CRAFTMADE INTERNATIONAL INC - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004 OR


[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO

Commission File Number

000-26667

CRAFTMADE INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)


Delaware		75-2057054

(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)


650 South Royal Lane, Suite 100, Coppell, Texas		75019

(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (972) 393-3800

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]. No [ ].

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [X]. No [ ].

5,128,948 shares of Common Stock were outstanding as of May 17, 2004.

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)


	FOR THE THREE MONTHS ENDED				FOR THE NINE MONTHS ENDED
	March 31		March 31,		March 31,		March 31,
	2004		2003		2004		2003
	(In thousands except per share data)
Net Sales	$	28,988	$	26,778	$	89,126	$	81,891
Cost of goods sold		20,526		18,568		62,800		55,719

Gross profit		8,462		8,210		26,326		26,172

Selling, general and administrative expenses		4,421		4,560		13,863		13,714
Interest expense, net		226		226		565		683
Depreciation and amortization		151		162		456		478

Total expenses		4,798		4,948		14,884		14,875

Income before income taxes and minority interests		3,664		3,262		11,442		11,297
Minority interests		836		1,043		2,756		3,459

Income before income taxes		2,828		2,219		8,686		7,838
Provision for income taxes		1,046		863		3,170		2,910

Net income	$	1,782	$	1,356	$	5,516	$	4,928

Basic earnings per common share	$	0.34	$	0.25	$	1.02	$	0.89

Diluted earnings per common share	$	0.33	$	0.25	$	1.01	$	0.88

Cash dividends declared per common share	$	0.10	$	0.07	$	0.30	$	0.21

SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS


	March 31,		June 30,
	2004		2003
	(Unaudited)
	(In thousands except share data)
Current assets:
Cash	$	4,889	$	4,992
Accounts receivable — net of allowance for doubtful accounts of $150 and $150 respectively		17,622		16,582
Inventory		15,057		13,124
Deferred income taxes		358		358
Prepaid expenses and other current assets		599		671

Total current assets		38,525		35,727

Property and equipment, net
Land		1,535		1,535
Building		7,784		7,784
Office furniture and equipment		8,980		8,818
Leasehold improvements		279		279

		18,578		18,416
Less: accumulated depreciation		9,172		7,524

Total property and equipment, net		9,406		10,892

Goodwill, net of accumulated amortization of $1,204 and $1,204 respectively		4,735		4,735
Other assets		12		12

Total other assets		4,747		4,747

Total assets	$	52,678	$	51,366

SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS’ EQUITY


	March 31,			June 30,
	2004			2003
	(Unaudited)
	(In thousands except share data)
Current liabilities:
Note payable — current	$	3,168		$	976
Revolving lines of credit		14,184			12,000
Accounts payable		4,798			4,486
Commissions payable		259			287
Income taxes payable		1,305			608
Accrued customer allowances		3,271			3,058
Other accrued expenses		1,069			914

Total current liabilities		28,054			22,329
Note payable — long term		3,228			4,517
Deferred income taxes		415			415
Minority interests		1,711			3,567
Commitments and contingencies (Note 5)
Stockholders’ equity:
Series A cumulative, convertible callable preferred stock, $1.00 par value, 2,000,000 shares authorized; 32,000 shares issued		32			32
Common stock, $.01 par value, 15,000,000 shares authorized, 9,464,535 and 9,424,035 shares issued, respectively		95			94
Additional paid-in capital		13,853			13,584
Unearned deferred compensation		(19	)		(43	)
Retained earnings		39,565			35,684

		53,526			49,351
Less: treasury stock, 4,220,193 and 4,004,277 common shares at cost, and 32,000 preferred shares at cost		34,256			28,813

Total stockholders’ equity		19,270			20,538

Total liabilities and stockholders’ equity	$	52,678		$	51,366

SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


	FOR THE NINE MONTHS ENDED
	March			March
	31, 2004			31, 2003
	(In thousands)
Net cash provided by operating activities:		8,394		$	10,944

Cash flows from investing activities:
Net additions to property and equipment		(162	)		(213	)

Net cash used in investing activities		(162	)		(213	)

Cash flows from financing activities:
Net proceeds from lines of credit		2,184			3,242
Principal payments on notes payable		(1,197	)		(688	)
Proceeds from notes payable		2,100			—
Treasury stock repurchases		(5,443	)		(7,746	)
Stock options exercised		269			162
Cash dividends		(1,635	)		(1,158	)
Distributions to minority interest members		(4,613	)		(1,855	)

Net cash used in financing activities		(8,335	)		(8,043	)

Net (decrease) increase in cash		(103	)		2,688
Cash at beginning of period		4,992			1,312

Cash at end of period	$	4,889		$	4,000

SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OF CRAFTMADE INTERNATIONAL, INC.
AND SUBSIDIARIES

MARCH 31, 2004 (Unaudited)

Note 1 — BASIS OF PREPARATION AND PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and with the rules and regulations of the Securities and Exchange Commission for interim financial reporting, and include all adjustments which are, in the opinion of management, necessary for a fair presentation. The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. As further discussed in Note 3, the Company adopted new accounting guidance that required the consolidation of Design Trends and PHI. The Company adopted this guidance as of January 1, 2004 and retroactively applied it to its previously issued financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures are adequate to make the information presented not misleading; however, it is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto which are incorporated by reference in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2003. The financial data for the interim periods may not necessarily be indicative of results to be expected for the year. All financial information is in thousands (000’s) except share data.

Employee stock-based compensation

The Company has adopted SFAS 123, “Accounting for Stock-Based Compensation,” on a disclosure basis only. The Company measures compensation costs under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and its related interpretations. Had compensation cost for all of the Company’s stock option plans been determined based upon fair value at the grant dates consistent with the methodology prescribed in FAS 123, the Company’s net income and net income per share would have changed to the pro forma amounts listed below using the weighted average fair values indicated.


	FOR THE THREE MONTHS ENDED
	March 31,		March 31,
	2004		2003
	(In thousands except per share data)
Net income, as reported	$	1,782	$	1,356
Net income, proforma		1,744		1,317
Basic earnings per share, as reported		0.34		0.25
Basic earnings per share, pro forma		0.33		0.24
Diluted earnings per share, as reported		0.33		0.25
Diluted earnings per share, pro forma		0.33		0.24


	FOR THE NINE MONTHS ENDED
	March 31,		March 31,
	2004		2003
Net income, as reported	$	5,516	$	4,928
Net income, proforma		5,416		4,827
Basic earnings per share, as reported		1.02		0.89
Basic earnings per share, pro forma		1.00		0.87
Diluted earnings per share, as reported		1.01		0.88
Diluted earnings per share, pro forma		1.00		0.86

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OF CRAFTMADE INTERNATIONAL, INC.
AND SUBSIDIARIES
March 31, 2004
(Unaudited)
(In Thousands)

Note 2 — EARNINGS PER SHARE

The following is a reconciliation of the numerator and denominator used in the basic and diluted EPS calculations:


	FOR THE THREE MONTHS ENDED				FOR THE NINE MONTHS ENDED
	March		March		March		March
	31, 2004		31, 2003		31, 2004		31, 2003
	(In thousands except per share data)
Basic and Diluted EPS
Numerator:
Net Income	$	1,782	$	1,356	$	5,516	$	4,928

Denominator:
Common Shares Outstanding		5,314		5,384		5,392		5,565

Basic EPS	$	0.34	$	0.25	$	1.02	$	0.89

Denominator:
Common Shares Outstanding		5,314		5,384		5,392		5,565
Options		46		52		48		58

Total Shares		5,360		5,436		5,440		5,623

Diluted EPS	$	0.33	$	0.25	$	1.01	$	0.88

NOTE 3 — ACCOUNTING CHANGES

FIN 46

In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”) and amended it by issuing FIN 46R in December 2003. Among other things, FIN 46R generally deferred the effective date of FIN 46 to the quarter ended March 31, 2004. Variable interest entities (“VIEs”) are primarily entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. All VIEs with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.

The Company has a 50% ownership interest in two limited liability companies (“LLC” or “LLC’s”), Design Trends, LLC (“Design Tends”) and Prime/Home Impressions, LLC (“PHI”) collectively referred to herein as entities. In connection with the adoption of FIN 46R, the Company concluded that Design Trends and PHI are VIEs and that the Company is the primary beneficiary. Pursuant to the provisions of FIN 46R, effective January 1, 2004, the Company began to consolidate Design Trends and PHI and restated its previously issued financial statements to reflect Design Trends and PHI as consolidated entities.

Design Trends markets indoor lighting, including portable table lamps, floor lamps, chandeliers and wall sconces designed by the other member of the LLC. PHI markets various replacement parts for lamps, as well as fan accessories including decorative pull-chains, replacement switches, blade arms, blades and ceiling medallions. All of PHI’s sales are to mass merchandisers.

Prior to the adoption of FIN 46, the Company guaranteed the debt of PHI; thus, the recognition of the debt of PHI in the Condensed Consolidated Balance Sheets does not represent an incremental increase in the claims on the general assets of the Company. Further, management believes that recognition of the other liabilities as a result of consolidating Design Trends and PHI does not result in any incremental increase in the level of claims on the general assets of the Company; rather, the additional liabilities represent claims against the additional assets recognized by the Company as a result of the consolidations. Conversely, the additional assets recognized as a result of consolidating Design Trends and PHI do not represent additional assets of the Company that could be used to satisfy claims by the creditors of the Company.

The following table presents the summarized financial information of the Company’s wholly owned subsidiaries and the Company’s consolidated VIEs, Design Trends and PHI, as of March 31, 2004 and June 30, 2003 and for the three and nine months ended March 31, 2004 and March 31, 2003.

For the nine months ended March 31, 2004


							Consolidation and
	Craftmade/		Design				Elimination
	TSI		Trends		PHI		Entries			Consolidated
Net Sales	$	53,894	$	28,192	$	7,040				$	89,126
Income before income taxes and minority interests		5,927		4,904		611		0			11,442
Net income	$	2,757	$	4,904	$	611		($2,756	)	$	5,516

For the nine months ended March 31, 2003


							Consolidation and
	Craftmade/		Design				Elimination
	TSI		Trends		PHI		Entries			Consolidated
Net Sales	$	52,861	$	23,416	$	5,614				$	81,891
Income before income taxes and minority interests		4,379		5,168		1,750		0			11,297
Net income	$	1,469	$	5,168	$	1,750		($3,459	)	$	4,928

In December 2003, the SEC issued Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition”, which supercedes SAB 101, “Revenue Recognition in Financial Statements”. SAB 104 rescinds the accounting guidance contained in SAB 101 specifically related to multiple elements revenue managements, but leaves the remaining SAB 101 principles largely unchanged. The adoption of SAB 104 did not have an impact on Craftmade’s condensed consolidated results of operations or financial position.

NOTE 4 — SEGMENT INFORMATION

The Company operates in two reportable segments, Craftmade and TSI. The accounting policies of the segments are the same as those described in Note 2 — Summary of Significant Accounting Policies to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2003. The Company evaluates the performance of its segments and allocates resources to them based on their operating profit and loss and cash flows.

The Company is organized on a combination of product type and customer base. The Craftmade segment primarily derives its revenue from home furnishings including ceiling fans, light kits, bathstrip lighting, outdoor lighting, and lamps offered primarily through lighting showrooms, mass merchandisers and catalog houses. The TSI segment derives its revenue from ceiling mount lighting fixtures, bath-strip lighting and outdoor lighting marketed solely to mass merchandisers.

The following table presents information about the reportable segments:

Craftmade

TSI

Total

For the three months ended March 31, 2004

Net sale


Part I.	Financial Information
	Item 1.	Financial Statements (unaudited).
		Condensed Consolidated Statements of Income for the three and nine months ended March 31, 2004 and 2003.
		Condensed Consolidated Balance Sheets as of March 31, 2004 and June 30, 2003.
		Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2004 and 2003.
		Notes to Condensed Consolidated Financial Statements.
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk.
	Item 4.	Controls and Procedures.
Part II	Other Information
	Item 1.	Legal Proceedings.
	Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.
	Item 3.	Defaults Upon Senior Securities.
	Item 4.	Submission of Matters to a Vote of Security Holders.
	Item 5.	Other Information.
	Item 6.	Exhibits and Reports on Form 8-K.
Certification of James R. Ridings, CEO
Certification of Kathleen B. Oher, CFO
Certification of James R. Ridings, CEO
Certification of Kathleen B. Oher, CFO


								Consolidation and
	Craftmade/		Design					Elimination
	TSI		Trends		PHI			Entries			Consolidated
Total assets	$	40,023	$	7,923	$	4,732		$	0		$	52,678

Total liabilities and minority interests		23,105		6,873		5,295			(1,865	)		33,408

Total stockholders’ equity		16,711		845		(1,091	)		2,805			19,270

Total liabilities and stockholders’ equity	$	39,816	$	7,718	$	4,204		$	940		$	52,678


							Consolidation and
	Craftmade/		Design				Elimination
	TSI		Trends		PHI		Entries			Consolidated
Total assets	$	39,556	$	9,447	$	2,363	$	0		$	51,366

Total liabilities and minority interests		22,805		5,444		1,256		1,323			30,828

Total stockholders’ equity		20,735		3,882		907		(4,986	)		20,538

Total liabilities and stockholders’ equity	$	43,540	$	9,326	$	2,163	($	3,663	)	$	51,366

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