SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
20549
FORM 10-Q
For the Quarter Ended September 30, 2002 Commission file number 1-2661
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 September 30, 2002, there were 7,598,574 shares of Common Stock
outstanding which excludes shares which may still be issued upon exercise of
stock options.
Page 1 of 21
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 September 30, 2002 and March 31, 2002, the results of
operations for the three and six months ended September 30, 2002 and 2001 and
the cash flows for the six months ended September 30, 2002 and 2001. The results
for the three and six months ended September 30, 2002 and 2001 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/A and with Part II of this document.
PAGE NO.
--------
Consolidated Statements of Operations and Comprehensive Income (Loss) - Three
and six months ended September 30, 2002 and 2001 3
Consolidated Condensed Balance Sheets - September 30, 2002 and March 31, 2002 4
Consolidated Statements of Cash Flows - Six months ended
September 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6-12
Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-15
Quantitive and Qualitative Disclosures About Market Risk 16
Controls and Procedures 16
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Certifications 20-21
Page 2 of 21
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands, except
per share amounts)
Three Months Ended Six Months Ended
September 30, September 30,
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
SALES $ 175,452 $ 134,383 $ 226,009 $ 163,200
--------- --------- --------- ---------
COSTS AND EXPENSES
Cost of sales 131,512 98,722 167,717 119,386
Selling, general and administrative expenses 25,482 21,377 46,480 36,350
Interest expense, net 1,132 763 1,407 751
Rental and other expense (income), net 120 75 (21) 23
158,246 120,937 215,583 156,510
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 17,206 13,446 10,426 6,690
INCOME TAX EXPENSE 6,194 4,840 3,754 2,408
--------- --------- --------- ---------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 11,012 8,606 6,672 4,282
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, NET OF TAX -- -- (8,813) --
--------- --------- --------- ---------
NET INCOME (LOSS) $ 11,012 $ 8,606 $ (2,141) $ 4,282
========= ========= ========= =========
BASIC NET INCOME (LOSS) PER COMMON SHARE
Before cumulative effect of accounting change $ 1.45 $ .97 $ .83 $ .48
Cumulative effect of accounting change -- -- (1.10) --
--------- --------- --------- ---------
Basic net income (loss) per common share $ 1.45 $ .97 $ (.27) $ .48
========= ========= ========= =========
DILUTED NET INCOME (LOSS) PER COMMON SHARE
Before cumulative effect of accounting change $ 1.37 $ .96 $ .79 $ .48
Cumulative effect of accounting change -- -- (1.04) --
--------- --------- --------- ---------
Diluted net income (loss) per common share $ 1.37 $ .96 $ (.25) $ .48
========= ========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC 7,587 8,852 8,022 8,850
========= ========= ========= =========
DILUTED 8,052 8,972 8,478 8,943
========= ========= ========= =========
CASH DIVIDENDS PER SHARE OF COMMON STOCK $ -- $ -- $ -- $ --
========= ========= ========= =========
- ---------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS)
Net income (loss) $ 11,012 $ 8,606 $ (2,141) $ 4,282
Change in fair value of interest rate swap agreements, net 31 (454) (212) (572)
Foreign currency translation adjustment (43) -- (1) --
--------- --------- --------- ---------
Comprehensive income (loss) $ 11,000 $ 8,152 $ (2,354) $ 3,710
========= ========= ========= =========
See notes to consolidated financial statements.
Page 3 of 21
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
September 30, March 31,
2002 2002
------------- ---------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and temporary investments $ 3,263 $ 20,006
Accounts receivable, net 134,251 30,021
Inventories 157,676 98,541
Income tax receivable -- 2,222
Deferred income taxes 6,408 6,408
Other current assets 11,234 19,471
-------- --------
Total current assets 312,832 176,669
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 78,642 80,426
-------- --------
OTHER ASSETS
Intangible assets 25,939 37,656
Other 5,211 3,744
-------- --------
Total other assets 31,150 41,400
-------- --------
Total assets $422,624 $298,495
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $134,600 $ --
Other current liabilities 82,253 51,271
-------- --------
Total current liabilities 216,853 51,271
-------- --------
LONG-TERM OBLIGATIONS 2,307 3,138
-------- --------
DEFERRED INCOME TAXES 4,919 9,241
-------- --------
SHAREHOLDERS' EQUITY 198,545 234,845
-------- --------
Total liabilities and shareholders' equity $422,624 $298,495
======== ========
See notes to consolidated financial statements.
Page 4 of 21
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
September 30,
----------------------
2002 2001
--------- ---------
Cash flows from operating activities:
Net (loss) income $ (2,141) $ 4,282
Adjustments to reconcile net (loss) income to net cash
used for operating activities:
Cumulative effect of accounting change, net of tax 8,813 --
Depreciation and amortization 6,437 5,603
(Gain) loss on disposal of assets, net (2) 5
Provision for doubtful accounts 849 725
Deferred taxes -- 1,000
Changes in assets and liabilities, net of effects from
purchase of a business:
(Increase) in accounts receivable (105,079) (85,374)
(Increase) in inventory (59,135) (55,959)
Decrease in other assets 6,603 2,286
Increase in other current liabilities 25,937 23,477
Increase in accrued taxes 6,434 1,319
--------- ---------
Total adjustments (109,143) (106,918)
--------- ---------
Net cash (used for) operating activities (111,284) (102,636)
Cash flows from investing activities:
Purchase of property, plant and equipment (5,582) (6,457)
Purchase of a business -- (7,849)
Proceeds on assets held for sale 2 4,118
--------- ---------
Net cash (used for) investing activities (5,580) (10,188)
--------- ---------
Cash flows from financing activities:
Payments on long-term obligations (532) (2,364)
Net borrowings on notes payable 134,600 75,455
Purchase of treasury stock (36,510) --
Proceeds from exercise of stock options 2,564 459
--------- ---------
Net cash provided by financing activities 100,122 73,550
--------- ---------
Effect of exchange rate changes on cash (1) --
Net (decrease) in cash and temporary investments (16,743) (39,274)
--------- ---------
Cash and temporary investments at beginning of period 20,006 41,687
--------- ---------
Cash and temporary investments at end of period $ 3,263 $ 2,413
========= =========
See notes to consolidated financial statements.
Page 5 of 21
CSS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
(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. Translation adjustments are
charged or credited to a separate component of shareholders' equity. Gains
and losses on foreign currency transactions are not material and are
included in rental and other expense (income), net in the consolidated
statements of operations.
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, 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 fiscal year and a material
portion of the Company's trade receivables are due in December and January
of each year.
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 (in thousands):
September 30, March 31,
2002 2002
------------- ---------
Raw material........... $ 30,102 $25,196
Work-in-process........ 25,307 28,612
Finished goods......... 102,267 44,733
-------- -------
$157,676 $98,541
======== =======
Revenue Recognition -
The Company recognizes revenue from product sales when the goods are
shipped and the title and risk of loss pass to the customer. Provisions for
allowances and rebates to customers, returns and other adjustments are
provided in the same period that the related sales are recorded.
Page 6 of 21
Net Income (Loss) Per Common Share -
The following table sets forth the computation of basic income (loss) per
common share and diluted income (loss) per common share for the three
months and six months ended September 30, 2002 and 2001 (in thousands,
except per share data):
Three Months Ended Six Months Ended
September 30, September 30,
---------------------- ----------------------
2002 2001 2002 2001
------- ------- -------- -------
Numerator:
Income before cumulative effect of
accounting change .......................... $11,012 $ 8,606 $ 6,672 $ 4,282
Cumulative effect of accounting change ...... -- -- (8,813) --
------- ------- -------- -------
Net income (loss) ........................... $11,012 $ 8,606 $ (2,141) $ 4,282
======= ======= ======== =======
Denominator:
Weighted average shares outstanding
for basic income (loss) per common share .. 7,587 8,852 8,022 8,850
Effect of dilutive stock options ............ 465 120 456 93
------- ------- -------- -------
Adjusted weighted average shares outstanding
for diluted income (loss) per common share. 8,052 8,972 8,478 8,943
======= ======= ======== =======
Basic net income (loss) per common share:
Income before cumulative effect of
accounting change .......................... $ 1.45 $ .97 $ .83 $ .48
Cumulative effect of accounting change ........ -- -- (1.10) --
------- ------- -------- -------
Net income (loss) per common share ............ $ 1.45 $ .97 $ (.27) $ .48
======= ======= ======== =======
Diluted net income (loss) per common share:
Income before cumulative effect of
accounting change .......................... $ 1.37 $ .96 $ .79 $ .48
Cumulative effect of accounting change ........ -- -- (1.04) --
------- ------- -------- -------
Net income (loss) per common share ............ $ 1.37 $ .96 $ (.25) $ .48
======= ======= ======== =======
Statements of Cash Flows -
For purposes of the consolidated statements of cash flows, the Company
considers all holdings of highly liquid debt instruments with a purchased
maturity of less than three months to be temporary investments.
(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, 2002, the notional amount of open foreign
currency forward contracts was $6,517,000 and the related gain was $73,000.
Page 7 of 21
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 notional amounts of interest rate swap contracts subject to fixed
rates that will be outstanding during fiscal years 2003 and 2004 are
$21,890,000 and $10,946,000, respectively, as of September 30, 2002. These
agreements involve the Company receiving variable rate payments in exchange
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 4.96% and 5.09% for fiscal years 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 and amounted to $299,000
and $147,000 for the quarter ended September 30, 2002 and 2001 and $315,000
and $159,000 for the six months ended September 30, 2002 and 2001.
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 second quarter of fiscal 2003, unrealized after tax net gains of
$31,000 were recorded in other comprehensive income. Unrealized after tax
net losses of $212,000 were recorded in other comprehensive loss during the
six months ended September 30, 2002. The fair value of interest rate swap
agreements is included in other current liabilities and totaled $474,000 as
of September 30, 2002.
(3) TREASURY STOCK TRANSACTIONS:
On June 24, 2002, the Company purchased an aggregate of 1,100,000 shares of
its common stock from its Chairman, members of his family and a trust for
members of his family. The terms of the purchase were negotiated on behalf
of the Company by a Special Committee of the Board of Directors consisting
of three independent directors. The Special Committee retained an
independent investment bank which rendered a fairness opinion. The Special
Committee unanimously recommended that the Company's Board of Directors
authorize the purchase, and the Board of Directors, other than its Chairman
who was not present at the meeting, unanimously authorized the purchase.
The total amount of this transaction was approximately $36,510,000.
On February 19, 1998, the Company's Board of Directors authorized the
purchase of up to 1,000,000 shares of the Company's common stock.
Subsequently, the Board of Directors authorized additional repurchases of
3,100,000 shares, for a total of 4,100,000 shares, on terms acceptable to
management. As of September 30, 2002, the Company had repurchased 3,899,000
shares for $107,056,000 under this program.
(4) AMENDMENT TO REVOLVING CREDIT FACILITY:
Effective June 21, 2002, the Company amended its unsecured revolving credit
facility to increase the facility from $75,000,000 to $100,000,000. In
connection with the increase and in order to enable the Company to
effectuate the repurchase of common stock from certain of its shareholders,
the minimum consolidated net worth financial covenant was also amended to
adjust for the aggregate amount paid by the Company for the stock
repurchase. Effective September 3, 2002, the Company again amended its
unsecured revolving credit facility increasing the facility from
$100,000,000 to $150,000,000 in order to provide the Company with an
adequate source of financing for an anticipated acquisition (see footnote
8). In connection with the increase and a change in accounting principle
(see footnote 6), certain financial covenants were amended. The Company is
in compliance with all financial debt covenants as of September 30, 2002.
Page 8 of 21
(5) BUSINESS ACQUISITIONS AND DIVESTITURES:
C.M. Offray & Son, Inc.
On March 15, 2002, a subsidiary of the Company completed the acquisition of
substantially all of the business and assets of the portion of C. M. Offray
& Son, Inc. ("Offray") which manufactures and sells decorative ribbon
products, floral accessories and narrow fabrics for apparel, craft and
packaging applications. In consideration, the Company paid approximately
$44,865,000 in cash, including transactions costs. A portion of the
purchase price is being held in escrow to cover indemnification
obligations. The acquisition was accounted for as a purchase and the cost
approximated the fair market value of the net assets acquired.
In conjunction with the acquisition of Offray, the Company's management
approved a restructuring plan. As part of this plan, the Company accrued
$4,541,000 on the day of acquisition for severance and costs related to the
closure of certain facilities. Payments, mainly for severance costs, of
approximately $293,000 and $960,000 were made in the second quarter and in
the six months ended September 30, 2002, respectively. In addition, during
the three months ended June 30, 2002, there were noncash reductions in the
restructuring accrual of approximately $1,935,000. Such reductions were for
costs related to the closure of certain facilities that were projected to
be less than originally estimated as well as severance and certain other
costs that will be expensed as incurred. There was a corresponding
reduction in property, plant and equipment for this amount. As of September
30, 2002, the remaining liability of approximately $1,646,000 was
classified as a current liability in the accompanying consolidated balance
sheet.
Selected information relating to the restructuring costs follows (in
thousands):
Contractual
Obligations and
Severance Facility Exit Costs Total
--------- ------------------- -----
Initial accrual as of March 31, 2002 $2,465 $2,076 $4,541
Cash paid - 2003 (872) (88) (960)
Noncash reductions - 2003 (635) (1,300) (1,935)
------- ------ ------
Restructuring reserve as of September 30, 2002 $ 958 $ 688 $1,646
======= ====== ======
Tye-Sil Corporation Ltd.
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 $7,849,000 in cash, including transaction costs. The
acquisition was accounted for as a purchase and the cost approximated the
fair market value of the net assets acquired. Subsequent to the
acquisition, the operations of Tye-Sil were consolidated into existing
operations of the Company.
Page 9 of 21
(6) IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
Adoption of SFAS No. 142
Effective July 1, 2001 and April 1, 2002, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations,"
and SFAS No. 142, "Goodwill and Other Intangible Assets", respectively. The
guidance in SFAS No. 141 supercedes APB Opinion No. 16. "Business
Combinations." Upon adoption of SFAS No. 142, amortization of existing
goodwill ceased. Goodwill is now subject to fair-value based impairment
tests performed, at a minimum, on an annual basis. In addition, a
transitional goodwill impairment test is required as of the adoption date.
These impairment tests are conducted on each business of the Company where
goodwill is recorded, and many require two steps. The initial step is
designed to identify potential goodwill impairment by comparing an estimate
of fair value for each applicable business to its respective carrying
value. For those businesses where the carrying value exceeds fair value, a
second step is performed to measure the amount of goodwill impairment, if
any.
The Company had approximately $39,715,000 in positive goodwill and
$2,393,000 in negative goodwill recorded on its consolidated balance sheet
at the beginning of fiscal year 2003. The $2,393,000 in negative goodwill
within the Cleo Inc reporting unit was required to be reversed upon
adoption of SFAS No. 142. The Company completed the required transitional
goodwill impairment test in the first quarter of 2003, and determined that
$14,049,000 of goodwill recorded within the Company's Paper Magic Group,
Inc.- Fall, Spring and Everyday reporting unit was impaired under the fair
value impairment test approach required by SFAS No. 142.
The fair value of the reporting units was estimated using the expected
present value of associated future cash flows and market values of
comparable businesses where available. Upon adoption of SFAS No. 142, an
$8,813,000 charge, net of tax, was recognized in the first quarter of 2003
to record this impairment as well as the removal of negative goodwill and
was classified as a cumulative effect of a change in accounting principle.
Goodwill amortization expense for the three months and six months ended
September 30, 2001 was $318,000 and $636,000, respectively. The effects on
income and income per common share of excluding such goodwill amortization
from the three months and six months ended September 30, 2001 follow (in
thousands, except per share data):
Three Months Ended Six Months Ended
September 30, September 30,
--------------------- --------------------
2002 2001 2002 2001
------- ------- ------- ---------
Income before accounting change as reported ............... $11,012 $ 8,606 $ 6,672 $ 4,282
Add back:
Goodwill amortization, net of income taxes ............. -- 287 -- 574
------- ------- ------- ---------
Pro forma income before accounting change ................. $11,012 $ 8,893 $ 6,672 $ 4,856
======= ======= ======= =========
Net income (loss) as reported ............................. $11,012 $ 8,606 $(2,141) $ 4,282
Add back:
Goodwill amortization, net of income taxes ............. -- 287 -- 574
------- ------- ------- ---------
Pro forma net income (loss) ............................... $11,012 $ 8,893 $(2,141) $ 4,856
======= ======= ======= =========
Pro forma income per common share before accounting change:
Basic .................................................. $ 1.45 $ 1.00 $ .83 $ .55
======= ======= ======= =========
Diluted ................................................ $ 1.37 $ .99 $ .79 $ .54
======= ======= ======= =========
Pro forma net income (loss) per common share:
Basic .................................................. $ 1.45 $ 1.00 $ (.27) $ .55
======= ======= ======= =========
Diluted ................................................ $ 1.37 $ .99 $ (.25) $ .54
======= ======= ======= =========
Page 10 of 21
The changes in the carrying amount of goodwill for the six months ended
September 30, 2002 are as follows (in thousands):
Balance as of March 31, 2002 $37,322
Cumulative effect of adopting SFAS No. 142:
Impairment loss recognized (14,049)
Elimination of negative goodwill 2,393
-------
Balance as of September 30, 2002 $25,666
=======
In addition to goodwill, the Company has $273,000 of other intangible
assets, net of amortization, relating to trademarks and customer lists that
are being amortized over periods of three to five years.
Adoption of SFAS No. 144
In August 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." 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 measures 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 to reflect the use of the asset over its
shortened useful life 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. SFAS No. 144 was adopted by the Company at the beginning of fiscal
year 2003 with no impact to the Company's financial position or results of
operations.
(7) EFFECT OF NEW ACCOUNTING STANDARDS NOT YET ADOPTED
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 or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement, among other things, rescinds SFAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt," and SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." The
Statement requires gains and losses from debt extinguishments that are used
as part of the Company's risk management strategy to be classified as part
of income from operations rather than as extraordinary items, net of tax.
SFAS No. 145 is effective for fiscal years beginning after May 15, 2002
with earlier adoption encouraged. Based on current operations, the Company
does not expect the adoption of SFAS No. 145 to have a material effect on
its financial position or results of operations.
Page 11 of 21
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and
other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 requires that a liability for costs
associated with an exit or disposal activity be recognized when the
liability is incurred rather than when a company commits to such an
activity and also establishes fair value as the objective for initial
measurement of the liability. The Company will adopt SFAS No. 146 for exit
or disposal activities that are initiated after December 31, 2002. Based on
current operations, the Company does not expect the adoption of this
statement to have a material effect on its financial position or results of
operations.
(8) SUBSEQUENT EVENT
On October 18, 2002, a subsidiary of the Company acquired all of the
capital stock of Crystal Creative Products, Inc. ("Crystal") for
approximately $22,750,000 and assumed and repaid $18,828,000 of outstanding
debt (primarily seasonal working capital debt). Crystal, headquartered in
Middletown, Ohio, is a leading designer, manufacturer and distributor of
consumer convenience gift wrap products. Its product lines include gift
tissue, gift bags, and related packaging products for the consumer market,
as well as specialty tissues used by retailers for in-store packaging. A
portion of the purchase price is being held in escrow for certain post
closing adjustments and indemnification obligations. The acquisition was
accounted for as a purchase and the excess of cost over the fair market
value of the net assets acquired (estimated to be approximately $7,000,000,
subject to the completion of appraisals in accordance with FAS 141) will be
recorded as goodwill.
Page 12 of 21
CSS INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States. The preparation
of these financial statements 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.
The significant accounting policies of the Company are described in the
notes to the consolidated financial statements included in the Annual Report on
Form 10-K/A. Judgments and estimates of uncertainties are required in applying
the Company's accounting policies in many areas. Following are some of the areas
requiring significant judgments and estimates: useful lives of plant and
equipment; cash flow and valuation assumptions in performing asset impairment
tests of long-lived assets and goodwill; valuation of inventory and accounts
receivable reserves; income tax valuation; and estimated costs to be incurred
for settlement of litigation.
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 fiscal year, thereby
causing significant fluctuations in the quarterly results of operations of the
Company.
Stock Repurchases
On June 24, 2002, the Company purchased an aggregate of 1,100,000 shares of
its common stock from its Chairman, members of his family and a trust for
members of his family. The terms of the purchase were negotiated on behalf of
the Company by a Special Committee of the Board of Directors consisting of three
independent directors. The Special Committee retained an independent investment
bank which rendered a fairness opinion. The Special Committee unanimously
recommended that the Company's Board of Directors authorize the purchase, and
the Board of Directors, other than its Chairman who was not present at the
meeting, unanimously authorized the purchase. The total amount of this
transaction was $36,510,000.
On February 19, 1998, the Company's Board of Directors authorized the
purchase of up to 1,000,000 shares of the Company's common stock. Subsequently,
the Board of Directors authorized additional repurchases of 3,100,000 shares,
for a total of 4,100,000 shares, on terms acceptable to management. As of June
30, 2002, the Company had repurchased 3,899,000 shares for $107,056,000 under
this program.
Page 13 of 21
Six Months Ended September 30, 2002 Compared to Six Months Ended
September 30, 2001
Sales for the six months ended September 30, 2002 increased 38% to
$226,009,000 from $163,200,000 in 2001. The increase in sales was primarily a
result of the inclusion of Offray, acquired on March 15, 2002. Excluding Offray,
sales increased $15,905,000, or 10%, due primarily to the earlier timing of
Christmas shipments, partially offset by lower Halloween sales.
Cost of sales, as a percentage of sales, was 74% in 2002 compared to 73% in
2001. The increase in cost of sales, as a percentage of sales, was a result of
lower margins, particularly on certain Halloween product lines.
Selling, general and administrative ("SG&A") expenses, as a percentage of
sales, decreased to 21% from 22% in 2001. The decrease in SG&A expenses, as a
percentage of sales, was primarily due to lower product development costs
compared to prior year and professional fees related to the enterprise resource
planning system implemented in the prior year. Partially offsetting this overall
decrease in SG&A spending was the impact of the Offray acquisition. Excluding
Offray, SG&A spending declined by 2%, as a percentage of sales.
Interest expense, net was $1,407,000 in 2002 and $751,000 in 2001. Average
borrowings for the six months ended September 30, 2002 were $50,262,000 compared
with $37,697,000 for the same six months in the prior year. The increase in
interest expense was primarily due to increased borrowings related to the
purchase of Offray on March 15, 2002 and stock repurchases, net of cash
generated from operations.
Income taxes as a percentage of income before taxes were 36% in 2002 and
2001.
Net income before cumulative effect of change in accounting principle
increased 56% to $6,672,000 or $.79 per diluted share, compared to prior year
net income of $4,282,000, or $.48 per diluted share. The increase in net income
before the cumulative effect of the accounting change, versus the prior year,
was primarily due to the effect of higher sales of Christmas products and lower
selling, general and administrative expenses (including lower goodwill
amortization) in the base businesses, partially offset by the impact of lower
Halloween sales and margins, higher interest expense and a modest loss
contributed by the Offray division. The Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets", effective April 1, 2002, which resulted in a
non-cash write-off of goodwill and negative goodwill in the amount of
$8,813,000, net of taxes, or $1.04 per diluted share.
Quarter Ended September 30, 2002 Compared to Quarter Ended September 30, 2001
Sales for the quarter ended September 30, 2002 increased 31% to
$175,452,000 from $134,383,000. The increase in sales was primarily due to the
inclusion of Offray, acquired on March 15, 2002. Excluding Offray, sales
increased $17,189,000, or 13%, primarily due to the earlier timing of Christmas
shipments, partially offset by lower sales of Halloween and educational
products.
Cost of sales, as a percentage of sales, was 75% for the quarter ended
September 30, 2002 compared to 73% in the prior year quarter. The increase in
cost of sales, as a percentage of sales, was a result of unfavorable margins on
certain Halloween product lines. Selling, general and administrative expenses,
as a percentage of sales, decreased to 15% in the second quarter of fiscal 2003,
compared to 16% in the prior year quarter, primarily as a result of lower
product development costs and professional fees, partially offset by the impact
of the Offray acquisition. Excluding Offray, SG&A spending declined by 2%, as a
percentage of sales.
Page 14 of 21
Interest expense, net was $1,132,000 for the quarter ended September 30,
2002 compared to $763,000 for the same quarter of the prior year. Average
borrowings for the second quarter of fiscal 2003 were $94,932,000 compared with
$41,669,000 in the same quarter of fiscal 2002. The increase in interest expense
was due to increased borrowing levels related to the Offray acquisition on March
15, 2002 and stock repurchases, net of cash generated from operations.
Income taxes, as a percentage of income before taxes, were 36% in the
second quarter of fiscal 2003 and 2002.
Net income increased to $11,012,000 for the quarter ended September 30,
2002, or $1.37 per diluted share, compared to prior year net income of
$8,606,000, or $.96 per diluted share. The increase in net income was primarily
due to the impact of higher sales of Christmas products and lower selling,
general and administrative expenses (including lower goodwill amortization),
partially offset by lower Halloween sales and margins and higher interest
expense.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, the Company had working capital of $95,979,000 and
shareholders' equity of $198,545,000. The increase in accounts receivable from
March 31, 2002 reflected seasonal billings of current year Halloween and
Christmas accounts receivables, net of current year collections. The increase in
inventories and other current liabilities from March 31, 2002 reflected normal
seasonal inventory build necessary for the 2002 shipping season. The decrease in
other current assets from March 31, 2002 is primarily attributable to the
collection of amounts due under a claims put agreement related to the Chapter XI
proceeding of Kmart. The decrease in intangibles is due to the impairment charge
recognized upon adoption of SFAS No. 142 on April 1, 2002, net of the reversal
of negative goodwill. The decrease in shareholders' equity was primarily
attributable to the Company's repurchase of an aggregate of 1,100,000 shares of
its common stock for $36,510,000 on June 24, 2002.
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 increase through December and peak prior to Christmas. Seasonal
borrowings are made under an unsecured revolving credit facility with five
banks, which was increased from $75,000,000 to $100,000,000 effective June 21,
2002, and increased to $150,000,000 effective September 3, 2002. Seasonal
borrowings are also made under 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 Company's seasonal borrowing
needs and to provide the Company with sources of capital for general corporate
purposes, including acquisitions as permitted under the unsecured revolving
credit facility. As of September 30, 2002, the Company had short-term borrowings
of $134,600,000. 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.
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for
Asset Retirement Obligations." In August 2001, the FASB issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." In April 2002,
the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections." In June 2002,
the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities." See the notes to the consolidated financial statements for
information concerning the Company's implementation and impact of these new
standards.
Page 15 of 21
ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes and manages
this exposure through the use of variable-rate and fixed-rate debt and by
utilizing interest rate swaps. The Company does not enter into contracts for
trading purposes and does not use leveraged instruments. The market risks
associated with debt obligations and other significant instruments as of
September 30, 2002 has not materially changed from March 31, 2002 (See Item 7A
of the Annual Report on Form 10-K/A).
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Within 90 days prior to
the filing date of this report, under the supervision and with the
participation of the Company's management, the Company's President and
Chief Executive Officer and Vice President - Finance and Chief Financial
Officer, evaluated the effectiveness of the Company's disclosure controls
and procedures in accordance with Rule 13a-14 of the Securities Exchange
Act of 1934 (the "Exchange Act"). Based upon that evaluation, the President
and Chief Executive Officer and Vice President - Finance and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in providing reasonable assurance that information
required to be disclosed by the Company in reports that it files under the
Exchange Act is recorded, processed, summarized and reported within the
time period specified in the Commission's rules and procedures.
(b) Changes in Internal Controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly
affect these controls subsequent to the date of the evaluation.
Page 16 of 21
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 stockholders of the Registrant was held on
August 7, 2002.
(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 7,145,599 773,909
Stephen V. Dubin 7,008,178 911,330
David J.M. Erskine 7,008,178 911,330
Jack Farber 7,145,599 773,909
Leonard E. Grossman 7,105,616 813,892
James E. Ksansnak 7,105,616 813,892
Michael L. Sanyour 7,145,599 773,909
(c) The results of the vote of the stockholders on the proposal to
approve an amendment to the CSS Industries, Inc. 1994 Equity
Compensation Plan was as follows:
For 5,801,019
Against 1,809,803
Abstain 122,697
Page 17 of 21
CSS INDUSTRIES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 99.1 Certification of the Chief Executive Officer of CSS
Industries, Inc. Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.
Exhibit 99.2 Certification of the Chief Financial Officer of CSS
Industries, Inc. Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.
(b) The Company filed a report on Form 8-K on July 10, 2002 with
respect to the engagement of KPMG LLP as its independent public
accountants, effective July 3, 2002, to audit its financial
statements for its fiscal year ending March 31, 2003.
Page 18 of 21
SIGNATURES
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 14, 2002 By: /s/ David J.M. Erskine
-----------------------------
David J.M. Erskine
President and Chief
Executive Officer
Date: November 14, 2002 By: /s/ Clifford E. Pietrafitta
-----------------------------
Clifford E. Pietrafitta
Vice President - Finance,
Chief Financial Officer and
Principal Accounting Officer
Page 19 of 21
CERTIFICATIONS
I, David J.M. Erskine, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CSS Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors:
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ David J.M. Erskine
----------------------------------
David J.M. Erskine,
President and Chief Executive Officer
Page 20 of 21
CERTIFICATIONS
I, Clifford E. Pietrafitta, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CSS Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors:
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Clifford E. Pietrafitta
----------------------------------
Clifford E. Pietrafitta
Vice President - Finance, Chief Financial Officer and
Principal Accounting Officer
Page 21 of 21