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| CRFT > SEC Filings for CRFT > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-2008
Quarterly Report
Results of Operations
Management reviews a number of key indicators to evaluate the Company's
financial performance, including net sales, gross profit and selling, general
and administrative expenses by segment.
This discussion and analysis includes references to historical Craftmade.
Historical Craftmade consists of ceiling fans, lighting, door chimes and
pushbutton sales and related operations that have historically comprised the
Company's operations prior to the acquisition of certain net assets of Woodard,
LLC.
Three Months Ended September 30, 2008 Compared to Three Months Ended
September 30, 2007
An unaudited, condensed overview of results for the three months ended
September 30, 2008, and the corresponding prior year period is summarized as
follows:
Three Months Ended Three Months Ended
September 30, 2008 September 30, 2007
Specialty Mass Total Specialty Mass Total
Net sales $ 20,471 $ 9,694 $ 30,165 $ 14,283 $ 8,455 $ 22,738
Cost of goods sold (13,814 ) (7,881 ) (21,695 ) (9,276 ) (5,952 ) (15,228 )
Gross profit 6,657 1,813 8,470 5,007 2,503 7,510
As a % of net sales 32.5 % 18.7 % 28.1 % 35.1 % 29.6 % 33.0 %
Selling, general and
administrative (6,042 ) (1,855 ) (7,897 ) (3,961 ) (1,580 ) (5,541 )
As a % of net sales 29.5 % 19.1 % 26.2 % 27.7 % 18.7 % 24.4 %
Depreciation and
amortization (172 ) (66 ) (238 ) (140 ) (65 ) (205 )
Total operating
expenses (6,214 ) (1,921 ) (8,135 ) (4,101 ) (1,645 ) (5,746 )
Income (loss) from
operations $ 443 $ (108 ) 335 $ 906 $ 858 1,764
Other income 5 -
Interest expense, net (359 ) (322 )
Income (loss) before
income taxes and
minority interest (19 ) 1,442
Income taxes
(expense) / benefit 51 (326 )
Income before
minority interest 32 1,116
Minority interest (161 ) (498 )
Net income (loss) $ (129 ) $ 618
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Net Sales. Net sales for the Company increased $7,427,000 or 32.7% to $30,165,000 for the quarter ended September 30, 2008, compared to $22,738,000 for the quarter ended September 30, 2007. The increase is due to the acquisition of certain assets of Woodard, LLC, offset by declines in sales in both segments.
Management believes that the decline in the housing market and the overall
economic downturn will continue to negatively impact the sales of the Company's
various product lines in both the Specialty and Mass segments. The Company
continues to aggressively implement its strategic growth plans in order to
mitigate the impact on future sales.
Net sales from the Specialty segment increased $6,188,000 or 43.3% to
$20,471,000 for the quarter ended September 30, 2008, compared to $14,283,000
for the quarter ended September 30, 2007, as summarized in the following table.
Fans Woodard
Lighting & Outdoor Segment
Three Months Ended Accessories Furniture Total
September 30, 2008 $ 12,359 $ 8,112 $ 20,471
September 30, 2007 14,283 - 14,283
Dollar increase (decrease) $ (1,924 ) $ 8,112 $ 6,188
Percent increase (decrease) (13.5 %) 100.0 % 43.3%
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While the sales of fans and lighting related products continue to be affected by
the extremely weak overall housing market, overall segment sales increased due
to the addition of outdoor furniture sales.
Management continues to focus on introducing new lighting products, expanding
Teiber accounts and developing new accounts for the Durocraft product lines to
offset the weak housing market and economic downturn. Management believes that
long-term growth will be favorably affected by additional product offerings
through enhanced product development efforts, as well as selling outdoor
furniture products to lighting showrooms and selling outdoor lighting and
ceiling fans to patio dealers, and focusing efforts on the hospitality markets.
The first and second quarter net sales of Woodard outdoor furniture were and are
expected to decline versus the third and fourth quarters of the prior fiscal
year given Woodard seasonality. Historically, sales of outdoor furniture to
patio dealers are seasonally high during the third and fourth quarters of the
Company's fiscal year, with the first and second quarter being considered the
off-season for outdoor furniture sales.
Net sales of the Mass segment increased $1,239,000 or 14.7% to $9,694,000 for
the quarter ended September 30, 2008, compared to $8,455,000 for the quarter
ended September 30, 2007, as summarized in the following table:
Net Sales of Mass Segment
(Dollars in thousands)
Fans Woodard
Lighting & Outdoor Segment
Three Months Ended Accessories Furniture Total
September 30, 2008 $ 7,359 $ 2,335 $ 9,694
September 30, 2007 8,455 - 8,455
Dollar increase (decrease) $ (1,096 ) $ 2,335 $ 1,239
Percent increase (decrease) (13.0 %) 100.0 % 14.7 %
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The decrease in net sales of fans, lighting and accessories was primarily the
result of a decline in: (i) orders from Lowe's related to indoor lighting and
outdoor lighting; (ii) non-core drop shipped products; (iii) sales of fan
accessories; (iv) and, sales of the mix and match portable lamps through Lowe's.
Woodard sales were primarily comprised of sales to its various mass merchant
customers. Most of its products are shipped directly from China. Due to the
seasonal nature of outdoor furniture, the majority of sales to mass merchants
occur from December to April each year.
Based on the most recent annual line review, management believes that Lowe's
remains committed to the respective programs it currently has with the Company.
Management believes that, based on the amount of product currently shipped to
Lowe's, the Company continues to be a primary vendor for Lowe's mix and match
portable lamp and fan accessory/ceiling medallion programs. Management believes
that the Company will continue to be invited to participate in each of Lowe's
scheduled line reviews for its existing and new product lines. The line reviews
occur on an annual basis for each product category throughout the year and give
us the potential to add new SKUs to the Lowe's program. However, participation
in line reviews could also result in a partial or complete reduction of either
subsidiary's existing SKUs in the product lines currently offered to Lowe's.
While competitive pricing is essential in the Mass segment, management believes
that future growth is contingent upon the success of the Company's ongoing
efforts to introduce new products, styles and marketing concepts to existing
customers and the expansion of the business to new customers.
Gross Profit. Gross profit of the Company as a percentage of net sales decreased
4.9% to 28.1% for the quarter ended September 30, 2008, compared to 33.0% for
the quarter ended September 30, 2007, primarily due to consolidated sales of
Woodard products that carry a lower gross profit percentage than the Company's
historical operations.
Gross profit as a percentage of net sales of the Specialty segment decreased
2.6% to 32.5% for the quarter ended September 30, 2008, compared to 35.1% in the
quarter ended September 30, 2007. The decrease is summarized in the following
table.
Gross Profit as a Percentage of Net Sales of Specialty Segment
Fans Woodard
Lighting & Outdoor Segment
Three Months Ended Accessories Furniture Total
September 30, 2008 34.0 % 30.3 % 32.5 %
September 30, 2007 35.1 % - 35.1 %
Percent decrease (1.1 %) (2.6 %)
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Decreases in gross margin for ceiling fans and lighting is primarily due to
changes in sales mix to items that carry a lower margin, as well as inflation in
the cost of goods sold.
For fiscal year 2009, we expect gross profit as a percentage of net sales of the
ceiling fan and lighting sales in the Specialty segment to be roughly equal to
the results generated in the fiscal year ended June 30, 2008, as the Company is
able to offset the increases in cost of goods with higher pricing to its
Specialty customers. Gross profit as a percentage of net sales of Woodard
outdoor furniture is also expected to increase slightly over fiscal 2008, as the
Company has implemented higher pricing for the 2009 season, to offset cost of
goods increases from its suppliers.
Gross profit as a percentage of net sales of the Mass segment decreased 10.9% to
18.7% of net sales for the quarter ended September 30, 2008, compared to 29.6%
of net sales in the same prior year period, as summarized in the following
table:
Gross Profit as a Percentage of Net Sales of Mass
Fans Woodard
Lighting & Outdoor Segment
Three Months Ended Accessories Furniture Total
September 30, 2008 23.2 % 4.6 % 18.7 %
September 30, 2007 29.6 % - 29.6 %
Percent decrease (6.4 %) (10.9 %)
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Gross profit as a percentage of net sales for the Mass segment decreased due to
higher material costs experienced in our Design Trends subsidiary. Woodard gross
profit as a percent of net sales is low as all sales are direct import.
For fiscal year 2009, gross profit as a percentage of net sales of fans,
lighting and accessories are expected to remain consistent with the fiscal year
ended June 30, 2008, provided that the segment maintains a sales mix, customer
concentration and level of vendor program commitment similar to that maintained
during fiscal year 2008. Management expects gross profit as a percentage of net
sales for Woodard to increase slightly versus fiscal 2008 as sales mix changes
to customers with less discounting.
Selling, General and Administrative Expenses. Total selling, general and
administrative ("SG&A") expenses of the Company increased $2,356,000 to
$7,897,000 or 26.2% of net sales for the quarter ended September 30, 2008,
compared to $5,541,000 or 24.4% of net sales for the same period last year.
Selling, General and Administrative Expenses
(Dollars in thousands)
Increase/
Three Months Ended (Decrease)
September 30, September 30, Over Prior
2008 2007 Year Period
Historical Craftmade $ 5,322 $ 5,541 $ (219 )
Woodard Incremental 2,575 - 2,575
$ 7,897 $ 5,541 $ 2,356
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The decrease in historical Craftmade expenses was primarily due to lower
commissions, reduced group health costs, and reductions in accounting,
consulting and legal fees as summarized below:
Increase/
Three Months Ended (Decrease)
September 30, September 30, Over Prior
2008 2007 Year Period
Group Insurance $ 272 $ 374 (102 )
Commissions 692 761 $ (69 )
Accounting, legal and consulting 685 737 (52 )
Other 3,673 3,669 4
$ 5,322 $ 5,541 $ (219 )
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Management anticipates that based on current market conditions, SG&A expenses
for the second quarter of fiscal year 2009 will be relatively consistent with
results generated in the quarter ended September 30, 2008. Management believes
that it will be able to reduce certain expenses in future periods as it realizes
synergies from the acquisition of certain assets of Woodard, LLC.
Interest Expense. Net interest expense of the Company increased $37,000 to
$359,000 for the quarter ended September 30, 2008, compared to $322,000 for the
quarter ended September 30, 2007. This increase is primarily due to increased
working capital associated with the acquisition of certain assets of Woodard,
LLC, partially offset by lower interest rates in effect as compared to the
previous year.
Minority interest. Minority interest expense decreased $337,000 to $161,000 for
the quarter ended September 30, 2008, compared to $498,000 for the same period
in the previous quarter. The decrease in minority interest resulted from lower
profits at Design Trends as a result of the decline in net sales.
Provision for Income Taxes. The income tax benefit was $51,000 or 28.3% of loss
before income taxes for the quarter ended September 30, 2008, compared to an
income tax provision of $326,000 or 34.5% of income before income taxes for the
quarter ended September 30, 2007. The effective income tax rate for the current
quarter was different from the prior year quarter primarily due to the weighted
average tax effect of operating losses in certain legal entities of the Company.
See Note 6 in the Notes to the Unaudited Condensed Consolidated Financial
Statements for additional detail regarding the Company's policy for determining
the provision for income taxes.
Liquidity and Capital Resources
The Company's cash decreased $791,000 from $1,269,000 at June 30, 2008 to
$478,000 at September 30, 2008. Net cash used by the Company's operating
activities was $1,801,000 for the three months ended September 30, 2008,
compared to cash provided by the Company's operating activities of $2,738,000
for the same period last year. The increased use of cash was primarily due to
increased inventories of outdoor lighting, chimes and pushbuttons built up in
preparation for a change in production sites for these products, and to
increased inventories of outdoor furniture in advance of the selling season.
The $847,000 of cash used in investing activities for the three months ended
September 30, 2008 was primarily related to investing in tooling for the Owosso,
Michigan production facility, and leasehold improvements in the new Woodard
showroom in Chicago, Illinois.
The $1,857,000 of cash provided by financing activities for the three months
ended September 30, 2008 primarily resulted from drawing on the Company's lines
of credit to support increased inventory levels.
The Company's management believes that its current lines of credit, combined
with cash flows from operations, are adequate to fund the Company's current
operating needs, debt service payments and any future dividend payments. In
addition, the Company is currently evaluating various financing options
regarding the 306,000 square foot manufacturing facility in Owosso, Michigan.
Management anticipates that future cash flows will be used primarily to
retire existing debt, fund potential acquisitions, repurchase Common Stock or
fund other investments that will enhance long-term shareholder value and
distribute earnings to its minority interest member. The Company remains
committed to its business strategy of creating long-term earnings growth,
maximizing stockholder value through internal improvements, making selective
acquisitions and dispositions of assets, focusing on cash flow and retaining
quality personnel.
Recent Accounting Pronouncements
In December 2007, FASB issued Statement of Financial Accounting Standards
No. 141 (revised 2007), Business Combinations, ("SFAS 141(R)"). SFAS 141(R)
amends the principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling interest in the acquired company and the
goodwill acquired. SFAS 141(R) also establishes disclosure requirements to
enable the evaluation of the nature and financial effects of the business
combination. SFAS 141(R) is effective for the Company on February 1, 2009, and
the Company will apply SFAS 141(R) prospectively to all business combinations
subsequent to the effective date.
In December 2007, FASB issued Statement of Financial Accounting Standards
No. 160, Noncontrolling Interests in Consolidated Financial Statements - an
amendment of Accounting Research Bulletin No. 51 ("SFAS 160"). SFAS 160
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 also
establishes disclosure requirements that clearly identify and distinguish
between the controlling and noncontrolling interests and requires the separate
disclosure of income attributable to controlling and noncontrolling interests.
SFAS 160 is effective for fiscal years beginning after December 15, 2008. The
Company is currently evaluating the impact that the adoption of SFAS 160 will
have on its consolidated financial statements.
In February 2007, FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities ("SFAS 159"). This statement permits
entities to choose to measure many financial instruments and certain other items
at fair value. Companies should report unrealized gains and losses on items for
which the fair value option has been elected in earnings at each subsequent
reporting date. This statement is effective as of the beginning of an entity's
first fiscal year that begins after November 15, 2007. The Company is currently
assessing the potential impact, if any, of the adoption of SFAS 159 on its
consolidated financial statements.
In September 2006, FASB issued SFAS No. 157, Fair Value Measurements ("SFAS
157"). This statement defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, and expands disclosures
about fair value measurements. This statement applies under other accounting
pronouncements that require or permit fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007 and interim periods
within those years. The FASB has also issued Staff Position FAS 157-2 ("FSP
157-2"), which delays the effective date of SFAF 157 for non-financial assets
and liabilities, except for items that are recognized or disclosed at fair value
in the financial statements on a recurring basis (at least annually), until
fiscal years beginning after November 15, 2008. The Company is currently
assessing the impact that the adoption of SFAS 157 and FSP 157-2 will have on
its consolidated financial statements.
In July 2006, FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes ("FIN 48") which clarifies the accounting for uncertainty in
income taxes recognized under FASB Statement No. 109, Accounting for Income
Taxes. FIN 48 addresses the recognition and measurement of tax positions taken
or expected to be taken, and also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods and
disclosure. We adopted and applied FIN 48 under the transition provisions to all
of our income tax positions at the required effective date of July 1, 2007. See
Note 6 in the Notes to the Unaudited Condensed Consolidated Financial Statements
for additional detail.
Long-Term Obligations
The Company's long-term obligations are summarized in the following table:
Outstanding
Balance Current
Commitment Sept 30, 2008 Interest Rate Maturity
Revolving line of credit $ 50,000 $ 19,517 LIBOR plus 1.50% December 31, 2009
Note payable - facility n/a 10,667 6.5% December 10, 2017
Capital lease obligation n/a 102 November 5, 2010
Sub-total 30,286
Less: current amounts due (515 )
Long-term obligations $ 29,771
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On December 31, 2007, Craftmade entered into a Third Amended and Restated Loan Agreement (the "Loan Agreement") with The Frost National Bank ("Frost"). The Loan Agreement amends the Second Amended and Restated Loan Agreement dated September 18, 2006, between Craftmade and Frost. Also, on March 31, 2008, Craftmade executed (i) a Revolving Promissory Note (the "Frost Note") payable to . . .
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