Crown Crafts, Inc. — Q3 FY2017 Form 10-Q
Reporting period: Three and nine months ended January 1, 2017; fiscal year ends April 2, 2017. Comparative results are for periods ended December 27, 2015. Amounts below are in millions unless stated otherwise; interim statements are unaudited.
Business context and results
Crown Crafts sells infant, toddler and juvenile products, including bedding, blankets, bibs, bath products, disposables and accessories. Products are sourced primarily in Asia and sold to retailers under company-owned, licensed and private-label brands.
| Metric | Q3 FY2017 | Q3 prior period | Nine months FY2017 | Nine months prior period |
|---|---|---|---|---|
| Net sales | $17.262 | $20.691 | $48.670 | $59.265 |
| Gross profit | $5.639 | $6.252 | $14.235 | $16.739 |
| Gross margin | 32.7% | 30.2% | 29.2% | 28.2% |
| Operating income | $3.063 | $3.070 | $6.059 | $7.188 |
| Net income | $1.861 | $2.143 | $3.963 | $4.635 |
| Diluted EPS | $0.19 | $0.21 | $0.39 | $0.46 |
In Q3, sales fell 16.6% year over year while gross margin rose 2.5 percentage points. For the nine months, sales declined 17.9%, while gross margin improved 1.0 percentage point. Marketing and administrative expenses decreased 19.0% in Q3 and 14.4% year to date. Nine-month net margin was 8.1%, versus 7.8% in the prior period.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $11.952 million, versus $9.527 million; investing cash outflow was $0.152 million, versus $0.308 million; financing cash outflow was $4.980 million, versus $3.477 million.
- Cash at January 1, 2017 was $14.394 million, up from $7.574 million at April 3, 2016. Current assets were $48.430 million and current liabilities $16.113 million.
- No revolving-credit balance or letters of credit were outstanding. Availability under the $26 million CIT facility was $21.3 million, subject to eligible receivables and inventory; the facility matures July 11, 2019. The company reported covenant compliance.
- Dividends declared were $0.64 per share year to date, including $0.48 in Q3. Dividends paid during the nine months were $4.905 million. Financing outflows included payment of a previously declared special dividend of $0.25 per share. Treasury-stock purchases were $0.861 million.
- Accounts payable rose to $7.633 million from $4.640 million, and dividends payable were $4.816 million. The company has no reported conventional borrowings outstanding.
Material changes and management commentary
- Management attributed weaker sales primarily to a prior-year Black Friday promotion that did not recur and reduced shipments to a customer experiencing credit problems. It also cited a sluggish market and a shift toward infant-bedding separates, often at lower price points; expanded separates and bedroom-decor offerings partly offset the trend.
- Bedding, blankets and accessories sales fell 27.7% in Q3 and 25.0% year to date. Bibs, bath and disposable sales rose 19.4% in Q3 and were essentially flat year to date.
- Management said gross-margin improvement reflected cost control and lower product costs from China, supported by favorable exchange-rate movements. Lower compensation, advertising and outside-services costs contributed to lower administrative expenses.
- Management believes cash, operating cash flow and available credit will be adequate for liquidity needs at current operating levels. It did not provide specific revenue or earnings guidance. It did not anticipate a material change to the fiscal 2017 effective tax rate, while noting that income mix and tax credits could affect it.
Risks, contingencies and unusual items
- Most trade receivables are factored through CIT. At January 1, 2017, $14.0 million was due from CIT for factored receivables and $14.4 million was held as a negative revolver balance; the filing identifies $28.4 million as the maximum loss if CIT completely failed to perform. CIT bears approved-customer credit losses within limits, but can restrict customer approvals.
- California notified the company in December 2016 that it intends to examine several tax years. Management says an adjustment could adversely affect future results if reserves are insufficient; the ultimate resolution is uncertain. The reserve for unrecognized tax benefits was $0.656 million.
- The company recorded discrete tax benefits of $0.248 million year to date from early adoption of stock-compensation guidance. Reported results may also be sensitive to estimates for receivable allowances, inventory reserves and tax positions.
- Principal stated risks include economic and retail conditions, customer orders and competition, raw-material prices, reliance on foreign suppliers and third-party licenses, shipping disruptions, and acceptance of new products. Management reported no material change to previously disclosed risk factors and no ordinary-course legal proceeding expected to have a material adverse effect.
- The company adopted new accounting guidance that moved $0.454 million of deferred tax assets from current to noncurrent classification, without affecting earnings. Other upcoming accounting standards remained under evaluation.
Important facts for investors to verify
- Whether the customer with credit problems resumes normal purchasing and whether shipment reductions persist.
- Whether bedding-market mix changes, shipment timing and promotional comparisons continue to pressure sales.
- Whether higher gross margins are sustainable amid foreign-exchange, supplier-cost and pricing changes.
- The outcome and potential financial effect of the California tax examination and adequacy of tax reserves.
- Continued CIT facility availability, factoring terms and exposure to CIT performance, alongside the pace of dividends and share repurchases.