Crown Crafts, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2013, the first quarter of fiscal 2014; compared with the three months ended July 1, 2012. The company sells infant, toddler and juvenile products, primarily to retailers, and sources most products from Asia.
Financial performance and position
| Metric | Quarter ended June 30, 2013 | Comparable 2012 quarter |
|---|---|---|
| Net sales | $16.613 million | $17.453 million |
| Gross profit / margin | $4.494 million / 27.1% | $4.425 million / 25.4% |
| Operating income | $1.324 million | $1.440 million |
| Net income | $822,000 | $897,000 |
| Diluted earnings per share | $0.08 | $0.09 |
| Operating cash flow | $3.375 million | $4.128 million |
| Cash at quarter-end | $2.890 million | $3.561 million |
- Sales declined 4.8%. Bedding, blankets and accessories fell 7.5% to $11.298 million; bibs, bath and disposable products increased 1.4% to $5.315 million.
- Gross margin improved despite lower sales. Management attributed the improvement mainly to lower customer-related reductions from gross sales to net sales, reflecting customer mix, and $75,000 less auxiliary warehouse expense.
- Marketing and administrative expense increased 6.2% to $3.170 million, including higher compensation and legal costs, partly offset by lower advertising expense.
- Investing cash use was $35,000; financing cash use was $790,000, mainly reflecting dividends. The company declared $0.08 per share versus none in the comparison quarter.
- At June 30, current assets were $35.071 million and current liabilities $10.789 million. Shareholders’ equity was $32.984 million. Inventory was $15.117 million, up from $10.930 million at March 31.
- No revolving credit balance or letters of credit were outstanding at June 30; $20.7 million was available under the facility, subject to eligible receivables and inventory. The company reported no funded debt balance.
Material changes, outlook and risks
- Management cited a challenging retail environment and lower birth rate as factors affecting sales. It said current cash, operating cash flow and credit availability should be adequate for liquidity needs based on current operations; no numerical earnings or sales guidance was provided.
- The CIT financing agreement was amended to extend maturity from July 11, 2013 to July 11, 2016. Effective July 11, 2013, the amendment reduced borrowing rates, the unused commitment fee and the rate paid on daily cash balances. The company was in compliance with facility covenants at June 30.
- Two lawsuits remain notable: a patent-infringement case concerning the company’s mesh crib liner, in which discovery was temporarily stayed August 6, 2013; and a California consumer class action concerning crib bumpers, seeking unspecified damages and other relief. The company stated it intends to defend both. It had capitalized approximately $1.0 million of costs related to the mesh-liner patent application and litigation; a different litigation outcome could result in an impairment charge up to that amount.
- Other risks identified include consumer spending and retail conditions, competition, customer orders and pricing, raw-material costs, reliance on third-party and foreign suppliers, transportation disruptions, product acceptance, and third-party licenses. Management noted that inflation-related price increases may not fully or promptly offset cost increases.
- Management’s annual impairment test concluded goodwill fair value substantially exceeded carrying value as of April 1, 2013. Management also noted estimates and judgments for receivable allowances, inventory reserves and inventory cost allocations can affect reported results.
Most important facts for investors to verify
- Whether the sales decline and pressure in bedding products persist, and whether improved gross margin is sustainable.
- Inventory growth, its sell-through and reserve assumptions, given inventory’s increase since March 31.
- Developments and potential financial exposure in both lawsuits, including the carrying value of mesh-liner-related costs.
- Availability and terms of the amended credit facility, including borrowing-base availability and covenant compliance.
- Cash generation, dividend sustainability, and the effects of customer concentration, supplier dependence and raw-material costs.