Crown Crafts, Inc. — Form 10-Q Summary
Business and period: The company sells infant, toddler and juvenile products, including bedding, blankets, accessories, bibs, bath and disposable products. This unaudited report covers the three and six months ended October 2, 2016; comparisons are with the periods ended September 27, 2015. Fiscal 2017 ends April 2, 2017.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $15.8 million, down 23.7% | $31.4 million, down 18.6% |
| Gross profit / margin | $4.3 million / 27.3% (27.5% prior year) | $8.6 million / 27.4% (27.2% prior year) |
| Operating income | $1.5 million | $3.0 million |
| Net income / diluted EPS | $1.0 million / $0.10 | $2.1 million / $0.21 |
| Operating cash flow | Not presented for quarter | $6.9 million, versus $7.3 million |
Balance sheet at October 2, 2016: Cash and equivalents were $10.2 million; total assets $49.3 million; current liabilities $7.8 million; shareholders’ equity $40.9 million. No revolving-credit borrowings or letters of credit were outstanding. The $26.0 million facility had $21.9 million available, subject to eligible receivables and inventory. The filing reports no balance-sheet debt outstanding.
Cash and capital allocation: Six-month investing outflow was $0.1 million and financing outflow was $4.2 million. Dividends paid totaled $4.1 million, and $0.7 million was spent on treasury shares. Cash increased $2.6 million from the fiscal-year opening balance.
Changes and management commentary
- Sales fell in both product categories. Bedding, blankets and accessories declined 29.8% for the quarter and 23.4% for the half-year; bibs, bath and disposable products declined 10.0% and 7.8%, respectively.
- Management attributed weaker sales to a sluggish market, a shift toward lower-priced infant-bedding separates (“naked crib”), reduced shipments to a customer experiencing credit problems, and shipment timing. Expanded separates and décor offerings partly offset the bedding trend.
- Gross margin was nearly unchanged for the quarter and improved slightly for the half-year. Management cited cost controls and favorable exchange-rate-related product costs from China. Marketing and administrative expense decreased, reflecting lower compensation, advertising and outside-services costs.
- The six-month effective tax rate was 31.0%, including $242,000 of discrete tax benefits from early adoption of stock-compensation guidance; the quarter’s rate was 35.9%. Management estimated a 37.3% annual effective rate and did not expect a material change for the balance of fiscal 2017, subject to income and tax-credit variation.
Outlook, risks and unusual items
- No specific sales or earnings guidance was provided. Management believes cash, operating cash flow and available credit will meet liquidity needs at current operating levels.
- Risks cited include consumer spending and broader economic conditions, competition and retail changes, customer orders and acceptance of products, raw-material prices, reliance on third-party and overseas suppliers, shipping disruptions, licensed products and customer credit. CIT may limit factoring approval for customers; the company could then bear credit risk or stop shipments.
- The company factors most trade receivables. At October 2, $15.3 million was due from CIT under factoring arrangements and $9.9 million was held as a negative balance under the revolving facility. Together, $25.2 million represented potential loss if CIT failed completely to perform.
- After quarter-end, the board declared a special dividend of $0.40 per share in addition to the regular $0.08 quarterly dividend, both payable January 6, 2017 to holders of record December 16, 2016.
- The company reported no legal proceeding expected to have a material adverse effect and no material change to the risk factors in its latest annual report. Disclosure controls were deemed effective; no material internal-control change was reported.
Important facts for investors to verify
- Whether the steep sales decline persists, particularly in bedding, and how customer shipment timing and the credit-affected customer develop.
- Whether gross-margin gains from cost control and favorable currency-related sourcing continue, and the extent to which supplier cost reductions are passed to customers.
- Liquidity and counterparty exposure to CIT, including factoring approvals, eligible borrowing capacity and the reported $25.2 million combined exposure.
- The cash-flow and balance-sheet effects of the special dividend, alongside the regular dividend and ongoing share repurchases.
- The contribution of stock-compensation tax benefits to reported earnings and the company’s future effective tax rate.