997. The NoJo and Hamco acquisitions accounted for $7.8
million of the increase. The increase in the current year is also due partially
to higher levels of inventory needed to support the overall growth in sales
volume, and to increased demand for some of the Company's imported products
which have a longer lead time for delivery than domestically produced products.
Accordingly, Crown Crafts is warehousing more of these products to enable it to
meet expected demand.
On January 2, 1998, the Company acquired all of the outstanding stock of Pinky
Baby Products, a manufacturer and marketer of infant soft goods for a total
purchase price of $3.5 million in cash. The acquisition was financed by
borrowings under the Company's uncommitted lines of credit. This acquisition
along with the acquisitions of Hamco and Nojo, is consistent with the Company's
strategy of growing infant and juvenile products to about one-third of its
total business. The Company continues to review appropriate acquisition
opportunities as a significant part of its growth strategy.
11
FORM 10-Q
CROWN CRAFTS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
None
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
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
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27 Financial Data Schedule (for SEC use only)
There were no reports on Form 8-K during the quarter ended December
28, 1997.
12
FORM 10-Q
CROWN CRAFTS, INC. AND SUBSIDIARIES
DECEMBER 28, 1997
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 9, 1998 /s/ Robert E. Schnelle
---------------- ----------------------------------
ROBERT E. SCHNELLE
Treasurer
(Chief Accounting Officer)
13