Crown Crafts, Inc. — FY2020 Form 10-K Summary
Reporting period: Fiscal year ended March 29, 2020 (52 weeks), compared with the 52 weeks ended March 31, 2019. Crown Crafts designs, sources and sells infant, toddler and juvenile products, including bedding, blankets, bibs, bath products, toys and accessories.
Financial performance and liquidity
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net sales | $73.4 million | $76.4 million | Down 3.9% |
| Gross profit | $21.6 million | $22.3 million | Down 3.2% |
| Gross margin | 29.4% | 29.2% | Up 0.2 percentage points |
| Operating income | $7.7 million | $7.1 million | Up $624,000 |
| Net income | $6.6 million | $5.0 million | Up 30.7% |
| Diluted earnings per share | $0.65 | $0.50 | Up $0.15 |
| Cash from operating activities | $8.5 million | $9.0 million | Down $442,000 |
| Capital expenditures | $705,000 | $751,000 | Down $46,000 |
Sales declines were concentrated in bedding, blankets and accessories, down $2.6 million (6.5%); the other product category declined $360,000 (1.0%). Management attributed the overall sales decrease mainly to retailer shipment timing and a program discontinued during the second quarter.
Marketing and administrative expense fell $1.3 million to $13.9 million, helping lift operating income despite lower sales. The effective tax rate was 15.5%, versus 26.1% in FY2019; FY2020 included $654,000 of discrete tax benefits, including reserve reversals and tax credits. Net income growth therefore reflects both lower operating expenses and favorable tax items.
At year-end, cash was $282,000, accounts receivable were $17.8 million and inventory was $17.7 million. Current assets totaled $37.0 million versus current liabilities of $6.5 million. Revolving-credit borrowings were $2.6 million, down from $4.5 million; $20.1 million was available under the $26 million facility, subject to eligible receivables and inventory. The facility matures July 11, 2022, is secured by company assets, and carried a 3.27% LIBOR-based rate at year-end. The company reported covenant compliance. Operating lease liabilities totaled $5.15 million after adoption of the new lease standard.
FY2020 financing cash outflow was $7.7 million, including $5.8 million of dividends. Dividends declared were $0.57 per share, including a $0.25 special dividend, compared with $0.32 per share in FY2019. Shareholders’ equity was $42.4 million, up from $41.4 million.
Material changes, outlook and risks
- COVID-19: The company reported sales declines to some customers beginning in March 2020 as stores closed or experienced weaker sales; higher sales to other customers and e-commerce partly offset the decline. Chinese supply disruptions began in February, but most foreign suppliers were back at full capacity by May 18, 2020. Management said the longer-term financial impact could not be reasonably estimated.
- Liquidity outlook: Management expected operating cash flow, revolving-credit availability and the subsequent PPP loan proceeds to fund working capital, capital expenditures and debt service for at least 12 months. The company stated it expected to meet obligations as they came due over the next 12 months.
- PPP loan: After year-end, the company obtained a $1,963,800 Paycheck Protection Program loan, funded April 20, 2020. All or part could be forgiven if program requirements are met; forgiveness was not assured in the filing.
- Concentration and licensing: Walmart accounted for 42% and Amazon 20% of FY2020 gross sales. Licensed products were 40% of gross sales, including 30% associated with Disney licenses. Disney infant-bedding licensing was due to expire December 31, 2020; other listed Disney agreements expired December 31, 2021. Minimum guaranteed royalties totaled $4.2 million, mainly payable in FY2021 and FY2022.
- Other principal exposures: Dependence on China sourcing and shipping through the Port of Long Beach; retailer order reductions, competition and pricing pressure; declining U.S. birthrates; inventory obsolescence; product safety and liability; and customer, supplier, cybersecurity and foreign-trade risks. The company had no long-term purchase agreements with customers.
- Taxes and accounting: A California refund claim for FY2014 remained unresolved as of April 20, 2020 and could involve administrative or legal proceedings. The company adopted lease accounting Topic 842 on April 1, 2019, recognizing lease assets and liabilities; the auditor issued an unqualified opinion on the financial statements.
Most important facts for investors to verify
- Whether COVID-related customer demand, retail closures and supply-chain conditions materially affected results after March 29, 2020.
- Whether the PPP loan qualified for forgiveness and how any remaining balance was treated.
- Ongoing sales, receivables and order exposure to Walmart and Amazon, and renewal or replacement of major licenses.
- Available borrowing capacity under the asset-based credit facility, covenant compliance and the very low year-end cash balance.
- The outcome of the remaining California tax-refund matter and the extent to which FY2020 earnings benefited from discrete tax items.
- The sustainability of dividends, particularly the special dividend, given cash generation, investment needs and debt obligations.