Crown Crafts, Inc. — Q1 FY2013 Form 10-Q
Business context and period. Crown Crafts designs and markets infant and toddler products, including bedding, bibs, bath and disposable products, using contract manufacturers primarily in Asia. The unaudited quarter ended July 1, 2012; comparisons are with the three months ended July 3, 2011. Amounts below are in U.S. dollars.
Financial performance
| Metric | Quarter ended July 1, 2012 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $17.453 million | $17.499 million | Down 0.3% |
| Gross profit / margin | $4.425 million / 25.4% | $3.783 million / 21.6% | Profit up 17.0%; margin up 3.8 percentage points |
| Operating income | $1.440 million | $0.928 million | Up $0.512 million |
| Net income / diluted EPS | $0.897 million / $0.09 | $0.530 million / $0.05 | Net income up 69.2% |
| Operating cash flow | $4.128 million | $4.173 million | Down $0.045 million |
| Cash at quarter-end | $3.561 million | $0.011 million | Compared with prior-year quarter-end |
- Sales of bedding, blankets and accessories fell 5.8% to $12.213 million; bibs, bath and disposable products grew 15.4% to $5.240 million.
- Marketing and administrative expenses rose 4.6% to $2.985 million. Interest expense declined to $19,000 from $78,000.
- Cash used in investing was $290,000, primarily for internally developed intangible assets. Financing used $491,000, including $387,000 of dividends paid and $1.002 million of treasury-stock purchases.
- At July 1, total assets were $45.077 million, current assets $35.390 million, current liabilities $9.485 million, and shareholders’ equity $35.592 million. Inventory was $14.519 million, up from $11.839 million at April 1, 2012.
- No balance was outstanding under the revolving credit line; $21.2 million was available based on eligible receivables and inventory. The $26 million facility matures July 11, 2013. The company reported compliance with its covenants. The filing does not identify other outstanding debt at quarter-end.
Material changes and management commentary
- Management attributed stronger gross margin to product redesigns that reduced reliance on high-cost cotton, discontinuation of an unprofitable private-label bedding program, and $123,000 less amortization related to the Springs acquisition. Sales were nearly flat, with the prior-year discontinuation of that bedding program and a timing shift of sales into the current quarter affecting the comparison.
- Operating cash flow was slightly lower year over year. The company cited a lower increase in inventory, offset by a lower net increase in accounts payable and accrued liabilities. The current quarter’s cash balance increased by $3.347 million from April 1.
- The factoring agreements with CIT were amended effective April 2, 2012: CIT now remits funds as it receives customer payments. The agreements expire in July 2013. At July 1, $14.5 million was due from CIT and $3.4 million of company cash was held there; together these were the stated maximum exposure if CIT failed completely to perform.
- No dividend was declared in the quarter, compared with $0.03 per share in the prior-year quarter. The company bought back 180,438 shares for an average $5.55 per share; these were shares surrendered for option exercise costs and tax withholding, not purchases under a public repurchase program.
- Effective April 2, 2012, the dormant Churchill property was reclassified from held for sale to held and used; the company resumed depreciation and included maintenance costs in continuing operations.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management stated that cash, operating cash flow and revolver availability should meet liquidity needs at current operating levels, while cautioning that actual results are not necessarily indicated by this quarter.
- Risks cited include consumer spending and economic conditions, raw-material prices (including cotton and oil), competition and retail changes, customer orders and pricing, reliance on third-party suppliers and licenses, product acceptance, and shipping disruptions. Management noted that price increases may not fully or promptly offset cost inflation.
- The estimated fiscal 2013 effective tax rate was 37.2%, versus 38.2% for fiscal 2012. Management did not anticipate a material change for the rest of fiscal 2013, but noted sensitivity to income mix, nondeductible expenses and tax credits.
- BreathableBaby alleges patent infringement involving the company’s mesh crib liner. A motion for summary judgment was denied without prejudice on July 25, 2012 pending discovery; the company said it intends to defend the claim. A separate putative consumer class action alleges crib-bumper safety disclosure and consumer-protection violations; no child injury was alleged. The company filed an answer and motion to dismiss certain claims, scheduled for hearing August 27, 2012. The filing does not quantify potential damages or provide a clear estimate of exposure.
- The company said other ordinary-course legal matters were not expected, individually or in aggregate, to materially adversely affect financial condition, results or cash flows. It also reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether improved gross margins persist as product costs, cotton prices and product mix change.
- Whether inventory growth converts to sales and cash without additional markdowns or reserves.
- Available borrowing capacity and the July 2013 expiration and renewal terms of the CIT facility and factoring agreements.
- Developments and potential financial exposure in the patent and consumer class-action litigation.
- Future dividend policy, given no dividend was declared in this quarter despite dividends payable at quarter-end.