Crown Crafts, Inc. — Q1 FY2019 Form 10-Q
Reporting period: Three months ended July 1, 2018; comparative period ended July 2, 2017. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless noted.
Business context and results
Crown Crafts sells infant, toddler and juvenile products, including bedding, blankets, bibs, bath products, toys and accessories, primarily through retailers and direct-to-consumer channels. It operates as one principal business segment.
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Net sales | $15.460 million | $13.647 million |
| Gross profit / margin | $4.128 million / 26.7% | $3.602 million / 26.4% |
| Operating income | $0.443 million | $0.701 million |
| Net income | $0.264 million | $0.518 million |
| Diluted EPS | $0.03 | $0.05 |
| Operating cash flow | $6.606 million | $4.926 million |
Financial position, liquidity and cash flow
- Revenue grew 13.3%. Bedding, blankets and accessories sales rose 1.2% to $8.521 million; bibs, bath, toys, feeding, baby care and disposable products rose 32.9% to $6.939 million.
- Gross margin improved 0.3 percentage points, but marketing and administrative expenses rose 27.0% to $3.685 million, or 23.8% of sales versus 21.3%. Operating margin declined to about 2.9% from 5.1%; net margin fell to 1.7% from 3.8%.
- Operating cash flow increased to $6.606 million, primarily reflecting working-capital movements, including higher accounts payable and lower accounts receivable. Investing cash use was $0.102 million, mainly capital expenditures. Financing cash use was $6.520 million, including net revolving-credit repayments, dividends and treasury-stock purchases.
- Cash was $0.199 million at quarter-end. The revolving credit balance was $3.840 million, down from $9.458 million at April 1, 2018; $17.9 million remained available under the $26 million facility, subject to eligible receivables and inventory. The company reported compliance with facility covenants.
- Current assets were $36.783 million and current liabilities $9.678 million. The company declared dividends of $0.08 per share; $0.807 million was paid during the quarter.
- The majority of trade receivables are factored through CIT, which assumes approved-customer credit losses within approved limits. The company reported $10.7 million due from CIT at July 1.
Material changes and notable items
- Sales included $2.2 million from the Sassy acquisition and $1.8 million from Carousel. These gains were partly offset by the loss of Toys-Delaware sales, which were $3.4 million in the prior-year quarter. Toys-Delaware liquidation sales and discounting also made it a competitor during the current quarter.
- Marketing and administrative expense included $0.904 million of Carousel-related costs and $0.210 million for moving remaining Sassy inventory. Lower advertising costs partly offset these amounts. Advertising expense overall was $0.325 million versus $0.219 million.
- Interest expense increased to $0.099 million from $0.020 million. The effective tax provision was 23.3%, compared with 28.2%; management cited the lower federal tax rate under the Tax Cuts and Jobs Act.
- On August 7, 2018, after quarter-end, the company extended its CIT facility maturity to July 11, 2022 and reduced the LIBOR margin to 1.75%, effective August 1, 2018.
- The company adopted the new revenue recognition standard on April 2, 2018; it reported no material effect on financial position or results. Acquisition purchase-price allocations for Sassy and Carousel remained preliminary.
Outlook, risks and contingencies
No numerical revenue or earnings guidance was provided. Management believes operating cash flow and revolver availability will be adequate for liquidity needs and does not anticipate a material change in the estimated effective tax rate for the remainder of FY2019, while noting that pre-tax income variations could affect it.
Key risks include dependence on a small number of customers and licensed products, the loss of Toys-Delaware business, customer acceptance and order levels, integrating acquisitions, reliance on third-party suppliers—especially in China—and changes in cotton, oil, labor, freight, duties or currency costs. CIT may change customer credit approvals, which could require the company to assume credit risk or stop shipments. Variable-rate debt exposes earnings to interest-rate increases. The filing reports no legal proceeding expected to have a material adverse effect and no material changes to the prior annual report’s risk factors.
The company had $2.546 million of claims related to Toys-Delaware arrangements payable by Chase under customary closing procedures at quarter-end, including $0.746 million from the first agreement and $1.8 million under the second. A related-party lease with an entity owned by Carousel’s former president/CEO generated $0.024 million of quarterly rent expense.
Important facts for investors to verify
- Whether sales lost from Toys-Delaware are replaced by other customers, and whether liquidation-driven pricing pressure persists.
- How acquired businesses contribute to sales and profitability after acquisition-related costs and inventory-transfer expenses.
- Receivables collection and completion of the Chase claim payments, along with CIT factoring terms and borrowing availability.
- Customer and licensing concentration: the top three customers were about 65% of FY2018 gross sales, and licensed products were 52%, including 34% associated with Disney-affiliated licenses.
- Final Sassy and Carousel purchase-price allocations, acquisition integration, and any related goodwill or intangible-asset impairment indicators.