Crown Crafts, Inc. — Q3 FY2019 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended December 30, 2018, compared with periods ended December 31, 2017. Crown Crafts sells infant, toddler and juvenile products, including bedding, bibs, bath products, toys and accessories, through retail and direct-to-consumer channels. Most products are made by contract manufacturers, with the largest concentration in China. Results are unaudited; management cautions that interim results are not necessarily indicative of full-year results.
Key financial results
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Net sales | $18.668 million | $17.476 million | $54.664 million | $47.584 million |
| Gross profit / margin | $5.597 million / 30.0% | $5.269 million / 30.1% | $16.095 million / 29.4% | $13.893 million / 29.2% |
| Operating income | $2.151 million | $1.613 million | $5.137 million | $3.529 million |
| Net income / net margin | $1.554 million / 8.3% | $531,000 / 3.0% | $3.627 million / 6.6% | $1.774 million / 3.7% |
| Diluted EPS | $0.15 | $0.05 | $0.36 | $0.18 |
| Operating cash flow | Not provided for the quarter | $10.515 million | $8.634 million |
Liquidity and debt at December 30, 2018: Cash was $63,000; current assets were $38.803 million and current liabilities were $11.229 million. Working capital was approximately $27.574 million. Revolver debt was $1.865 million, down from $9.458 million at April 1, 2018. The $26.0 million facility had $20.9 million available, subject to eligible receivables and inventory; no letters of credit were outstanding. The facility matures July 11, 2022. The company reported compliance with its covenants.
For the nine-month period, investing cash use was $560,000, primarily capital expenditures, versus $15.405 million in the prior-year period, which included the Carousel and Sassy acquisitions. Financing cash use was $10.107 million, including net revolver repayments and $2.419 million of dividends paid. Cash decreased $152,000 to $63,000. Interest expense was $249,000 for the nine months; the period-end variable-rate debt was $1.9 million, and a one-percentage-point rate increase was estimated to reduce net income by approximately $14,000.
Changes versus prior comparable periods
- Sales rose 6.8% in Q3 and 14.9% year to date. Q3 sales of bibs, bath, developmental toys, feeding, baby care and disposable products increased 49.6%; bedding, blankets and accessories fell 15.1%. Nine-month category changes were +44.4% and -1.8%, respectively.
- Acquisitions contributed materially: Sassy generated $3.6 million of Q3 sales and $8.6 million year to date; Carousel generated $1.4 million and $5.0 million, respectively. Prior-year periods included Carousel sales, but not Sassy sales for the comparable full periods.
- These gains were partly offset by the loss of Toys-Delaware sales, which were $2.4 million in the prior-year quarter and $7.5 million in the prior-year nine-month period. The company said Toys-Delaware’s liquidation sales also delayed the shift of some business to other customers.
- Gross margin was nearly flat in Q3 and improved 0.2 percentage points year to date. Marketing and administrative expense fell 5.7% in Q3 but rose 5.7% year to date, including acquisition-related costs and $210,000 of Sassy inventory-transfer charges. Net income benefited from lower tax expense; the prior-year period included discrete Tax Cuts and Jobs Act charges.
- Nine-month operating cash flow increased $1.881 million, primarily because net income was higher. Revolver borrowings declined substantially from the April 1, 2018 balance.
Outlook, risks and unusual items
- Management stated that operating cash flow and revolver availability should be adequate for liquidity needs at the current operating level. No specific sales or earnings guidance was provided. Management did not anticipate a material change in the estimated effective tax rate for the balance of FY2019, but noted that pre-tax income estimates could affect it.
- Major risks include dependence on a small group of customers and licensed brands: the top three customers represented approximately 65% of FY2018 gross sales, while licensed products represented 52%, including 34% associated with Disney-affiliated licenses. The filing warns that loss of a major customer or license could materially affect results.
- Other cited risks include changes in consumer spending and retail conditions; competition; reliance on third-party suppliers, particularly in China; cotton, oil, labor, freight and currency-related cost pressures; shipping disruptions; customer acceptance of new products; and the ability to integrate acquisitions. The company may not be able to pass cost increases on to customers promptly.
- The company factors most trade receivables through CIT, which bears specified credit losses on approved customers within credit limits. CIT may limit or withdraw customer approval; the company would then bear subsequent credit risk or stop shipments. The company reported $14.1 million due from CIT at period end.
- The filing reports a $1.150 million reserve for unrecognized tax liabilities. It also discloses a related-party lease with a company owned by the CEO and Carousel’s former president. Management reported no material subsequent events and no legal proceeding expected to have a material adverse effect.
Important facts for investors to verify
- Whether growth from Sassy and Carousel can offset the loss of Toys-Delaware business and the decline in bedding sales.
- Customer and license concentration, including the status of the company’s major retail relationships and Disney-related licenses.
- Future gross margins and the effect of sourcing, freight, labor, cotton, oil and currency costs, and the company’s ability to raise prices.
- Actual revolver availability under borrowing-base requirements, factoring terms and CIT customer approvals; period-end cash was only $63,000.
- Inventory valuation and obsolescence assumptions, tax reserves and the effect of the forthcoming lease-accounting standard, whose balance-sheet impact had not yet been determined.