Crown Crafts, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2017, compared with periods ended January 1, 2017. Financial amounts below are in millions unless otherwise indicated. The company designs, markets and sells infant, toddler and juvenile products.
Financial performance
| Metric | Three months ended Dec. 31, 2017 | Year-over-year change | Nine months ended Dec. 31, 2017 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $17.476 | Up 1.2% | $47.584 | Down 2.2% |
| Gross profit / margin | $5.269 / 30.1% | Down from 32.7% | $13.893 / 29.2% | Profit down 2.4%; margin unchanged |
| Operating income | $1.613 | Down from $3.063 | $3.529 | Down from $6.059 |
| Net income | $0.531 | Down 71.5% | $1.774 | Down 55.2% |
| Diluted EPS | $0.05 | Down from $0.19 | $0.18 | Down from $0.39 |
| Operating cash flow | Not presented separately | — | $8.634 | Down from $11.952 |
Marketing and administrative expenses rose 41.9% in the quarter to $3.656 million and 26.8% year to date to $10.364 million. The quarter’s net margin was 3.0%, versus 10.8% a year earlier; the nine-month net margin was 3.7%, versus 8.1%.
Liquidity, debt and cash flows
- At December 31, cash was $117,000, current assets were $37.830 million and current liabilities were $13.087 million. Working capital was approximately $24.743 million.
- Long-term debt was $2.311 million, borrowed under the revolving credit facility; $18.9 million remained available based on eligible receivables and inventory. The company reported covenant compliance. The facility matures July 11, 2019, and borrowings bore a 3.37% LIBOR-based rate at quarter-end.
- Nine-month investing cash outflow was $15.405 million, primarily reflecting the Carousel and Sassy acquisitions. Financing cash outflow was $1.004 million. Cash declined from $7.892 million at the fiscal-year start to $117,000.
- Inventory increased to $22.844 million from $15.821 million at April 2, 2017. The company attributed some operating cash flow pressure to higher inventory and lower net income.
- Management believes operating cash flow and revolver availability will meet liquidity needs at the current level of operations.
Material changes and notable items
- Carousel Designs was acquired on August 4, 2017, for a net acquisition cost of approximately $8.7 million. It contributed $1.8 million of quarterly sales and $3.0 million from acquisition through December 31. Its purchase price allocation remains preliminary and includes $5.4 million of goodwill.
- The Sassy-branded product line was acquired on December 15, 2017, for approximately $6.5 million. It contributed $20,000 of sales through December 31; its preliminary allocation includes $359,000 of goodwill.
- Quarterly sales growth included $1.8 million from Carousel, partly offset by a $1.6 million decline at Crown Crafts Infant Products. Management cited reduced shipments to a customer with credit problems and a market shift away from bedding sets toward lower-priced separates.
- Gross margin declined in the quarter due to more low-margin closeout sales and a less profitable customer and product mix. Marketing and administrative costs also included acquisition costs, amortization, higher advertising, and fees connected with a major customer’s bankruptcy.
- Toys “R” Us filed for Chapter 11 on September 18, 2017. The company had $1.3 million of receivables from the retailer covered by a separate agreement at quarter-end; $755,000 under an earlier agreement remained due from Chase. The filing says those agreements generated fees, including $572,000 in the nine-month period.
- The Tax Cuts and Jobs Act prompted a provisional $409,000 charge to revalue deferred tax assets and a $132,000 discrete charge from revaluing unrecognized tax benefits. Reported effective tax rates were 66.3% for the quarter and 49.7% year to date. Management estimated a 33.0% fiscal 2018 effective tax rate and did not anticipate a material change for the rest of the year, subject to estimates and tax credits.
Outlook, risks and contingencies
The filing provides no sales or earnings guidance. Management describes possible acquisition synergies and direct-to-consumer opportunities, but cautions that integration may require resources and expected benefits may not be realized. Other cited risks include consumer spending and retail conditions, competition, supplier dependence and foreign sourcing, raw-material and labor costs, customer orders, licensing and customer concentration, and disruptions to shipping. For fiscal 2017, the top two customers represented 61% of gross sales; licensed products represented 62%, including 43% associated with Walt Disney Company affiliates.
The company reported no legal proceeding expected to have a material adverse effect and no material subsequent event requiring disclosure. It stated that disclosure controls were effective; internal-control evaluations excluded Carousel and Sassy operations during the period.
Important facts for investors to verify
- Whether customer credit issues, including the Toys “R” Us bankruptcy, lead to further shipment reductions, fees or collection exposure.
- Final purchase-price allocations, integration costs and realized benefits for Carousel and Sassy.
- Whether margins recover from low-margin closeouts and the changing bedding product mix, and whether elevated marketing and administrative expenses persist.
- The final tax impact of the tax-law changes and any further adjustments to deferred tax assets or tax reserves.
- Cash and working-capital needs, inventory levels, revolver availability and compliance with credit-facility covenants.
- The company’s reliance on major customers, licensed brands, foreign suppliers and concentrated sourcing in China.