Crown Crafts(CRWS) - 2019 Q4 - Annual Report

Part I Item 1. Business Crown Crafts, Inc. operates in the infant, toddler, and juvenile products segment, selling items under proprietary and licensed brands, primarily sourced from China, with major sales to Walmart, Amazon, and Target - The company operates in the infant, toddler, and juvenile products segment through its subsidiaries Sassy Baby, NoJo, and Carousel Designs[22] Major Customer Sales Concentration (FY 2019 & 2018) | Customer | Fiscal Year 2019 | Fiscal Year 2018 | | :--- | :--- | :--- | | Walmart Inc. | 41% | 39% | | Amazon.com, Inc. | 16% | 11% | | Target Corporation | 10% | * | | Toys "R" Us, Inc. | * | 15% | - Sales under company-owned trademarks accounted for 38% of total gross sales in fiscal 2019, an increase from 30% in 2018[27] - Licensed products constituted 41% of gross sales in fiscal 2019, with Disney-licensed products alone representing 29%, and several key Disney license agreements expiring in late 2019 and 2020[43][50] - Most products are manufactured by foreign contract manufacturers, primarily in China, where the company maintains a Shanghai office for production and sourcing coordination[33][34] Item 1A. Risk Factors The company faces significant risks including high customer concentration, heavy reliance on expiring licensed products, declining US birthrates, foreign sourcing disruptions, cybersecurity threats, and intense industry competition - The top three customers accounted for approximately 67% of gross sales in fiscal year 2019, posing a material risk if any relationship is lost[45] - Heavy reliance on licensed products, which were 41% of gross sales in FY2019, with Disney licenses alone at 29%, means non-renewal could materially harm revenues[46][49] - General economic conditions and a declining U.S. birthrate could reduce product demand[47][48] - Primary sourcing from China exposes the company to risks from international trade regulations, tariffs, currency fluctuations, and supply chain disruptions[71][72] - Evolving e-commerce sales tax regulations, post-South Dakota v. Wayfair, Inc., may increase compliance costs and reduce product pricing competitiveness[82] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments - None[84] Item 2. Properties The company leases all its facilities, including headquarters, distribution centers, and offices across the U.S. and in Shanghai, which management deems suitable for current and future operations Principal Leased Properties as of May 10, 2019 | Location | Use | Approximate Square Feet | | :--- | :--- | :--- | | Gonzales, Louisiana | Administrative and sales office | 17,761 | | Compton, California | Offices, warehouse and distribution center | 157,400 | | Douglasville, Georgia | Offices, manufacturing and warehouse | 23,800 | | Grand Rapids, Michigan | Product design offices | 3,600 | | Bentonville, Arkansas | Sales office | 1,376 | | Shanghai, People's Republic of China | Office | 1,912 | Item 3. Legal Proceedings The company is involved in ordinary course legal proceedings, none of which are expected to materially adversely affect its financial position, operations, or cash flows - The company is not a party to any legal proceeding expected to have a material adverse effect[87] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[91] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the Nasdaq Capital Market under "CRWS", with a history of cash dividends permitted by its credit facility, subject to financial conditions and Board discretion - The company's common stock is traded on the Nasdaq Capital Market under the symbol "CRWS"[88] - The company has historically paid cash dividends, permitted by its credit facility provided no default occurs[89] Item 6. Selected Financial Data This section summarizes five years of key financial data, showing fiscal 2019 net sales of $76.4 million and net income of $5.0 million, or $0.50 per diluted share, compared to $70.3 million and $3.0 million respectively in fiscal 2018 Selected Financial Data (Fiscal Years 2015-2019, in thousands, except per share data) | | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating results: | | | | | | | Net sales | $76,381 | $70,270 | $65,978 | $84,342 | $85,978 | | Gross profit | $22,307 | $19,779 | $19,411 | $23,813 | $23,550 | | Income from operations | $7,113 | $5,507 | $8,700 | $10,788 | $9,220 | | Net income | $5,019 | $3,021 | $5,572 | $6,829 | $5,718 | | Diluted earnings per share | $0.50 | $0.30 | $0.55 | $0.68 | $0.57 | | Cash dividends declared per share | $0.32 | $0.32 | $0.72 | $0.57 | $0.32 | | Financial position at year-end: | | | | | | | Total assets | $54,779 | $56,581 | $47,184 | $52,415 | $49,946 | | Long-term debt | $4,486 | $9,458 | - | - | - | | Shareholders' equity | $41,388 | $39,318 | $38,923 | $40,019 | $39,572 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion attributes the 8.7% net sales increase in FY2019 to acquisitions, offsetting Toys "R" Us liquidation, with gross profit margin improving to 29.2% and net income rising to $5.0 million, supported by strong liquidity Results of Operations Fiscal 2019 net sales increased 8.7% to $76.4 million due to acquisitions, despite Toys "R" Us sales loss, with gross profit rising 12.8% to $22.3 million and net income growing 66.1% to $5.0 million due to improved margins and a lower 26.1% effective tax rate Fiscal 2019 vs. 2018 Results of Operations (in thousands) | | 2019 | 2018 | Change $ | Change % | | :--- | :--- | :--- | :--- | :--- | | Total net sales | $76,381 | $70,270 | $6,111 | 8.7% | | Gross profit | $22,307 | $19,779 | $2,528 | 12.8% | | % of net sales | 29.2% | 28.1% | | | | Marketing and admin expenses | $15,194 | $14,272 | $922 | 6.5% | | Net income | $5,019 | $3,021 | $1,998 | 66.1% | - Net sales growth was driven by Carousel and Sassy acquisitions, contributing $6.5 million and $11.8 million respectively, partially offset by the $9.7 million loss from Toys "R" Us sales[100] - The effective tax rate decreased to 26.1% in FY2019 from 44.3% in FY2018, with the prior year's rate impacted by a $377,000 charge from TCJA deferred tax asset revaluation[105][108] Financial Position, Liquidity and Capital Resources The company's financial position improved with net cash from operating activities increasing to $9.0 million in FY2019, debt reduced by $4.9 million, and $19.4 million available on its revolving credit facility as of March 31, 2019 - Net cash provided by operating activities increased to $9.0 million in FY2019 from $2.5 million in FY2018[111] - Net cash used in investing activities decreased to $751,000 in FY2019 from $15.5 million in FY2018, primarily due to prior year acquisition payments[112] - As of March 31, 2019, the company had a $4.5 million balance on its revolving line of credit and $19.4 million available for borrowing[116] - The company uses factoring agreements with CIT to assign most trade accounts receivable, reducing credit loss exposure[118] Critical Accounting Policies and Estimates Management identifies critical accounting policies requiring significant judgment, including revenue recognition, allowances, purchase price allocations, goodwill, long-lived asset valuation, and inventory valuation, which could materially impact financial results - Key policies requiring significant management estimates include Revenue Recognition, Allowances Against Accounts Receivable, Purchase Price Allocations and Goodwill, Valuation of Long-Lived Assets, and Inventory Valuation[122] - Goodwill is tested for impairment annually or when recoverability is in doubt, with an initial qualitative assessment preceding a quantitative test if needed[128] - Inventory is valued at the lower of cost or net realizable value, with management periodically reviewing for obsolescence and establishing allowances requiring significant judgment[133] Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure This item is not applicable to the company - Not applicable[136] Item 9A. Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and internal control over financial reporting were effective as of March 31, 2019, with no material changes identified - The CEO and CFO concluded that the company's disclosure controls and procedures are effective as of the report period end[137] - Management concluded that the company's internal control over financial reporting was effective as of March 31, 2019[138] Item 9B. Other Information This item is not applicable to the company - Not applicable[141] Part III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the company's 2019 Annual Meeting of Stockholders Proxy Statement - Information is incorporated by reference from the Proxy Statement[144] Item 11. Executive Compensation Executive compensation information is incorporated by reference from the company's 2019 Annual Meeting of Stockholders Proxy Statement - Information is incorporated by reference from the Proxy Statement[145] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the Proxy Statement, with 556,013 securities remaining available under the 2014 Omnibus Equity Compensation Plan as of March 31, 2019 Securities Authorized for Issuance under Equity Compensation Plans (as of March 31, 2019) | Plan Category | Number of securities to be issued upon exercise | Weighted-average exercise price | Number of securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders: | | | | | 2006 Omnibus Incentive Plan | 97,500 | $6.87 | 0 | | 2014 Omnibus Equity Compensation Plan | 360,000 | $7.60 | 556,013 | Item 13. Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the company's 2019 Annual Meeting of Stockholders Proxy Statement - Information is incorporated by reference from the Proxy Statement[149] Item 14. Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the company's 2019 Annual Meeting of Stockholders Proxy Statement - Information is incorporated by reference from the Proxy Statement[150] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed with the Form 10-K, including consolidated financial statements, notes, the independent auditor's report, and Schedule II for Valuation and Qualifying Accounts - The report includes the Consolidated Balance Sheets, Statements of Income, Statements of Changes in Shareholders' Equity, Statements of Cash Flows, and Notes to Consolidated Financial Statements[153] - Financial Statement Schedule II — Valuation and Qualifying Accounts is filed with the report[154] Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm KPMG LLP issued an unqualified opinion on the company's consolidated financial statements for the two-year period ended March 31, 2019, affirming fair presentation in conformity with U.S. GAAP and PCAOB standards - KPMG LLP issued an unqualified audit opinion, stating the financial statements are presented fairly in accordance with U.S. GAAP[172] - The company was not required to have, nor was KPMG engaged to perform, an audit of its internal control over financial reporting[174] Consolidated Financial Statements The consolidated financial statements present the company's financial position, operations, and cash flows, with FY2019 showing total assets of $54.8 million, total liabilities of $13.4 million, shareholders' equity of $41.4 million, net income of $5.0 million, and net sales of $76.4 million Consolidated Balance Sheet Highlights (in thousands) | | March 31, 2019 | April 1, 2018 | | :--- | :--- | :--- | | Total current assets | $38,679 | $39,754 | | Total assets | $54,779 | $56,581 | | Total current liabilities | $7,711 | $6,788 | | Long-term debt | $4,486 | $9,458 | | Total shareholders' equity | $41,388 | $39,318 | Consolidated Statement of Income Highlights (in thousands) | | 2019 | 2018 | | :--- | :--- | :--- | | Net sales | $76,381 | $70,270 | | Gross profit | $22,307 | $19,779 | | Income from operations | $7,113 | $5,507 | | Net income | $5,019 | $3,021 | | Diluted EPS | $0.50 | $0.30 | Consolidated Statement of Cash Flows Highlights (in thousands) | | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $8,974 | $2,453 | | Net cash used in investing activities | ($751) | ($15,466) | | Net cash (used in) provided by financing activities | ($8,295) | $5,336 | | Net decrease in cash and cash equivalents | ($72) | ($7,677) | Notes to Consolidated Financial Statements The notes detail accounting policies and financial data, covering revenue recognition, financing, acquisitions, goodwill, stock-based compensation, income taxes, major customer concentrations, and commitments for leases and royalties Note 4 – Acquisitions In fiscal 2018, the company acquired Carousel Designs for $8.7 million (adding $5.7 million goodwill) and the Sassy® product line for $6.5 million (adding $320,000 goodwill), expanding its portfolio and direct-to-consumer channel Carousel Acquisition Cost Allocation (in thousands) | | Amount | | :--- | :--- | | Total tangible assets | $2,040 | | Total amortizable intangible assets | $2,560 | | Goodwill | $5,679 | | Total acquired assets | $10,279 | | Less: Liabilities assumed | ($1,554) | | Net acquisition cost | $8,725 | Sassy Acquisition Cost Allocation (in thousands) | | Amount | | :--- | :--- | | Total tangible assets | $3,800 | | Total amortizable intangible assets | $2,420 | | Goodwill | $320 | | Total acquired assets | $6,540 | | Less: Liabilities assumed | ($20) | | Net acquisition cost | $6,520 | Note 8 – Stock-based Compensation In fiscal 2019, total stock-based compensation expense was $377,000, with 110,000 stock options granted and 47,500 forfeited, and $47,000 and $261,000 in unrecognized stock-option and non-vested stock grant compensation costs respectively - Total stock-based compensation expense was $377,000 in fiscal 2019, down from $539,000 in fiscal 2018[272] Stock Option Activity (Fiscal Year 2019) | | Number of Options | | :--- | :--- | | Outstanding at Beginning of Period | 395,000 | | Granted | 110,000 | | Forfeited | (47,500) | | Outstanding at End of Period | 457,500 | | Exercisable at End of Period | 292,500 | - The company recognized $116,000 in compensation expense in FY2019 for shares granted under its performance bonus plan related to FY2017 performance[282] Note 9 – Income Taxes Fiscal 2019 income tax expense was $1.8 million, with an effective tax rate of 26.1%, significantly lower than FY2018's 44.3% due to TCJA impacts, and the company maintains a $1.2 million reserve for unrecognized tax benefits Reconciliation of Federal Statutory Rate to Effective Tax Rate (in thousands) | | 2019 | 2018 | | :--- | :--- | :--- | | Federal statutory rate | 21.00% | 30.75% | | Tax expense at federal statutory rate | $1,426 | $1,662 | | State income taxes, net of Federal benefit | $241 | $126 | | Discrete items | $113 | $626 | | Other | $ (8) | $ (14) | | Income tax expense | $1,772 | $2,400 | - The company's reserve for unrecognized tax benefits increased from $1.0 million at the beginning of FY2019 to $1.2 million at year-end[293] - A valuation allowance of $710,000 is held against deferred tax assets as of March 31, 2019, related to unrealizable state net operating loss carryforwards[288] - The company adopted ASU No. 2014-09 (Revenue from Contracts with Customers) on April 2, 2018, with no material impact on financial position or results[233][235] - The company plans to adopt ASU No. 2016-02 (Leases) on April 1, 2019, expecting to recognize approximately $1.9 million in operating lease liabilities and right-of-use assets[238] - Royalty expense, included in cost of products sold, was $5.2 million in FY2019 and $7.2 million in FY2018[213] Major Customer Sales Concentration (FY 2019 & 2018) | Customer | 2019 | 2018 | | :--- | :--- | :--- | | Walmart Inc. | 41% | 39% | | Amazon.com, Inc. | 16% | 11% | | Target Corporation | 10% | * | | Toys "R" Us, Inc. | * | 15% | - As of March 31, 2019, the company has commitments for minimum guaranteed rental payments of $1.9 million and minimum guaranteed royalty payments of $3.2 million[301][302]