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CRWS > SEC Filings for CRWS > Form 10-Q on 13-Nov-2012All Recent SEC Filings

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Form 10-Q for CROWN CRAFTS INC


13-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company operates indirectly through its wholly-owned subsidiaries, CCIP and Hamco, Inc., in the infant and toddler products segment within the consumer products industry. The infant and toddler products segment consists of infant and toddler bedding, bibs, disposable products, soft goods and accessories. Sales of the Company's products are generally made directly to retailers, which are primarily mass merchants, mid-tier retailers, juvenile specialty stores, value channel stores, grocery and drug stores, restaurants, internet accounts, wholesale clubs and catalog retailers. The Company's products are produced by contract manufacturers located primarily in Asia and marketed under a variety of Company-owned trademarks, under trademarks licensed from others and as private label goods.

The Company's products are marketed through a national sales force consisting of salaried sales executives and employees located in Compton, California; Gonzales, Louisiana; and Rogers, Arkansas. Products are also marketed by independent commissioned sales representatives located throughout the United States. Sales outside the United States are made primarily through distributors.

The Company's products are produced by foreign and domestic manufacturers, with the largest concentration being in China. The Company makes sourcing decisions on the basis of quality, timeliness of delivery and price, including the impact of ocean freight and duties. The Company maintains a foreign representative office in Shanghai, China for the coordination of production, purchases and shipments, seeking out new vendors and overseeing inspections for social compliance and quality.

The infant and toddler consumer products industry is highly competitive. The Company competes with a variety of distributors and manufacturers (both branded and private label), including large infant and juvenile product companies and specialty infant and juvenile product manufacturers, on the basis of quality, design, price, brand name recognition, service and packaging. The Company's ability to compete depends principally on styling, price, service to the retailer and continued high regard for the Company's products and trade names.

The Company believes that its creative team is one of its key strengths. Product design ideas are drawn from various sources and are reviewed and modified by the design staff to ensure consistency within the Company's existing product offerings and the themes and images associated with such existing products. In order to respond effectively to changing consumer preferences, the Company's designers and stylists attempt to stay abreast of emerging lifestyle trends in color, fashion and design. When designing products under the Company's various licensed brands, the Company's designers coordinate their efforts with the licensors' design teams to provide for a more fluid design approval process and to effectively incorporate the image of the licensed brand into the product.

The following discussion is a summary of certain factors that management considers important in reviewing the Company's results of operations, financial position, liquidity and capital resources. This discussion should be read in conjunction with the accompanying consolidated financial statements and related notes included elsewhere in this report.


RESULTS OF OPERATIONS

The following table contains results of operations for the three and six-month
periods ended September 30, 2012 and October 2, 2011 and the dollar and
percentage changes for those periods (in thousands, except percentages):

                          Three-Month Periods Ended                                     Six-month Periods Ended
                         September         October 2,                               September 30,       October 2,
                          30, 2012            2011         Change       Change          2012               2011          Change      Change
Net sales by category
Bedding, blankets and
accessories             $     12,381       $   15,382     $ (3,001 )      -19.5 %   $      24,594       $    28,342     $ (3,748 )     -13.2 %
Bibs, bath and
disposable products            4,901            5,937       (1,036 )      -17.4 %          10,141            10,476         (335 )      -3.2 %
Total net sales               17,282           21,319       (4,037 )      -18.9 %          34,735            38,818       (4,083 )     -10.5 %
Cost of products sold         13,368           16,578       (3,210 )      -19.4 %          26,396            30,294       (3,898 )     -12.9 %
Gross profit                   3,914            4,741         (827 )      -17.4 %           8,339             8,524         (185 )      -2.2 %
% of net sales                  22.6 %           22.2 %                                      24.0 %            22.0 %
Marketing and
administrative
expenses                       2,774            2,954         (180 )       -6.1 %           5,759             5,809          (50 )      -0.9 %
% of net sales                  16.1 %           13.9 %                                      16.6 %            15.0 %
Interest expense                  18               70          (52 )      -74.3 %              37               148         (111 )     -75.0 %
Other income                      25                2           23       1150.0 %              32                10           22       220.0 %
Income tax expense               392              652         (260 )      -39.9 %             923               980          (57 )      -5.8 %
Net income                       755            1,067         (312 )      -29.2 %           1,652             1,597           55         3.4 %
% of net sales                   4.4 %            5.0 %                                       4.8 %             4.1 %

Net Sales: Sales of $17.3 million were lower for the three-month period ended September 30, 2012 compared with the same period in the prior year, having decreased 18.9%, or $4.0 million. Sales decreased due to the transitioning away in the prior year from an unprofitable private label bedding program and also due to a shift of sales from the current quarter into the three-month period ending July 1, 2012.

Gross Profit: Gross profit decreased in amount by $827,000, but increased as a percentage of net sales, from 22.2% to 22.6%, for the three-month period of fiscal year 2013 compared with the same period of fiscal year 2012, due to lower production costs resulting from the redesign, commenced in the prior year, of several product lines to reduce the Company's dependence on cotton, the cost of which reached record-setting levels in the prior year. The discontinuance of the unprofitable private label bedding program mentioned above also contributed to the higher gross margin percentage in the current year. The Company also in the current quarter experienced a decline in amortization costs related to the Company's acquisition of the baby products line of Springs Global US, Inc. on November 5, 2007, which were $122,000 lower than in fiscal year 2012.

Marketing and Administrative Expenses: Marketing and administrative expenses were $180,000 lower in the three-month period of the current year compared with the same period of the prior year, primarily due to lower costs for advertising.

Interest Expense: The decrease in interest expense for the three and six-month periods of fiscal year 2013 compared with the same period in fiscal year 2012 is due to lower balances on the Company's credit facility.

Income Tax Expense: The Company's provision for income taxes is based upon an estimated annual effective tax rate of 35.8% for fiscal year 2013, compared with 38.0% for fiscal year 2012. The decrease in the estimated annual effective tax rate in the current year is related to an increase in the current year in the amount of certain expenses which are deductible for tax purposes but not for book purposes, as well as an increase in projected state Enterprise Zone wage credits. Although the Company does not anticipate a material change to the effective tax rate for the balance of fiscal year 2013, several factors could impact the rate, including variations from the Company's estimates of the amount and source of its pre-tax income, the amount of certain expenses which are not deductible for tax purposes and the amount of certain tax credits.

Inflation: The Company has traditionally attempted to increase its prices to offset inflationary increases in its raw materials and other costs, but there is no assurance that the Company will be successful in the future in implementing such price increases or in effecting such price increases in a manner that will provide a timely match to the cost increases.

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

There was an increase in net cash provided by operating activities, from $5.9 million to $7.8 million, for the six months ended September 30, 2012 compared with the six months ended October 2, 2011. The Company experienced in the current year a lower increase in inventories and a higher decrease in accounts receivable, which was offset by a higher net decrease in accounts payable.

Net cash used in investing activities was $405,000 in the current year compared with $146,000 in the prior year. Current year investing activities were primarily related to the capitalized costs of internally-developed intangible assets.


Net cash of $1.2 million was used in financing activities in the current year, primarily for the payment of dividends. This compares with $5.8 million used in financing activities in the prior year, which was used primarily for net repayments on the Company's revolving line of credit and the Company's final payments on subordinated notes payable.

From October 2, 2011 to September 30, 2012, the Company paid off $1.2 million owed under the Company's revolving line of credit and increased its cash balance by $6.2 million. At September 30, 2012, there was no balance owed on the revolving line of credit, there was no letter of credit outstanding and the Company had $19.0 million available under the revolving line of credit based on its eligible accounts receivable and inventory balances. The Company anticipates that a special cash dividend on the Company's common stock of $0.50 per share, declared by the Board on November 6, 2012 and payable on December 27, 2012 to stockholders of record at the close of business on December 14, 2012, will result in a reduction in the Company's cash balances of $4.9 million.

The Company's future performance is, to a certain extent, subject to general economic, financial, competitive, legislative, regulatory and other factors beyond its control. Based upon the current level of operations, the Company believes that its cash balance, its cash flow from operations and its availability from the revolving line of credit will be adequate to meet its liquidity needs.

To reduce its exposure to credit losses and to enhance the predictability of its cash flow, the Company assigns the majority of its trade accounts receivable to CIT pursuant to factoring agreements which expire in July 2013. CIT approves customer accounts and credit lines and collects the Company's accounts receivable balances. CIT bears credit losses with respect to assigned accounts receivable from approved customers that are within approved credit limits. The Company bears the responsibility for adjustments related to returns, allowances, claims and discounts. CIT may at any time terminate or limit its approval of shipments to a particular customer. If such a termination were to occur, the Company must either assume the credit risk for shipments after the date of such termination or cease shipments to such customer. Under the terms of the factoring agreements in effect prior to April 2, 2012, CIT would remit payments to the Company on the average due date of each group of invoices assigned. If a customer failed to pay CIT by the due date, the Company would be charged interest at prime plus 1.0% until payment was received. The Company incurred interest expense of $16,000 and $33,000 for the three and six-month periods ended October 2, 2011, respectively, as a result of the failure of the Company's customers to pay CIT by the due date. The factoring agreements were amended effective as of April 2, 2012 to provide that CIT will remit payments to the Company as such payments are received by CIT.

FORWARD-LOOKING INFORMATION

This report contains forward-looking statements within the meaning of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Such statements are based upon management's current expectations, projections, estimates and assumptions. Words such as "expects," "believes," "anticipates" and variations of such words and similar expressions identify such forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties that may cause future results to differ materially from those suggested by the forward-looking statements. These risks include, among others, general economic conditions, including changes in interest rates, in the overall level of consumer spending and in the price of oil, cotton and other raw materials used in the Company's products, changing competition, changes in the retail environment, the level and pricing of future orders from the Company's customers, the Company's dependence upon third-party suppliers, including some located in foreign countries with unstable political situations, the Company's ability to successfully implement new information technologies, customer acceptance of both new designs and newly-introduced product lines, actions of competitors that may impact the Company's business, disruptions to transportation systems or shipping lanes used by the Company or its suppliers, and the Company's dependence upon licenses from third parties. Reference is also made to the Company's periodic filings with the SEC for additional factors that may impact the Company's results of operations and financial condition. The Company does not undertake to update the forward-looking statements contained herein to conform to actual results or changes in the Company's expectations, whether as a result of new information, future events or otherwise.

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