Crown Crafts, Inc. — Q1 FY2022 Form 10-Q
Reporting period: Three months ended June 27, 2021; comparative period ended June 28, 2020. Amounts are in U.S. dollars. Interim financial statements are unaudited.
Business context and results
Crown Crafts sells infant and toddler products, including bedding, blankets, bibs, bath products, toys and disposable products. Its products are sold under owned and licensed brands and as private-label goods. The company operates primarily as one reportable segment.
- Net sales: $18.712 million, up 15.5% from $16.205 million. Bibs, bath, developmental toy, feeding, baby-care and disposable products rose 41.5% to $8.755 million; bedding, blankets and accessories edged down 0.6% to $9.957 million.
- Profitability: Gross profit declined 7.3% to $4.656 million, and gross margin contracted to 24.9% from 31.0%. Operating income was $1.290 million versus $1.643 million.
- Net income and EPS: Net income was $2.665 million, or $0.27 per basic and diluted share, compared with $1.215 million, or $0.12 per share. The current-period result included a $1.985 million gain from forgiveness of the PPP loan.
- Cash flow: Operating cash flow was $4.998 million, down from $7.905 million. Capital expenditures were $75,000; cash increased by $4.089 million to $4.702 million.
- Liquidity and debt: Current assets were $45.084 million and current liabilities were $14.595 million. No revolving-credit balance or letters of credit were outstanding; $26.0 million was available under the credit facility. The $1.964 million PPP loan was forgiven in full in May 2021.
Material changes and unusual items
- Management attributed higher sales mainly to increased orders from a major brick-and-mortar retailer, partly offset by lower sales to an online retailer as consumers returned to stores.
- Gross profit included a $647,000 gross loss related to Carousel Designs, comprising sales of inventory below cost, a $344,000 supplier-settlement charge and a $265,000 inventory-liquidation charge. Higher ocean-freight costs also pressured margins.
- The board approved Carousel’s closure on May 5, and operations ceased May 21, citing high costs, declining sales, operating and cash-flow losses, and expectations those losses would continue.
- The PPP loan forgiveness generated a $1.985 million gain. The company said the gain is expected to be excluded from taxable income.
- The revolving-credit agreement was amended to extend maturity from July 2022 to July 2025. The facility provides up to $26.0 million, subject to eligible receivables and inventory, and is secured by company assets.
Outlook, risks and contingencies
- No specific revenue, earnings or margin guidance was provided. Management said operating cash flow and available revolving-credit capacity should fund working capital and capital expenditures for at least the next 12 months.
- Management said the continuing effects of COVID-19 cannot be predicted, with possible impacts on supply chains, transportation, customers, retail traffic, consumer sentiment, revenue, earnings, liquidity and cash flow.
- Other cited risks include freight and raw-material costs, competition, reliance on foreign suppliers (particularly in China), potential currency effects, licensing arrangements and customer concentration. The top two customers represented about 68% of FY2021 gross sales; licensed products were 41%, including 34% associated with Disney-affiliated licenses.
- At June 27, $16.7 million was due from factor CIT under receivables factoring, and another $4.7 million was due from CIT as a negative balance under the revolving facility. The filing identifies $21.4 million as the combined maximum loss if CIT failed to perform.
- The company recorded a $667,000 reserve for unrecognized tax liabilities and disclosed ongoing California and federal tax examinations. Management said their outcomes could result in adjustments, but ordinary-course legal proceedings were not expected to have a material adverse effect.
- The company reported no material changes to previously disclosed risk factors and no material subsequent events. Management concluded disclosure controls were effective.
Key facts for investors to verify
- How sales trends at major retail and online customers develop, and the effect of customer concentration.
- Whether freight, sourcing and other product costs continue to pressure gross margin after Carousel’s closure.
- The ongoing cash and earnings effects of closing Carousel, including whether further closure-related charges arise.
- Availability and terms of the CIT facility, factoring exposure and the company’s reliance on CIT.
- Progress and potential outcomes of the disclosed tax examinations and unrecognized-tax-liability reserve.
- Whether COVID-19, supply-chain disruption, raw-material prices or licensing changes materially affect demand, costs or liquidity.