Crown Crafts, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2020, the three months ended June 30, 2019, compared with the three months ended July 1, 2018. Crown Crafts designs and markets infant, toddler and juvenile products, including bedding, bibs, bath products, toys and accessories. The interim financial statements are unaudited.
Financial performance and position
| Metric | Q1 FY2020 | Prior-year quarter |
|---|---|---|
| Net sales | $15.942 million | $15.460 million |
| Gross profit / gross margin | $4.551 million / 28.5% | $4.128 million / 26.7% |
| Operating income | $1.099 million | $0.443 million |
| Net income | $1.079 million | $0.264 million |
| Diluted earnings per share | $0.11 | $0.03 |
| Net cash from operating activities | $8.692 million | $6.606 million |
- Marketing and administrative expenses were $3.452 million, or 21.7% of sales, versus $3.685 million, or 23.8%, a year earlier.
- Cash and cash equivalents were $3.467 million at June 30, 2019, compared with $0.143 million at March 31, 2019. Current assets were $37.523 million and current liabilities were $11.622 million.
- No revolving credit balance was outstanding at quarter-end; $19.2 million was available under the facility, subject to eligible receivables and inventory. Long-term debt was zero, versus $4.486 million at March 31, 2019. The facility matures July 11, 2022.
- Operating cash flow benefited from a $5.301 million decrease in accounts receivable. Investing cash outflow was $0.055 million, primarily capital expenditures; financing cash outflow was $5.313 million, including dividends paid.
- Inventory was $20.449 million, up from $19.534 million at March 31, 2019. Shareholders’ equity was $41.705 million.
Material changes versus the prior-year quarter
- Sales increased 3.1%, driven by higher replenishment orders. Bibs, bath, developmental toys, feeding, baby care and disposable products rose 18.6% to $8.229 million; bedding, blankets and accessories fell 9.5% to $7.713 million.
- Gross margin improved 1.8 percentage points. Management attributed the increase in gross profit primarily to higher sales.
- Operating income rose to $1.099 million from $0.443 million. Marketing and administrative expenses declined $0.233 million, mainly because the prior-year quarter included $0.210 million of costs to transfer Sassy-branded inventory between distribution facilities.
- Interest income/expense improved by $0.128 million, reflecting no debt outstanding at quarter-end and a credit to interest expense described below.
- Operating cash flow increased $2.086 million; management cited a larger reduction in accounts receivable than in the prior-year quarter.
Outlook, commentary and risks
- The filing provides no sales or earnings guidance. Management said it did not anticipate a material change in the effective tax rate from continuing operations for the balance of fiscal 2020, while noting that pre-tax income variations could affect it. Management cautioned that the quarter’s results are not necessarily indicative of full-year results.
- The reported income tax provision was $57,000, an overall effective rate of 5.0%, compared with 23.3% in the prior-year quarter. A July 31, 2019 notice from California’s Franchise Tax Board led the company to reverse reserves for three earlier tax years, recording a $232,000 discrete tax benefit and a $78,000 credit to interest expense in the quarter. A separate refund claim for fiscal 2014 remained unresolved and could involve administrative or legal proceedings.
- The company depends on third-party manufacturers, with the largest sourcing concentration in China, and faces exposure to cotton, oil, labor, currency, freight and supply-chain disruptions. It may not be able to pass increased costs to customers promptly.
- Customer and licensing concentration are significant: the top three customers represented approximately 67% of fiscal 2019 gross sales; licensed products represented 41%, including 29% associated with Walt Disney Company affiliates. Loss of major customers or licenses could materially affect results.
- CIT factors most trade receivables and bears approved-customer credit losses, but can limit or terminate shipment approvals. The filing identifies a maximum potential exposure of $14.8 million if CIT failed to perform on the factoring agreements and revolving facility.
- The company adopted lease accounting Topic 842 on April 1, 2019, recognizing operating lease right-of-use assets and liabilities. At June 30, lease liabilities totaled $1.681 million. Management reported compliance with credit-facility covenants and effective disclosure controls.
- Management reported no material changes to the risk factors in its prior Form 10-K and no legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- Whether the sales mix shift toward bibs, bath and related products continues, and whether bedding sales stabilize.
- How much of the quarter’s net income improvement reflects ongoing operations versus the $232,000 tax benefit and $78,000 interest credit arising from the California tax matter.
- Receivables collection, inventory levels and the company’s continuing dependence on CIT, including available borrowing capacity under its asset-based facility.
- Developments in the unresolved fiscal 2014 California refund claim and any resulting tax, interest or penalty exposure.
- Customer and licensed-product concentration, and the potential impact of changes in major customer orders, licenses or sourcing costs.