SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
20549
FORM 10-Q
For the Quarter Ended Commission file number 1-2661
June 30, 2001
- ---------------------------
CSS INDUSTRIES, INC.
-------------------------------------------------------------
(Exact name of registrant as specified in its Charter)
Delaware 13-1920657
- ------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
1845 Walnut Street, Philadelphia, PA 19103
- --------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
(215) 569-9900
-------------------------------------------------------------------------
(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
----- -----
As of June 30, 2001, there were 8,851,170 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 June 30, 2001 and March 31, 2001, the results of
operations for the three months ended June 30, 2001 and 2000 and the cash flows
for the three months ended June 30, 2001 and 2000. The results for the three
months ended June 30, 2001 and 2000 are not necessarily indicative of the
expected results for the 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, with the March
31, 2001 quarterly transition report on Form 10-Q and with Part II of this
document.
PAGE NO.
--------
Consolidated Statements of Operations - Three months ended June 30,
2001 and 2000 3
Consolidated Condensed Balance Sheets - June 30, 2001 and March 31,
2001 4
Consolidated Statements of Cash Flows - Three months ended
June 30, 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 4. Submission of Matters to a Vote of Security Holders 12
SIGNATURE 13
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Page 2 of 13
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
(In thousands, except
per share amounts)
Three Months Ended
June 30,
----------------------------
2001 2000
-------- --------
SALES $ 28,817 $ 38,194
-------- --------
COSTS AND EXPENSES
Cost of sales 20,664 28,357
Selling, general and administrative expenses 14,973 15,639
Interest (income) expense, net (12) 630
Rental and other income, net (52) (92)
-------- --------
35,573 44,534
-------- --------
LOSS BEFORE INCOME TAXES (6,756) (6,340)
INCOME TAX BENEFIT (2,432) (2,283)
-------- --------
NET LOSS $ (4,324) $ (4,057)
======== ========
NET LOSS PER COMMON SHARE
Basic $ (.49) $ (.45)
======== ========
Diluted $ (.49) $ (.45)
======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 8,847 9,072
======== ========
Diluted 8,847 9,072
======== ========
CASH DIVIDENDS PER SHARE OF COMMON STOCK $ -- $ --
======== ========
- ------------------------------------------------------------------------------------------------
COMPREHENSIVE LOSS
Net loss $ (4,324) $ (4,057)
Change in fair value of interest rate swap agreements, net (118) --
-------- --------
Comprehensive loss $ (4,442) $ (4,057)
======== ========
Page 3 of 13
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
(In thousands)
June 30, March 31,
2001 2001
-------- ---------
(Unaudited) (Unaudited)
ASSETS
------
CURRENT ASSETS
Cash and temporary investments $ 609 $ 41,687
Accounts receivable, net 20,143 20,174
Inventories 132,376 82,140
Deferred income taxes 5,714 5,714
Other current assets 8,989 6,764
-------- --------
Total current assets 167,831 156,479
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 64,028 62,105
-------- --------
OTHER ASSETS
Intangible assets 38,217 38,535
Other 4,668 5,292
-------- --------
Total other assets 42,885 43,827
-------- --------
Total assets $274,744 $262,411
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Notes payable $ 9,020 --
Other current liabilities 39,834 32,341
-------- --------
Total current liabilities 48,854 32,341
-------- --------
LONG-TERM OBLIGATIONS 2,724 2,908
-------- --------
DEFERRED INCOME TAXES 6,250 6,250
-------- --------
SHAREHOLDERS' EQUITY 216,916 220,912
-------- --------
Total liabilities and shareholders' equity $274,744 $262,411
======== ========
See notes to consolidated financial statements.
Page 4 of 13
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
(In thousands)
Three Months Ended
June 30,
--------------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net loss $ (4,324) $ (4,057)
-------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,751 3,082
Loss on disposal of assets, net 5 28
Provision for doubtful accounts 110 104
Deferred tax benefit -- (80)
Changes in assets and liabilities, net of effects from
purchase of a business:
(Increase) in accounts receivable (80) (2,167)
(Increase) in inventory (47,369) (50,720)
(Increase) in other assets (18) (1,284)
Increase in other current liabilities 10,153 14,529
(Decrease) in accrued taxes (2,481) (2,271)
-------- --------
Total adjustments (36,929) (38,779)
-------- --------
Net cash (used for) operating activities (41,253) (42,836)
-------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment (4,046) (3,920)
Purchase of a business (7,849) --
Proceeds on assets held for sale 4,716 18
-------- --------
Net cash (used for) investing activities (7,179) (3,902)
-------- --------
Cash flows from financing activities:
Payments on long-term obligations (2,079) (380)
Borrowing on long-term obligation -- 86
Net borrowings on notes payable 9,020 52,425
Purchase of treasury stock -- (2,958)
Proceeds from exercise of stock options 413 --
-------- --------
Net cash provided by financing activities 7,354 49,173
-------- --------
Net (decrease) increase in cash and temporary investments (41,078) 2,435
Cash and temporary investments at beginning of period 41,687 441
-------- --------
Cash and temporary investments at end of period $ 609 $ 2,876
======== ========
See notes to consolidated financial statements.
Page 5 of 13
CSS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
June 30, 2001
-------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
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 income in the consolidated statements of operations.
Change in Fiscal Year -
---------------------
On February 21, 2001, CSS' Board of Directors approved a change in the
Company's fiscal year end from December 31 to March 31. The transition
period began January 1, 2001 and ended March 31, 2001. The Company's
new fiscal year began April 1, 2001 and will end March 31, 2002
("Fiscal 2002"). With this change, the Company's new fiscal year now
coincides with its natural revenue cycle.
Nature of Business -
------------------
CSS is a consumer products company primarily engaged in the 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:
Page 6 of 13
June 30, March 31,
2001 2001
------------ -----------
Raw material............... $ 21,627,000 $17,795,000
Work-in-process............ 31,963,000 30,375,000
Finished goods............. 78,786,000 33,970,000
------------ -----------
$132,376,000 $82,140,000
============ ===========
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 Loss Per Common Share -
-------------------------
Basic and diluted net loss per common share is based on the weighted
average number of common shares outstanding during the first quarter -
8,846,778 in 2001 and 9,072,453 in 2000.
As of June 30, 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 June 30, 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 classifications.
(2) DERIVATIVE FINANCIAL INSTRUMENTS:
---------------------------------
The Company enters into foreign currency forward 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 foreign currency forward 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 June 30, 2001, the notional amount of open foreign
currency forward contracts was $9,295,000 and the related gains and losses
were not material.
The Company enters into interest rate swap agreements 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 June 30, 2001 were $32,838,000, $21,890,000 and
$10,946,000 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 4.82%, 4.96% and 5.09% 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.
Page 7 of 13
The Company designates all of its interest rate swap agreements as cash
flow hedges and recognizes the fair value of its interest rate swap
agreements on the balance sheet. Changes in the fair value of these
agreements are recorded in other comprehensive income (loss) and
reclassified into earnings as the underlying hedged item affects earnings.
During the first quarter of fiscal 2002, unrealized after tax net losses of
$118,000 were recorded in other comprehensive loss.
(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. As
of June 30, 2001, the Company had repurchased 2,472,000 shares for
$61,137,000. There were no stock repurchases in the quarter ended June 30,
2001.
(4) 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
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 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. At June 30,
2001, $1,900,000 was utilized under the program.
(5) BUSINESS ACQUISITIONS AND DIVESTITURES:
---------------------------------------
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
$7,849,000 in cash, including transaction costs, which approximated the
fair value of the assets acquired. The acquisition was accounted for as a
purchase. The operations of Tye-Sil have been consolidated into existing
operations of the Company.
(6) ACCOUNTING PRONOUNCEMENTS:
--------------------------
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires
all business combinations be accounted for by the purchase method and adds
disclosure requirements related to business combination transactions. SFAS
Page 8 of 13
No. 141 also establishes criteria for the recognition of intangible assets
apart from goodwill. SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets. The Statement
provides that goodwill and some intangibles will no longer be amortized.
SFAS No. 142 provides specific guidance for testing goodwill for
impairment. The Statement also requires new disclosure of information about
goodwill and other intangible assets subsequent to their acquisition. The
Company will adopt the provisions of SFAS No. 142 effective with the
beginning of its next fiscal year, April 1, 2002. The Company is in the
process of evaluating the financial statement impact of adoption of SFAS
No. 142.
Page 9 of 13
CSS INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
Seasonality and Change in Fiscal Year
- -------------------------------------
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.
On February 21, 2001, CSS' Board of Directors approved a change in the
Company's fiscal year end from December 31 to March 31. The transition period
began January 1, 2001 and ended March 31, 2001. The Company's new fiscal year
began April 1, 2001 and will end March 31, 2002 ("Fiscal 2002"). With this
change, the Company's new fiscal year now coincides with its natural revenue
cycle.
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. As of June 30, 2001, the
Company had repurchased 2,472,000 shares for $61,137,000. There were no stock
repurchases in the quarter ended June 30, 2001.
Quarter Ended June 30, 2001 Compared to Quarter Ended June 30, 2000
- -------------------------------------------------------------------
Sales for the quarter ended June 30, 2001 decreased 25% to $28,817,000 from
$38,194,000. The decrease in sales was primarily due to the deferral of
Halloween, Christmas, educational and ribbon and bow shipments from the first
quarter into the second quarter of fiscal 2002. This decrease was partially
offset by higher sales of custom ribbon and bows.
Cost of sales, as a percentage of sales, was 72% in 2001 compared to 74% in
2000. The decrease in cost of sales, as a percentage of sales, was primarily due
to favorable margins on mix of product shipped. Also contributing to the
decrease were lower closeout sales compared to the same quarter in the prior
year and increased production efficiencies. Selling, general and administrative
expense was $14,973,000 for the first quarter 2002, compared to $15,639,000 in
the prior year quarter. The decrease of $666,000, or 4%, was a result of cost
containment programs and the timing of sales related expenses.
Interest income, net was $12,000 in 2001 compared to interest expense, net
of $630,000 in 2000. Average borrowings for the first quarter of fiscal 2002
were $624,000 compared with $21,960,000 in the same quarter of the prior year.
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 36% in 2001 and
2000.
The net loss for the quarter ended June 30, 2001 was $4,324,000, or $.49
per share, compared to a net loss of $4,057,000, or $.45 per share, in 2000. The
increased loss was due to the impact of the sales decline, partially offset by
higher margins, lower selling, general and administrative expenses and lower
interest expense.
Page 10 of 13
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At June 30, 2001, the Company had working capital of $118,977,000 and
shareholders' equity of $216,916,000. The increase in inventories and other
current liabilities from March 31, 2001 reflected normal seasonal inventory
build necessary for the 2001 shipping season. The decrease in shareholders'
equity was primarily attributable to the net loss during the quarter ended June
30, 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.
Payment for Christmas related products is usually not received until after the
holiday in accordance with general industry practice. As a result, short-term
borrowing needs are repaid in January, but increase through December, peaking
prior to Christmas. Seasonal borrowings are made under a $75,000,000 unsecured
revolving credit facility with five banks and a receivable purchase agreement in
an amount up to $100,000,000 with an issuer of receivables-backed commercial
paper. These financial facilities are available to fund the seasonal borrowing
needs and to provide the Company with sources of capital for general corporate
purposes. As of June 30, 2001, the Company had short-term borrowings of
$9,020,000. 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.
Page 11 of 13
CSS INDUSTRIES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
-------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
----------------------------------------------------
(a) The annual meeting of shareholders of the Registrant was held on
May 1, 2001.
(b) The following were elected to serve as Directors of the Registrant
until the next annual meeting and until their successors shall be
elected and qualify:
SHARES OF VOTING STOCK
-------------------------
FOR WITHHELD
-------------------------
James H. Bromley 8,325,612 4,544
Stephen V. Dubin 7,564,608 765,548
David J.M. Erskine 8,325,712 4,444
Jack Farber 7,564,608 765,548
Richard G. Gilmore 8,325,712 4,444
Leonard E. Grossman 8,325,712 4,444
James E. Ksansnak 8,325,712 4,444
Michael L. Sanyour 8,325,712 4,444
Page 12 of 13
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: August 14, 2001 By: /s/ Clifford E. Pietrafitta
--------------------------------
Clifford E. Pietrafitta
Vice President - Finance,
Chief Financial Officer and
Principal Accounting Officer
Page 13 of 13
DOCUMENT
TYPE EX-27
TEXT
ARTICLE 5
CIK 0000020629
NAME CSS INDUSTRIES
MULTIPLIER 1,000
PERIOD-TYPE 3 MOS
FISCAL-YEAR-END MAR-31-2002
PERIOD-START APR-01-2001
PERIOD-END JUN-30-2001
CASH 609
SECURITIES 0
RECEIVABLES 20,864
ALLOWANCES 721
INVENTORY 132,376
CURRENT-ASSETS 167,831
PP&E 129,866
DEPRECIATION 65,838
TOTAL-ASSETS 274,744
CURRENT-LIABILITIES 48,854
BONDS 135
COMMON 1,237
PREFERRED-MANDATORY 0
PREFERRED 0
OTHER-SE 215,679
TOTAL-LIABILITY-AND-EQUITY 274,744
SALES 28,817
TOTAL-REVENUES 28,817
CGS 20,664
TOTAL-COSTS 20,664
OTHER-EXPENSES 14,811
LOSS-PROVISION 110
INTEREST-EXPENSE (12)
INCOME-PRETAX (6,756)
INCOME-TAX (2,432)
INCOME-CONTINUING (4,324)
DISCONTINUED 0
EXTRAORDINARY 0
CHANGES 0
NET-INCOME (4,324)
EPS-PRIMARY (.49)
EPS-DILUTED (.49)