Note 1 - Summary of Significant Accounting Policies |
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| Significant Accounting Policies [Text Block] |
Note
1 – Summary of Significant Accounting Policies
Basis of
Presentation: The accompanying unaudited
consolidated financial statements include the accounts of
Crown Crafts, Inc. and its subsidiaries (collectively, the
“Company”) and have been prepared in accordance
with U.S. generally accepted accounting principles
(“GAAP”) applicable to interim financial
information as promulgated by the Financial Accounting
Standards Board (“FASB”) and the rules and
regulations of the Securities and Exchange Commission
(“SEC”). 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
the FASB periodically revises through the issuance of an
Accounting Standards Update (“ASU”) and which has
been established by the FASB as the authoritative source for
GAAP recognized by the FASB to be applied by nongovernmental
entities. In the opinion of management, these interim
consolidated financial statements contain all adjustments
necessary to present fairly the financial position of the
Company as of October 2, 2011 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 October 2, 2011 are not necessarily
indicative of the results that may be expected for the fiscal
year ending April 1, 2012. 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 year ended
April 3, 2011.
Fiscal
Year: The Company’s fiscal year ends
on the Sunday nearest March 31. References herein
to “fiscal year 2012” represent the 52-week
period ending April 1, 2012 and references herein to
“fiscal year 2011” represent the 53-week period
ended April 3, 2011.
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 the disclosure of
contingent assets and liabilities as of the date of the
consolidated balance sheets and the reported amounts of
revenues and expenses during the periods presented on the
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 necessitate the
establishment of inventory reserves and allocates indirect
costs to inventory based on an estimated percentage of the
supplier purchase price, each of which are highly
subjective. Actual results could differ from those
estimates.
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.
Financial
Instruments: The following methods and
assumptions were used to estimate the fair value of each
class of financial instruments for which it is practicable to
estimate such value:
Depreciation and
Amortization: The accompanying 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
one to sixteen 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.
Segment and
Related Information: The Company operates
primarily in one principal segment, infant, toddler and
juvenile products. These products consist of crib
and toddler bedding, nursery accessories, room décor,
infant bibs and related soft goods. Net sales of
bedding, blankets and accessories amounted to $28.3 million
and $29.9 million for the six-month periods ended October 2,
2011 and September 26, 2010, respectively, and net sales of
bibs, bath and disposable products amounted to $10.5 million
and $11.0 million for the six-month periods ended October 2,
2011 and September 26, 2010, respectively.
Revenue
Recognition: Sales are recorded when goods are shipped
to customers and are reported net of allowances for estimated
returns and allowances in the accompanying consolidated
statements of income. Allowances for returns are
estimated based on historical rates. Allowances
for returns, advertising allowances, warehouse allowances,
placement fees and volume rebates are recorded commensurate
with sales activity or using the straight-line method, as
appropriate, and the cost of such allowances is netted
against sales in reporting the results of
operations. Shipping and handling costs, net of
amounts reimbursed by customers, are not material and are
included in net sales.
Allowances
Against Accounts Receivable: The Company’s
allowances against accounts receivable are primarily
contractually agreed-upon deductions for items such as
advertising and warehouse allowances, placement fees and
volume rebates. These deductions are recorded
throughout the year commensurate with sales activity or using
the straight-line method, as appropriate. Funding
of the majority of the Company’s allowances occurs on a
per-invoice basis. The allowances for customer
deductions, which are netted against accounts receivable in
the consolidated balance sheets, consist of agreed upon
advertising support, placement fees, markdowns and warehouse
and other allowances. All such allowances are
recorded as direct offsets to sales and such costs are
accrued commensurate with sales activities or as a
straight-line amortization charge of an agreed-upon fixed
amount, as appropriate to the circumstances for each such
arrangement. When a customer requests deductions,
the allowances are 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 customer-initiated funding requests for advertising
support can cause the net balance in the allowance account to
fluctuate from period to period. The timing of
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.
To reduce the exposure to credit losses and to enhance the
predictability of its cash flows, the Company assigns the
majority of its trade accounts receivable under factoring
agreements with The CIT Group/Commercial Services, Inc., a
subsidiary of CIT Group, Inc.
(“CIT”). In the event a factored
receivable becomes uncollectible due to creditworthiness, CIT
bears the risk of loss. The Company must make
estimates of the uncollectibility of its non-factored
accounts receivable, which it accomplishes by specifically
analyzing accounts receivable, historical bad debts, customer
concentrations, customer creditworthiness, current economic
trends and changes in its customers’ payment terms to
evaluate the adequacy of its allowance for doubtful
accounts. The Company’s accounts receivable
at October 2, 2011 amounted to $14.4 million, net of
allowances of $1.5 million. Of this amount, $14.2
million is due from CIT under the factoring agreements, which
amount represents the maximum amount of loss that the Company
could incur under the factoring agreements if CIT failed
completely to perform its obligations thereunder.
Inventory
Valuation: The preparation of the Company's financial
statements requires careful determination of the appropriate
dollar amount of the Company's inventory
balances. Such amount is presented as a current
asset in the accompanying consolidated balance sheets and is
a direct determinant of cost of goods sold in the
accompanying consolidated statements of income and,
therefore, has a significant impact on the amount of net
income in the accounting periods reported. The
basis of accounting for inventories is cost, which includes
the direct supplier acquisition cost, duties, taxes and
freight, and the indirect costs incurred 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 market, 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.
The
indirect costs allocated to inventory are done so as a
percentage of the supplier purchase price and can impact the
Company’s results of operations as purchase volume
fluctuates from quarter to quarter and year to
year. The difference between indirect costs
incurred and the indirect costs allocated to inventory
creates a burden variance, which is generally favorable when
actual inventory purchases exceed planned inventory
purchases, and is generally unfavorable when actual inventory
purchases are lower than planned inventory
purchases. While the burden variance can be
significant during interim periods, it is generally not
material by the end of each fiscal year. 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, the
amount and timing of the Company's cost of goods sold and the
resulting net income for any accounting period.
On a periodic basis, management reviews the Company’s
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 normal operating cycle of the Company's
operations. 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 goods 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 of is the allowance
reduced accordingly. Significant management
judgment is required in determining the amount and adequacy
of this allowance. In the event that actual
results differ from management's estimates or these estimates
and judgments are revised in future periods, 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.
Valuation of
Long-Lived Assets, Identifiable Intangible Assets and
Goodwill: 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. Assets to be disposed of, if any, are
recorded at the lower of net book value or fair market value,
less estimated costs to sell at the date management commits
to a plan of disposal, and are classified as assets held for
sale on the accompanying consolidated balance sheets.
The
Company tests the fair value of the goodwill of its reporting
units annually as of the first day of the Company’s
fiscal year. An additional interim impairment test
is performed during the year whenever an event or change in
circumstances occurs that suggest that the fair value of the
goodwill of either of the reporting units of the Company has
more likely than not fallen below its carrying
value. The annual or interim impairment test is
performed in a two-step approach. The first step
is the estimation of the fair value of each reporting unit to
ensure that its fair value exceeds its carrying
value. If step one indicates that a potential
impairment exists, then the second step is performed to
measure the amount of an impairment charge, if
any. In the second step, these estimated fair
values are used as the hypothetical purchase price for the
reporting units, and an allocation of such hypothetical
purchase price is made to the identifiable tangible and
intangible assets and assigned liabilities of the reporting
units. The impairment charge is calculated as the
amount, if any, by which the carrying value of the goodwill
exceeds the implied amount of goodwill that results from this
hypothetical purchase price allocation.
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
royalties are accrued based upon historical sales rates
adjusted for current sales trends by
customers. Royalty expense is included in cost of
sales and amounted to $2.9 million and $3.0 million for the
six-month periods ended October 2, 2011 and September 26,
2010, respectively.
Provisions for
Income Taxes: The Company’s provisions for
income taxes include all currently payable federal, state,
local and foreign taxes and are based upon the
Company’s estimated annual effective tax rate, which is
based on the Company’s forecasted annual pre-tax
income, as adjusted by certain expenses within the financial
statements which will never be deductible on the
Company’s tax returns, multiplied by the statutory tax
rates for the various jurisdictions in which the Company
operates and reduced by certain anticipated tax
credits. 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’s policy is
to recognize the effect that a change in enacted tax rates
would have on net deferred income tax assets and liabilities
in the period that the tax rates are changed.
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 general examination or other adjustment
as of October 2, 2011 were the fiscal years ended March 30,
2008, March 29, 2009, March 28, 2010 and April 3, 2011, as
well as the fiscal year ended April 1, 2007 for several
states.
The
Internal Revenue Service is examining the Company’s
consolidated federal income tax return for the fiscal year
ended March 29, 2009. Although management believes
that the calculations and positions taken on this and all
other filed income tax returns are reasonable and
justifiable, the final outcome of this or any other
examination could result in an adjustment to the position
that the Company took on such income tax
return. Such adjustment could be favorable or
unfavorable and could result in adjustments to one or more
state income tax returns, or to income tax returns for prior
or subsequent years, or both. The cumulative
effect of such adjustments could have a material impact on
the Company’s future results of operations.
Earnings 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 options, which are added to basic
shares to arrive at diluted shares.
The
following table sets forth the computation of basic and
diluted net income per common share for the three and
six-month periods ended October 2, 2011 and September 26,
2010.
Recently Issued
Accounting Standards: On May 12, 2011, the
FASB issued FASB ASU No. 2011-04, Fair Value
Measurement (Topic 820): Amendments to Achieve
Common Fair Value Measurements and Disclosure Requirements in
U.S. GAAP and IFRSs. This ASU is intended
to improve consistency across jurisdictions to ensure that
U.S. GAAP and International Financial Reporting Standards
(“IFRSs”) fair value measurement and disclosure
requirements are described in the same way. For
publicly-traded companies, the amendments in this ASU are to
be applied prospectively effective for annual periods
beginning after December 15, 2011, and early application is
not permitted. The Company does not anticipate
that its adoption of ASU No. 2011-04 on April 2, 2012 will
impact its consolidated financial statements.
On
September 15, 2011, the FASB issued FASB ASU No. 2011-08,
Intangibles
– Goodwill and Other (Topic 350): Testing
Goodwill for Impairment. This ASU will give
an entity the option to first assess qualitative factors to
determine whether it is more likely than not (defined as
having a likelihood of greater than 50%) that the fair value
of a reporting unit is less than its carrying amount as a
basis for determining whether it is necessary to perform the
two-step impairment test as described above. The
ASU is intended to reduce the cost and complexity associated
with the test for goodwill impairment. The
amendments in this ASU are effective for annual and interim
goodwill impairment tests performed for fiscal years
beginning after December 15, 2011, and early application is
permitted. Since the annual impairment test of the
fair value of the goodwill of the Company’s reporting
units has already been performed as of April 4, 2011, the
Company expects that it will adopt ASU No. 2011-04 on April
2, 2012 and does not anticipate that such adoption will
impact its consolidated financial statements.
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