FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period ended March 31, 2005 or | ||
o
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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
CRAFTMADE INTERNATIONAL, INC.
| 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 þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o
5,200,000 shares of Common Stock were outstanding as of April 30, 2005.
CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
Index to Quarterly Report on Form 10-Q
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements. (Unaudited)
CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
| FOR THE THREE MONTHS ENDED | FOR THE NINE MONTHS ENDED | |||||||||||||||
| March 31, | March 31, | March 31, | March 31, | |||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Net sales |
$ | 27,059 | $ | 28,988 | $ | 84,433 | $ | 89,126 | ||||||||
Cost of goods sold |
19,166 | 20,526 | 59,208 | 62,800 | ||||||||||||
Gross profit |
7,893 | 8,462 | 25,225 | 26,326 | ||||||||||||
Selling, general and administrative expenses |
4,902 | 4,165 | 14,807 | 13,607 | ||||||||||||
Interest expense, net |
263 | 226 | 733 | 565 | ||||||||||||
Depreciation and amortization |
148 | 151 | 436 | 456 | ||||||||||||
Total expenses |
5,313 | 4,542 | 15,976 | 14,628 | ||||||||||||
Income before income taxes and minority interests |
2,580 | 3,920 | 9,249 | 11,698 | ||||||||||||
Provision for income taxes |
628 | 1,302 | 2,466 | 3,426 | ||||||||||||
| 1,952 | 2,618 | 6,783 | 8,272 | |||||||||||||
Minority interests |
859 | 836 | 2,420 | 2,756 | ||||||||||||
Net income |
$ | 1,093 | $ | 1,782 | $ | 4,363 | $ | 5,516 | ||||||||
Basic earnings per common share |
$ | 0.22 | $ | 0.34 | $ | 0.86 | $ | 1.02 | ||||||||
Diluted earnings per common share |
$ | 0.22 | $ | 0.33 | $ | 0.86 | $ | 1.01 | ||||||||
Cash dividends declared per common share |
$ | 0.10 | $ | 0.10 | $ | 0.30 | $ | 0.30 | ||||||||
SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
3
CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
ASSETS
| March 31, | June 30, | |||||||
| 2005 | 2004 | |||||||
| (Unaudited) | ||||||||
Current assets |
||||||||
Cash |
$ | 5,930 | $ | 5,838 | ||||
Accounts receivable — net of allowance
of $245 and $150, respectively |
18,876 | 19,242 | ||||||
Inventory |
18,517 | 15,172 | ||||||
Deferred income taxes |
— | 9 | ||||||
Prepaid expenses and other current assets |
554 | 1,193 | ||||||
Total current assets |
43,877 | 41,454 | ||||||
Property and equipment |
||||||||
Land |
1,535 | 1,535 | ||||||
Building |
7,796 | 7,784 | ||||||
Office furniture and equipment |
9,094 | 9,013 | ||||||
Leasehold improvements |
279 | 279 | ||||||
| 18,704 | 18,611 | |||||||
Less: accumulated depreciation |
(10,128 | ) | (9,626 | ) | ||||
Total property and equipment, net |
8,576 | 8,985 | ||||||
Other assets |
||||||||
Goodwill net of accumulated amortization
of $1,204 in each period presented |
11,556 | 4,735 | ||||||
Other intangibles net of accumulated amortization
of $2 at March 31, 2005 |
198 | — | ||||||
Other assets |
78 | 80 | ||||||
Total other assets |
11,832 | 4,815 | ||||||
Total assets |
$ | 64,285 | $ | 55,254 | ||||
SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
4
CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
LIABILITIES AND STOCKHOLDERS’ EQUITY
| March 31, | June 30, | |||||||
| 2005 | 2004 | |||||||
| (Unaudited) | ||||||||
Current liabilities |
||||||||
Note payable — current |
$ | 1,602 | $ | 2,662 | ||||
Revolving line of credit |
20,644 | 16,125 | ||||||
Accounts payable |
8,561 | 6,186 | ||||||
Commissions payable |
228 | 289 | ||||||
Income taxes payable |
157 | 1,112 | ||||||
Current deferred income taxes |
208 | — | ||||||
Accrued customer allowances |
4,913 | 4,320 | ||||||
Other accrued expenses |
992 | 1,074 | ||||||
Total current liabilities |
37,305 | 31,768 | ||||||
Other non-current liabilities |
||||||||
Note payable — long term |
1,817 | 2,949 | ||||||
Deferred income taxes |
268 | 214 | ||||||
Total other non-current liabilities |
2,085 | 3,163 | ||||||
Total liabilities |
39,390 | 34,931 | ||||||
Minority interests |
2,282 | 1,984 | ||||||
Commitments and contingencies (Note 6) |
||||||||
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, $0.01 par value, 15,000,000
shares authorized, 9,698,220 and 9,465,535
shares issued, respectively |
97 | 95 | ||||||
Additional paid-in capital |
18,458 | 14,098 | ||||||
Unearned deferred compensation |
— | (11 | ) | |||||
Retained earnings |
44,033 | 41,207 | ||||||
Less: treasury stock, 4,499,920 and 4,336,587
common shares at cost, and 32,000
preferred shares at cost |
(40,007 | ) | (37,082 | ) | ||||
Total stockholders’ equity |
22,613 | 18,339 | ||||||
Total liabilities and stockholders’ equity |
$ | 64,285 | $ | 55,254 | ||||
SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
5
CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
| FOR THE NINE MONTHS ENDED | ||||||||
| March 31, | March 31, | |||||||
| 2005 | 2004 | |||||||
Net cash provided by operating activities |
$ | 7,383 | $ | 8,394 | ||||
Cash flows from investing activities |
||||||||
Acquisition of Bill Teiber Co., Inc., net of cash acquired |
(4,000 | ) | — | |||||
Net additions to property and equipment |
(57 | ) | (162 | ) | ||||
Net additions to other intangibles |
(10 | ) | — | |||||
Net cash used in investing activities |
(4,067 | ) | (162 | ) | ||||
Cash flows from financing activities |
||||||||
Net proceeds from (payments on) lines of credit |
4,519 | 2,184 | ||||||
Principal payments on notes payable |
(2,191 | ) | (1,197 | ) | ||||
Proceeds from notes payable |
— | 2,100 | ||||||
Treasury stock repurchases |
(2,925 | ) | (5,443 | ) | ||||
Stock options exercised |
306 | 269 | ||||||
Cash dividends |
(1,538 | ) | (1,635 | ) | ||||
Distributions to minority interest members |
(1,395 | ) | (4,613 | ) | ||||
Net cash used in financing activities |
(3,224 | ) | (8,335 | ) | ||||
Net increase/(decrease) in cash |
92 | (103 | ) | |||||
Cash at beginning of period |
5,838 | 4,992 | ||||||
Cash at end of period |
$ | 5,930 | $ | 4,889 | ||||
SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
| 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 (“SEC”) 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. 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, in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2004 filed with the SEC on September 28, 2004. The financial data for the interim periods may not necessarily be indicative of results to be expected for the year. State income tax expense of $256,000 previously classified in selling, general and administrative expenses has been reclassified to provision for income taxes for the quarter ended March 31, 2004. Such reclassification had no effect on previously reported net income. | ||||
| Note 2 | - ACQUISITION OF BILL TEIBER CO., INC. | |||
| On March 1, 2005, the Company acquired 100% of the issued and outstanding shares of capital stock of Bill Teiber Co., Inc. (“Teiber”) through a merger of subsidiaries. Teiber is an importer and distributor of decorative light bulbs, door chimes, ventilation systems and related lighting accessories. The business will be operated as Teiber Lighting Products, Inc., a wholly-owned subsidiary of Craftmade. Craftmade acquired Teiber in order to distribute Teiber’s product lines to Craftmade’s existing 1,600 showroom customers. | ||||
| Assets acquired and liabilities assumed were recorded on the Company’s Condensed Consolidated Balance Sheets as of the acquisition date based upon their estimated fair values at such date. The results of operations have been included in the Condensed Consolidated Statements of Income since the date of merger in the Craftmade segment. | ||||
| The aggregate purchase price was calculated as follows: | ||||
Number of shares of Common Stock |
190,385 | |||
Average trading price |
$ | 21.306 | (i) | |
Sub-total |
$ | 4,056,343 | ||
Cash consideration |
4,000,000 | |||
Merger-related costs |
99,278 | |||
Total consideration |
$ | 8,155,621 | ||
| (i) | The average trading price is based on the average of the closing prices of Craftmade’s common stock, $0.01 par value per share (“Common Stock”), for the two days before, the day of, and the two days after the date of the announcement of the merger, March 1, 2005. |
| The following table sets forth the unaudited pro forma results of operations of the Company as if the Teiber merger had occurred at the beginning of the periods presented. These pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the merger occurred as of the |
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
AS OF AND FOR THE NINE MONTHS ENDED
MARCH 31, 2005
| beginning of each of the periods presented or that may be obtained in the future. |
Unaudited Pro Forma Results
(In thousands except per share data)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Revenues |
$ | 28,111 | $ | 30,074 | $ | 89,109 | $ | 93,475 | ||||||||
Net income |
1,125 | 1,805 | 4,620 | 5,691 | ||||||||||||
Diluted earnings per share |
$ | 0.22 | $ | 0.34 | $ | 0.91 | $ | 1.05 | ||||||||
| The purchase price has been allocated based on the estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition. The purchase price allocation is preliminary and may be adjusted for changes in estimates of fair value, including but not limited to changes in allowances for doubtful accounts and inventory reserves. The following represents the preliminary allocation of the purchase price: |
Current assets |
$ | 2,931,441 | ||
Property and equipment |
36,771 | |||
Intangible assets |
200,000 | |||
Goodwill |
6,821,046 | |||
Other assets |
9,559 | |||
Total assets |
9,998,817 | |||
Current liabilities |
(1,843,196 | ) | ||
Total liabilities |
(1,843,196 | ) | ||
Total purchase price |
$ | 8,155,621 | ||
| The amounts assigned to intangible assets represent the value of non-compete agreements for the two principals of Teiber. The value was based on an independent appraisal and will be amortized over seven years using the straight-line method. | ||||
| The amount of goodwill allocated to the purchase price was $6,821,046 of which $4,000,000 is deductible for tax purposes. | ||||
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
AS OF AND FOR THE NINE MONTHS ENDED
MARCH 31, 2005
| Note 3 | - 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 31, | March 31, | March 31, | March 31, | |||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
| (In thousands except per share data) | ||||||||||||||||
Basic and diluted earnings per share: |
||||||||||||||||
Numerator |
||||||||||||||||
Net income |
$ | 1,093 | $ | 1,782 | $ | 4,363 | $ | 5,516 | ||||||||
Denominator for basic EPS |
||||||||||||||||
Common shares outstanding |
5,062 | 5,314 | 5,060 | 5,392 | ||||||||||||
Denominator for diluted EPS |
||||||||||||||||
Common shares outstanding |
5,062 | 5,314 | 5,060 | 5,392 | ||||||||||||
Stock options |
12 | 46 | 25 | 48 | ||||||||||||
Potentially dilutive common shares |
5,074 | 5,360 | 5,085 | 5,440 | ||||||||||||
Basic earnings per share |
$ | 0.22 | $ | 0.34 | $ | 0.86 | $ | 1.02 | ||||||||
Diluted earnings per share |
$ | 0.22 | $ | 0.33 | $ | 0.86 | $ | 1.01 | ||||||||
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
AS OF AND FOR THE NINE MONTHS ENDED
MARCH 31, 2005
| Note 4 | - STOCK-BASED COMPENSATION | |||
| The Company follows the disclosure only provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148. However, the Company continues to measure compensation cost for those plans using the intrinsic value based method of accounting as prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”. | ||||
| Had compensation cost for the Company’s stock option plans been determined based on the fair value of the stock options at grant date, in accordance with the provisions of FAS 123, “Accounting for Stock-Based Compensation”, the Company’s net income and diluted earnings per common share would have been adjusted to the pro forma amounts indicated: | ||||
| FOR THE THREE MONTHS ENDED | FOR THE NINE MONTHS ENDED | |||||||||||||||
| March 31, | March 31, | March 31, | March 31, | |||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
| (In thousands except per share data) | ||||||||||||||||
Net income, as reported |
$ | 1,093 | $ | 1,782 | $ | 4,363 | $ | 5,516 | ||||||||
Compensation expense, proforma |
(5 | ) | (38 | ) | (46 | ) | (100 | ) | ||||||||
Net income, proforma |
$ | 1,088 | $ | 1,744 | $ | 4,317 | $ | 5,416 | ||||||||
Basic earnings per share, as reported |
$ | 0.22 | $ | 0.34 | $ | 0.86 | $ | 1.02 | ||||||||
Basic earnings per share, proforma |
0.21 | 0.33 | 0.85 | 1.00 | ||||||||||||
Diluted earnings per share, as reported |
$ | 0.22 | $ | 0.33 | $ | 0.86 | $ | 1.01 | ||||||||
Diluted earnings per share, proforma |
0.21 | 0.33 | 0.85 | 1.00 | ||||||||||||
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
AS OF AND FOR THE NINE MONTHS ENDED
MARCH 31, 2005
| Note 5 | - 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, 2004. The Company evaluates the performance of its segments and allocates resources to them based on their net sales and income before minority interests and income taxes. | ||||
| 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, lamps, light bulbs, door chimes and ventilation systems offered primarily through lighting showrooms and selected electrical distributors. The TSI segment derives its revenue from indoor lighting, including portable table lamps, floor lamps, ceiling mount lighting fixtures, bath-strip lighting, and outdoor lighting marketed solely to mass merchandisers. | ||||
| The following table presents information about the reportable segments: | ||||
| FOR THE THREE MONTHS ENDED | FOR THE NINE MONTHS ENDED | |||||||||||||||
| March 31, | March 31, | March 31, | March 31, | |||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
| (In thousands except per share data) | ||||||||||||||||
Net sales |
||||||||||||||||
Craftmade |
$ | 12,707 | $ | 12,289 | $ | 39,576 | $ | 39,147 | ||||||||
TSI |
14,352 | 16,699 | 44,857 | 49,979 | ||||||||||||
Total |
$ | 27,059 | $ | 28,988 | $ | 84,433 | $ | 89,126 | ||||||||
Income before minority interests and
income taxes |
||||||||||||||||
Craftmade |
$ | 1,130 | $ | 2,001 | $ | 4,237 | $ | 6,487 | ||||||||
TSI |
1,450 | 1,919 | 5,012 | 5,211 | ||||||||||||
Total |
$ | 2,580 | $ | 3,920 | $ | 9,249 | $ | 11,698 | ||||||||
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
AS OF AND FOR THE NINE MONTHS ENDED
MARCH 31, 2005
| Note 6 | - COMMITMENTS AND CONTINGENCIES | |||
| The Company is a party to a lawsuit alleging patent infringement related to a patent held by Lamps Plus, Inc. In November 2003, a jury verdict held that the Company willfully infringed on the patent. The jury awarded damages of $143,385, and Lamps Plus filed a motion to seek treble damages plus reasonable attorneys’ fees and court costs. On September 14, 2004, the Court entered a Judgment and Permanent Injunction and issued an Order Awarding Attorneys’ Fees. The Judgment awards Lamps Plus $143,385 in actual damages plus costs of court. The Order awards $600,000 in attorneys’ fees to Lamps Plus. The Company and other defendants in the lawsuit have appealed the Judgment and Order, and the outcome of the appeal is uncertain, accord | ||||