Crown Crafts, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended January 1, 2012; comparisons are to the periods ended December 26, 2010. The interim financial statements are unaudited. Crown Crafts sells infant and toddler bedding, accessories, bibs, bath and disposable products.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $21.649 million, down 1.3% | $60.467 million, down 3.7% |
| Gross profit / margin | $5.244 million / 24.2%; prior 20.1% | $13.768 million / 22.8%; prior 22.8% |
| Operating income | $2.550 million; prior $1.360 million | $5.276 million; prior $4.772 million |
| Net income | $1.548 million; prior $0.775 million | $3.145 million; prior $2.715 million |
| Diluted earnings per share | $0.16; prior $0.08 | $0.32; prior $0.28 |
For the nine months, bedding, blankets and accessories sales were $44.709 million, down 4.0%; bibs, bath and disposable products sales were $15.758 million, down 3.0%. Management attributed lower sales primarily to weaker retail sell-through. Quarterly gross margin improved with lower raw-material and freight costs, product re-engineering, supplier changes and the exit from an unprofitable private-label bedding program. Marketing and administrative expenses fell 11.4% for the nine months, partly due to lower compensation and lower corporate-governance and shareholder-related professional fees.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $7.650 million, compared with $0.216 million in the prior period. The improvement reflected a smaller inventory increase, a larger receivables reduction and increased accounts payable, partly offset by lower accrued liabilities.
- Investing cash outflow was $0.285 million, principally capital expenditures. Financing cash outflow was $7.291 million, including $2.0 million of debt payments, $4.336 million of net revolver repayments, $0.738 million of treasury-stock purchases and $0.866 million of dividends paid.
- Cash was $0.279 million at January 1, 2012. Total assets were $44.874 million and shareholders’ equity was $33.875 million. Current assets were $35.342 million versus current liabilities of $10.999 million.
- No debt or letters of credit were outstanding at January 1, 2012. The $26 million revolving facility matured July 2013; $23.3 million was available based on eligible receivables and inventory. The company reported compliance with its covenants.
- The company had paid off $7.7 million of debt since December 26, 2010, including the remaining $2.0 million subordinated-note balance in July 2011. The majority of trade receivables are factored with CIT; the factoring agreements expire in July 2013.
Dividends declared were $0.04 per share for the quarter and $0.10 per share for the nine months. Management believes operating cash flow and revolver availability will meet liquidity needs at current operating levels.
Outlook, risks and unusual items
- No specific sales, earnings or margin guidance was provided. Management said results for the interim periods are not necessarily indicative of full-year results and did not anticipate a material change in the estimated 38.1% effective tax rate for the remainder of fiscal 2012, while noting that actual results and tax credits could affect it.
- Risks cited include consumer spending and retail conditions, competition, raw-material costs including cotton and oil, dependence on third-party and overseas suppliers, customer orders, product acceptance, shipping disruptions, and reliance on third-party licenses. The company cautioned it may not be able to pass cost inflation through promptly or successfully.
- BreathableBaby filed patent-infringement complaints in Minnesota on January 11, 2012 and California on February 8, 2012, alleging infringement by the company’s mesh crib liner. The company says it has meritorious defenses and intends to defend itself vigorously; the filing does not quantify potential exposure.
- The IRS was examining the company’s federal return for fiscal 2009. Management said an examination adjustment could affect future results, but the amount or outcome was not clear in the filing.
- Churchill Weavers’ former property remained classified as held for sale at $0.275 million. Its upkeep generated small discontinued-operation losses. The annual goodwill impairment test as of April 4, 2011 found reporting-unit fair values above carrying values.
Most important facts for investors to verify
- Whether retail sell-through and sales trends improve, particularly in bedding and accessories.
- Whether improved gross margins persist as raw-material, freight and supplier costs change.
- Revolver borrowing-base availability, factoring terms and compliance with credit-facility covenants.
- Developments and potential financial exposure from the BreathableBaby patent litigation and the IRS examination.
- Inventory valuation and customer deductions, both identified as areas involving significant management estimates.