Crown Crafts, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the first quarter of fiscal 2012, the three months ended July 3, 2011; comparisons are to the three months ended June 27, 2010. Crown Crafts sells infant and toddler products, including bedding, bibs, bath and disposable products. Its products are manufactured primarily in Asia.
Financial results and position
| Metric | Q1 FY2012 | Comparable quarter |
|---|---|---|
| Net sales | $17.499 million | $17.167 million |
| Gross profit / margin | $3.783 million / 21.6% | $4.291 million / 25.0% |
| Operating income | $0.933 million | $1.276 million |
| Net income | $0.530 million | $0.726 million |
| Diluted EPS | $0.05 | $0.08 |
| Operating cash flow | $4.173 million | $4.066 million |
| Cash at period end | $0.011 million | $0.918 million |
At July 3, 2011, total assets were $44.061 million, current assets $34.046 million and current liabilities $11.984 million. Total debt, net of original issue discount, was $2.415 million, comprising $1.988 million of current maturities and $0.427 million of long-term debt. The company had $21.5 million available under its revolving facility, based on eligible receivables and inventory, and a $0.5 million letter of credit outstanding. Shareholders’ equity was $31.650 million. The company declared dividends of $0.03 per share for the quarter.
Changes versus the prior comparable quarter
- Sales increased 1.9%. Bedding, blankets and accessories sales rose 3.3% to $12.960 million; bib, bath and disposable products sales fell 1.8% to $4.539 million.
- Gross profit declined 11.8%, and gross margin contracted 3.4 percentage points. Management attributed this chiefly to higher raw-material, labor, transportation and currency costs tied to sourcing in China. Prior-year gross profit benefited from $0.333 million of overhead over-absorption; the current-quarter impact was minimal.
- Marketing and administrative expenses fell 5.5% to $2.850 million, reflecting lower compensation costs and factoring fees, and lower costs associated with shareholder-related matters than in the prior-year period.
- Net income declined 27.0%. Interest expense decreased to $0.078 million from $0.097 million, primarily due to lower credit-facility balances.
- Operating cash flow was slightly higher year over year. Investing used $0.075 million, mainly for capital expenditures, versus $1.619 million used in the prior year, which included the Bibsters acquisition. Financing used $4.292 million, primarily reflecting $3.909 million of net revolver repayments, treasury-stock purchases and dividends.
- Inventory increased to $18.383 million from $13.560 million at April 3, 2011, while cash fell to $0.011 million from $0.205 million. Revolver debt declined to $0.427 million from $4.336 million.
Outlook, risks and unusual items
- No numerical earnings or sales guidance is provided. Management said it believes operating cash flow and revolver availability will be adequate for liquidity needs based on current operations.
- Management has sought price increases to offset inflation, but cautioned that it may not achieve increases, or may not implement them quickly enough to match rising costs.
- Key disclosed risks include economic and consumer-spending conditions; raw-material, oil and currency costs; competition and retail changes; customer orders and pricing; reliance on third-party, including foreign, suppliers; transportation disruptions; product acceptance; and dependence on third-party licenses.
- The $2.0 million non-interest-bearing subordinated notes were due July 11, 2011, shortly after quarter-end. The filing does not clearly state whether they were repaid or refinanced after that date.
- The IRS selected the federal tax return for the year ended March 29, 2009 for examination. Management considers its tax positions reasonable but notes that examination adjustments could affect future results.
- The company reported no legal proceedings expected to have a material adverse effect, no material changes to previously disclosed risk factors, and compliance with its credit-facility covenants at quarter-end. Disclosure controls were assessed as effective.
- At the August 9, 2011 annual meeting, shareholders approved reducing authorized capital stock from 75 million shares to 40 million shares, all Series A common stock.
Important facts for investors to verify
- Whether the $2.0 million subordinated notes due July 11, 2011 were repaid, refinanced or otherwise addressed.
- Whether inventory growth and the quarter’s working-capital movements align with expected demand and sell-through.
- Whether pricing actions can offset China-related input, labor, freight and currency cost pressures without harming orders or margins.
- Whether gross-margin weakness persists, considering the prior-year overhead benefit and the quarter’s limited overhead absorption.
- The outcome and potential financial effect of the IRS examination, and changes in receivable or inventory allowance estimates.