SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
20549
FORM 10-Q
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For the Quarter Ended Commission file number 1-2661
September 30, 2001
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CSS INDUSTRIES, INC.
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(Exact name of registrant as specified in its Charter)
Delaware 13-1920657
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
1845 Walnut Street, Philadelphia, PA 19103
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(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 September 30, 2001, there were 8,853,370 shares of Common Stock
outstanding which excludes shares which may still be issued upon exercise of
stock options.
Page 1 of 12
CSS INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
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PART I - FINANCIAL INFORMATION
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In the opinion of management, the accompanying unaudited consolidated condensed
financial statements contain all adjustments necessary to present fairly the
financial position as of September 30, 2001 and March 31, 2001, the results of
operations for the three months and six months ended September 30, 2001 and 2000
and the cash flows for the six months ended September 30, 2001 and 2000. The
results for the three months and six months ended September 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 June 30, 2001 quarterly report on Form 10-Q and
with Part II of this document.
PAGE NO.
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Consolidated Statements of Operations - Three months and six months ended
September 30, 2001 and 2000 3
Consolidated Condensed Balance Sheets - September 30, 2001 and
March 31, 2001 4
Consolidated Statements of Cash Flows - Six months ended
September 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
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Items 1 through 6 - Not Applicable
SIGNATURE 12
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Page 2 of 12
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
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(Unaudited)
(In thousands, except
per share amounts)
Three Months Ended Six Months Ended
September 30, September 30,
----------------------------- -----------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
SALES $ 134,383 $ 148,261 $ 163,200 $ 186,455
--------- --------- --------- ---------
COSTS AND EXPENSES
Cost of sales 98,722 113,551 119,386 141,908
Selling, general and administrative expenses 21,377 21,566 36,350 37,205
Interest expense, net 763 1,755 751 2,385
Rental and other expense (income), net 75 (12) 23 (104)
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120,937 136,860 156,510 181,394
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INCOME BEFORE INCOME TAXES 13,446 11,401 6,690 5,061
INCOME TAX EXPENSE 4,840 4,105 2,408 1,822
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NET INCOME $ 8,606 $ 7,296 $ 4,282 $ 3,239
========= ========= ========= =========
NET INCOME PER COMMON SHARE
Basic $ .97 $ .81 $ .48 $ .36
========= ========= ========= =========
Diluted $ .96 $ .81 $ .48 $ .36
========= ========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 8,852 8,968 8,850 9,020
========= ========= ========= =========
Diluted 8,972 8,973 8,943 9,025
========= ========= ========= =========
CASH DIVIDENDS PER SHARE OF COMMON STOCK $ -- $ -- $ -- $ --
========= ========= ========= =========
- -----------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME
Net income $ 8,606 $ 7,296 $ 4,282 $ 3,239
Change in fair value of interest
rate swap agreements, net (454) -- (572) --
--------- --------- --------- ---------
Comprehensive income $ 8,152 $ 7,296 $ 3,710 $ 3,239
========= ========= ========= =========
Page 3 of 12
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
(Unaudited)
(In thousands)
September 30, March 31,
2001 2001
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ASSETS
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CURRENT ASSETS
Cash and temporary investments $ 2,413 $ 41,687
Accounts receivable, net 104,822 20,174
Inventories 141,258 82,140
Deferred income taxes 5,735 5,714
Other current assets 7,632 6,764
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Total current assets 261,860 156,479
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PROPERTY, PLANT AND EQUIPMENT, NET 64,185 62,105
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OTHER ASSETS
Intangible assets 37,899 38,535
Other 3,746 5,292
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Total other assets 41,645 43,827
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Total assets $367,690 $262,411
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Notes payable $ 75,455 $ --
Other current liabilities 57,610 32,341
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Total current liabilities 133,065 32,341
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LONG-TERM OBLIGATIONS 2,495 2,908
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DEFERRED INCOME TAXES 7,271 6,250
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SHAREHOLDERS' EQUITY 224,859 220,912
-------- --------
Total liabilities and shareholders' equity $367,690 $262,411
======== ========
See notes to consolidated financial statements.
Page 4 of 12
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
(In thousands)
Six Months Ended
September 30,
-----------------------------
2001 2000
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Cash flows from operating activities:
Net income $ 4,282 $ 3,239
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Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,603 5,149
Loss on sale or disposal of assets 5 30
Provision for doubtful accounts 725 675
Deferred tax 1,000 387
Changes in assets and liabilities, net of effects from
purchase of a business:
(Increase) in accounts receivable (85,374) (101,290)
(Increase) in inventory (55,959) (37,211)
Decrease in other assets 2,286 3,223
Increase in other current liabilities 23,477 18,419
Increase in accrued income taxes 1,319 1,493
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Total adjustments (106,918) (109,125)
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Net cash (used for) operating activities (102,636) (105,886)
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Cash flows from investing activities:
Purchase of property, plant and equipment (6,457) (7,157)
Purchase of a business (7,849) --
Proceeds on assets held for sale 4,118 19
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Net cash (used for) investing activities (10,188) (7,138)
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Cash flows from financing activities:
Payments on long-term obligations (2,364) (712)
Borrowing on long-term obligation -- 86
Net borrowings on notes payable 75,455 120,510
Purchase of treasury stock -- (5,101)
Proceeds from exercise of stock options 459 --
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Net cash provided by financing activities 73,550 114,783
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Net (decrease) increase in cash and temporary investments (39,274) 1,759
Cash and temporary investments at beginning of period 41,687 441
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Cash and temporary investments at end of period $ 2,413 $ 2,200
========= =========
See notes to consolidated financial statements
Page 5 of 12
CSS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 expense (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 12
September 30, March 31,
2001 2001
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Raw material............... $ 22,718,000 $17,795,000
Work-in-process............ 20,610,000 30,375,000
Finished goods............. 97,930,000 33,970,000
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$141,258,000 $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 Income Per Common Share -
The following table sets forth the computation of basic earnings per share
and diluted earnings per share for the three months and six months ended
September 30, 2001 and 2000:
Three Months Ended Six Months Ended
September 30, September 30,
--------------------- -------------------
2001 2000 2001 2000
---- ---- ---- ----
Numerator:
Net income ................................. $8,606,000 $7,296,000 $4,282,000 $3,239,000
Denominator:
Weighted average shares outstanding
for basic earnings per share............. 8,852,000 8,968,000 8,850,000 9,020,000
Effect of dilutive stock options............ 120,000 5,000 93,000 5,000
-------- -------- ------- -------
Adjusted weighted average shares out-
standing for diluted earnings per share.. 8,972,000 8,973,000 8,943,000 9,025,000
========= ========= ========= =========
Basic earnings per share....................... $.97 $.81 $.48 $.36
==== ==== ==== ====
Diluted earnings per share..................... $.96 $.81 $.48 $.36
==== ==== ==== ====
Statements of Cash Flows -
Forpurposes 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.
Page 7 of 12
(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 September 30, 2001, the notional amount of open foreign
currency forward contracts was $8,826,000 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 September 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.
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 and reclassified into
earnings as the underlying hedged item affects earnings. Unrealized after
tax net losses of $454,000 during the three months ended and $572,000
during the six months ended September 30, 2001 were recorded in other
comprehensive income.
When entering into hedging transactions, the Company documents the
relationships between hedging instruments and hedged items, as well as the
risk management objective and strategy. This process links all derivatives
that are designated fair value, cash flow or foreign currency hedges to
specific assets and liabilities on the Consolidated Condensed Balance
Sheet. The Company assesses, both at inception and on an on-going basis,
the effectiveness of all hedges in offsetting changes in fair values or
cash flows of hedged items.
(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 September 30, 2001, the Company had repurchased 2,472,000 shares for
$61,137,000. There were no stock repurchases in the quarter or six month
period ended September 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.
Page 8 of 12
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 September
30, 2001, $66,000,000 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
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, and will discontinue the
amortization of goodwill at that time. As of September 30, 2001, goodwill
totaled $40,627,000 and negative goodwill totaled $2,728,000. For the six
months ended September 30, 2001, net amortization expense was $636,000.
Negative goodwill remaining at the date of adoption will be recorded as
income from a cumulative effect of accounting change. The Company is in the
process of evaluating the financial statement impact of the impairment
provisions of SFAS No. 142.
SFAS No. 143, "Accounting for Asset Retirement Obligations," was issued in
June 2001. SFAS No. 143 addresses accounting and reporting for legal
obligations and related costs associated with the retirement of long-lived
assets. The Statement requires that the fair value of the liability for an
asset retirement obligation be recognized in the period incurred if a
reasonable estimate of fair value can be made. The estimated retirement
costs are capitalized as part of the carrying amount of the long-lived
asset. SFAS No. 143 is effective for financial statements issued for fiscal
years beginning after June 15, 2002. 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.
SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets,"
was issued in August 2001 and is effective for fiscal years beginning after
December 15, 2001. This statement retains existing requirements to
recognize an impairment loss only if the carrying amount of a long-lived
asset is not recoverable from its undiscounted cash flows and measure any
impairment loss as the difference between the carrying amount and the fair
value of the asset. SFAS No. 144 a) removes goodwill from its scope, b)
allows for probability-weighted cash flow estimation techniques when
measuring for impairment, c) requires that, for any assets to be abandoned,
the depreciable life be adjusted and the cumulative impact of such change
treated as an accounting change and d) an impairment loss be recognized at
the date a long-lived asset is exchanged for a similar productive asset or
distributed to owners in a spinoff if the carrying value of the asset
exceeds its fair value. 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.
Page 9 of 12
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 September 30, 2001,
the Company had repurchased 2,472,000 shares for $61,137,000.
Six Months Ended September 30, 2001 Compared to Six Months Ended September 30,
2000
Sales for the six months ended September 30, 2001 decreased 12% to
$163,200,000 from $186,455,000 in 2000. The decrease in sales was primarily due
to customer requested deferral of Christmas product shipments.
Cost of sales, as a percentage of sales, was 73% in 2001 compared to 76% in
2000. The decrease in cost of sales, as a percentage of sales, was a result of
decreased closeout sales, lower manufacturing costs and increased production
efficiencies.
Selling, general and administrative ("SG&A") expenses, as a percentage of
sales, increased to 22% from 20% in 2000. The increase in SG&A expenses, as a
percentage of sales, was due to the lower sales base.
Interest expense, net was $751,000 in 2001 and $2,385,000 in 2000. The
decrease in interest expense was due to reduced interest rates and lower
borrowing levels as a result of 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.
Page 10 of 12
Net income for the six months ended September 30, 2001 was $4,282,000, or
$.48 per share, compared to prior year net income of $3,239,000, or $.36 per
share. The increase in earnings was due to improved margins and lower interest
expense, partially offset by the impact of lower sales.
Second Quarter Fiscal 2002 Compared to Second Quarter Fiscal 2001
Sales for the quarter ended September 30, 2001 decreased 9% to $134,383,000
from $148,261,000 in 2000. The decrease in sales was primarily the result of
customer requested shipment deferrals into October of Christmas products which
historically shipped in September.
Cost of sales, as a percentage of sales, was 73% in 2001 and 77% in 2000.
The decrease in cost of sales was due to favorable margins on mix of product
shipped, lower closeout sales and reduced manufacturing costs. SG&A expenses, as
a percentage of sales, were 16% in 2001 compared to 15% in 2000. The increase in
SG&A expense, as a percentage of sales, was a result of lower sales.
Interest expense, net was $763,000 in 2001 compared to $1,755,000 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 36% in 2001 and
2000.
Net income for the second quarter was $8,606,000, or $.96 per share,
compared to prior year net income of $7,296,000, or $.81 per share. The increase
in income was primarily due to higher margins and lower interest expense, offset
by the impact of lower sales.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, the Company had working capital of $128,795,000 and
shareholders' equity of $224,859,000. The increase in accounts receivable from
March 31, 2001 reflected seasonal billings of fiscal 2002 Halloween and
Christmas accounts receivables, net of current year collections. The increase in
inventory and other current liabilities reflected normal seasonal inventory
build necessary for the fiscal 2002 shipping season. The increase in
shareholders' equity is primarily attributable to year-to-date net income.
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 peak prior to Christmas and are repaid in January. 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 September
30, 2001, the Company had short-term borrowings of $75,455,000. 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 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: November 13, 2001 By: /s/ Clifford E. Pietrafitta
----------------------------
Clifford E. Pietrafitta
Vice President - Finance,
Chief Financial Officer and
Principal Accounting Officer
Page 12 of 12