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Note 1 - Summary of Significant Accounting Policies
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Jan. 01, 2012
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| Note 1 - Summary of Significant Accounting Policies |
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 January 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 and nine-month periods ended January 1,
2012 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. The Company’s credit facilities
include 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
immediately available to be drawn upon by the Company.
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:
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 $44.7 million and $46.6 million for the
nine-month periods ended January 1, 2012 and December 26, 2010,
respectively, and net sales of bibs, bath and disposable products
amounted to $15.8 million and $16.2 million for the nine-month
periods ended January 1, 2012 and December 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 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
January 1, 2012 amounted to $16.4 million, net of allowances of
$1.1 million. Of this amount, $16.1 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.
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.
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 $4.5 million and $4.9
million for the nine-month periods ended January 1, 2012 and
December 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 January 1,
2012 were the fiscal years ended March 29, 2009, March 28, 2010
and April 3, 2011, as well as the fiscal year ended March 30,
2008 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 nine-month periods
ended January 1, 2012 and December 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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