Crown Crafts, Inc. — Form 10-Q Summary
Business context and reporting period. Crown Crafts designs and markets infant, toddler and juvenile products, including bedding, blankets, bibs, bath and disposable products. This unaudited filing covers the three and nine months ended December 27, 2015, compared with the periods ended December 28, 2014. Fiscal 2016 is a 53-week year ending April 3, 2016. Dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $20.691; down 12.9% | $59.265; down 1.0% |
| Gross profit / margin | $6.252 / 30.2%, versus $6.628 / 27.9% | $16.739 / 28.2%, versus $16.756 / 28.0% |
| Income from operations | $3.070, versus $3.272 | $7.188, versus $5.731 |
| Net income | $2.143, versus $2.046 | $4.635, versus $3.579 |
| Diluted EPS | $0.21, versus $0.20 | $0.46, versus $0.36 |
| Dividends declared per share | $0.08 | $0.24 |
Cash flow and liquidity. Nine-month operating cash flow was $9.527, compared with $2.594 a year earlier. Investing activities used $0.308, including $0.123 for purchased intangible assets; financing activities used $3.477, including $2.410 of dividends paid and $1.692 of treasury-stock purchases. Cash was $7.549 at December 27, 2015, versus $1.807 at March 29, 2015. Current assets were $46.963 and current liabilities $12.099. Inventory was $17.513, up from $15.468 at fiscal year-end.
Debt and credit availability. No amount was outstanding on the $26.0 million revolving facility at quarter-end; no letters of credit were outstanding, and $25.4 million was available based on eligible receivables and inventory. The facility is secured by company assets. The company reported compliance with its covenants. Its CIT financing agreement was amended on December 28, 2015, extending maturity to July 11, 2019 and eliminating the commitment fee.
Material changes and management commentary
- Quarterly sales declined primarily because of lower replenishment amid soft retail sales and retailers shifting purchases toward seasonal goods. Prior-year sales also included initial shipments from business gained after a competitor exited.
- For the nine-month period, bedding, blankets and accessories sales fell 4.7% to $42.456 million; bibs, bath and disposable product sales rose 9.7% to $16.809 million.
- Quarterly gross margin improved mainly from tight cost control and lower product costs in China associated with favorable exchange-rate movements. Nine-month margin improvement was modest, with efficiencies partly offset by lower preset prices on acquired business.
- Nine-month legal expense fell about $1.3 million, primarily because the prior-year period included an $0.850 million settlement and $0.369 million in related legal fees.
- Management believes cash, operating cash flow and available revolving credit are adequate for current liquidity needs. It did not anticipate a material change in the effective tax rate for the balance of fiscal 2016, while noting that income mix and tax credits could affect it.
Outlook, risks and unusual items
- The company recorded a $0.230 million discrete net tax benefit in the quarter, primarily related to more favorable state apportionment percentages. It also recorded a $0.140 million net reserve for unrecognized tax benefits after offsetting a $0.713 million gross reserve with $0.573 million of state tax overpayments, net of federal tax impact.
- After the reporting date, the board declared a special cash dividend of $0.25 per share in addition to the regular $0.08 dividend. Both were scheduled for payment on April 8, 2016 to holders of record on March 18, 2016.
- Management cites risks including consumer spending and retail conditions, competition, customer order levels and pricing, raw-material costs, reliance on third-party and foreign suppliers, transportation disruptions, product acceptance and dependence on third-party licenses. CIT may limit credit approval for customers; the company would then bear credit risk on subsequent shipments or stop shipments.
- The filing reports ordinary-course legal and regulatory matters but no proceeding expected to have a material adverse effect. The company said there were no material changes to the risk factors in its prior Form 10-K. Disclosure controls were assessed as effective, with no reported material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the sales decline—particularly in bedding, blankets and accessories—continues, and whether the improved gross margin is sustainable.
- How much of the increase in operating cash flow reflects durable earnings versus working-capital timing, including receivables, inventory and payables movements.
- The terms and ongoing availability of the CIT facility, including eligible collateral, customer credit approvals and compliance with covenants.
- The resolution and cash impact of the state tax position and related unrecognized-tax-benefit reserve.
- The cash cost and implications of the special dividend alongside regular dividends and treasury-stock purchases.