Note 1 - Summary of Significant Accounting Policies
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3 Months Ended |
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Jul. 01, 2012
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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 July 1, 2012 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-month period ended July 1, 2012 are not necessarily
indicative of the results that may be expected by the Company
for its fiscal year ending March 31, 2013. 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 April 1, 2012.
Fiscal
Year: The Company’s fiscal year ends
on the Sunday that is nearest to or on March
31. References herein to “fiscal year
2013” represent the 52-week period ending March 31,
2013 and references herein to “fiscal year 2012”
represent the 52-week period ended April 1, 2012.
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: For short-term instruments
such as cash and cash equivalents, accounts receivable and
accounts payable, the Company used carrying value as a
reasonable estimate of the fair value.
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 $12.2 million
and $13.0 million for the three-month periods ended July 1,
2012 and July 3, 2011, respectively, and net sales of bibs,
bath and disposable products amounted to $5.3 million and
$4.5 million for the three-month periods ended July 1, 2012
and July 3, 2011, respectively.
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 in the accompanying consolidated statements of income
and amounted to $1.5 million and $1.3 million for the
three-month periods ended July 1, 2012 and July 3, 2011,
respectively.
Advertising
Costs: 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. Advertising expense is included in
marketing and administrative expenses in the accompanying
consolidated statements of income and amounted to $309,000
and $291,000 for the three-month periods ended July 1, 2012
and July 3, 2011, 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, cooperative 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
cooperative 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.
(“CIT”), a subsidiary of CIT Group,
Inc. 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 July 1, 2012 amounted to $15.2 million, net
of allowances of $771,000. Of this amount, $14.5
million was due from CIT under the factoring agreements and
the Company held $3.4 million in cash at CIT; such amounts
together represented the maximum loss that the Company
could incur if CIT failed completely to perform its
obligations under its agreements with the Company.
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 twenty-one years for property, plant and equipment,
and one 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.
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.
Goodwill: The
Company tests the fair value of the goodwill, if any, carried
within 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 suggests that
the fair value of the goodwill of either of the reporting
units of the Company has more likely than not (defined
as having a likelihood of greater than 50%) fallen
below its carrying value. The annual or interim
impairment test is performed by first assessing
qualitative factors to determine whether it is more likely
than not that the fair value of a reporting unit is less than
its carrying amount. If such qualitative factors
so indicate, then the impairment test is continued 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.
Patent
Costs: The Company incurs certain legal and
related costs in connection with patent
applications. If a future economic benefit is
anticipated from the resulting patent or an alternative
future use is available to the Company, then the Company may
capitalize such costs to be amortized over the expected life
of the patent. The Company may also capitalize
legal costs incurred in the 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 or a successful defense
of its patents involves considerable management judgment, and
a different conclusion could result in a material impairment
charge amounting to the carrying value of these
assets.
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 projected annual supplier purchases 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.
Provisions 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, which is based on the
Company’s forecasted annual pre-tax income, as adjusted
by certain expenses within the financial statements that will
never be deductible on the Company’s tax returns (or
vice versa), 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
within which it operates, including the U.S., several U.S.
states and the People’s Republic of
China. The prescription period for the income tax
returns varies by jurisdiction; tax years open to federal or
state general examination or other adjustment as of July 1,
2012 were the fiscal years ended March 29, 2009, March 28,
2010, April 3, 2011 and April 1, 2012, as well as the fiscal
year ended March 30, 2008 for several states.
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.
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