Crown Crafts, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 29, 2013; comparisons are to the periods ended December 30, 2012. The company designs and markets infant, toddler and juvenile products, with manufacturing primarily through third parties in Asia, especially China.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $20.6 million, up 2.7% | $57.3 million, up 4.5% |
| Gross profit / margin | $6.0 million / 28.9%; prior-year margin 26.3% | $16.2 million / 28.2%; prior-year margin 24.9% |
| Operating income | $2.9 million, versus $2.5 million | $6.0 million, versus $5.1 million |
| Net income | $1.8 million, up 10.9%; diluted EPS $0.18 | $3.7 million, up 15.0%; diluted EPS $0.38 |
Sales growth was led by bedding, blankets and accessories: up 6.5% in the quarter and 6.9% year to date. Bibs, bath and disposable products declined 6.7% and 1.3%, respectively. Management attributed the overall sales increase largely to three new programs introduced in the second quarter.
Gross margin improvement reflected a more favorable customer and product mix, better fixed-cost coverage from higher sales, and lower costs for an auxiliary warehouse the company vacated and sublet. Marketing and administrative expenses rose 11.4% for the quarter and 18.8% year to date, mainly from performance-based compensation and legal fees. The estimated fiscal 2014 effective tax rate was 37.7%, versus 36.2% in fiscal 2013.
Cash, liquidity and capital
- Nine-month operating cash flow was $6.0 million, down from $8.6 million, primarily reflecting a larger inventory build partly offset by a larger reduction in receivables. Investing cash outflow was $0.08 million; financing cash outflow was $2.4 million, mainly dividends.
- Cash at December 29 was $3.8 million, compared with $0.3 million at March 31, 2013. Inventory rose to $17.2 million from $10.9 million, primarily finished goods.
- No revolving-credit borrowings or letters of credit were outstanding. The $26 million facility matures July 11, 2016; $23.6 million was available subject to eligible receivables and inventory. The company reported covenant compliance.
- Current liabilities were $14.8 million and shareholders’ equity was $34.6 million. Dividends declared were $0.08 per share for the quarter and $0.24 year to date, versus $0.58 and $0.66 in the comparable periods.
- Management said cash, operating cash flow and credit availability should meet liquidity needs at the current operating level. It provided no specific earnings or sales guidance.
Material developments, risks and contingencies
- A patent-infringement suit by BreathableBaby concerning the company’s mesh crib liner remains pending. Discovery was temporarily stayed in August 2013. The company disputes the claims and intends to defend itself. It has capitalized about $1.0 million of patent and litigation costs; an adverse outcome could result in an impairment charge up to that carrying amount.
- The company factors most trade receivables through CIT. CIT bears specified credit losses on approved customers, but may limit or withdraw customer approvals. The filing identifies $18.6 million as the maximum loss if CIT failed completely to perform on the factored receivables and revolving-line cash balance.
- Key disclosed risks include competition, customer demand and retail conditions, reliance on third-party suppliers and licenses, foreign sourcing and shipping disruptions, and changes in oil, cotton and other input costs. Management cautioned that price increases may not fully or promptly offset inflation.
- Management identified no material subsequent events and no material changes to previously disclosed risk factors. Disclosure controls were concluded effective, with no reported material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the new sales programs and favorable product mix continue, particularly given the decline in bibs, bath and disposable products.
- Inventory growth, sell-through and any resulting markdowns or reserve needs; inventory valuation relies on management estimates.
- Progress and potential financial impact of the BreathableBaby litigation and the recoverability of the related $1.0 million capitalized balance.
- Availability under the asset-based credit facility and exposure to CIT, including factoring terms and customer-approval changes.
- Performance-based compensation, legal costs and the factors that could change the estimated effective tax rate.