Crown Crafts, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended September 28, 2014; comparisons are to the periods ended September 29, 2013. The company designs and markets infant, toddler and juvenile products, manufactured primarily in Asia. Fiscal 2015 ends March 29, 2015.
Financial performance
| Metric | Three months ended Sep. 28, 2014 | Six months ended Sep. 28, 2014 |
|---|---|---|
| Net sales | $20.441 million | $36.145 million |
| Gross profit / margin | $5.846 million / 28.6% | $10.128 million / 28.0% |
| Operating income | $1.339 million | $2.459 million |
| Net income | $0.830 million | $1.533 million |
| Diluted EPS | $0.08 | $0.15 |
| Operating cash flow | Not provided separately for the quarter | $3.327 million |
Quarterly gross margin was unchanged year over year; six-month gross margin edged up from 27.9% to 28.0%. Net income margin was 4.1% for the quarter and 4.2% for the six months. Dividends declared were $0.08 per share for the quarter and $0.16 per share for the six months.
At September 28, cash was $2.203 million, current assets were $42.324 million and current liabilities were $13.546 million. Inventory was $19.055 million, up from $13.607 million at fiscal year-end. There was no revolving-line balance or outstanding letter of credit; $24.7 million was available under the facility, subject to eligible receivables and inventory. The $26 million facility matures July 11, 2016. Shareholders’ equity was $36.650 million.
Six-month investing cash use was $0.120 million, mainly capital expenditures; financing cash use was $1.564 million, primarily dividends. Cash increased $1.643 million from fiscal year-end. The company had no outstanding borrowings under its revolving credit line at period-end.
Changes versus prior year
- Quarterly sales increased 1.9% ($0.390 million), while six-month sales declined 1.4% ($0.519 million). Bedding, blankets and accessories grew in the quarter; bibs, bath and disposable products declined over the six-month period.
- Quarterly net income fell 27.3% to $0.830 million; six-month net income declined 21.9% to $1.533 million. Operating income fell to $1.339 million for the quarter and $2.459 million for the half year.
- Legal expense rose to $1.109 million for the quarter and $1.301 million for the half year, principally due to the BreathableBaby settlement and related legal fees. The settlement charge was $0.850 million pretax and reduced net income by approximately $0.530 million, or $0.05 per diluted share, in each reported period.
- Six-month operating cash flow increased from $3.103 million to $3.327 million. Management attributed the increase principally to higher accounts payable, partly offset by a smaller reduction in receivables and a greater inventory build.
Outlook, risks and unusual items
Management said cash, operating cash flow and available credit should be adequate for liquidity needs at current activity levels. No specific sales or earnings guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results and that the estimated annual effective tax rate is 37.4%, subject to change based on income mix, nondeductible expenses and tax credits.
The BreathableBaby patent dispute was settled: the company will make a one-time $0.850 million payment and may manufacture and sell a redesigned mesh crib liner. The settlement agreement was still being finalized when the filing was made. The company also identified risks involving consumer spending, competition and retail conditions, raw-material costs, third-party and overseas suppliers, customer orders, product acceptance, shipping disruptions, and reliance on third-party licenses. CIT bears certain credit losses on approved factored receivables, but can limit or terminate customer approvals; the company reported a maximum potential loss of $19.9 million if CIT failed completely to perform on factoring and revolving-line obligations. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Final terms and payment timing for the BreathableBaby settlement, and the commercial prospects of the redesigned product.
- Whether the inventory build converts to sales without additional markdowns, obsolescence reserves or pressure on cash flow.
- Availability and terms of CIT factoring and borrowing capacity, including the company’s exposure to CIT and customer-approval changes.
- Whether sales and profitability recover, and whether the 37.4% estimated tax rate and quarterly dividend remain sustainable.