Crown Crafts, Inc. — FY2018 Form 10-K Summary
Business context and reporting period
Crown Crafts designs, sources and sells infant, toddler and juvenile products, including bedding, blankets, bibs, bath products, developmental toys and accessories. This 10-K covers the 52-week fiscal year ended April 1, 2018; the comparison year ended April 2, 2017.
Financial results and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $70.3 million | $66.0 million |
| Gross profit / margin | $19.8 million / 28.1% | $19.4 million / 29.4% |
| Operating income | $5.5 million | $8.7 million |
| Net income / diluted EPS | $3.0 million / $0.30 | $5.6 million / $0.55 |
| Operating cash flow | $2.5 million | $10.4 million |
| Cash at year-end | $0.2 million | $7.9 million |
| Revolving credit debt | $9.5 million | None |
Sales increased 6.5%, primarily reflecting $5.4 million of Carousel sales and $2.1 million of Sassy sales, partly offset by a $4.3 million decline at Crown Crafts Infant Products. Gross margin fell 1.3 percentage points. Marketing and administrative expenses rose 33.2% to $14.3 million, contributing to lower operating income and net income. Net margin was 4.3%, versus 8.4% in FY2017.
Operating cash flow declined substantially, including from a $2.9 million increase in accounts receivable. Investing activities used $15.5 million, mainly for the two acquisitions. Financing activities provided $5.3 million, including net revolving-line borrowings. At year-end, $13.2 million remained available under the $26.0 million facility, subject to eligible receivables and inventory. The facility bears variable interest; the selected LIBOR rate was 3.67%, and it matures in July 2019. The company reported compliance with its covenants.
Current assets were $39.8 million and current liabilities $6.8 million. Inventory was $19.8 million, up from $15.8 million. Long-term debt was $9.5 million. Cash dividends declared fell to $0.32 per share from $0.72, which included a special dividend in FY2017.
Material changes, outlook and risks
- Acquisitions: Carousel was acquired for approximately $8.7 million, funded with cash; Sassy for approximately $6.5 million, funded with cash and the revolving line. Purchase-price allocations were preliminary. Management cited potential synergies and product/customer-channel diversification; no quantified guidance was provided.
- Toys “R” Us: The customer represented 15% of FY2018 gross sales and entered bankruptcy; Crown Crafts stopped shipments before the U.S. liquidation. The company expects other customers may partly offset lost business. The top three customers accounted for approximately 65% of gross sales; Walmart was 39% and Amazon 11%.
- Licenses: Licensed products represented 52% of gross sales, including 34% associated with Disney. Disney infant bedding and décor licenses expire December 2018; infant feeding and bath and toddler bedding licenses expire December 2019. Minimum guaranteed royalties totaled $4.4 million in future commitments.
- Market and sourcing risks: Consumer preference for fewer infant bedding sets and more separates is pressuring average selling prices. Competition, customer pricing demands, raw-material, labor and transport costs, and reliance on Chinese suppliers and shipping routes may affect sales and margins.
- Unusual expenses and tax: FY2018 marketing and administrative expenses included $653,000 in customer credit-coverage fees and $218,000 in bad-debt expense related to the retail customer bankruptcy, plus acquisition costs. The effective tax rate rose to 44.3% from 36.7%; discrete tax expense included a $377,000 deferred-tax revaluation after U.S. tax-law changes and other tax adjustments.
- Other exposures: A California tax examination of prior-year returns was pending. The filing identifies risks involving product safety and liability, inventory obsolescence, cybersecurity, foreign trade and currency, and license renewals. No material adverse legal proceedings were reported.
Management believed operating cash flow and available revolver capacity would meet liquidity needs based on current operations. No specific revenue or earnings forecast was provided. Management and the auditor reported effective internal control over financial reporting, but the assessment excluded Carousel and Sassy operations acquired during the year. The auditor issued an unqualified opinion on the financial statements.
Investor verification points
- Track post-bankruptcy customer replacement sales and exposure to Walmart and other major accounts.
- Review acquisition integration, final purchase-price allocations, and whether the acquisitions deliver expected returns.
- Monitor gross-margin recovery, customer pricing, closeout inventory and the bedding-market shift.
- Check revolver borrowing, availability, covenant compliance and refinancing before the facility’s maturity.
- Confirm Disney license renewals and the company’s ability to meet minimum royalty commitments.
- Follow resolution of the California tax examination and the treatment of acquired businesses in subsequent control assessments.