Crown Crafts, Inc. — Q1 FY2017 Form 10-Q
Reporting period: Three months ended July 3, 2016; comparison is the three months ended June 28, 2015. The company sells infant, toddler and juvenile products, primarily through retailers, with products manufactured mainly in Asia. Financial amounts below are in U.S. dollars; tables show thousands except per-share data.
Financial performance
| Metric | Q1 FY2017 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $15,599 | $17,858 | Down 12.6% |
| Gross profit | $4,287 | $4,781 | Down 10.3% |
| Gross margin | 27.5% | 26.8% | Up 0.7 percentage points |
| Marketing and administrative expenses | $2,839 | $3,261 | Down 12.9% |
| Operating income | $1,448 | $1,520 | Down 4.7% |
| Net income | $1,103 | $927 | Up 19.0% |
| Basic and diluted EPS | $0.11 | $0.09 | Up $0.02 |
| Operating cash flow | $8,298 | $7,696 | Up $602 |
- Bedding, blankets and accessories sales fell 16.0% to $10.3 million; bibs, bath and disposable products sales fell 5.4% to $5.3 million.
- Gross margin improved amid cost control and favorable currency movements affecting product costs from China. Lower compensation costs contributed to reduced marketing and administrative expenses.
- Net income increased despite lower sales and operating income, principally because income tax expense fell to $387,000 from $605,000. The current quarter included a $199,000 discrete tax benefit from early adoption of stock-compensation accounting guidance.
Cash, debt and liquidity
- Cash and cash equivalents were $12.4 million at July 3, 2016, versus $7.6 million at April 3, 2016. Operating activities provided $8.3 million; investing used $101,000; financing used $3.3 million.
- Financing cash use included $3.3 million of dividends paid, primarily the $0.25-per-share special dividend declared in the prior year. The quarter’s declared dividend was $0.08 per share.
- No balance was outstanding on the revolving credit line, and no letters of credit were outstanding. Availability was $20.6 million under the $26 million facility, subject to eligible receivables and inventory. The facility matures July 11, 2019; the company reported covenant compliance.
- Current assets were $44.3 million and current liabilities $10.4 million. The company reported no drawn debt under the revolving facility.
Management commentary, outlook and risks
- Management attributed lower sales to a sluggish retail environment, delayed rollout of a new modular set by a major retailer, and another major retailer remaining overstocked after a large prior-quarter order.
- Management believes cash, operating cash flow and available credit will be adequate for liquidity needs at the current operating level. No specific earnings or revenue guidance was provided; management cautioned that quarterly results are not necessarily indicative of the full fiscal year.
- Key stated risks include consumer spending and retail conditions, competition, raw-material prices, reliance on third-party and foreign suppliers, customer orders and product acceptance, shipping disruptions, and dependence on third-party licenses.
- The company factors most trade receivables with CIT. CIT bears specified credit losses on approved customer accounts, but may terminate or limit customer approvals. The filing states that combined amounts due from CIT under factoring and the credit arrangement were $24.8 million, representing the stated maximum loss if CIT failed completely to perform.
- No material change to previously disclosed risk factors was reported. Ordinary-course legal proceedings were not expected to have a material adverse effect; management reported effective disclosure controls.
Important facts for investors to verify
- Whether the delayed retail modular-set rollout and customer overstock resolve, and how they affect subsequent sales.
- Whether improved gross margin persists, including the effect of exchange rates and product costs.
- How much of reported earnings growth reflects the one-time $199,000 tax benefit; management estimated a 37.3% annual effective tax rate before that discrete benefit.
- Ongoing dividend and repurchase cash requirements, and the availability of the asset-based credit line as receivables and inventory change.
- Exposure to CIT performance and customer concentration, alongside inventory valuation and customer-allowance estimates that require management judgment.