SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q For the Quarter Ended Commission file number 1-2661 September 30, 1996 - ---------------------- 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, 1996, there were 10,737,909 shares of Common Stock outstanding which excludes shares which may still be issued upon exercise of stock options. Page 1 of 11 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, 1996 and December 31, 1995 and the results of operations and cash flows for the three months and nine months ended September 30, 1996 and 1995. The results for the three months and nine months ended September 30, 1996 and 1995 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 and with the June 30, 1996 quarterly report on Form 10-Q. PAGE NO. -------- Consolidated Statements of Operations - Three months and nine months ended September 30, 1996 and 1995 3 Consolidated Condensed Balance Sheets - September 30, 1996 and December 31, 1995 4 Consolidated Statements of Cash Flows - Nine months ended September 30, 1996 and 1995 5 Notes to Consolidated Financial Statements 6-8 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-10 PART II - OTHER INFORMATION Items 1 through 6 - Not Applicable SIGNATURE 11 -2- CSS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share amounts) Three Months Ended Nine Months Ended September 30, September 30, ------------------------- ------------------------- 1996 1995 1996 1995 ----------- ----------- ------------ ---------- SALES $ 147,527 $ 100,736 $ 242,102 $ 186,303 ---------- ----------- ----------- ----------- COSTS AND EXPENSES Cost of sales 97,975 64,043 153,991 111,783 Selling, general and administrative expenses 27,930 22,581 69,887 57,069 Interest expense, net 2,366 877 5,321 1,429 Rental and other expense (income), net 184 (472) (70) (1,064) ---------- ----------- ----------- ----------- 128,455 87,029 229,129 169,217 ---------- ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST 19,072 13,707 12,973 17,086 INCOME TAXES 7,878 5,481 5,359 6,855 ---------- ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST 11,194 8,226 7,614 10,231 MINORITY INTEREST IN INCOME OF SUBSIDIARIES, NET 53 106 315 350 ---------- ----------- ----------- ----------- NET INCOME $ 11,141 $ 8,120 $ 7,299 $ 9,881 ========== =========== =========== =========== NET INCOME PER COMMON SHARE Primary $ 1.01 $ .75 $ .66 $ .91 ========== =========== =========== =========== Fully diluted $ 1.01 $ .74 $ .66 $ .89 ========== =========== =========== =========== WEIGHTED AVERAGE SHARES OUTSTANDING Primary 10,990 10,854 10,993 10,914 ========== =========== =========== =========== Fully diluted 11,019 10,997 11,013 11,147 ========== =========== =========== =========== CASH DIVIDENDS PER SHARE OF COMMON STOCK $ - $ - $ - $ - ========== =========== =========== =========== See notes to consolidated financial statements. -3- CSS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands) September 30, December 31, 1996 1995 ------------- ------------ (Unaudited) ASSETS CURRENT ASSETS Cash and temporary investments $ 4,101 $ 3,102 Marketable securities 290 800 Accounts receivable, net 129,844 174,832 Inventories 117,950 76,397 Deferred taxes 7,234 -- Other current assets 8,980 8,349 -------- -------- Total current assets 268,399 263,480 -------- -------- PROPERTY, PLANT AND EQUIPMENT, NET 51,741 44,995 -------- -------- OTHER ASSETS Intangible assets 48,787 50,019 Deferred income taxes 1,803 1,829 Other 14,835 14,638 -------- -------- Total other assets 65,425 66,486 -------- -------- Total assets $385,565 $374,961 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY TOTAL CURRENT LIABILITIES $193,333 $197,085 LONG-TERM OBLIGATIONS 27,425 20,412 MINORITY INTEREST 3,755 3,608 CONTINGENCIES AND COMMITMENTS -- -- SHAREHOLDERS' EQUITY 161,052 153,856 -------- -------- Total liabilities and shareholders' equity $385,565 $374,961 ======== ======== See notes to consolidated financial statements. -4- CSS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Nine Months Ended September 30, -------------------------- 1996 1995 -------- -------- Cash flows from operating activities: Net income $ 7,299 $ 9,881 -------- -------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,339 6,032 Loss (gain) on sale of assets 52 (54) Gain on sale of marketable securities (146) (277) Deferred tax benefit (9,307) -- Provision for doubtful accounts 1,269 982 Minority interest in income of subsidiaries 315 350 Changes in assets and liabilities, net of effects of business combinations: Decrease (increase) in accounts receivable 43,719 (31,099) (Increase) in inventories (41,553) (23,528) (Increase) decrease in other assets (1,084) 270 Increase in current liabilities 5,926 5,935 -------- -------- Total adjustments 5,530 (41,389) -------- -------- Net cash provided by (used for) operating activities 12,829 (31,508) -------- -------- Cash flows from investing activities: Purchase of marketable securities -- (2,080) Purchases of businesses -- (8,740) Purchase of property, plant and equipment (13,162) (7,173) Proceeds on sale of marketable securities 424 788 Proceeds on sale of property, plant and equipment 983 181 -------- -------- Net cash (used for) investing activities (11,755) (17,024) -------- -------- Cash flows from financing activities: Payments on long-term obligations (19,610) (1,850) Borrowings on note payable 19,593 48,181 Purchase of treasury stock (736) (5,254) Redemption of subsidiary stock from minority shareholders (168) -- Proceeds from exercise of stock options 864 4 -------- -------- Net cash (used for) provided by financing activities (57) 41,081 -------- -------- Effect of exchange rate changes on cash (18) 13 -------- -------- Net increase (decrease) in cash and temporary investments 999 (7,438) Cash and temporary investments at beginning of period 3,102 8,774 -------- -------- Cash and temporary investments at end of period $ 4,101 $ 1,336 ======== ======== See notes to consolidated financial statements. -5- CSS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 (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 and all adjustments are of a normal recurring nature. Translation adjustments of a foreign subsidiary are charged or credited to a separate component of shareholders' equity. Nature of Business- CSS is a diversified company with two groups of businesses - the Consumer Products Group and the Direct Mail Business Products Group. The Consumer Products Group is primarily engaged in the manufacture and sale to mass market retailers of seasonal gift wrap, gift bags, boxed greeting cards, gift tags, tissue paper and vinyl decorations, classroom exchange Valentines, decorative ribbons and bows, Halloween masks, costumes, make-ups and novelties and Easter egg dyes and novelties. Due to the seasonality of the Consumer Products Group with the majority of sales occurring in the third and fourth quarters, a material portion of the Company's trade receivables are due in December and January of each year. The Consumer Products Group is comprised of The Paper Magic Group, Inc. ("Paper Magic"), acquired by the Company in August 1988, Berwick Industries, Inc. ("Berwick"), acquired in May 1993, and Cleo Inc. ("Cleo"), acquired in November 1995. The Direct Mail Business Products Group, composed of Rapidforms, Inc. and its subsidiaries ("Rapidforms"), develops and sells business forms, business supplies, in-store retail merchandising products, holiday greeting cards and advertising specialties to small and medium sized businesses in the United States, the United Kingdom and France, primarily through the direct mailing of catalogs and brochures. Rapidforms was acquired by CSS in January 1985. Use of Estimates- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Inventories- Inventories are stated primarily 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 cost or market. Inventories consisted of the following: -6- September 30, December 31, 1996 1995 ------------ ------------ Raw material................... $17,986,000 $21,926,000 Work-in-process................ 19,316,000 13,196,000 Finished goods................. 80,648,000 41,275,000 ------------ ------------ $117,950,000 $76,397,000 ============ =========== Revenue Recognition- The Company recognizes revenues in accordance with its shipping terms. Returns and allowances are reserved for based on current customer program estimates and the Company's historical experience. Net Income Per Common Share- Primary net income per common share is based on the weighted average number of common and common equivalent shares outstanding during the third quarter and nine months ended September 30, 1996 and 1995 - 10,990,155 and 10,993,254 in 1996 and 10,854,316 and 10,913,987 in 1995. Average outstanding shares used in the computation of fully diluted net income per share were 11,019,038 and 11,013,117 for the quarter and nine months ended September 30, 1996 and 10,996,699 and 11,147,365 for the quarter and nine months ended September 30, 1995. Statements of Cash Flows- For purposes of the statements of cash flows, the Company considers all holdings of highly liquid debt instruments with original maturity of less than 3 months to be temporary investments. Reclassifications Certain reclassifications have been reflected in the financial statements in order to conform prior years to the current presentation. See Note 2 for supplemental disclosure of noncash investing activities. (2) BUSINESS ACQUISITION: CSS acquired all of the outstanding stock of Cleo, effective November 15, 1995, for approximately $108,500,000 in cash and $24,547,000 in short-term notes. The purchase price includes $12,000,000 held in escrow for certain post closing adjustments and indemnification obligations which is included in other assets in the consolidated balance sheet. The Company and the seller have disagreed on the disbursement of the escrow and have engaged an independent public accounting firm to resolve the disputed items. Cleo designs, manufactures and distributes a wide range of promotional gift wrap and gift wrap accessories to mass market retailers in the United States and Canada. The acquisition was accounted for as a purchase and the excess of historical book value over the purchase price resulted in a $28,528,000 reduction to fixed assets, an accrual for restructuring expenses of $11,000,000, and a credit to goodwill of $7,562,000. Negative goodwill is included in intangible assets in the accompanying consolidated balance sheet and is being amortized over ten years. -7- (3) FINANCING ACTIVITIES: On August 1, 1996, CSS utilized proceeds from its $195,000,000 unsecured revolving credit facility to redeem the outstanding principal balance of $12,880,000 related to economic development revenue bonds assumed in connection with the acquisition of Cleo. On August 13, 1996, CSS entered into an interest rate swap agreement to reduce the impact of changes in interest rates on its floating rate revolving credit facility. At September 30, 1996 the Company has a swap agreement with a total notional amount of $20,000,000. This agreement fixes the interest rate on $20,000,000 of the borrowings under the revolving credit facility to 7.125%. The interest rate swap agreement matures on February 13, 1998. The counter party to the interest rate swap agreement is a major financial institution. Management believes the risk of incurring losses related to credit risk is remote and any losses would be immaterial. On September 18, 1996, CSS entered into a $20,000,000 term loan with a bank which matures on December 31, 1996. The proceeds from the term loan were used to repay a portion of the amount outstanding on the revolving credit facility and will be used for seasonal requirements and to provide the Company additional flexibility for general corporate purposes. -8- CSS INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS On November 15, 1995 CSS acquired all of the outstanding stock of Cleo. Cleo designs, manufactures and distributes a wide range of promotional gift wrap and gift wrap accessories to mass market retailers in the United States and Canada. As over 90% of Cleo's business is Christmas related, the seasonality of the Company's operating results will be more pronounced then in the past, with losses in the first half and higher profits in the second half. Comparisons with prior periods will be distorted until Cleo has been a part of CSS for more than a year. Concurrent with the acquisition of Cleo, CSS divided its businesses into two distinct business units - the Consumer Products Group ("CPG"), comprised of Paper Magic, Berwick and Cleo, and the Direct Mail Business Products Group ("BPG"), comprised of Rapidforms. First Nine Months of 1996 Compared to First Nine Months of 1995 Consolidated sales for the nine months ended September 30, 1996 increased by 30% to $242,102,000 from $186,303,000 in 1995. The increase was driven by a 43% increase in CPG sales largely as a result of incremental sales of Cleo, acquired by CSS in the fourth quarter of 1995. Excluding the impact of Cleo, CPG sales decreased 9% as certain key customers deferred shipments (historically made in the third quarter) until the fourth quarter of 1996. BPG sales increased 3% for the nine months largely as a result of year to year pricing increases. Cost of sales, as a percentage of sales, was 64% in 1996 and 60% in 1995. The increase in the cost of sales percentage was primarily attributable to the inclusion of Cleo and its lower margin sales. Excluding the impact of Cleo, lower material costs positively impacted CPG margins, while these benefits were somewhat offset by higher paper costs and lower margins on BPG sales. Selling, general and administrative expenses, as a percentage of sales, decreased to 29% in 1996 from 31% in 1995 resulting from the leverage provided by 1996 Cleo sales. Interest expense, net of $5,321,000 increased from $1,429,000 in 1995 due to higher seasonal borrowing needs and the acquisition debt associated with Cleo. Rental and other income, net decreased to $70,000 from $1,064,000 in 1995 due to the absence in 1996 of sublease income related to a leasehold interest which expired in late 1995, incremental Cleo expenses and lower gains from sales of marketable securities. Income taxes as a percentage of income before taxes and minority interest was 41% in 1996 and 40% in 1995. The increase was primarily due to the absence in 1996 of certain tax benefits related to 1995 permanent differences. Net income for the nine months ended September 30, 1996 was $7,299,000, or $.66 per share compared to net income of $9,881,000, or $.89 per share. The decrease in year to date earnings reflects the more pronounced seasonality of the Company's business since the acquisition of Cleo. -9- Third Quarter 1996 Compared to Third Quarter 1995 Third quarter 1996 sales increased 46% to $147,527,000 from $100,736,000 in 1995. The increase was due to incremental sales of Cleo and a 4% improvement in BPG sales. Excluding the Cleo acquisition, sales of the other CPG companies declined 10% due to certain customer requested deferrals, into the fourth quarter, of orders historically shipped in the third quarter. Cost of sales, as a percentage of sales increased to 66% in 1996 from 64% in 1995, reflecting the inclusion of Cleo lower margin sales. Excluding Cleo, cost of sales of the other CPG companies improved due to lower material costs and the achievement of higher production efficiencies. The percentage of cost of sales of BPG remained relatively unchanged from the third quarter of 1995. Selling, general and administrative expenses, as a percentage of sales, decreased to 19% from 22% in 1995. The decrease was primarily attributable to the leverage provided by Cleo's sales in 1996. The increase in interest expense, net to $2,366,000 from $877,000 was due to increased borrowings for higher seasonal requirements and the Cleo acquisition debt. Rental and other expense (income), net of $184,000 in 1996 compared to $(472,000) in 1995 due to the absence in 1996 of sublease income related to a leasehold interest which expired in late 1995, incremental Cleo expenses and lower gains from sales of marketable securities. Income taxes as a percentage of income before taxes and minority interest increased to 41% from 40% in the third quarter of 1995. The increase is explained in the nine month comparisons above. Net income was $11,141,000, or $1.01 per share in 1996, compared to $8,120,000, or $.74 per share in 1995. The increase reflects the impact of Cleo and the heightened seasonality of the Company's operations. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1996, the Company had working capital of $75,066,000 and shareholders' equity of $161,052,000. The decrease in accounts receivable and the increase in inventories compared to December 31, 1995 reflected the seasonal effect of CPG shipments scheduled for the fourth quarter. The increase in current deferred taxes is due to the timing of payments made to taxing authorities which will reverse in later years. The Company relies primarily on cash generated from its operations and seasonal borrowings to meet its liquidity requirements. Most CPG revenues are seasonal with more than 80% of sales generated in the second half of the year. Payment for Christmas related products is usually not received until after the holiday in accordance with general industry practice. As a result, short-term borrowing needs increase throughout the second and third quarters, and will peak prior to Christmas. Seasonal borrowings are made under a $195,000,000 unsecured revolving credit facility with thirteen banks and financial institutions. To supplement the revolver, the Company also entered into a $20,000,000 term note maturing on December 31, 1996. The facilities are available to fund seasonal borrowing needs and provide the Company with a source of capital for general corporate purposes. At September 30, 1996, there was $146,750,000 outstanding under these facilities. 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. -10- SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CSS INDUSTRIES, INC. ------------------------ (Registrant) Date: November 12, 1996 By: /s/ James G. Baxter ---------------------------- James G. Baxter Chief Financial Officer and Principal Accounting Officer -11-