Crown Crafts, Inc. — Fiscal 2016 Form 10-K
Reporting period: Fiscal year ended April 3, 2016, a 53-week year, compared with the 52-week fiscal year ended March 29, 2015. This is an annual filing, not a standalone fourth-quarter report. The company sells infant and toddler products, primarily to retailers, and sources products mainly from Asia.
Financial performance
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Net sales | $84.342 million | $85.978 million | Down 1.9% |
| Gross profit / margin | $23.813 million / 28.2% | $23.550 million / 27.4% | Profit up $263,000; margin up 0.8 percentage points |
| Operating income / margin | $10.788 million / 12.8% | $9.220 million / 10.7% | Up $1.568 million |
| Net income / margin | $6.829 million / 8.1% | $5.718 million / 6.7% | Up 19.4% |
| Diluted earnings per share | $0.68 | $0.57 | Up $0.11 |
| Cash from operating activities | $11.016 million | $4.766 million | Up $6.250 million |
| Cash and cash equivalents at year-end | $7.574 million | $1.807 million | Up $5.767 million |
- Sales mix: Bedding, blankets and accessories sales fell 7.8% to $59.020 million; bibs, bath and disposable products rose 15.4% to $25.322 million.
- Margins and expenses: Management attributed improved gross margin mainly to lower product costs from favorable exchange-rate movements in China. Operating income benefited from legal expense falling to $107,000 from $1.368 million, including the prior-year $850,000 settlement and $380,000 of related legal fees.
- Cash flow and investment: Investing activities used $324,000, including $123,000 for intangible assets; capital expenditures for property and equipment were $232,000. Financing activities used $4.925 million, including $3.211 million of dividends paid and $2.838 million for treasury shares acquired through employee share-exercise and tax-withholding arrangements.
- Liquidity and debt: Current assets were $45.732 million and current liabilities $12.185 million. There was no balance drawn on the revolving credit facility at year-end; $25.6 million was available, subject to eligible receivables and inventory. The $26 million facility matures July 11, 2019, is secured by a first lien on company assets, and the company reported covenant compliance.
- Dividends: $0.57 per share was declared for FY2016, including a special $0.25-per-share dividend, versus $0.32 in FY2015.
Material changes and management commentary
- Net sales declined mainly because prior-year initial placements of programs taken over from a competitor were not repeated. The prior period had one fewer week.
- Operating cash flow increased as inventory and receivables declined, reversing prior-year increases. Management said cash flow from operations and the revolving credit line should be adequate for liquidity needs at current operating levels.
- Wal-Mart accounted for 42% of gross sales, up from 36%; Toys R Us accounted for 23%, down from 25%. Together, the two customers represented approximately 65% of FY2016 gross sales.
- Licensed products represented 62% of gross sales; 46% of total gross sales were associated with Disney licenses, which expire December 31, 2017.
- The company recorded a discrete net tax benefit of approximately $260,000, primarily related to more favorable state apportionment percentages, and recorded a net reserve for unrecognized tax benefits of about $200,000. The filing gives differing effective-tax-rate descriptions: 36.4% in the tax discussion and 38.9% in one MD&A statement; the reported tax expense was $3.915 million on pretax income of $10.744 million.
- Management provided no specific revenue or earnings guidance. It said results are exposed to customer demand, competition and cost changes, including cotton, labor, transportation and currency costs.
Risks, contingencies and unusual items
- Concentrated customer exposure and reliance on major retail accounts could make sales and operating income vulnerable to lost customers or reduced orders.
- License renewal and licensed-property popularity are material risks, particularly given Disney’s significant contribution and the disclosed 2017 expiration date.
- Most products are sourced from foreign manufacturers, with the largest concentration in China, and nearly all products enter through the Port of Long Beach. Trade restrictions, currency changes, supplier disruption or port and freight bottlenecks could raise costs or delay deliveries.
- Customer price pressure, raw-material and labor inflation, changing consumer preferences, excess or obsolete inventory, product-safety recalls, and intellectual-property claims could adversely affect results.
- Minimum guaranteed royalty commitments were $10.2 million as of year-end; minimum guaranteed rent commitments were $5.4 million. The filing reported no legal proceeding expected to have a material adverse effect.
- The company stated that adoption of the new lease standard would significantly affect its financial position and disclosures, though it did not expect a material effect on results of operations. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued an unqualified opinion.
Important facts for investors to verify
- Whether the two largest customers’ orders and sales concentrations remain stable.
- Renewal terms and economics for the Disney licenses before their December 31, 2017 expiration.
- Whether improved cash generation is sustainable and whether inventory and receivables continue to convert to cash.
- The resolution of the state tax position and the filing’s inconsistent effective-tax-rate statements.
- Future gross margins in light of sourcing costs, customer pricing pressure, and the prior-year program placements that did not recur.
- Credit-facility availability, covenant compliance, and the effect of lease obligations and minimum royalty commitments on liquidity.