Quarterly report pursuant to Section 13 or 15(d)

Significant Accounting Policies (Policies)

v3.19.3
Significant Accounting Policies (Policies)
6 Months Ended
Sep. 29, 2019
Accounting Policies [Abstract]  
Basis of Accounting, Policy [Policy Text Block]
Basis of Presentation
:
The accompanying unaudited consolidated financial statements include the accounts of Crown Crafts, Inc. (the “Company”) and its subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) applicable to interim financial information as promulgated by the Financial Accounting Standards Board (“FASB”). Accordingly, they do
not
include all of the information and disclosures required by GAAP for complete financial statements. References herein to GAAP are to topics within the FASB Accounting Standards Codification (the “FASB ASC”), which has been established by the FASB as the authoritative source for GAAP to be applied by nongovernmental entities.
 
In the opinion of management, the interim unaudited consolidated financial statements contained herein include all adjustments necessary to present fairly the financial position of the Company as of
September 29, 2019
and the results of its operations and cash flows for the periods presented. Such adjustments include normal, recurring accruals, as well as the elimination of all significant intercompany balances and transactions. Operating results for the
three
and
six
-month periods ended
September 29, 2019
are
not
necessarily indicative of the results that
may
be expected by the Company for its fiscal year ending
March 29, 2020.
For further information, refer to the Company’s consolidated financial statements and notes thereto included in the Company’s annual report on Form
10
-K for the fiscal year ended
March 31, 2019.
Fiscal Period, Policy [Policy Text Block]
Fiscal Year:
The Company’s fiscal year ends on the Sunday that is nearest to or on
March 31.
References herein to “fiscal year
2020”
or
“2020”
represent the
52
-week period ending
March 29, 2020
and references herein to “fiscal year
2019”
or
“2019”
represent the
52
-week period ended
March 31, 2019.
Reclassification, Policy [Policy Text Block]
Reclassifications:
The Company has classified certain prior year information to conform to the amounts presented in the current year.
None
of the changes impact the Company’s previously reported financial position or results of operations.
Use of Estimates, Policy [Policy Text Block]
Use of Estimates
:
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed consolidated balance sheets and the reported amounts of revenues and expenses during the periods presented on the unaudited consolidated statements of income and cash flows. Significant estimates are made with respect to the allowances related to accounts receivable for customer deductions for returns, allowances and disputes. The Company also has a certain amount of discontinued finished goods which necessitates the establishment of inventory reserves that are highly subjective. The Company has also established estimated reserves in connection with the uncertainty concerning the amount of income tax recognized. Actual results could differ materially from those estimates.
Cash and Cash Equivalents, Policy [Policy Text Block]
Cash and Cash Equivalents:
The Company considers highly-liquid investments, if any, purchased with original maturities of
three
months or less to be cash equivalents.
 
The Company’s credit facility consists of a revolving line of credit under a financing agreement with The CIT Group/Commercial Services, Inc. (“CIT”), a subsidiary of CIT Group Inc. The Company classifies a negative balance outstanding under this revolving line of credit as cash, as these amounts are legally owed to the Company and are immediately available to be drawn upon by the Company. There are
no
compensating balance requirements or other restrictions on the transfer of amounts associated with the Company’s depository accounts.
Fair Value of Financial Instruments, Policy [Policy Text Block]
Financial Instruments
:
For short-term instruments such as cash and cash equivalents, accounts receivable and accounts payable, the Company uses carrying value as a reasonable estimate of the fair value.
Advertising Cost [Policy Text Block]
Advertising Cost
s
:
The Company’s advertising costs are primarily associated with cooperative advertising arrangements with certain of the Company’s customers and are recognized using the straight-line method based upon aggregate annual estimated amounts for those customers, with periodic adjustments to the actual amounts of authorized agreements. Costs associated with advertising on websites such as Facebook and Google and which are related to the Company’s online business are recorded as incurred. Advertising expense is included in marketing and administrative expenses in the accompanying unaudited condensed consolidated statements of income and amounted to
$260,000
and
$348,000
for the
three
months ended
September 29, 2019
and
September 30, 2018,
respectively, and amounted to
$544,000
and
$673,000
for the
six
months ended
September 29, 2019
and
September 30, 2018,
respectively.
Revenue from Contract with Customer [Policy Text Block]
Revenue Recognition:
Revenue is recognized upon the satisfaction of all contractual performance obligations and the transfer of control of the products sold to the customer. The majority of the Company’s sales consists of single performance obligation arrangements for which the transaction price for a given product sold is equivalent to the price quoted for the product, net of any stated discounts applicable at a point in time. Each sales transaction results in an implicit contract with the customer to deliver a product as directed by the customer. Shipping and handling costs that are charged to customers are included in net sales, and the Company’s costs associated with shipping and handling activities are included in cost of products sold.
 
A provision for anticipated returns, which are based upon historical returns and claims, is provided through a reduction of net sales and cost of products sold in the reporting period within which the related sales are recorded. Actual returns and claims experienced in a future period
may
differ from historical experience, and thus, the Company’s provision for anticipated returns at any given point in time
may
be over-funded or under-funded.
 
The Company recognizes revenue associated with unredeemed store credits and gift certificates at the earlier of their redemption by customers, their expiration or when their likelihood of redemption becomes remote, which is generally
two
years from the date of issuance.
 
Revenue from sales made directly to consumers is recorded when the shipped products have been received by customers, and excludes sales taxes collected on behalf of governmental entities. Revenue from sales made to retailers is recorded when legal title has been passed to the customer based upon the terms of the customer’s purchase order, the Company’s sales invoice, or other associated relevant documents. Such terms usually stipulate that legal title will pass when the shipped products are
no
longer under the control of the Company, such as when the products are picked up at the Company’s facility by the customer or by a common carrier. Payment terms can vary from prepayment for sales made directly to consumers and some international sales to payment due in arrears (generally,
60
days of being invoiced) for sales made to retailers. A disaggregation of the Company’s revenue is set forth below under the heading
Segment and Related Information
in this Note
1.
Receivable [Policy Text Block]
Allowances Against Accounts Receivable:
     Revenue from sales made to retailers is reported net of allowances for anticipated returns and other allowances, including cooperative advertising allowances, warehouse allowances, placement fees, volume rebates, coupons and discounts. Such allowances are recorded commensurate with sales activity or applying the straight-line method, as appropriate, and the cost of such allowances is netted against sales in reporting the results of operations. The provision for the majority of the Company’s allowances occurs on a per-invoice basis. When a customer requests to have an agreed-upon deduction applied against the customer’s outstanding balance due to the Company, the allowances are correspondingly reduced to reflect such payments or credits issued against the customer’s account balance. The Company analyzes the components of the allowances for customer deductions monthly and adjusts the allowances to the appropriate levels. The timing of funding requests for advertising support can cause the net balance in the allowance account to fluctuate from period to period. The timing of such funding requests should have
no
impact on the consolidated statements of income since such costs are accrued commensurate with sales activity or using the straight-line method, as appropriate.
 
Uncollectible Accounts:
     To reduce the exposure to credit losses and to enhance the predictability of its cash flows, the Company assigns the majority of its receivables under factoring agreements with CIT. If a factored receivable becomes uncollectible due to creditworthiness, then CIT bears the risk of loss. The Company recognizes revenue net of the amount that is expected to be uncollectible on any accounts receivable that are
not
assigned under the factoring agreements with CIT. The Company’s management makes estimates of the uncollectiblity of its non-factored accounts receivable by specifically analyzing the accounts receivable, historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in its customers’ payment terms.
Concentration Risk, Credit Risk, Policy [Policy Text Block]
Credit Concentration:
The Company’s accounts receivable as of
September 29, 2019
amounted to
$14.2
million, net of allowances of
$589,000.
Of this amount,
$12.7
million was due from CIT under the factoring agreements and
$132,000
was due from CIT as a negative balance outstanding under the revolving line of credit. The combined amount of
$12.9
million represents the maximum loss that the Company could incur if CIT failed completely to perform under the factoring agreements and the revolving line of credit.
Other Accrued Liabilities [Policy Text Block]
Other Accrued Liabilities
:     
An amount of
$196,000
was recorded as other accrued liabilities as of
September 29, 2019.
Of this amount,
$125,000
reflected unearned revenue recorded for payments from customers that were received before the products ordered were received by the customers. Other accrued liabilities as of
September 29, 2019
also include a reserve for customer returns of
$14,000
and unredeemed store credits and gift certificates totaling
$14,000.
Segment Reporting, Policy [Policy Text Block]
Segment and Related Information:
The Company operates primarily in
one
principal segment – infant, toddler and juvenile products. These products consist of infant and toddler bedding, bibs, soft bath products, disposable products and accessories. Net sales of bedding, blankets and accessories and net sales of bibs, bath, developmental toy, feeding, baby care and disposable products for the
three
and
six
-month periods ended
September 29, 2019
and
September 30, 2018
are as follows (in thousands):
 
   
Three-Month Periods Ended
   
Six-Month Periods Ended
 
   
September 29, 2019
   
September 30, 2018
   
September 29, 2019
   
September 30, 2018
 
Bedding, blankets and accessories
  $
10,364
    $
11,535
    $
18,077
    $
20,056
 
Bibs, bath, developmental toy, feeding, baby care and disposable products
   
8,196
     
9,001
     
16,425
     
15,940
 
Total net sales
  $
18,560
    $
20,536
    $
34,502
    $
35,996
 
Inventory, Policy [Policy Text Block]
Inventory Valuation:
The preparation of the Company's financial statements requires careful determination of the appropriate value of the Company's inventory balances. Such amounts are presented as a current asset in the accompanying condensed consolidated balance sheets and are a direct determinant of cost of products sold in the accompanying unaudited condensed consolidated statements of income and, therefore, have a significant impact on the amount of net income reported in the accounting periods. The basis of accounting for inventories is cost, which includes the direct supplier acquisition cost, duties, taxes and freight, and the indirect costs to design, develop, source and store the product until it is sold. Once cost has been determined, the Company’s inventory is then stated at the lower of cost or net realizable value, with cost determined using the
first
-in,
first
-out ("FIFO") method, which assumes that inventory quantities are sold in the order in which they are acquired, and the average cost method for a portion of the Company’s inventory.
 
The determination of the indirect charges and their allocation to the Company's finished goods inventories is complex and requires significant management judgment and estimates. If management made different judgments or utilized different estimates, then differences would result in the valuation of the Company's inventories and in the amount and timing of the Company's cost of products sold and the resulting net income for the reporting period.
 
On a periodic basis, management reviews its inventory quantities on hand for obsolescence, physical deterioration, changes in price levels and the existence of quantities on hand which
may
not
reasonably be expected to be sold within the Company’s normal operating cycle. To the extent that any of these conditions is believed to exist or the market value of the inventory expected to be realized in the ordinary course of business is otherwise
no
longer as great as its carrying value, an allowance against the inventory value is established. To the extent that this allowance is established or increased during an accounting period, an expense is recorded in cost of products sold in the Company's consolidated statements of income. Only when inventory for which an allowance has been established is later sold, or is otherwise disposed, is the allowance reduced accordingly. Management judgment is required in determining the amount and adequacy of this allowance. If actual results differ from management's estimates or these estimates and judgments are revised in future periods, then the Company
may
not
fully realize the carrying value of its inventory or
may
need to establish additional allowances, either of which could materially impact the Company's financial position and results of operations.
Royalty Payments [Policy Text Block]
Royalty Payments:
The Company has entered into agreements that provide for royalty payments based on a percentage of sales with certain minimum guaranteed amounts. These royalty amounts are accrued based upon historical sales rates adjusted for current sales trends by customers. Royalty expense is included in cost of products sold in the accompanying unaudited condensed consolidated statements of income and amounted to
$1.3
million and
$1.4
million for the
three
months ended
September 29, 2019
and
September 30, 2018,
respectively, and amounted to
$2.2
million and
$2.4
million for the
six
months ended
September 29, 2019
and
September 30, 2018.
Depreciation, Depletion, and Amortization [Policy Text Block]
Depreciation and Amortization:
The accompanying condensed consolidated balance sheets reflect property, plant and equipment, and certain intangible assets at cost less accumulated depreciation or amortization. The Company capitalizes additions and improvements and expenses maintenance and repairs as incurred. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, which are
three
to
eight
years for property, plant and equipment, and
five
to
twenty
years for intangible assets other than goodwill. The Company amortizes improvements to its leased facilities over the term of the lease or the estimated useful life of the asset, whichever is shorter.
Goodwill and Intangible Assets, Policy [Policy Text Block]
Valuation of Long-Lived Assets
and
Identifiable Intangible Assets
:
In addition to the depreciation and amortization procedures set forth above, the Company reviews for impairment long-lived assets and certain identifiable intangible assets whenever events or changes in circumstances indicate that the carrying amount of any asset
may
not
be recoverable. In the event of impairment, the asset is written down to its fair market value.
Intangible Assets, Finite-Lived, Policy [Policy Text Block]
Patent Costs:
The Company incurs certain legal and related costs in connection with patent applications. The Company capitalizes such costs to be amortized over the expected life of the patent to the extent that an economic benefit is anticipated from the resulting patent or an alternative future use is available to the Company. The Company also capitalizes legal and other costs incurred in the protection or defense of the Company’s patents when it is believed that the future economic benefit of the patent will be maintained or increased and a successful defense is probable. Capitalized patent defense costs are amortized over the remaining expected life of the related patent. The Company’s assessment of future economic benefit of its patents involves considerable management judgment, and a different conclusion could result in a material impairment charge up to the carrying value of these assets.
Income Tax, Policy [Policy Text Block]
Provision for Income Taxes:
The Company’s provision for income taxes includes all currently payable federal, state, local and foreign taxes and is based upon the Company’s estimated annual effective tax rate (“ETR”), which is based on the Company’s forecasted annual pre-tax income, as adjusted for certain expenses within the consolidated statements of income that will never be deductible on the Company’s tax returns and certain charges expected to be deducted on the Company’s tax returns that will never be deducted on the consolidated statements of income, multiplied by the statutory tax rates for the various jurisdictions in which the Company operates. The Company’s provisions for income taxes for the
six
-month periods ended
September 29, 2019
and
September 30, 2018
are based upon an estimated annual ETR from continuing operations of
24.0%
and
23.4%,
respectively. The Company provides for deferred income taxes based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates that will be in effect when the differences are expected to reverse.
 
The Company files income tax returns in the many jurisdictions in which it operates, including the U.S., several U.S. states and the People’s Republic of China. The statute of limitations varies by jurisdiction; tax years open to federal or state audit or other adjustment as of
September 29, 2019
were the tax years ended
March 31, 2019,
April 1, 2018,
April 2, 2017,
April 3, 2016,
March 29, 2015
and
March 30, 2014.
 
Management evaluates items of income, deductions and credits reported on the Company’s various federal and state income tax returns filed and recognizes the effect of positions taken on those income tax returns only if those positions are more likely than
not
to be sustained. The Company applies the provisions of FASB ASC Sub-topic
740
-
10
-
25,
which requires a minimum recognition threshold that a tax benefit must meet before being recognized in the financial statements. Recognized income tax positions are measured at the largest amount that has a greater than
50%
likelihood of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
 
In evaluating the process regarding the calculation of the state portion of its income tax provision, the Company has taken a tax position that reflects opportunities for more favorable state apportionment percentages, which were applied to several prior fiscal years and to succeeding fiscal years. After considering all relevant information, the Company believes that the technical merits of this tax position would more likely than
not
be sustained. However, the Company also believes that the ultimate resolution of the tax position will result in a tax benefit that is less than the full amount realized through the application of the more favorable state apportionment percentages. Therefore, the Company’s measurement regarding the tax impact of the revised state apportionment percentages resulted in the Company recording discrete reserves for unrecognized tax liabilities of
$31,000
and
$56,000
during the
three
-month periods ended
September 29, 2019
and
September 30, 2018,
respectively, and
$42,000
and
$59,000
during the
six
-month periods ended
September 29, 2019
and
September 30, 2018,
respectively, in the accompanying unaudited condensed consolidated statements of income.
 
The Company’s policy is to accrue interest expense and penalties as appropriate on estimated unrecognized tax liabilities as a charge to interest expense in the Company’s consolidated statements of income. The Company accrued interest and penalties associated with its reserve for unrecognized tax liabilities during the
three
-month periods ended
September 29, 2019
and
September 30, 2018
of
$18,000
and
$21,000,
respectively, and during the
six
-month periods ended
September 29, 2019
and
September 30, 2018
of
$29,000
and
$46,000,
respectively, in the accompanying unaudited condensed consolidated statements of income for interest expense and penalties on the unrecognized tax liabilities for which the relevant statute of limitations remained unexpired.
No
interest expense or penalties are accrued with respect to estimated unrecognized tax liabilities that are associated with state income tax overpayments that remain receivable.
 
In
December 2016,
the Company was notified by the Franchise Tax Board of the State of California (the “FTB”) of its intention to examine the Company’s claims for refund made in connection with amended consolidated income tax returns that the Company had filed for the fiscal years ended
March 30, 2014,
March 31, 2013,
April 1, 2012
and
April 3, 2011.
As outlined above, the Company has recorded discrete reserves for unrecognized tax liabilities for these and succeeding fiscal years, and has also accrued interest expense and penalties associated with these estimated unrecognized tax liabilities.
 
On
July 31, 2019,
the FTB notified the Company that it would take
no
further action with regard to the fiscal years ended
March 31, 2013,
April 1, 2012
and
April 3, 2011.
Accordingly, the Company reversed the reserves for unrecognized tax liabilities that it had previously recorded for these fiscal years, which resulted in the recognition of a discrete income tax benefit of
$232,000
during the
six
-month period ended
September 29, 2019
in the accompanying unaudited condensed consolidated statements of income. The Company also reversed the interest expense and penalties that it had accrued in respect of the estimated unrecognized tax liabilities for these fiscal years, which resulted in the recognition of a credit to interest expense of
$78,000
during the
six
-month period ended
September 29, 2019.
 
As of
October 25, 2019,
the status of the Company’s claim for refund made in connection with the amended consolidated income tax return that the Company filed for the fiscal year ended
March 30, 2014
was
not
resolved. The ultimate resolution of this claim for refund could include administrative or legal proceedings. Although management believes that the calculations and positions taken on the amended consolidated income tax return and all other filed income tax returns are reasonable and justifiable, the outcome of this or any other examination could result in an adjustment to the position that the Company took on such income tax returns. Such adjustment could also lead to adjustments to
one
or more other state income tax returns, or to income tax returns for subsequent fiscal years, or both. To the extent that the Company’s reserve for unrecognized tax liabilities is
not
adequate to support the cumulative effect of such adjustments, the Company could experience a material adverse impact on its future results of operations. Conversely, to the extent that the calculations and positions taken by the Company on the filed income tax returns under examination are sustained, another reversal of all or a portion of the Company’s reserve for unrecognized tax liabilities could result in a favorable impact on its future results of operations.
 
During the
three
-month periods ended
September 29, 2019
and
September 30, 2018,
the Company recorded discrete income tax charges of
$4,000
and
$17,000,
respectively, to reflect the effect of the tax shortfalls arising from the vesting of non-vested stock during the periods. During the
six
-month periods ended
September 29, 2019
and
September 30, 2018,
the Company recorded discrete income tax charges of
$6,000
and
$12,000,
respectively, to reflect the net effects of the tax shortfalls arising from the vesting of non-vested stock during the periods.
 
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
18.8%
and
26.0%
for the
six
-month periods ended
September 29, 2019
and
September 30, 2018,
respectively.
Earnings Per Share, Policy [Policy Text Block]
E
arnings Per Share:
The Company calculates basic earnings per share by using a weighted average of the number of shares outstanding during the reporting periods. Diluted shares outstanding are calculated in accordance with the treasury stock method, which assumes that the proceeds from the exercise of all exercisable options would be used to repurchase shares at market value. The net number of shares issued after the exercise proceeds are exhausted represents the potentially dilutive effect of the exercisable options, which are added to basic shares to arrive at diluted shares.
New Accounting Pronouncements, Policy [Policy Text Block]
Recently-Issued Accounting Standards
:
   In
June 2016,
the FASB issued ASU
No.
2016
-
13,
Financial Instruments – Credit Losses (Topic
326
): Measurement of Credit Losses on Financial Instruments
, the objective of which is to provide financial statement users with more information about the expected credit losses on financial instruments and other commitments to extend credit held by an entity. Current GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable that a loss has been incurred. Because this methodology restricted the recognition of credit losses that are expected, but did
not
yet meet the “probable” threshold, ASU
No.
2016
-
13
was issued to require the consideration of a broader range of reasonable and supportable information when determining estimates of credit losses. The ASU will become effective for the
first
interim period of the fiscal year beginning after
December 15, 2019.
The ASU is to be applied using a modified retrospective approach, and the ASU
may
be early-adopted as of the
first
interim period of the fiscal year beginning after
December 15, 2018.
The Company intends to adopt ASU
No.
2016
-
13
effective as of
March 30, 2020.
Although the Company has
not
determined the full impact of the adoption of the ASU, because the Company assigns the majority of its trade accounts receivable under factoring agreements with CIT, the Company does
not
believe that the adoption of the ASU will have a significant impact on the Company’s financial position, results of operations and related disclosures.
 
The Company has determined that all other ASUs which had become effective as of
September 29, 2019,
or which will become effective at some future date, are
not
expected to have a material impact on the Company’s consolidated financial statements.