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CRWS > SEC Filings for CRWS > Form 10-Q on 14-Aug-2013All Recent SEC Filings

Show all filings for CROWN CRAFTS INC

Form 10-Q for CROWN CRAFTS INC


14-Aug-2013

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, toddler and juvenile products segment within the consumer products industry. The infant and toddler products segment consists of infant and toddler bedding and blankets, bibs, soft bath products, disposable products 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 and wholesale clubs. The Company's products are manufactured 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 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 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-month periods
ended June 30, 2013 and July 1, 2012 and the dollar and percentage changes for
those periods (in thousands, except percentages):



                                               Three-Month Periods Ended
                                           June 30, 2013        July 1, 2012        Change        Change
Net sales by category
Bedding, blankets and accessories          $       11,298       $      12,213     $     (915 )        -7.5 %
Bibs, bath and disposable products                  5,315               5,240             75           1.4 %
Total net sales                                    16,613              17,453           (840 )        -4.8 %
Cost of products sold                              12,119              13,028           (909 )        -7.0 %
Gross profit                                        4,494               4,425             69           1.6 %
% of net sales                                       27.1 %              25.4 %
Marketing and administrative expenses               3,170               2,985            185           6.2 %
% of net sales                                       19.1 %              17.1 %
Interest expense                                       21                  19              2          10.5 %
Other income                                            6                   7             (1 )       -14.3 %
Income tax expense                                    487                 531            (44 )        -8.3 %
Net income                                            822                 897            (75 )        -8.4 %
% of net sales                                        4.9 %               5.1 %


Net Sales: Sales of $16.6 million were lower for the three-month period ended June 30, 2013 compared with the same period in the prior year, having decreased 4.8%, or $840,000. Sales were impacted by a challenging retail environment and a lower birth rate.

Gross Profit: In spite of the decrease in sales, gross profit increased in amount by $69,000, and as a percentage of net sales, from 25.4% to 27.1%, for the three-month period of fiscal year 2014 compared with the same period of fiscal year 2013, due primarily to lower reductions from gross sales to net sales based upon the customer mix in the current year as compared to the prior year. The Company also in the current year experienced a decline of $75,000 in costs associated with the Company's rental of an auxiliary warehouse and distribution center, which the Company vacated and sublet late in fiscal year 2013.

Marketing and Administrative Expenses: Marketing and administrative expenses for the three months ended June 30, 2013 increased in amount and as a percentage of net sales as compared with the same period of fiscal year 2013 primarily due to an increase of $237,000 in overall compensation costs. The Company also in the current year experienced an increase of $135,000 in legal fees, primarily due to a $172,000 increase in legal fees in the current year associated with the Company's defense of two lawsuits. These increases were offset by a decrease in the current year of $88,000 in advertising costs as compared with the same period of the prior year.

Interest Expense and Income: The Company experienced slight variations in interest expense and income for the three months ended June 30, 2013 as compared with the same period in fiscal year 2013.

Income Tax Expense: The Company's provision for income taxes is based upon an estimated annual effective tax rate of 37.2% for both fiscal years 2014 and 2013. Although the Company does not anticipate a material change to the effective tax rate for the balance of fiscal year 2014, 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 that 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

Net cash provided by operating activities decreased from $4.1 million to $3.4 million, for the three-month period ended June 30, 2013 compared with the three-month period ended July 1, 2012. The Company experienced in the current year a higher increase in inventories and a higher decrease in accounts payable, which was offset by a higher decrease in accounts receivable.

Net cash used in investing activities was $35,000 in the current year compared with $290,000 in the prior year. Investing activities in the prior year were primarily related to the capitalized costs of internally-developed intangible assets.

Net cash used in financing activities in the current year was $790,000 as compared with $491,000 in the prior year. The current year increase was primarily due to higher payments for dividends.

From July 1, 2012 to June 30, 2013, the Company's cash balances decreased by $671,000. At June 30, 2013, there was no balance owed on the revolving line of credit, there was no letter of credit outstanding and the Company had $20.7 million available under the revolving line of credit based on its eligible accounts receivable and inventory balances.

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 under factoring agreements. Under the terms of the factoring agreements, CIT remits customer payments to the Company as such payments are received by CIT and bears credit losses with respect to assigned accounts receivable from approved customers that are within approved credit limits, while the Company bears the responsibility for adjustments from customers 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 limitation or cease shipments to such customer. Factoring fees, which are included in marketing and administrative expenses in the accompanying consolidated statements of income, were $85,000 and $95,000 for the three-month periods ended June 30, 2013 and July 1, 2012, respectively. There were no advances from the factor at either June 30, 2013 or March 31, 2013.

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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