Crown Crafts, Inc. — Form 10-Q summary
Reporting period: Second quarter and first six months of fiscal 2019, ended September 30, 2018; comparisons are with the periods ended October 1, 2017. The filing’s financial statements are unaudited. Crown Crafts sells infant, toddler and juvenile products, including bedding, blankets, bibs, bath products, toys and accessories.
Key financial results
| Metric | Three months ended Sept. 30, 2018 | Six months ended Sept. 30, 2018 | Comparable prior-year period |
|---|---|---|---|
| Net sales | $20.536 million | $35.996 million | $16.461 million and $30.108 million |
| Gross profit / margin | $6.370 million / 31.0% | $10.498 million / 29.2% | $5.022 million / 30.5%; $8.624 million / 28.6% |
| Operating income | $2.543 million | $2.986 million | $1.215 million and $1.916 million |
| Net income | $1.809 million | $2.073 million | $0.725 million and $1.243 million |
| Diluted EPS | $0.18 | $0.21 | $0.07 and $0.12 |
- Quarterly sales rose 24.8% and six-month sales rose 19.6%. Gross margin improved by 0.5 and 0.6 percentage points, respectively; net income increased 149.5% and 66.8%.
- Six-month operating cash flow was $7.133 million, versus $6.681 million. Investing used $0.406 million, compared with $8.823 million, largely reflecting the prior-year $8.7 million Carousel acquisition. Financing used $6.788 million, principally due to net revolver repayments and dividends.
- At September 30, cash was $154,000; current assets were $37.855 million and current liabilities $8.912 million. Working capital was $28.943 million. Inventory was $19.780 million.
- Revolver debt was $4.378 million, down from $9.458 million at April 1, 2018. The company reported $18.5 million available under the facility, no outstanding letters of credit, and compliance with covenants. The facility was extended to July 11, 2022; the September 30 LIBOR borrowing rate was 3.86%.
- Cash dividends declared were $0.08 per share for the quarter and $0.16 for six months, unchanged from the comparable periods.
Changes and management commentary
- Sales of bibs, bath, developmental toys, feeding, baby care and disposable products increased 49.3% for the quarter and 41.7% for six months. Bedding, blankets and accessories increased 10.6% and 6.4%.
- Acquisitions contributed materially: Sassy added $2.8 million of quarterly sales and $5.0 million for six months; Carousel contributed $1.8 million and $3.6 million. The prior-year periods included $1.2 million and $2.4 million of Carousel sales, respectively.
- Growth was partly offset by the loss of Toys-Delaware sales following its bankruptcy and liquidation. It represented $1.7 million of prior-year quarterly sales and $5.1 million of prior-year six-month sales. Management said organic quarterly growth was $643,000 despite this loss; Toys-Delaware liquidation discounting also affected the first quarter.
- Marketing and administrative expense increased $20,000 for the quarter and $804,000 for six months. Current-year factors included Carousel costs and $210,000 of Sassy inventory-transfer costs; prior-year comparisons included Toys-Delaware credit-coverage fees.
- The effective tax rate on continuing operations was estimated at 23.4% for six months, versus 36.0% a year earlier; the overall tax provision rates were 26.0% and 36.1%. Management did not anticipate a material change to the estimated rate for the remainder of fiscal 2019, but noted it could vary with pretax income.
Outlook, risks and notable items
- No specific revenue or earnings guidance was provided. Management said operating cash flow and revolver availability should be adequate for liquidity needs at the current operating level; results to date are not necessarily indicative of full-year results.
- Key risks include dependence on a small group of major customers and licensed brands, competition and retail conditions, supplier concentration (particularly in China), raw-material, labor, freight and currency costs, and reliance on third-party licenses. The three largest customers represented about 65% of fiscal 2018 gross sales; licensed products represented 52%, including 34% associated with Walt Disney affiliates.
- Variable-rate debt exposed the company to interest-rate changes; management estimated a one-percentage-point rate increase would reduce net income by about $34,000, based on period-end debt.
- Chase paid the company $1.8 million during the quarter under a Toys-Delaware claims agreement. A separate $746,000 claim remained receivable from Chase at period-end. The filing reported no material subsequent events and no legal proceedings expected to have a material adverse effect.
- The company adopted the new revenue recognition standard on April 2, 2018; it enhanced disclosures but had no material effect on financial position or results. It planned to adopt the lease standard effective April 1, 2019 and was still evaluating its impact.
Investor verification points
- Assess how much sales and earnings growth is organic versus attributable to Sassy and Carousel, and whether former Toys-Delaware sales have shifted to other customers.
- Monitor customer and licensing concentration, especially performance of the two remaining major customers and renewal or continuation of key licenses.
- Review the quality and timing of receivables, including the $746,000 Chase claim, factoring arrangements, and the availability of the revolving facility against eligible receivables and inventory.
- Track gross margins, inventory reserves, supplier and input-cost exposure, and the effect of higher interest expense as borrowing rates or balances change.
- Confirm future tax-rate assumptions and the balance-sheet impact of adopting the lease accounting standard.