Crown Crafts, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended March 30, 2014, a 52-week year. The filing reports annual results, not standalone fourth-quarter results. Comparative figures are for the 52 weeks ended March 31, 2013. Amounts below are in U.S. dollars.
Business context
Crown Crafts designs and markets infant and toddler bedding, blankets, bibs, bath products, disposable products and accessories. Products are sold mainly to retailers, manufactured primarily by third parties in Asia, and marketed under company-owned, licensed and private-label brands.
Financial performance and position
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Net sales | $81.294 million | $78.416 million | +3.7% |
| Gross profit / margin | $22.534 million / 27.7% | $19.767 million / 25.2% | Profit +14.0%; margin +2.5 percentage points |
| Operating income | $9.378 million | $8.093 million | +15.9% |
| Net income / net margin | $5.771 million / 7.1% | $5.111 million / 6.5% | +12.9%; margin +0.6 percentage points |
| Diluted EPS | $0.59 | $0.52 | +$0.07 |
| Cash from operations | $3.639 million | $9.123 million | Down $5.484 million |
| Cash and cash equivalents at year-end | $0.560 million | $0.340 million | Up $0.220 million |
- Sales growth was concentrated in bedding, blankets and accessories, up 4.8% to $58.332 million; bibs, bath and disposable products increased 1.0% to $22.962 million.
- Gross margin improved with a more favorable product mix, stronger fixed-cost absorption on higher sales, and $248,000 lower auxiliary warehouse costs.
- Marketing and administrative expenses rose 12.7% to $13.156 million, mainly due to higher performance-based compensation and legal fees. Legal expense was $867,000, versus $302,000.
- Net income benefited from higher operating income; income tax expense rose to $3.575 million and the effective tax rate increased to 38.3% from 36.3%.
- Operating cash flow fell as inventory increased $2.677 million and accounts payable decreased $2.310 million. Investing activities used $161,000; financing activities used $3.258 million.
- At March 30, 2014, total assets were $46.215 million, current assets $38.069 million, current liabilities $10.298 million, and shareholders’ equity $35.917 million. Inventory was $13.607 million, up from $10.930 million.
- No revolving-credit balance or letters of credit were outstanding. The $26.0 million asset-secured facility had $24.7 million available, subject to eligible receivables and inventory; it matures July 11, 2016. The company reported covenant compliance.
- Dividends declared were $0.32 per share, or $3.153 million, compared with $0.74 per share, or $7.277 million, in FY2013, which included a special $0.50-per-share dividend. The company also used $457,000 to acquire treasury stock, primarily through employee share surrenders.
Material changes, outlook and risks
- Management attributed most of the sales increase to three new programs introduced in the second quarter. It cited product mix and cost absorption as key drivers of margin improvement.
- Management believes operating cash flow and available revolving credit will meet liquidity needs at the current level of operations. The filing provides no numerical revenue or earnings guidance.
- Customer concentration is substantial: Wal-Mart represented 41% of FY2014 gross sales and Toys R Us 19%; the top two accounted for approximately 60%. The company has no long-term customer purchase agreements.
- Licensed products represented 61% of gross sales, including 38% associated with Disney licenses expiring December 31, 2015. Renewal or replacement risk could materially affect sales.
- Key operating exposures include competition and customer pricing pressure; cotton, labor, freight and currency costs; reliance on China-based sourcing; import duties and transportation disruptions; inventory obsolescence; and product-safety recalls or liability claims.
- The company and subsidiary CCIP face BreathableBaby patent litigation over a mesh crib liner. Discovery was temporarily stayed in August 2013. The company disputes the claims; an unfavorable outcome could restrict sales or cause damages, royalties, legal costs, or impairment of up to the approximately $1.0 million carrying value of the related patent asset.
- Minimum guaranteed royalty commitments were $6.2 million, principally due in FY2015 and FY2016; minimum lease commitments totaled $6.4 million. The company reported no material subsequent events.
- KPMG issued an unqualified audit opinion. Management concluded disclosure controls and internal control over financial reporting were effective as of March 30, 2014.
Important facts for investors to verify
- Whether the three new programs sustain sales growth and whether margin gains persist as product mix, freight, labor and sourcing costs change.
- Wal-Mart and Toys R Us sales exposure, customer order patterns, and any changes to factoring approval or customer credit support.
- Disney license renewal prospects before the December 31, 2015 expirations and the economics of any replacement licenses.
- Inventory growth and valuation, including sell-through of finished goods and the adequacy of reserves for discontinued or slow-moving products.
- Status and potential financial impact of the BreathableBaby litigation, including the value of capitalized patent-defense costs.
- Dividend sustainability relative to operating cash generation, working-capital needs and credit-facility covenants.