SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
20549
FORM 10-Q
For the Quarter Ended Commission file number 1-2661
September 30, 2005
- ----------------------
CSS INDUSTRIES, INC.
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(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
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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.
/X/ Yes / / No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
/X/ Yes / / No
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 126-2 of the Exchange Act.)
/ / Yes /X/ No
As of November 7, 2005, there were 10,547,795 shares of common stock outstanding
which excludes shares which may still be issued upon exercise of stock options.
1
CSS INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
PAGE NO.
--------
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Operations and Comprehensive Income - Three and six
months ended September 30, 2005 and 2004 3
Condensed Consolidated Balance Sheets - September 30, 2005 and March 31, 2005
4
Consolidated Statements of Cash Flows - Six months ended September 30, 2005
and 2004 5
Notes to Consolidated Financial Statements 6-13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14-18
Item 3. Quantitive and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 18
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits 20
Signatures 21
2
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except
per share data)
Three Months Ended Six Months Ended
September 30, September 30,
----------------------- -------------------------
2005 2004 2005 2004
---- ---- ---- ----
SALES $164,043 $181,711 $221,537 $231,266
-------- -------- -------- --------
COSTS AND EXPENSES
Cost of sales 125,676 132,553 168,441 168,614
Selling, general and administrative expenses 23,050 24,588 43,035 44,763
Interest expense, net 1,057 709 1,499 1,126
Other income, net (130) (457) (135) (692)
-------- -------- -------- --------
149,653 157,393 212,840 213,811
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 14,390 24,318 8,697 17,455
INCOME TAX PROVISION 5,151 8,705 3,113 6,249
-------- -------- -------- --------
NET INCOME $ 9,239 $ 15,613 $ 5,584 $11,206
======== ======== ======== =======
NET INCOME PER COMMON SHARE
Basic $.88 $1.31 $.53 $.94
==== ===== ==== ====
Diluted $.84 $1.24 $.51 $.89
==== ===== ==== ====
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 10,496 11,961 10,455 11,919
====== ====== ====== ======
Diluted 11,017 12,619 10,966 12,641
====== ====== ====== ======
CASH DIVIDENDS PER SHARE OF COMMON STOCK
$.12 $.10 $.24 $.20
==== ==== ==== ====
- ------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME
Net income $9,239 $15,613 $5,584 $11,206
Foreign currency translation adjustment 3 3 - 5
------ ------- ------ -------
Comprehensive income $9,242 $15,616 $5,584 $11,211
====== ======= ====== =======
See notes to consolidated financial statements.
3
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
September 30, March 31,
2005 2005
----------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,937 $ 57,333
Accounts receivable, net 126,723 37,273
Inventories 177,812 101,867
Deferred income taxes 8,720 8,199
Other current assets 17,301 13,945
-------- --------
Total current assets 337,493 218,617
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 72,766 75,402
-------- --------
OTHER ASSETS
Goodwill 30,952 30,952
Intangible assets, net 4,469 4,516
Other 4,151 4,419
-------- --------
Total other assets 39,572 39,887
-------- --------
Total assets $449,831 $333,906
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 76,400 $ -
Current portion of long-term debt 10,175 10,442
Accrued customer programs 13,401 13,628
Other current liabilities 78,190 42,669
-------- --------
Total current liabilities 178,166 66,739
-------- --------
LONG-TERM DEBT, NET OF CURRENT PORTION 40,000 40,000
------- ---------
LONG-TERM OBLIGATIONS 3,233 3,607
-------- --------
DEFERRED INCOME TAXES 7,260 7,071
-------- ---------
STOCKHOLDERS' EQUITY 221,172 216,489
-------- --------
Total liabilities and stockholders' equity $449,831 $333,906
======== ========
See notes to consolidated financial statements.
4
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
September 30,
2005 2004
--------- ------
Cash flows from operating activities:
Net income $ 5,584 $ 11,206
--------- --------
Adjustments to reconcile net income to net cash used for
operating activities:
Depreciation and amortization 6,937 6,888
Provision for doubtful accounts 339 177
Deferred tax (benefit) provision (332) 777
Loss (gain) on sale of assets 174 (141)
Compensation expense related to stock options 172 165
Changes in assets and liabilities:
Increase in accounts receivable (89,789) (111,704)
Increase in inventory (75,945) (70,077)
Increase in other assets (3,158) (3,117)
Increase in other current liabilities 36,135 47,629
--------- ---------
Total adjustments (125,467) (129,403)
---------- ---------
Net cash used for operating activities (119,883) (118,197)
---------- ---------
Cash flows from investing activities:
Purchase of property, plant and equipment (4,664) (2,610)
Proceeds from sale of assets 307 222
--------- --------
Net cash used for investing activities (4,357) (2,388)
--------- --------
Cash flows from financing activities:
Payments on long-term obligations (267) (12)
Borrowings on notes payable 166,435 69,485
Repayments on notes payable (90,035) (31,605)
Dividends paid (2,516) (2,386)
Purchase of treasury stock (3,235) (6,571)
Proceeds from exercise of stock options 3,462 4,618
--------- --------
Net cash provided by financing activities 73,844 33,529
--------- --------
Effect of exchange rate changes on cash - 5
--------- --------
Net decrease in cash and cash equivalents (50,396) (87,051)
Cash and cash equivalents at beginning of period 57,333 93,191
--------- ---------
Cash and cash equivalents at end of period $ 6,937 $ 6,140
========= =========
See notes to consolidated financial statements.
5
CSS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation -
CSS Industries, Inc. (collectively with its subsidiaries, "CSS" or the
"Company") has prepared the consolidated financial statements included
herein pursuant to the rules and regulations of the Securities and Exchange
Commission. The Company has condensed or omitted certain information and
footnote disclosures normally included in consolidated financial statements
prepared in accordance with accounting principles generally accepted in the
United States pursuant to such rules and regulations. In the opinion of
management, the statements include all adjustments (which include normal
recurring adjustments) required for a fair presentation of financial
position, results of operations and cash flows for the interim periods
presented. These financial statements should be read in conjunction with
the financial statements and notes thereto included in the latest Annual
Report on Form 10-K. The results of operations for the interim periods are
not necessarily indicative of the results for the full year.
Principles of Consolidation -
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries. All significant intercompany transactions and
accounts have been eliminated in consolidation.
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. The seasonal nature of CSS' business has historically resulted in
lower sales and operating losses in the first and fourth quarters and
comparatively higher shipment levels and operating profits in the second
and third quarters of the Company's fiscal year which ends March 31,
thereby causing significant fluctuations in the quarterly results of
operations of the Company.
Foreign Currency Translation and Transactions -
Translation adjustments are charged or credited to a separate component of
stockholders' equity. Gains and losses on foreign currency transactions are
not material and are included in other income, net in the consolidated
statements of operations.
6
Use of Estimates -
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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. Judgments and assessments of
uncertainties are required in applying the Company's accounting policies in
many areas. Such estimates pertain primarily to the valuation of inventory
and accounts receivable, the assessment of the recoverability of goodwill
and other intangible assets, income tax accounting and resolution of
litigation and other proceedings. Actual results could differ from those
estimates.
Inventories -
The Company records inventory at the date of taking title which generally
occurs upon receipt or prior to receipt with regard to in-transit inventory
of overseas product. The Company adjusts unsaleable and slow-moving
inventory to its net realizable value. Substantially all of the Company's
inventories are 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,
2005 2005
------------ ---------
Raw material............................ $ 35,128 $ 27,089
Work-in-process......................... 26,223 29,357
Finished goods.......................... 116,461 45,421
--------- ----------
$ 177,812 $ 101,867
========= =========
Revenue Recognition -
The Company recognizes revenue from product sales when the goods are
shipped and title and risk of loss passes to the customer. Provisions for
returns, allowances, rebates to customers and other adjustments are
provided in the same period that the related sales are recorded.
Stock-Based Compensation -
The Company applies Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock option plans. Accordingly, compensation expense is
generally not recognized for its stock-based compensation plans. Had
compensation expense for the Company's stock option plans been determined
based upon the fair value at the grant date for awards under these plans
consistent with the methodology prescribed under Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," the Company's net income and net income per share would have
been decreased as follows:
7
Three Months Ended Six Months Ended
September 30, September 30,
-------------------- -------------------
(in thousands, except per share data) 2005 2004 2005 2004
---- ---- ---- ----
Net income, as reported.................................. $9,239 $15,613 $5,584 $11,206
Add: Total stock-based employee compensation
expense included in the determination of net
income as reported, net of related tax effects....... 172 - 172 165
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects................................... (755) (746) (1,450) (1,366)
------ ------- ------ -------
Pro forma net income..................................... $8,656 $14,867 $4,306 $10,005
====== ======= ====== =======
Net income per share:
Basic - as reported...................................... $.88 $1.31 $.53 $.94
Basic - pro forma........................................ $.82 $1.24 $.41 $.84
Diluted - as reported.................................... $.84 $1.24 $.51 $.89
Diluted - pro forma...................................... $.80 $1.19 $.40 $.80
Net Income Per Common Share -
The following table sets forth the computation of basic and diluted net
income per common share for the three and six months ended September 30,
2005 and 2004 (in thousands, except per share data):
Three Months Ended Six Months Ended
September 30, September 30,
---------------------- ------------------------
2005 2004 2005 2004
Numerator:
Net income............................................. $ 9,239 $15,613 $ 5,584 $11,206
======= ======= ======= =======
Denominator:
Weighted average shares outstanding for basic
income per common share.............................. 10,496 11,961 10,455 11,919
Effect of dilutive stock options....................... 521 658 511 722
------- ------- ------- -------
Adjusted weighted average shares outstanding
for diluted income per common share.................. 11,017 12,619 10,966 12,641
======= ======= ======= =======
Basic net income per common share........................ $.88 $1.31 $.53 $.94
Diluted net income per common share...................... $.84 $1.24 $.51 $.89
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 cash equivalents.
8
(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, 2005, the notional amount of open foreign
currency forward contracts was $17,953,000 and the related loss was
$1,208,000.
(3) BUSINESS RESTRUCTURING:
On May 5, 2004, a subsidiary of the Company announced a restructuring of
its business and established a restructuring reserve related to its
administrative office located in Minneapolis, Minnesota. This restructuring
was established in order to gain efficiencies within the business unit and
was substantially completed by the first quarter of fiscal 2006. As part of
this restructuring plan, the Company accrued $377,000 for termination costs
and costs related to the restructuring of the administrative office. In
fiscal 2005, the Company increased the restructuring reserve related to the
ratable recognition of retention bonuses for employees providing service
until their termination date in the amount of $255,000. Payments of
$343,000 were made for termination costs during fiscal 2005. Additionally,
during fiscal 2005, there was an increase in the restructuring reserve
related to unutilized office space in the amount of $177,000 of which
$161,000 was paid as of March 31, 2005. As of the end of fiscal 2005, the
Company communicated termination of employment to 33 employees. Payments
for termination costs of $3,000 and $86,000 were made in the quarter and
six months ended September 30, 2005, respectively. Payments for facility
exit costs of $111,000 and $222,000 were made in the quarter and six months
ended September 30, 2005, respectively. During the second quarter, the
Company increased the restructuring reserve related primarily to the
ratable recognition of retention bonuses for employees providing service
until their termination date in the amount of $34,000. As of September 30,
2005, the remaining liability of $31,000 was classified as a current
liability in the accompanying condensed consolidated balance sheet and will
be paid during the remainder of fiscal 2006.
Selected information relating to the Minneapolis restructuring reserve
follows (in thousands):
Contractual
Termination Obligations and
Costs Facility Exit Costs Total
----------- ------------------- -------
Restructuring reserve as of March 31, 2005........... $ 83 $ 222 $ 305
Cash paid - fiscal 2006.............................. (86) (222) (308)
Charges to expense - fiscal 2006..................... 34 - 34
--- -- ---
Restructuring reserve as of September 30, 2005....... $ 31 $ - $ 31
==== ==== =====
On November 1, 2004, a subsidiary of the Company announced the anticipated
closure of its plant located in Anniston, Alabama. As of the end of fiscal
2005, the Company communicated termination of employment to 89 employees.
Manufacturing operations have been moved to other locations of the Company
and this project was substantially completed by March 2005. As part of this
restructuring plan, the Company accrued $206,000 for severance costs.
During the fourth quarter of fiscal 2005, the Company increased the
restructuring reserve related to medical benefits for employees providing
service until their termination date in the amount of $23,000.
Additionally, during the fourth quarter of fiscal 2005, there was an
increase in the restructuring reserve related to facility exit costs in the
amount of $734,000 of which $669,000 was paid as of March 31, 2005. In
addition, in the fourth quarter of fiscal 2005, the Company recorded an
impairment charge of $367,000 related to the write-down of a building.
Payments of $121,000 and $284,000, primarily for severance, were made
during the quarter and six months ended September 30, 2005, respectively.
As of September 30, 2005, the remaining liability of $10,000 was classified
as a current liability in the accompanying condensed consolidated balance
sheet and will be paid during the remainder of fiscal 2006.
9
Selected information relating to the Anniston restructuring follows (in
thousands):
Termination
Costs Facility Exit Costs Total
------------ ------------------- -----
Restructuring reserve as of March 31, 2005.............. $ 229 $ 65 $ 294
Cash paid - fiscal 2006 .............................. (219) (65) (284)
----- ----- -----
Restructuring reserve as of September 30, 2005.......... $ 10 $ - $ 10
===== ===== =====
(4) GOODWILL AND INTANGIBLES:
Effective April 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." Upon adoption of SFAS No. 142, amortization of
goodwill and indefinite-lived intangible assets ceased. The Company
determined that its tradenames are indefinite-lived assets.
The Company performs the required annual impairment test of the carrying
amount of goodwill and indefinite-lived intangible assets in the fourth
quarter of its fiscal year.
Included in intangibles assets, net in the accompanying condensed
consolidated balance sheets are the following acquired intangible assets
(in thousands):
September 30, March 31,
2005 2005
------------ -------
Tradenames....................................... $4,290 $4,290
Non-compete and other, net....................... 179 226
----- --------
$4,469 $4,516
====== ======
Amortization expense related to intangible assets was $24,000 and $38,000
for the quarters ended September 30, 2005 and 2004, respectively, and was
$47,000 and $75,000 for the six months ended September 30, 2005 and 2004,
respectively. The aggregate estimated amortization expense for intangible
assets remaining as of September 30, 2005 is as follows (in thousands):
Fiscal 2006 $ 47
Fiscal 2007 94
Fiscal 2008 38
Fiscal 2009 -
Fiscal 2010 -
----
Total $179
====
(5) COMMITMENTS AND CONTINGENCIES:
On May 25, 2005, the Company's Cleo subsidiary filed a complaint in United
States Court of International Trade appealing the U.S. International Trade
Commission's ("ITC") final determination that, in part, resulted in the
imposition of duties on certain tissue paper products imported from China
on or after September 21, 2004. In the fiscal year ended March 31, 2005,
the Company recognized an expense of approximately $2,300,000 for these
duties, reflecting Cleo's estimated liability for duties relating to
subject tissue paper products that Cleo imported from China during the 2005
fiscal year, based on the applicable deposit rates established by the U.S.
Commerce Department.
10
The amount of Cleo's actual liability for duties pertaining to the fiscal
year ended March 31, 2005, which liability is capped at the deposit rates
in effect with respect to the period of time that the subject products were
imported by Cleo, will be determined at the time of "liquidation" of the
applicable entries by the United States Bureau of Customs & Border
Protection. Liquidation of the applicable entries has been enjoined pending
the decision of the United States Court of International Trade in Cleo's
appeal of the ITC's final determination.
CSS and its subsidiaries are also involved in ordinary, routine legal
proceedings that are not considered by management to be material. In the
opinion of Company counsel and management, the ultimate liabilities
resulting from such lawsuits and claims will not materially affect the
consolidated financial position of the Company or its results of
operations.
(6) PENSION AND OTHER POST-RETIREMENT OBLIGATIONS:
The Company's Cleo subsidiary administers a defined benefit pension plan
covering substantially all salaried employees of Crystal Creative Products,
Inc. ("Crystal") at the time of Cleo's acquisition of Crystal in October
2002. The plan was frozen on November 2, 2002 and terminated September 30,
2003. After the plan was frozen, benefits were provided to eligible
employees by participation in an existing defined contribution profit
sharing and 401(k) plan. In the first quarter of fiscal 2006, the Company
received the Internal Revenue Service approval letter on termination of the
plan. The Company is in the process of making payments in accordance with
the provisions of the plan. During the quarter and six months ended
September 30, 2005, the Company recorded a charge of $155,000 related to
the incremental cost of annuities that are expected to be purchased in
fiscal 2006. The Company's Cleo subsidiary also administers a
postretirement medical plan covering certain persons who were former
employees of Crystal at the time of Cleo's acquisition of Crystal. The plan
was frozen to new participants prior to Crystal's acquisition by the
Company.
The components of net pension and other post-retirement benefit cost are as
follows (in thousands):
Six Months Ended September 30,
--------------------------------------------
2005 2004 2005 2004
---- ---- ---- ----
Pension Benefits Other Benefits
------------------- -------------------
Interest cost........................................... $ 16 $ 32 $28 $29
Expected return on plan assets.......................... (16) (74) - -
Other........ 155 - - -
---- ---- ---- ----
Benefit cost (credit)................................... $155 $(42) $28 $29
==== ==== ==== ====
Three Months Ended September 30,
--------------------------------------------
2005 2004 2005 2004
---- ---- ---- ----
Pension Benefits Other Benefits
------------------- ------------------
Interest cost...........................................$ - $ 16 $14 $14
Expected return on plan assets.......................... - (37) - -
Other........ 155 - - -
---- ---- --- ---
Benefit cost (credit)................................... $155 $(21) $14 $14
==== ===== === ===
11
(7) ACCOUNTING PRONOUNCEMENTS:
In November 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 151, "Inventory Costs," which amends the guidance in Accounting
Research Bulletin ("ARB") No. 43, Chapter 4, "Inventory Pricing" to clarify
the accounting for abnormal amounts of idle facility expense, freight,
handling costs and spoilage. SFAS No. 151 now requires that these costs be
expensed as current period charges. In addition, this statement requires
that the allocation of fixed production overhead to the costs of conversion
be based on the normal capacity of the production facilities. The
provisions of this statement are effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. The Company has not yet
completed its assessment of the impact of this statement on its financial
position or results of operations.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment," a
revision to SFAS 123. SFAS No. 123R supercedes APB Opinion No. 25. SFAS No.
123R establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services. This
statement requires that the cost of share-based payment transactions be
recorded as an expense at their fair value determined by applying a fair
value measurement method. The Company had expected to adopt this standard
as required in the second quarter of fiscal 2006 (the quarter ending
September 2005), however, the Securities and Exchange Commission in April
2005 issued a rule that allows companies to delay adoption, and as a
result, the Company expects to adopt this standard in the first quarter of
fiscal 2007 (the quarter ending June 2006). The statement applies to all
awards granted after the effective date and to awards modified,
repurchased, or canceled after that date. As the amount of expense to be
recognized in future periods will depend on the levels of future grants,
the effect of adoption of this statement cannot be predicted with
certainty. However, had the Company adopted this statement in prior
periods, the effect of adoption on net income and income per share would
have approximated the amounts shown in the pro forma information included
in Note 1, Summary of Significant Accounting Policies.
In December 2004, the FASB issued Staff Position No. 109-2, "Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004," (FSP No. 109-2). FSP No. 109-2
provides guidance with respect to recording the potential impact of the
repatriation provisions of the American Jobs Creation Act of 2004 (the
"Jobs Act") on income tax expense and deferred tax liability. The Jobs Act
includes a one year reduced tax rate on repatriation of foreign earnings.
The Company is currently evaluating the impact of repatriation provisions
as Treasury guidance is provided. However, the range of reasonably possible
amounts of unremitted earnings that is being considered for repatriation in
fiscal year 2006 is between $7,000,000 and $12,000,000 with the respective
income tax benefit ranging from $300,000 to $900,000. Any repatriation
would be made in the fourth quarter of fiscal 2006.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." SFAS No. 154 requires retrospective application to prior
periods' financial statements for voluntary changes in accounting
principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. This
statement also requires that retrospective application of a change in
accounting principle be limited to the direct effects of the change.
Indirect effects of a change in accounting principle, such as a change in
non-discretionary profit-sharing payments resulting from an accounting
change, should be recognized in the period of the accounting change. SFAS
No. 154 also requires that a change in depreciation, amortization, or
depletion method for long-lived non-financial assets be accounted for as a
change in accounting estimate affected by a change in accounting principle.
This statement is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. Early
adoption is permitted for accounting changes and corrections of errors made
in fiscal years beginning after the date this statement was issued. The
Company is required to adopt the provision of this statement, as
applicable, beginning in fiscal 2007.
12
In June 2005, the FASB's Emerging Issues Task Force reached a consensus on
Issue No. 05-6, "Determining the Amortization Period for Leasehold
Improvements" ("EITF 05-6"). The guidance requires that leasehold
improvements acquired in a business combination or purchased subsequent to
the inception of a lease be amortized over the lesser of the useful life of
the assets or a term that includes renewals that are reasonably assured at
the date of the business combination or purchase. The guidance is effective
for periods beginning after June 29, 2005. The adoption of EITF 05-6 had no
impact on the Company's financial position or results of operations.
13
CSS INDUSTRIES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
STRATEGIC OVERVIEW
The Company's business is roughly 75% seasonal (Christmas, Valentines, Easter
and Halloween products), with the remainder being everyday product sales.
Seasonal products are sold primarily to mass market retailers and the Company
typically has relatively high market shares in many of these categories. Most of
these markets have shown little or no growth in recent years and there continues
to be significant cost pressure in this area as our competitors source certain
products overseas and our customers increase direct sourcing from overseas
factories. Increasing customer concentration and bargaining power also
contribute to price pressure.
The Company is responding to these pressures in a number of ways. First, we have
increased our investment in product and packaging design and product knowledge
to assure we can continue to provide unique added value to our customers.
Secondly, we substantially expanded an office and showroom in the Far East to
better meet our customers' buying needs and to be able to provide alternatively
sourced products at competitive prices. Lastly, we increased our focus on
efficiency and productivity in our North American production and distribution
facilities to assure our competitiveness domestically.
Our everyday craft product line has high inherent growth potential due to higher
market growth rates. Further, our everyday craft and floral product lines have
high inherent growth potential due to our relatively low current market shares.
We have established project teams to pursue top line sales growth in these and
other areas.
The Company has experienced cost increases in certain key materials. These
increases continue to impact fiscal 2006, and management continues to assess
ways of reducing material costs in the products it sells.
Historically, significant growth at CSS has come through carefully chosen and
executed acquisitions. Management anticipates that it will continue this pursuit
in the future.
LITIGATION
On May 25, 2005, the Company's Cleo subsidiary filed a complaint in United
States Court of International Trade appealing the U.S. International Trade
Commission's ("ITC") final determination that, in part, resulted in the
imposition of duties on certain tissue paper products imported from China on or
after September 21, 2004. (The proceedings that led to the imposition of these
duties are further described in Item 3 of Part I of the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 2005.) In the fiscal year ended
March 31, 2005, the Company recognized an expense of approximately $2,300,000
for these duties, reflecting Cleo's estimated liability for duties relating to
subject tissue paper products that Cleo imported from China during the 2005
fiscal year, based on the applicable deposit rates established by the U.S.
Commerce Department.
The amount of Cleo's actual liability for duties pertaining to the fiscal year
ended March 31, 2005, which liability is capped at the deposit rates in effect
with respect to the period of time that the subject products were imported by
Cleo, will be determined at the time of "liquidation" of the applicable entries
by United States Bureau of Customs & Border Protection. Liquidation of the
applicable entries has been enjoined pending the decision of the United States
Court of International Trade in Cleo's appeal of the ITC's final determination.
CSS and its subsidiaries are also involved in ordinary, routine legal
proceedings that are not considered by management to be material. In the opinion
of Company counsel and management, the ultimate liabilities resulting from such
lawsuits and claims will not materially affect the consolidated financial
position of the Company or its results of operations.
14
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. 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 reserves for inventory and
accounts receivable; income tax accounting and resolution of litigation and
proceedings regarding the duties on tissue products.
RESULTS OF OPERATIONS
Seasonality
The seasonal nature of CSS' business has historically resulted in lower sales
and operating losses in the first and fourth quarters and comparatively higher
shipment levels and operating profits in the second and third quarters of the
Company's fiscal year which ends March 31, thereby causing significant
fluctuations in the quarterly results of operations of the Company.
Six Months Ended September 30, 2005 Compared to Six Months Ended
September 30, 2004
Sales for the six months ended September 30, 2005 decreased 4% to $221,537,000
from $231,266,000 in 2004 primarily due to customer requested shipment dates of
Christmas orders moving from September to October in the current year.
Cost of sales, as a percentage of sales, was 76% in 2005 and 73% in 2004. The
increase in cost of sales is primarily due to increased material and fuel costs
and an unfavorable mix of margins on certain Christmas products, partially
attributable to timing of shipments. These negative factors were partially
offset by improved margins on Halloween and everyday products and specific
project related operating efficiencies.
Selling, general and administrative ("SG&A") expenses, as a percentage of sales,
were 19% in 2005 and 2004. The decrease in SG&A expenses of $1,728,000, or 4%,
over the prior year six months is primarily due to lower compensation costs and
the absence of costs related to the Minneapolis restructuring plan established
in the prior year.
Interest expense, net was $1,499,000 in 2005 and $1,126,000 in 2004. The
increase in interest expense was primarily due to higher borrowing levels as a
result of the repurchase of $60,892,000 of the Company's stock in March 2005
offset by cash flows from operations, and higher interest rates compared to the
prior year.
Income taxes, as a percentage of income before taxes, were 36% in 2005 and 2004.
15
The net income for the six months ended September 30, 2005 was $5,584,000, or
$.51 per diluted share compared to $11,206,000, or $.89 per diluted share in
2004. The decrease in net income is primarily attributable to the impact of the
timing of lower sales volume and higher material and fuel costs.
Three Months Ended September 30, 2005 Compared to Three Months Ended
September 30, 2004
Sales for the quarter ended September 30, 2005 decreased 10% to $164,043,000
from $181,711,000 in 2004 primarily due to the earlier timing of shipments of
Halloween products in the first quarter and the later timing of Christmas
shipments from the second quarter to the third quarter in the current year.
Cost of sales, as a percentage of sales, was 77% in 2005 and 73% in 2004. The
increase in cost of sales is primarily due to increased material and fuel costs
and an unfavorable mix of product margins compared to the prior year, partially
offset by specific project related operating efficiencies.
Selling, general and administrative ("SG&A") expenses, as a percentage of sales,
were 14% in 2005 and 2004. The decrease in SG&A expenses of $1,538,000, or 6%,
is due primarily to lower compensation costs and the absence of costs related to
the Minneapolis restructuring plan established in the prior year.
Interest expense, net was $1,057,000 in 2005 and $709,000 in 2004. The increase
in interest expense was primarily due to higher borrowing levels as a result of
the repurchase of $60,892,000 of the Company's stock in March 2005 offset by
cash flows from operations, and higher interest rates compared to the prior
year.
Income taxes, as a percentage of income before taxes, were 36% in 2005 and 2004.
The net income for the three months ended September 30, 2005 was $9,239,000, or
$.84 per diluted share compared to $15,613,000, or $1.24 per diluted share in
2004.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2005, the Company had working capital of $159,327,000 and
stockholders' equity of $221,172,000. The increase in accounts receivable from
March 31, 2005 reflects 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, 2005 reflects the
normal seasonal inventory build necessary for the fiscal 2006 shipping season.
The increase in stockholders' equity was primarily attributable to the
year-to-date net income and capital contributed upon exercise of employee stock
options, partially offset by treasury share repurchases and payments of cash
dividends.
The Company relies primarily on cash generated from operations and seasonal
borrowings to meet its liquidity requirements. Historically, most revenues are
seasonal with approximately 80% of sales generated in the second and third
quarters. Payment for Christmas related products is usually not received until
after the holiday selling season 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 a $50,000,000 revolving credit
facility with five banks and an accounts receivable securitization facility with
an issuer of receivables-backed commercial paper. This facility has a
seasonally-adjusted funding limit of $100,000,000 during peak seasonal periods
and $25,000,000 during off-peak seasonal periods. In addition, the Company has
outstanding $50,000,000 of 4.48% senior notes due ratably in annual installments
over five years beginning in December 2005. These financing 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 revolving credit facility. At September 30,
2005, there was $50,000,000 of long-term borrowings outstanding related to the
senior notes and $76,400,000 outstanding under the Company's short-term credit
facilities. Based on its current operating plan, the Company believes its
sources of available capital are adequate to meet its ongoing cash needs for at
least the next 12 months.
16
As of September 30, 2005, the Company's letter of credit commitments are as
follows (in thousands):
Less than 1 1-3 4-5 After 5
Year Years Years Years Total
----------- --------- --------- -------- -------
Letters of credit.................. $10,183 $ - $ - $ - $10,183
The Company has letters of credit that guarantee funding of workers compensation
claims as well as obligations to certain vendors. Except as discussed in the
immediately succeeding paragraph, the Company has no financial guarantees or
other arrangements securing the obligations of any third parties or related
parties other than its subsidiaries.
In January 2005, the Company amended a $3,500,000 standby letter of credit (the
"Standby Letter of Credit") to secure the financial obligations of a Chinese
company to such company's bank. The Company provided the Standby Letter of
Credit for the benefit of the Chinese company in connection with a Company
subsidiary's purchases of imported products from a California-based vendor. The
Standby Letter of Credit will expire by its terms on December 31, 2005. The
amount of the Standby Letter of Credit is included in the aggregate amount of
the Company's letter of credit commitments of less than 1 year specified in the
table above, and has been included in similar tables set forth in the Company's
most recent Forms 10-K and 10-Q. Based upon recent discussions among
representatives of the Company, the vendor and the Chinese company, the Company
anticipates that the Chinese company's obligations to its bank will be paid in
full prior to December 15, 2005, and the Company does not expect any amounts to
be drawn under the Standby Letter of Credit.
In the ordinary course of business, the Company enters into arrangements with
vendors to purchase merchandise in advance of expected delivery. These purchase
orders do not contain any significant termination payments or other penalties if
cancelled.
LABOR RELATIONS
With the exception of the bargaining units at the gift wrap facility in Memphis,
Tennessee and the ribbon manufacturing facility in Hagerstown, Maryland, which
totaled approximately 900 employees as of September 30, 2005, CSS employees are
not represented by labor unions. Because of the seasonal nature of certain of
its businesses, the number of production employees fluctuates during the year.
The collective bargaining agreement with the labor union representing Cleo's
production and maintenance employees at the Cleo gift wrap plant and warehouses
in Memphis, TN remains in effect until December 31, 2007. The collective
bargaining agreement with the labor union representing the Hagerstown-based
employees remains in effect until December 31, 2006.
ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory Costs."
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment," and FSP
No. 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of 2004." In May
2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections."
In June 2005, the FASB's Emerging Issues Task Force reached a consensus on Issue
No. 05-6, "Determining the Amortization Period for Leasehold Improvements." See
the notes to the consolidated financial statements for information concerning
the Company's implementation and impact of these standards.
FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, including, among others,
statements relating to expected future earnings and financial performance.
Forward-looking statements are based on the beliefs of the Company's management
as well as assumptions made by and information currently available to the
Company's management as to future events and financial performance with respect
to the Company's operations. Forward-looking statements speak only as of the
date made. The Company undertakes no obligation to update any forward-looking
statements to reflect the events or circumstances arising after the date as of
which they were made. Actual events or results may differ materially from those
discussed in forward-looking statements as a result of various factors,
including without limitation, general market conditions, increased competition,
increased operating costs, including labor-related and energy costs, the impact
to the Company's operations attributable to Hurricanes Katrina and Rita,
currency risks and other risks associated with international markets, risks
associated with financial guarantees or other arrangements securing the
obligations of third parties, risks associated with acquisitions, including
acquisition integration costs, the Company's ability to integrate and derive the
expected benefits from recent acquisitions, the risk that customers may become
insolvent, costs of compliance with governmental regulations and government
investigations, liability associated with non-compliance with governmental
regulations, including regulations pertaining to the environment, Federal and
state employment laws, and import and export controls and customs laws, and
other factors described in the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 2005 and elsewhere in the Company's SEC filings. As
a result of these factors, readers are cautioned not to place undue reliance on
any forward-looking statements included herein or that may be made elsewhere
from time to time by, or on behalf of, the Company.
17
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. 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, 2005 has not materially changed from
March 31, 2005 (See Item 7A of the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 2005).
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. As of the end of the
period covered by this report, the Company's management, with the
participation of 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-15 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 periods
specified in the Securities and Exchange Commission's rules and procedures.
(b) Changes in Internal Controls. There was no change in the Company's internal
control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) as promulgated by the Securities Exchange Commission under the
Exchange Act) during the second quarter of fiscal year 2006 that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
18
CSS INDUSTRIES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Share Repurchase Program
A total of 21,700 shares were repurchased at an average price of $36.07 in the
second quarter of fiscal 2006. As of September 30, 2005, there remained an
outstanding authorization to repurchase 379,924 shares of outstanding CSS common
stock as represented in the table below.
Maximum
Total Number of Number of Shares
Total Number Shares Purchased as that May Yet Be
of Shares Average Price Part of Publicly Purchased Under
Purchased (1) Paid per Share Announced Program (2) the Program (2)
-------------- -------------- --------------------- ------------------
July 1 through July 31, 2005 - $ - - 401,624
August 1 through August 31, 2005 21,700 36.07 21,700 379,924
September 1 through September 30, 2005 - - - 379,924
------ ------ ------ -------
Total Second Quarter 21,700 $36.07 21,700 379,924
====== ====== ====== =======
(1) All share repurchases were effected in open-market transactions and in
accordance with the safe harbor provisions of Rule 10b-18 of the
Exchange Act.
(2) The Company announced that its Board of Directors had authorized on
February 18, 1998 the repurchase of up to 1,000,000 shares of the
Company's common stock (the "Repurchase Program"). Thereafter, the
Company announced that its Board of Directors had increased the number
of shares authorized to be repurchased by the Company pursuant to the
Repurchase Program as follows: November 9, 1998 (500,000 additional
shares); May 4, 1999 (500,000 additional shares); September 28, 1999
(500,000 additional shares); September 26, 2000 (500,000 additional
shares); and February 27, 2003 (400,000 additional shares). As a result
of the Company's three-for-two stock split distributed on July 10,
2003, the number of shares authorized for repurchase pursuant to the
Repurchase Program was automatically increased to 5,100,000 shares. The
aggregate number of shares repurchased by the Company pursuant to the
Repurchase Program as of September 30, 2005 was 4,720,076 on a
split-adjusted basis. An expiration date has not been established for
the Repurchase Program.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders of the registrant was held on August
2, 2005. The only matter voted upon at the annual meeting was the
election of Directors. 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
---------------------------------------
Scott A. Beaumont 9,896,154 13,903
James H. Bromley 9,544,705 365,352
David J. M. Erskine 9,800,698 109,359
Jack Farber 9,800,661 109,396
Leonard E. Grossman 9,835,570 74,487
James E. Ksansnak 9,735,730 174,327
Rebecca C. Matthias 9,757,636 152,421
19
Item 6. Exhibits
Exhibit 10.1 Employment Agreement dated as of July 11, 2005 between
CSS Industries, Inc. and William G. Kiesling.
Exhibit 31.1 Certification of the Chief Executive Officer of CSS
Industries, Inc. Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.
Exhibit 31.2 Certification of the Chief Financial Officer of CSS
Industries, Inc. Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.
Exhibit 32.1 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 32.2 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.
20
SIGNATURES
Pursuant to the requirements of the Securities 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 9, 2005 By: /s/David J. M. Erskine
------------------------
David J. M. Erskine
President and Chief
Executive Officer
Date: November 9, 2005 By: /s/Clifford E. Pietrafitta
-------------------------------
Clifford E. Pietrafitta
Vice President - Finance and
Chief Financial Officer
(principal financial and
accounting officer)
21