Crown Crafts, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 27, 2015; comparisons are to the periods ended September 28, 2014. The interim financial statements are unaudited. Crown Crafts sells infant, toddler and juvenile products, primarily through retailers, with manufacturing mainly in Asia.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $20.716 million, up 1.3% | $38.574 million, up 6.7% |
| Gross profit / margin | $5.706 million / 27.5% (prior: 28.6%) | $10.487 million / 27.2% (prior: 28.0%) |
| Operating income | $2.598 million (prior: $1.339 million) | $4.118 million (prior: $2.459 million) |
| Net income | $1.565 million (prior: $0.830 million) | $2.492 million (prior: $1.533 million) |
| Diluted earnings per share | $0.16 (prior: $0.08) | $0.25 (prior: $0.15) |
| Operating cash flow | Not presented separately for the quarter | $7.251 million (prior: $3.327 million) |
Revenue and margins: Second-quarter sales rose modestly as sales of bibs, bath and disposable products increased 25.7%, offsetting a 6.6% decline in bedding, blankets and accessories. For the first half, the categories increased 19.9% and 1.7%, respectively. Management attributed sales growth largely to initial shipments of new collections and replenishment of ongoing programs. Gross margin declined in both periods, which management attributed to lower preset prices on new business assumed from a former competitor.
Expenses and taxes: Legal expense fell by $1.1 million in the quarter and $1.2 million for the half, mainly because the prior-year periods included an $850,000 settlement and fees related to litigation settled in the quarter ended December 28, 2014. The reported income tax expense was $1.021 million for the quarter and $1.626 million for the half. Management estimated a 39.5% fiscal 2016 effective tax rate, versus 37.4% for fiscal 2015, mainly due to increased nondeductible expenses.
Financial position, liquidity and capital resources
- At September 27, 2015, cash was $6.139 million, up from $1.807 million at March 29, 2015. Current assets were $43.575 million and current liabilities were $10.539 million.
- Six-month operating cash flow of $7.251 million was primarily supported by net income and a decrease in receivables; inventory increased by $2.096 million. Investing cash outflow was $255,000, including $163,000 of property and equipment spending and $123,000 for purchased intangible assets. Financing cash outflow was $2.664 million, including $1.467 million of treasury-stock purchases and $1.611 million of dividends paid.
- No balance was drawn on the $26.0 million CIT revolving facility and no letters of credit were outstanding. Availability was $23.8 million, subject to eligible receivables and inventory. The facility matures July 11, 2016; the company reported covenant compliance and no other structured debt.
- The company declared dividends of $0.08 per share for the quarter. Management said cash, operating cash flow and facility availability should meet liquidity needs at current operating levels.
- The company factors most trade receivables to CIT. It disclosed $22.1 million as the combined maximum exposure if CIT completely failed to perform under the factoring arrangements and revolving facility; this is a stated exposure scenario, not a reported loss.
Outlook, risks and notable items
- The filing provides no quantified sales or earnings guidance. Management cautioned that interim results are not necessarily indicative of full-year results; fiscal 2016 is a 53-week year ending April 3, 2016.
- Risks identified include competition, consumer spending and retail conditions, raw-material costs (including oil and cotton), reliance on third-party and foreign suppliers, shipping disruptions, customer orders and acceptance of new products, and dependence on third-party licenses. Management also noted it may not be able to pass inflationary cost increases through to customers promptly or fully.
- 240,000 employee shares vested during the quarter, with $948,000 remitted for related tax withholding. Shares surrendered for withholding, including those connected with vesting and option exercises, accounted for 137,059 shares reported as purchased; these were not purchases under a publicly announced repurchase plan.
- The company reported no material subsequent events and no legal proceeding expected to have a material adverse effect. Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue gains in bibs, bath and disposable products can continue and offset the quarterly decline in bedding and related products.
- Whether the lower-margin business assumed from a former competitor continues to pressure gross margin.
- The sustainability of lower legal and administrative expenses, given the prior-year settlement and litigation-related comparison.
- Receivables, inventory levels and factoring dependence, including CIT’s customer-approval rights and the disclosed counterparty exposure.
- The renewal or replacement of the CIT facility before its July 11, 2016 maturity, and the company’s ability to maintain liquidity and covenant compliance.
- Potential effects of nondeductible expenses on the tax rate, and of share-based compensation and dividends on cash and shareholder dilution.