SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
20549
FORM 10-Q
For the Transition Period from Commission file number 1-2661
January 1, 2001 to March 31, 2001
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CSS INDUSTRIES, INC.
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(Exact name of registrant as specified in its Charter)
Delaware 13-1920657
- -------------------------------- -------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification number)
1845 Walnut Street, Philadelphia, PA 19103
- --------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
(215) 569-9900
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
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As of March 31, 2001, there were 8,830,520 shares of Common Stock outstanding
which excludes shares which may still be issued upon exercise of stock options.
Page 1 of 13
CSS INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
In the opinion of management, the accompanying unaudited consolidated condensed
financial statements contain all adjustments necessary to present fairly the
financial position as of March 31, 2001 and December 31, 2000, the results of
operations for the three months ended March 31, 2001 and 2000 and the cash flows
for the three months ended March 31, 2001 and 2000. The results for the three
months ended March 31, 2001 and 2000 are not necessarily indicative of the
expected results for a full year. As certain previously reported notes and
footnote disclosures have been omitted, these financial statements should be
read in conjunction with the latest annual report on Form 10-K and with Part II
of this document.
PAGE NO.
Consolidated Statements of Operations - Three months ended
March 31, 2001 and 2000 3
Consolidated Condensed Balance Sheets - March 31, 2001 and
December 31, 2000 4
Consolidated Statements of Cash Flows - Three months ended
March 31, 2001 and 2000 5
Notes to Consolidated Financial Statements 6-9
Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURE 13
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CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
(In thousands, except
per share amounts)
Three Months Ended
March 31,
--------------------
2001 2000
-------- --------
SALES $ 26,987 $ 25,715
-------- --------
COSTS AND EXPENSES
Cost of sales 19,963 18,765
Selling, general and administrative expenses 16,061 16,141
Interest expense, net 48 396
Rental and other expense, net 109 17
-------- --------
36,181 35,319
-------- --------
LOSS BEFORE INCOME TAXES (9,194) (9,604)
INCOME TAX BENEFIT (3,114) (3,457)
-------- --------
NET LOSS $ (6,080) $ (6,147)
======== ========
NET LOSS PER COMMON SHARE
Basic $ (.69) $ (.66)
======== ========
Diluted $ (.69) $ (.66)
======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 8,831 9,266
======== ========
Diluted 8,831 9,266
======== ========
CASH DIVIDENDS PER SHARE OF COMMON STOCK $ -- $ --
======== ========
- -------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME
Net loss $ (6,080) $ (6,147)
Other Comprehensive Income:
Change in fair value of interest rate swap agreements, net (66) --
-------- --------
Comprehensive Income $ (6,146) $ (6,147)
======== ========
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CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
March 31, December 31,
2001 2000
-------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and temporary investments $ 41,687 $ 1,058
Accounts receivable, net 20,174 177,087
Inventories 82,140 54,000
Deferred income taxes 5,714 5,096
Other current assets 8,394 9,509
-------- --------
Total current assets 158,109 246,750
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 62,105 60,945
-------- --------
OTHER ASSETS
Intangible assets 38,535 38,853
Other 5,292 2,995
-------- --------
Total other assets 43,827 41,848
-------- --------
Total assets $264,041 $349,543
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ -- $ 62,615
Other current liabilities 33,971 50,738
-------- --------
Total current liabilities 33,971 113,353
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LONG-TERM OBLIGATIONS 2,908 3,054
-------- --------
DEFERRED INCOME TAXES 6,250 6,045
-------- --------
SHAREHOLDERS' EQUITY 220,912 227,091
-------- --------
Total liabilities and shareholders' equity $264,041 $349,543
======== ========
See notes to consolidated financial statements.
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CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
(In thousands)
Three Months Ended
March 31,
----------------------
2001 2000
--------- ---------
Cash flows from operating activities:
Net loss $ (6,080) $ (6,147)
--------- ---------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,655 2,527
Loss (gain) on sale of assets 1 (7)
Provision for doubtful accounts 174 133
Deferred tax benefit (413) (51)
Changes in assets and liabilities:
Decrease in accounts receivable 156,740 138,940
(Increase) in inventory (28,140) (40,947)
(Increase) in other assets (1,199) (332)
(Decrease) in other current liabilities (6,179) (14,877)
(Decrease) in accrued income taxes (10,516) (11,751)
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Total adjustments 113,123 73,635
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Net cash provided by operating activities 107,043 67,488
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Cash flows from investing activities:
Purchase of property, plant and equipment (3,482) (2,586)
Proceeds on sale of property, plant and equipment -- 37
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Net cash used for investing activities (3,482) (2,549)
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Cash flows from financing activities:
Payments on long-term obligations (317) (1,665)
Net payments on notes payable (62,615) (62,370)
Purchase of treasury stock -- (3,819)
Proceeds from exercise of stock options -- 64
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Net cash used for financing activities (62,932) (67,790)
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Net increase (decrease) in cash and temporary investments 40,629 (2,851)
Cash and temporary investments at beginning of period 1,058 3,292
--------- ---------
Cash and temporary investments at end of period $ 41,687 $ 441
========= =========
See notes to consolidated financial statements.
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CSS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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Principles of Consolidation -
---------------------------
The consolidated financial statements include the accounts of the Company
and all subsidiaries. All significant intercompany transactions and
accounts have been eliminated in consolidation. Gains and losses on foreign
currency transactions are not material and are included in other expense in
the consolidated statements of operations.
Change in Fiscal Year -
---------------------
On February 21, 2001, the Board of Directors approved a change in the
Company's fiscal year end from December 31 to March 31. The transition
period commenced January 1, 2001 and ended March 31, 2001. The Company's
new fiscal year begins April 1, 2001 and ends on March 31, 2002 ("Fiscal
2002"). With this change, the Company's new fiscal year will coincide with
its natural revenue cycle.
Nature of Business -
------------------
CSS is a consumer products company primarily engaged in the design,
manufacture and sale to mass market retailers of seasonal, social
expression products, including gift wrap, gift bags, boxed greeting cards,
gift tags, tissue paper, paper and vinyl decorations, seasonal candles,
classroom exchange Valentines, decorative ribbons and bows, Halloween
masks, costumes, make-ups and novelties, Easter egg dyes and novelties and
educational products. Due to the seasonality of the Company's business, the
majority of sales occur in the second and third quarters of the Company's
new fiscal year and a material portion of the Company's trade receivables
are due in December and January of each year.
Use of Estimates -
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Inventories -
-----------
Inventories are generally stated at the lower of first-in, first-out (FIFO)
cost or market. The remaining portion of the inventory is valued at the lower of
last-in, first-out (LIFO) cost or market. Inventories consisted of the
following:
March 31, December 31,
2001 2000
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Raw material.......... $17,795,000 $13,874,000
Work-in-process....... 30,375,000 14,349,000
Finished goods........ 33,970,000 25,777,000
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$82,140,000 $54,000,000
=========== ===========
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Revenue Recognition -
-------------------
The Company recognizes revenues in accordance with its shipping terms.
Returns and allowances are reserved for based on the Company's historical
experience.
Net Income Per Common Share -
---------------------------
Basic and diluted net loss per common share is based on the weighted
average number of common shares outstanding during the three months ended
March 31 - 8,830,520 in 2001 and 9,266,053 in 2000.
As of March 31, 2001 and 2000, the numerator and denominator in the basic
and diluted earnings per share computations are equal as the Company had a
net loss for the three months ended March 31, 2001 and 2000. Common stock
equivalents are not used in the computation of diluted earnings per share
as they would have an anti-dilutive effect in the periods presented.
Statements of Cash Flows -
------------------------
For purposes of the statements of cash flows, the Company considers all
holdings of highly liquid debt instruments with original maturity of less
than three months to be temporary investments.
Reclassifications -
-----------------
Certain prior period amounts have been reclassified to conform with
current year classification.
(2) DERIVATIVE FINANCIAL INSTRUMENTS:
---------------------------------
The Company uses certain derivative financial instruments as part of its
risk management strategy to reduce interest rate and currency risk.
Derivatives are not used for trading or speculative activities. The Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities" and SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment of FASB Statement No. 133," on January 1, 2001.
The adoption of SFAS No. 133 was not material to the consolidated statement
of operations or financial position of the Company.
The Company recognizes all derivatives on the balance sheet at fair value.
On the date the derivative instrument is entered into, the company
generally designates the derivative as either (1) a hedge of the fair value
of a recognized asset or liability or of an unrecognized firm commitment
("fair value hedge"), or (2) a hedge of a forecasted transaction or of the
variability of cash flows to be received or paid related to a recognized
asset or liability ("cash flow hedge"). Changes in the fair value of a
derivative that is designated as, and meets all the required criteria for,
a fair value hedge, along with the gain or loss on the hedged asset or
liability that is attributable to the hedged risk, are recorded in current
period earnings. Changes in the fair value of a derivative that is
designated as, and meets all the required criteria for, a cash flow hedge
are recorded in accumulated other comprehensive income and reclassified
into earnings as the underlying hedged item affects earnings. The portion
of the change in fair value of a derivative associated with hedge
ineffectiveness or the component of a derivative instrument excluded from
the assessment of hedge effectiveness is recorded currently in earnings.
Also, changes in the entire fair value of a derivative that is not
designated as a hedge are recorded immediately in earnings. The company
formally documents all relationships between hedging instruments and hedged
items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. This process includes relating all
derivatives that are designated as fair value or cash flow hedges to
specific assets and liabilities on the balance sheet or to specific firm
commitments or forecasted transactions.
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The Company also formally assesses, both at the inception of the hedge and
on an ongoing basis, whether each derivative is highly effective in
offsetting changes in fair values or cash flows of the hedged item. If it
is determined that a derivative is not highly effective as a hedge or if a
derivative ceases to be a highly effective hedge, the Company will
discontinue hedge accounting prospectively.
The Company enters into foreign currency contracts in order to reduce the
impact of certain foreign currency fluctuations. Firmly committed
transactions and the related receivables and payables may be hedged with
forward exchange contracts. Gains and losses arising from foreign currency
forward contracts are recognized in income or expense as offsets of gains
and losses resulting from the underlying hedged transactions. As of March
31, 2001, the notional amount of open forward exchange contracts was
$1,630,000 and the related gains and losses were not material.
In March 2001, the Company entered into interest rate swap agreements,
with maturities of up to 34 months, to manage its exposure to interest rate
movements by effectively converting a portion of its anticipated working
capital debt from variable to fixed rates. The average annual notional
amounts of interest rate swap contracts subject to fixed rates as of March
31, 2001 were $16,419,000, $10,945,000 and $5,473,000 for fiscal years
2002, 2003 and 2004, respectively. These agreements involve the exchange of
variable rate payments for fixed rate payments without the effect of
leverage and without the exchange of the underlying face amount. Fixed
interest rate payments are at a weighted average rate of 4.90%, 5.03% and
5.14% for fiscal years 2002, 2003 and 2004, respectively. Variable rate
payments are based on one month U.S. dollar LIBOR. Interest rate
differentials paid or received under these agreements are recognized as
adjustments to interest expense. Unamortized deferred losses are included
in other current liabilities and totaled $99,000 as of March 31, 2001.
(3) TREASURY STOCK TRANSACTIONS:
----------------------------
On February 19, 1998, the Company announced that its Board of Directors had
authorized the purchase of up to 1,000,000 shares of the Company's Common
Stock. Subsequently, the Board of Directors authorized additional
repurchases totaling 2,000,000 shares on terms acceptable to management.
Any such buy back is subject to compliance with regulatory requirements and
relevant covenants of the Company's credit facility. As of March 31, 2001,
the Company had repurchased 2,472,000 shares for $61,137,000. There were no
stock repurchases in the three months ended March 31, 2001.
(4) FUTURE ACCOUNTING PRONOUNCEMENTS:
---------------------------------
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities - a
Replacement of FASB Statement No. 125." SFAS No. 140 revises the standards
for accounting for securitizations and other transfers of financial assets
and collateral and requires certain disclosures, but it carries over most
of SFAS No. 125's provisions without amendment. SFAS No. 140 is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. Based on current operations,
the Company does not expect the adoption of this statement to have a
material effect on its financial position and results of operations.
(5) SUBSEQUENT EVENTS:
------------------
Debt Refinancing
----------------
On April 30, 2001, the Company replaced its expiring revolving credit
facility with two new financing facilities. The Company entered into a
$75,000,000 unsecured revolving credit facility with five banks. This
facility allows for borrowings up to $75,000,000, expires on April 30, 2004
and provides that borrowings are limited during a consecutive 30 day period
-8-
in each year of the agreement. The loan agreement contains provisions to
increase or reduce the interest pricing spread based on the achievement of
certain benchmarks related to the ratio of earnings to interest expense. At
the Company's option, interest on the facility currently accrues at (1) the
greater of the prime rate minus 1/2% or the Federal Funds Rate, or (2)
LIBOR plus 1%. The loan agreement also contains covenants, the most
restrictive of which pertain to net worth; the ratio of operating cash flow
to fixed charges; the ratio of earnings to interest expense and the ratio
of debt to capitalization.
The Company also entered into a receivables purchase agreement with an
issuer of receivables-backed commercial paper. Under this arrangement, the
Company sells, on an ongoing basis and without recourse, its trade accounts
receivable to a wholly-owned special purpose subsidiary (the "SPS"), which
in turn has the option to sell, on an ongoing basis and without recourse,
to the commercial paper issuer an undivided percentage interest in the pool
of accounts receivable. Under the agreement, new trade receivables are
automatically sold to the SPS and become a part of the receivables pool.
The agreement permits the sale (and repurchase) of an undivided interest in
the accounts receivable pool for an amount of up to $100,000,000 through
April 30, 2004, subject to an annual renewal. Interest on amounts financed
under this facility is based on a variable commercial paper rate plus 3/8%.
This arrangement has been accounted for as a financing transaction.
Tye-Sil Corporation Ltd. Acquisition
------------------------------------
On May 8, 2001, the Company acquired certain assets of Tye-Sil Corporation
Ltd. of Montreal, Quebec, Canada. Tye-Sil had been the leading Canadian
provider of gift wrap and accessories. In consideration, the Company paid
approximately $7,200,000 in cash, including transaction costs. The
acquisition was accounted for as a purchase. The operations of Tye-Sil will
be consolidated into existing operations of the Company.
Interest Rate Swap Agreements
-----------------------------
In addition to the interest rate swap agreements described in footnote 2,
in April, 2001, the Company entered into additional interest rate swap
agreements with maturities of up to 33 months, to manage its exposure to
interest rate movements by effectively converting a portion of its
anticipated working capital debt from variable to fixed rates. The average
annual notional amounts hedged in these agreements were $16,419,000,
$10,945,000 and $5,473,000 for fiscal years 2002, 2003 and 2004,
respectively. These transactions involve the exchange of variable rate
payments for fixed rate payments without the effect of leverage and without
the exchange of the underlying face amount. Fixed interest rate payments
are at a weighted average rate of 4.74%, 4.89% and 5.05% for fiscal years
2002, 2003 and 2004, respectively. Variable rate payments are based on one
month U.S. dollar LIBOR. Interest rate differentials paid or received under
these agreements will be recognized as adjustments to interest expense.
-9-
CSS INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Seasonality
- -----------
The seasonal nature of CSS' business results in low sales and operating
losses in the first and fourth quarters and high shipment levels and operating
profits in the second and third quarters of the Company's new fiscal year,
thereby causing significant fluctuations in the quarterly results of operations
of the Company.
Stock Repurchase Program
- ------------------------
On February 19, 1998, the Company announced that its Board of Directors had
authorized the purchase of up to 1,000,000 shares of the Company's Common Stock.
Subsequently, the Board of Directors authorized additional repurchases totaling
2,000,000 shares on terms acceptable to management. Any such buy back is subject
to compliance with regulatory requirements and relevant covenants of the
Company's credit facility. As of March 31, 2001, the Company had repurchased
2,472,000 shares for $61,137,000. There were no stock repurchases in the three
months ended March 31, 2001.
Transition Quarter Ended March 31, 2001 Compared to Quarter Ended March 31, 2000
- --------------------------------------------------------------------------------
Consolidated sales for the three months ended March 31, 2001 were
$26,987,000 or 5% above 2000 sales of $25,715,000. The increase in sales was
primarily attributable to customer requested deferrals of Valentine and Easter
shipments from the fourth quarter of 2000 and increased sales of ribbons and
bows to the wholesale distribution channel. These increases were partially
offset by lower sales of product lines discontinued in early 2000 and lower
closeout sales.
Cost of sales, as a percentage of sales, was 74% in 2001 and 73% in 2000.
The increase in cost of sales, as a percentage of sales, was primarily due to a
charge to markdown excess inventories.
Interest expense, net decreased to $48,000 from $396,000 in 2000. The
decrease in interest expense was primarily due to lower borrowing levels as a
result of the cash generated from operations and improved management of working
capital.
Income taxes, as a percentage of income before taxes, were 34% in 2001 and
36% in 2000. The decreased rate for the period ended March 31, 2001 reflects the
effective tax rate for the three month transition period compared to an
estimated annual effective rate utilized for the three month period ended March
31, 2000.
The net loss for the three months ended March 31, 2001 was $6,080,000, or
$.69 per share compared to a net loss of $6,147,000, or $.66 per share, in 2000.
The decreased loss was due primarily to lower interest expense.
-10-
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At March 31, 2001, the Company had working capital of $124,138,000 and
shareholders' equity of $220,912,000. The decrease in accounts receivable from
December 31, 2000 reflected seasonal collections of Christmas accounts
receivables net of current year billings. The increase in inventories reflected
normal seasonal inventory increases necessary for the 2001 season. The decrease
in other current liabilities reflected payment of income taxes, sales
commissions, royalties and employee benefits. The decrease in shareholders'
equity was primarily attributable to the net loss during the three months ended
March 31, 2001.
The Company relies primarily on cash generated from operations and seasonal
borrowings to meet its liquidity requirements. Historically, most revenues are
seasonal with over 80% of sales generated in the second and third quarters of
the Company's new fiscal year. Payment for Christmas related products is usually
not received until after the holiday in accordance with general industry
practice. As a result, short-term borrowings were repaid in the three months
ending March 31, 2001 but will increase through the remainder of the year
peaking prior to Christmas. Seasonal borrowings during the quarter were made
under a $300,000,000 unsecured revolving credit facility with thirteen banks and
financial institutions. As of March 31, 2001, the Company had no borrowings
outstanding under this facility. As of April 30, 2001, the Company replaced the
expiring $300,000,000 unsecured revolving credit facility with two new financing
arrangements totalling $175,000,000. These financing facilities are available to
fund seasonal borrowing needs and provide the Company with sources of capital
for general corporate purposes. Based on its current operating plan, the Company
believes its sources of available capital are adequate to meet its ongoing cash
needs for the foreseeable future.
-11-
CSS INDUSTRIES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(b) The Company filed a report on Form 8-K on February 22, 2001 with respect to
the change in its fiscal year end from December 31 to March 31.
-12-
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CSS INDUSTRIES, INC.
----------------------------------------
(Registrant)
Date: May 15, 2001 By: /s/Clifford E. Pietrafitta
------------------------------------
Clifford E. Pietrafitta
Vice President - Finance,
Chief Financial Officer and
Principal Accounting Officer
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