Business context and reporting period
Crown Crafts, Inc. designs and markets infant, toddler and juvenile products, including bedding, blankets, bibs, bath and disposable products. Products are manufactured primarily in Asia and sold mainly to retailers. This unaudited Form 10-Q covers the three and six months ended September 29, 2013 (fiscal 2014); comparisons are to the periods ended September 30, 2012. Unless noted, amounts below are in millions.
Financial performance and liquidity
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $20.1 (+16.0%) | $36.7 (+5.6%) |
| Gross profit / margin | $5.7 / 28.6% (prior 22.6%) | $10.2 / 27.9% (prior 24.0%) |
| Income from operations | $1.8 (prior $1.1) | $3.2 (prior $2.6) |
| Net income | $1.1 (prior $0.8) | $2.0 (prior $1.7) |
| Diluted earnings per share | $0.12 (prior $0.08) | $0.20 (prior $0.17) |
For the six months, operating cash flow was $3.1, down from $7.8 a year earlier; higher inventory growth and a smaller reduction in receivables contributed to the decline. Investing cash use was $0.04 (prior $0.41), and financing cash use was $1.6 (prior $1.2), mainly reflecting higher dividend payments. Cash was $1.8 at September 29, versus $0.3 at March 31, 2013.
Current assets were $35.7 and current liabilities $10.6 at September 29. The company had no revolving-credit borrowings or outstanding letters of credit and reported $22.2 of availability under its $26.0 revolving facility, subject to eligible receivables and inventory. The facility matures July 11, 2016; the company was in covenant compliance. Six-month dividends declared were $0.16 per share, versus $0.08 in the prior-year period.
Material changes and management commentary
- Quarterly sales growth was driven largely by three new programs. Bedding, blankets and accessories sales rose 21.5% in the quarter; bibs, bath and disposable products rose 2.1%. For six months, the respective increases were 7.1% and 1.8%.
- Management attributed stronger gross margins to a more favorable customer and product mix, better absorption of fixed costs on higher sales, and lower costs after vacating and subletting an auxiliary warehouse.
- Marketing and administrative expense rose 40.0% in the quarter and 22.5% for six months, primarily due to higher performance-based compensation and legal fees. Legal expenses were $0.30 for the quarter and $0.56 for six months.
- Management said cash, operating cash flow and credit availability should meet liquidity needs at current operating levels. No specific earnings or sales guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
- The estimated annual effective tax rate increased to 37.4% from 35.8%, primarily due to fewer deductible-for-tax/book differences and lower projected state Enterprise Zone wage credits.
Risks, contingencies and unusual items
- A patent-infringement suit by BreathableBaby over the company’s mesh crib liner remained pending; discovery was temporarily stayed in August 2013. The company had capitalized approximately $1.0 of patent application and defense costs, which could be impaired if the litigation outcome differs from its expectations.
- A separate California consumer class complaint concerning crib bumpers was dismissed without prejudice in September 2013, with each party bearing its own costs and fees.
- Key disclosed business risks include competition, consumer spending and retailer orders, raw-material costs, reliance on third-party suppliers (including foreign suppliers), transportation disruptions, product acceptance, and reliance on third-party licenses. The company also noted judgment-sensitive estimates for customer allowances and inventory valuation.
- The prior-year cash comparison is affected by a $4.9 special dividend paid in December 2012. The filing reported no material changes to previously disclosed risk factors and no material subsequent events.
Important facts for investors to verify
- Whether sales growth from the three new programs continues and whether the favorable customer/product mix and gross margin improvement are sustainable.
- Inventory growth and the associated effect on operating cash flow, including the adequacy of inventory reserves.
- Developments in the BreathableBaby litigation and potential impairment of the approximately $1.0 capitalized patent-related balance.
- Performance-based compensation, legal costs and the effective tax rate in subsequent periods.
- Availability under the asset-based credit facility, factoring terms and customer-related deductions or credit exposure.