Crown Crafts, Inc. — Form 10-Q Summary
Business context and reporting period: This filing covers the three months ended June 28, 2020, Crown Crafts’ first quarter of fiscal 2021. The company sells infant, toddler and juvenile products, including bedding, blankets, bibs, bath products, toys and accessories. Its financial statements are unaudited.
Financial performance and position
| Metric | Quarter ended June 28, 2020 | Comparable 2019 quarter |
|---|---|---|
| Net sales | $16.205 million | $15.942 million |
| Gross profit / margin | $5.023 million / 31.0% | $4.551 million / 28.5% |
| Operating income | $1.643 million | $1.099 million |
| Net income | $1.215 million | $1.079 million |
| Basic and diluted EPS | $0.12 | $0.11 |
| Operating cash flow | $7.905 million | $8.692 million |
| Capital expenditures | $50,000 | $55,000 |
- Sales rose 1.6% year over year. Bedding, blankets and accessories increased 29.9% to $10.017 million; bibs, bath, developmental toys, feeding, baby care and disposable products fell 24.8% to $6.188 million.
- Gross margin improved 2.5 percentage points. Management attributed higher gross profit to sales growth and a more favorable customer and product mix. Marketing and administrative expense declined 2.1% to $3.380 million.
- Income tax expense was $425,000 versus $57,000 a year earlier. The prior-year comparison included a $232,000 discrete tax benefit and a $78,000 credit to interest expense from reversals of tax reserves. The current-quarter estimated annual effective tax rate was 25.1%.
- Cash and cash equivalents were $6.710 million at quarter-end, compared with $282,000 at March 29, 2020. Current assets were $40.153 million and current liabilities $9.335 million, a current ratio of approximately 4.3.
- The company had no revolving-line balance, no outstanding letter of credit, and $20.6 million available under its $26.0 million CIT facility, subject to eligible receivables and inventory. The facility matures July 11, 2022.
- Total debt was approximately $1.964 million, consisting of the PPP loan; $737,000 was classified as current and approximately $1.227 million as long-term. The loan bears 1% interest. Cash flow from operations exceeded the prior-year period’s cash flow less strongly; financing cash use was $1.427 million, including $813,000 of dividends paid.
Material changes and management commentary
- Management said the decline in the non-bedding product category was primarily due to certain retailers being affected by COVID-19; increased sell-through at major retailers drove bedding-category growth.
- Operating cash flow decreased $787,000 year over year. Management cited a smaller reduction in accounts receivable than in the prior-year quarter, partly offset by the inventory decrease in the current quarter versus an increase in the prior-year quarter.
- The company received a $1.964 million PPP loan in April 2020 and intends to seek forgiveness of the full amount. Forgiveness had not been assumed in the financial statements; repayment timing and any amount forgiven remained uncertain.
- Management stated that operating cash flow and revolver availability should be sufficient for working capital, capital expenditures and debt service for at least the next 12 months. No specific revenue or earnings guidance was provided.
- The 2012 Performance Bonus Plan was terminated on June 9, 2020. No shares or compensation expense were recorded under that plan in either comparable quarter.
Risks, contingencies and other matters
- Management could not predict COVID-19’s long-term effects on operations and results. Potential impacts include disruption to suppliers, manufacturing, shipping, retailers and consumer demand, with possible adverse effects on revenue, earnings, liquidity and cash flows.
- The two largest customers represented approximately 62% of fiscal 2020 gross sales. Licensed products represented 40% of gross sales, including 30% associated with Disney-affiliated licenses; loss of major customers or licenses could materially affect results.
- Most products are made by third-party manufacturers, with the largest concentration in China. Risks include supply and transport disruption, and changes in cotton, oil, labor and currency costs that may not be passed through to customers.
- A California tax refund claim for fiscal 2014 remained unresolved as of July 27, 2020; an adverse resolution could affect future results. The company reported no legal proceedings expected to have a material adverse effect, no material changes to previously disclosed risk factors, and no material subsequent events requiring disclosure.
- Goodwill was not impaired in the annual assessment performed March 30, 2020. Management reported that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether COVID-19 continues to affect retail customers, category sales, sourcing, shipping and consumer demand.
- The status and final forgiveness amount of the PPP loan, and resulting repayment obligations.
- Sales trends and concentration exposure among the largest customers and licensed products, particularly Disney-related sales.
- Whether the improved gross margin and product mix are sustainable, and whether tax expense remains near management’s estimated rate.
- The outcome of the unresolved California tax refund claim and any effect on tax reserves or future earnings.