Crown Crafts, Inc. — Q3 FY2015 Form 10-Q
Business and period: Crown Crafts designs, sources and markets infant, toddler and juvenile products, primarily through its subsidiaries CCIP and Hamco. The company reports one principal segment. This filing covers the three and nine months ended December 28, 2014; the comparable periods ended December 29, 2013. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Three months ended Dec. 28, 2014 | Year-over-year change | Nine months ended Dec. 28, 2014 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $23.743 | +15.2% | $59.888 | +4.5% |
| Gross profit / margin | $6.628 / 27.9% | +11.3%; margin down from 28.9% | $16.756 / 28.0% | +3.6%; margin down from 28.2% |
| Operating income | $3.272 | Up from $2.859 | $5.731 | Down from $6.028 |
| Net income | $2.046 | +15.0% | $3.579 | -4.4% |
| Diluted EPS | $0.20 | Up from $0.18 | $0.36 | Down from $0.38 |
- Sales mix: Bedding, blankets and accessories sales were $18.378 million for the quarter and $44.566 million year to date, up 20.1% and 7.0%, respectively. Bibs, bath and disposable products sales were $5.365 million and $15.322 million, up 0.9% for the quarter and down 2.0% year to date.
- Cash flow: Nine-month operating cash flow was $2.594 million, versus $5.957 million a year earlier. Investing used $0.223 million; financing used $2.446 million, including $2.399 million in dividends paid. Cash declined $0.075 million from the fiscal-year opening balance to $0.485 million.
- Liquidity and debt: At December 28, 2014, there were no borrowings or letters of credit outstanding under the $26 million revolving facility, and the full facility was available based on eligible receivables and inventory. The facility matures July 11, 2016; the company reported covenant compliance. Current assets were $45.501 million and current liabilities $15.059 million. No debt balance was reported.
- Other balance-sheet changes: Inventory was $19.301 million, up from $13.607 million at March 30, 2014, primarily finished goods. Accounts payable rose to $9.309 million from $4.730 million. Shareholders’ equity was $38.040 million.
Changes, outlook and risks
- Management attributed sales growth largely to initial shipments of programs transferred from a competitor that ceased business and strength in a licensed toddler property. New business at lower preset prices reduced quarterly gross margin.
- Year-to-date operating income and net income declined despite higher sales, reflecting increased operating expenses, including a $0.850 million litigation settlement charge. The settlement reduced nine-month net income by approximately $0.530 million after tax, or $0.05 per diluted share.
- Management said cash, operating cash flow and available revolving credit should be adequate for liquidity needs at the current operating level. The filing provides no quantitative earnings or sales guidance; management cautioned that interim results are not necessarily indicative of full-year results.
- Risks include competition, consumer spending and retail conditions, raw-material costs and the ability to pass through price increases, reliance on third-party and foreign suppliers, shipping disruptions, customer orders, licensed products, and CIT’s ability to change customer credit approvals. The company factors most trade receivables; CIT bears specified customer credit losses, while the company retains exposure to customer deductions and other stated exceptions.
- BreathableBaby litigation was settled on December 5, 2014: Crown Crafts paid $0.850 million and now manufactures and sells a redesigned mesh crib liner. The company reported no other proceedings expected to have a material adverse effect and no material subsequent events. It reported effective disclosure controls and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether the sales gains from transferred programs and the licensed toddler property continue, and how lower preset pricing affects gross margin.
- Inventory growth, cash conversion and the causes of operating cash flow falling to $2.594 million from $5.957 million.
- Future dividend affordability given cash of $0.485 million, ongoing working-capital needs and reliance on the revolving facility.
- Settlement terms and the commercial and financial effect of the redesigned mesh crib liner.
- Exposure to customer concentration, CIT factoring and credit-approval decisions, supplier and shipping risks, and the effect of raw-material inflation.