Crown Crafts, Inc. — Q2 FY2012 Form 10-Q
Business context and period. Crown Crafts designs and markets infant and toddler products, including bedding, nursery accessories, bibs and related soft goods, primarily for retailers. The unaudited quarter and six-month period ended October 2, 2011 are compared with periods ended September 26, 2010. Fiscal 2012 ends April 1, 2012.
Financial performance
| Metric | Three months ended Oct. 2, 2011 | Year-to-date | Change from comparable period |
|---|---|---|---|
| Net sales | $21.319 million | $38.818 million | Down 10.1% for the quarter; down 5.0% YTD |
| Gross profit / margin | $4.741 million / 22.2% | $8.524 million / 22.0% | Prior-year margins: 23.8% and 24.3% |
| Operating income | $1.793 million | $2.726 million | Down 16.1% for the quarter; down 20.1% YTD |
| Net income | $1.067 million | $1.597 million | Down 12.1% for the quarter; down 17.7% YTD |
| Diluted EPS | $0.11 | $0.16 | Prior-year $0.12 and $0.20 |
| Operating cash flow | $5.887 million YTD | Compared with $0.116 million used YTD last year |
Quarterly sales fell in both product categories: bedding, blankets and accessories declined 11.1%; bibs, bath and disposable products declined 7.3%. YTD category sales were down 5.1% and 5.0%, respectively. Cash dividends declared were $0.03 per share for the quarter and $0.06 YTD.
Financial position and liquidity
- At October 2, 2011, cash was $117,000; current assets were $33.150 million and current liabilities were $9.138 million. Inventory was $16.526 million, up from $13.560 million at April 3, 2011.
- Total debt was $1.175 million, all under the revolving credit line, versus $6.288 million at April 3, 2011. The company repaid the remaining $2.0 million subordinated notes in July and made $3.161 million net repayments on its revolver YTD.
- The CIT revolving facility provides up to $26.0 million, subject to eligible receivables and inventory. At quarter-end, $500,000 of letters of credit were outstanding and $20.7 million was available. The company reported compliance with covenants.
- YTD investing cash use was $146,000, primarily capital expenditures. Financing activities used $5.829 million, including debt repayments, $735,000 of treasury-stock purchases and $576,000 of dividends paid.
Material changes, outlook and risks
- Management attributed lower sales to discontinued programs and weaker replenishment orders, which more than offset new designs and promotions. Higher raw-material, labor, transportation and currency costs, plus increased returns and allowances, pressured gross margin despite price increases.
- Unfavorable inventory burden variance reduced gross margin by $624,000 for the quarter and $977,000 YTD versus the prior year, which had favorable variances. Management does not expect a material burden variance by fiscal year-end.
- Marketing and administrative expenses declined, reflecting lower compensation, factoring fees and costs associated with the prior-year proxy contest; higher advertising costs partly offset the decreases. Lower debt balances reduced interest expense.
- No specific sales or earnings guidance is provided. Management believes operating cash flow and revolver availability will be adequate for liquidity needs, but notes that future performance and debt-service capacity depend partly on factors outside its control. It cautions that it may not be able to implement price increases quickly enough to offset cost inflation.
- Key risks include consumer spending and economic conditions, raw-material and oil prices, competition and retail conditions, customer orders and pricing, reliance on third-party and foreign suppliers, shipping disruptions, new-product acceptance and third-party licenses. CIT may restrict customer credit approvals; the company remains responsible for returns, allowances, claims and discounts on factored receivables.
- The IRS is examining the federal income-tax return for fiscal 2009; any resulting adjustments could affect future results. Churchill Weavers’ former property remains held for sale. The filing reports no other legal proceedings expected to have a material adverse effect and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether customer order trends, discontinued-program impacts and replenishment demand improve, and whether price increases offset input-cost inflation.
- Whether gross margins recover as returns and allowances and the unfavorable inventory burden variance evolve; monitor inventory growth and reserve estimates.
- Whether operating cash generation and the $20.7 million of reported revolver availability remain adequate, including continued covenant compliance and CIT customer approvals.
- The outcome of the IRS examination and any effects on tax expense or cash taxes.
- Continued capital allocation through dividends and share repurchases alongside the company’s low cash balance.