Crown Crafts, Inc. — Form 10-Q Summary
Business and period: Crown Crafts designs, markets and sources infant, toddler and juvenile products, including bedding, blankets, bibs, bath and disposable products. The filing covers the three months ended June 29, 2014 (fiscal 2015 first quarter), compared with the three months ended June 30, 2013. Unless stated otherwise, amounts below are in millions.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Net sales | $15.704 | $16.613 |
| Gross profit / margin | $4.282 / 27.3% | $4.494 / 27.1% |
| Operating income | $1.120 | $1.324 |
| Net income | $0.703 | $0.822 |
| Basic and diluted EPS | $0.07 | $0.08 |
| Operating cash flow | $6.483 | $3.375 |
| Investing cash flow | ($0.045) | ($0.035) |
| Financing cash flow | ($0.779) | ($0.790) |
Marketing and administrative expenses, including separately presented legal expense, totaled $3.162 million versus $3.170 million; as a share of sales they rose to 20.1% from 19.1%. Interest expense was $8,000 versus $21,000. The effective tax rates disclosed for fiscal 2015 and 2014 were 37.6% and 37.2%, respectively. Dividends declared were $0.08 per share in both quarters.
Financial position and liquidity
At June 29, 2014, cash was $6.219 million, compared with $0.560 million at March 30, 2014. Total assets were $49.055 million and shareholders’ equity was $36.395 million. Current assets of $40.879 million exceeded current liabilities of $12.660 million. Inventory increased to $18.042 million from $13.607 million; accounts payable rose to $7.588 million from $5.066 million.
No amount was outstanding under the $26 million revolving credit facility, and no letters of credit were outstanding. Availability was $20.7 million, subject to eligible receivable and inventory balances; the facility matures July 11, 2016. The company reported compliance with its covenants. It factors most trade receivables through CIT. Amounts due from CIT totaled $20.1 million, including $14.0 million from factoring and $6.1 million associated with the facility; the filing identifies this as the maximum exposure if CIT failed to perform.
Changes, outlook and risks
- Sales declined 5.5% year over year. Bedding, blankets and accessories fell 4.4% to $10.801 million; bibs, bath and disposable products fell 7.8% to $4.903 million.
- Management attributed weaker sales to lower retailer replenishment orders as customers maintained leaner inventories, and lower initial set orders from a major retailer whose prior-year modular set was not fully refreshed. Gross margin improved 0.2 percentage points, but gross profit fell with sales; net income declined 14.5%.
- Operating cash flow improved primarily because of a larger increase in accounts payable. Management said cash, operating cash flow and available credit were expected to meet liquidity needs at current operating levels. No specific earnings or revenue guidance was provided.
- BreathableBaby alleges that the company’s mesh crib liner infringes its patent. Cross-motions for summary judgment were scheduled for September 24, 2014. The company reported about $1.0 million of capitalized patent and defense costs that could be impaired following an unfavorable outcome; the filing does not quantify other potential litigation exposure.
- Key risks include competition, consumer and retail conditions, customer order levels, raw-material and shipping costs, dependence on third-party suppliers (including in Asia), licensed intellectual property, and the outcome of the patent dispute. Management cautioned that price increases may not timely offset cost inflation.
- After quarter-end, stockholders approved a new equity compensation plan authorizing 1.2 million shares for future issuance and ending further grants under the prior plan. This creates potential future dilution.
Important facts for investors to verify
- Whether retailer replenishment and modular-set orders recover, and how sales trends develop across both product categories.
- Inventory growth and working-capital movements, including the contribution of higher accounts payable to operating cash flow.
- Available borrowing capacity under the asset-based facility and continuing reliance on CIT for factoring and liquidity.
- Developments and possible financial consequences of the BreathableBaby litigation, including any impairment or sales restrictions.
- The effect of future awards under the 1.2-million-share equity plan and the sustainability of dividends relative to earnings.