Crown Crafts, Inc. — Form 10-Q Summary
Business context and period. The company sells infant, toddler and juvenile products, including bedding, bibs, bath and disposable products, primarily to retailers. Products are made largely by contract manufacturers, with the largest sourcing concentration in China. This report covers the fiscal third quarter and first nine months ended December 30, 2012; comparisons are with periods ended January 1, 2012. Dollar amounts below are in millions unless otherwise noted.
Financial performance and position
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $20.07 vs. $21.65; down 7.3% | $54.81 vs. $60.47; down 9.4% |
| Gross profit / margin | $5.28 vs. $5.24; 26.3% vs. 24.2% | $13.62 vs. $13.77; 24.9% vs. 22.8% |
| Operating income | $2.50 vs. $2.54 | $5.08 vs. $5.26 |
| Net income / net margin | $1.60 vs. $1.55; 8.0% vs. 7.2% | $3.26 vs. $3.15; 5.9% vs. 5.2% |
| EPS | $0.16 basic and diluted, unchanged | $0.33 basic, unchanged; $0.33 diluted vs. $0.32 |
- Sales mix: Bedding, blankets and accessories revenue fell 12.2% in the quarter and 12.8% year to date. Bibs, bath and disposable products rose 7.8% in the quarter and 0.5% year to date.
- Cash flow: Nine-month operating cash flow was $8.59 vs. $7.65; investing used $0.61 vs. $0.29; financing used $7.95 vs. $7.29. Ending cash was $0.25 vs. $0.28 a year earlier.
- Balance sheet at December 30: Total assets were $43.58 and shareholders’ equity $31.62. Current assets were $34.43 and current liabilities $11.96. Inventory was $13.28, up from $11.84 at April 1, 2012.
- Debt and liquidity: No balance was owed on the $26.0 revolving facility; $23.0 was available based on eligible receivables and inventory, with no letters of credit outstanding. The facility matures July 11, 2013. The company also factors most receivables through CIT.
Changes, outlook and risks
- Management attributed nearly half of the year-to-date sales decline to the prior-year transition away from an unprofitable private-label bedding program; sluggish economic conditions and retailers’ inventory controls also weighed on sales.
- Gross margin improved as product redesigns reduced dependence on high-cost cotton and discontinuing the unprofitable program improved the mix. Marketing and administrative expense was broadly stable year over year.
- Lower credit-facility balances reduced interest expense. The amended CIT arrangement also generated $0.06 of interest income year to date. The estimated fiscal 2013 effective tax rate was 36.2%, versus 38.1% in fiscal 2012.
- The company declared $0.66 per share in dividends year to date, including a $0.50-per-share special dividend. Financing cash flow included $7.65 of dividends paid. Treasury-stock additions also include shares surrendered for option exercise costs and tax withholding; reported quarterly purchases were not under a publicly announced repurchase plan.
- Management expected operating cash flow and existing or future revolving credit availability to meet liquidity needs and believed it could secure financing before the current facility expires. No specific earnings or revenue guidance was provided.
- Key risks and contingencies: The BreathableBaby patent-infringement lawsuit over a mesh crib liner remained in discovery; the court denied the company’s summary-judgment motion without prejudice and did not rule on its merits. An unfavorable outcome or patent denial could require impairment of capitalized related costs. Other ordinary-course proceedings were not expected to have a material adverse effect. Risks also include economic and retail conditions, raw-material costs, competition, third-party and foreign suppliers, transportation disruptions, and dependence on third-party licenses.
- A one-time compensation item included $99,000 of accelerated expense after vesting conditions were met for part of the CEO’s stock award. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Check whether the company renewed or replaced the revolving credit facility and factoring agreements before their July 2013 expirations.
- Track bedding-category sales, retailer inventory levels, and whether improved gross margins persist as sales decline.
- Review developments in the BreathableBaby litigation and any resulting impairment of capitalized patent and defense costs.
- Assess cash generation against dividends, inventory growth, and the company’s reliance on CIT and eligible collateral for liquidity.
- Confirm whether the special dividend and stock-award-related share activity affect future capital returns and dilution.