Crown Crafts, Inc. — Form 10-Q Summary
Business context and period. Crown Crafts designs and sells infant, toddler and juvenile products, including bedding, blankets, bibs, bath and disposable products. This unaudited report covers the three and six months ended October 1, 2017, compared with periods ended October 2, 2016. Fiscal 2018 ends April 1, 2018.
Financial highlights
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $16.461 million, up 4.1% | $30.108 million, down 4.1% |
| Gross profit / margin | $5.022 million / 30.5%, versus $4.309 million / 27.3% | $8.624 million / 28.6%, versus $8.596 million / 27.4% |
| Operating income | $1.215 million, versus $1.548 million | $1.916 million, versus $2.996 million |
| Net income / diluted EPS | $725,000 / $0.07, versus $999,000 / $0.10 | $1.243 million / $0.12, versus $2.102 million / $0.21 |
| Operating cash flow | $6.681 million for the six months, versus $6.909 million |
At October 1, cash and cash equivalents were $3.242 million, down from $7.892 million at April 2. Current assets were $33.886 million and current liabilities $9.095 million. The company had no balance outstanding on its revolving credit line and no letters of credit; $18.5 million was available under the $26 million facility, subject to eligible receivables and inventory. Interest expense was $38,000 for the six months. The filing reports $845,000 of acquired capital leases were paid off.
Investing cash outflow was $8.823 million, primarily the $8.725 million net Carousel acquisition payment; financing cash outflow was $2.508 million, including $1.607 million of dividends paid. Quarterly dividends declared were $0.08 per share. The filing does not provide a separate operating margin figure.
Material changes and unusual items
- Carousel Designs was acquired on August 4, 2017. It contributed $1.2 million of sales from acquisition through quarter-end. The preliminary purchase-price allocation includes $5.379 million of goodwill; valuation remains subject to completion, expected within 12 months. Acquisition-related costs were recorded in marketing and administrative expenses.
- Marketing and administrative expense rose 37.9% in the quarter and 19.8% for the six months. The quarterly increase included $427,000 of fees for credit coverage related to Toys “R” Us’ Chapter 11 filing, plus Carousel-related costs. The company exercised its first agreement with Chase for an $866,000 receivable claim; a second agreement covered $249,000 of Toys “R” Us receivables at October 1.
- Quarterly sales growth reflected Carousel and higher sales in both product categories. Six-month sales declined, notably bedding, blankets and accessories, down 7.6%. Management cited reduced shipments to a customer with credit problems, a sluggish retail environment, and consumers shifting from bedding sets to separates with lower average prices.
- For the six months, marketing and administrative expense also included higher audit fees associated with the company’s transition to accelerated-filer status. Net income fell despite improved gross margin, reflecting higher overhead and lower six-month sales.
Outlook, risks and contingencies
Management provided no quantified earnings or revenue guidance. It believes operating cash flow and available revolver capacity will meet liquidity needs despite cash used for the acquisition. Management anticipates possible acquisition synergies and direct-to-consumer opportunities, but integration and realization are uncertain. It did not anticipate a material change to its estimated 36% full-year effective tax rate, while noting that income mix and tax credits could affect it.
Risks include customer and license concentration, retail conditions, supplier dependence, raw-material and labor costs, foreign exchange effects, competition, shipping disruption, and integrating acquisitions. For fiscal 2017, the top two customers represented 61% of gross sales; 62% of gross sales were licensed products, including 43% associated with Disney-affiliated licenses. The company relies on CIT factoring for most trade receivables; it disclosed a potential $13.8 million exposure if CIT failed completely to perform under factoring and revolving-line arrangements. The company was in compliance with credit-facility covenants. No material changes to previously disclosed risk factors or material litigation were reported.
Key facts for investors to verify
- Whether Carousel’s final asset and liability valuations, goodwill, and expected synergies differ materially from preliminary estimates.
- Developments in Toys “R” Us’ bankruptcy and recovery of the $866,000 Chase claim and the remaining covered receivables.
- Whether customer credit issues, customer concentration, or shifts away from bedding sets continue to pressure sales.
- Cash generation and borrowing availability after the acquisition, including dependence on CIT and compliance with facility covenants.
- Future gross margins, marketing and administrative costs, and the effective tax rate relative to the reported period.