Crown Crafts, Inc. — Q2 FY2021 Form 10-Q
Reporting period: Quarter and six months ended September 27, 2020; comparisons are with periods ended September 29, 2019. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. Crown Crafts sells infant and toddler products, including bedding, blankets, bibs, bath products, toys and accessories, through subsidiaries and retail and direct-to-consumer channels. The statements are unaudited.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $21.659 vs. $18.560; up 16.7% | $37.864 vs. $34.502; up 9.7% |
| Gross profit / margin | $7.094 / 32.8%, vs. $5.869 / 31.6% | $12.117 / 32.0%, vs. $10.420 / 30.2% |
| Operating income | $3.292 vs. $2.393 | $4.935 vs. $3.492 |
| Net income | $2.487 vs. $1.779 | $3.702 vs. $2.858 |
| Diluted EPS | $0.24 vs. $0.18 | $0.36 vs. $0.28 |
Marketing and administrative expenses were $3.802 million for the quarter and $7.182 million year to date, rising in dollars but declining as a share of sales to 17.6% and 19.0%, respectively. Management attributed higher gross profit and margin to increased sales and a more favorable customer and product mix.
- Sales mix: Bedding, blankets and accessories rose 25.8% for the quarter and 27.6% year to date. Other product categories rose 5.1% for the quarter but fell 9.9% year to date.
- Cash flow: Operating cash flow was $8.288 million vs. $6.393 million year to date. Investing used $0.312 million, primarily capital expenditures; financing used $1.426 million. Cash increased to $6.832 million from $0.282 million at fiscal year-end.
- Liquidity and debt: Current assets were $45.545 million and current liabilities $12.826 million. No revolving-credit balance was outstanding; $24.2 million was available under the $26 million facility, subject to eligible receivables and inventory. The company had $1.964 million of PPP debt, reported as $0.906 million current and $1.057 million long-term. Total operating lease liabilities were $4.420 million.
- Equity returns: The company declared a quarterly dividend of $0.08 per share, or $0.16 for the six-month period.
Changes, outlook and risks
Revenue growth was attributed to higher sell-through at major retailers, partly offset by declines at certain customers affected by COVID-19, including one customer that remained closed throughout the six-month period. The company said it could not predict the pandemic’s longer-term impact on operations or results. Management expected operating cash flow and revolving-credit availability to meet working-capital, capital-expenditure and debt-service needs for at least 12 months.
The company applied for forgiveness of the full $1.964 million PPP loan on October 15, 2020; forgiveness was not assured. It assumed repayments would begin in April 2021 and classified $0.906 million as current. California tax refund and return examinations remained unresolved; adverse outcomes could require additional tax charges. The filing identifies customer concentration, dependence on third-party suppliers (especially in China), commodity and currency exposure, licensing dependence, competition, and transportation and pandemic disruption as risks. The top two customers represented about 62% of FY2020 gross sales; licensed products were about 40%, including 30% associated with Disney-affiliated licenses.
No specific revenue or earnings guidance was provided. The company reported no material change in previously disclosed risk factors, no material legal proceeding expected to adversely affect it, and no material subsequent event requiring disclosure. Goodwill was not impaired in the annual assessment as of March 30, 2020.
Most important facts to verify
- Whether the PPP loan was forgiven, and the timing and amount of any repayment.
- Whether the sales and margin improvement persisted after the quarter, given COVID-19 effects and customer/product mix.
- Cash-flow quality: operating cash flow benefited from a $5.041 million increase in accounts payable, alongside higher receivables and inventory.
- Outcomes of California tax examinations and refund claim, and adequacy of the $0.785 million reserve for unrecognized tax liabilities.
- Customer and licensing concentration, supplier continuity, and the availability of the revolving facility under its borrowing-base limits.