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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
20549
FORM 10-Q
For the Quarter Ended June 30, 2003
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [X] No [ ]
As of June 30, 2003, there were 11,707,715 shares of common stock outstanding
which excludes shares which may still be issued upon exercise of stock options.
CSS INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to present fairly the
Company's financial position as of June 30, 2003 and March 31, 2003, and the
results of its operations and cash flows for the three months ended June 30,
2003 and 2002. The results for the three months ended June 30, 2003 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 Company's latest
annual report on Form 10-K and with Part II of this document.
PAGE NO.
--------
Consolidated Statements of Operations and Comprehensive Loss - Three months
ended June 30, 2003 and 2002 3
Condensed Consolidated Balance Sheets - June 30, 2003 and March 31, 2003 4
Consolidated Statements of Cash Flows - Three months ended June 30, 2003 and
2002 5
Notes to Consolidated Financial Statements 6-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-15
Item 3. Quantitive and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
June 30,
(In thousands, except --------------------
per share data) 2003 2002
-------- --------
SALES $ 58,290 $ 50,557
-------- --------
COSTS AND EXPENSES
Cost of sales 42,686 36,205
Selling, general and administrative expenses 21,553 20,998
Interest expense, net 705 275
Rental and other income, net (304) (141)
-------- --------
64,640 57,337
-------- --------
LOSS BEFORE INCOME TAXES (6,350) (6,780)
INCOME TAX BENEFIT (2,311) (2,440)
-------- --------
LOSS BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (4,039) (4,340)
-------- --------
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (NET OF TAX) - (8,813)
-------- --------
NET LOSS $ (4,039) $(13,153)
======== ========
BASIC AND DILUTED LOSS PER COMMON SHARE
Before cumulative effect of accounting change $ (.35) $ (.35)
Cumulative effect of accounting change - (.70)
-------- --------
Basic and diluted loss per common share $ (.35) $ (1.05)
======== ========
WEIGHTED AVERAGE BASIC AND DILUTED
SHARES OUTSTANDING 11,632 12,522
======== ========
CASH DIVIDENDS PER SHARE OF COMMON STOCK $ .067 $ -
======== ========
COMPREHENSIVE LOSS
Net loss $ (4,039) $(13,153)
Change in fair value of interest rate swap
agreements, net (1) (243)
Foreign currency translation adjustment - 42
-------- --------
Comprehensive loss $ (4,040) $(13,354)
======== ========
See notes to consolidated financial statements.
3
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, March 31,
(In thousands) 2003 2003
----------- ---------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,426 $ 51,981
Accounts receivable, net 45,739 47,583
Inventories 163,033 106,648
Current income taxes 5,112 2,398
Deferred income taxes 6,194 6,226
Other current assets 14,475 13,771
----------- ---------
Total current assets 239,979 228,607
----------- ---------
PROPERTY, PLANT AND EQUIPMENT, NET 81,618 82,731
----------- ---------
OTHER ASSETS
Intangible assets, net 36,017 36,045
Other 4,247 4,578
----------- ---------
Total other assets 40,264 40,623
----------- ---------
Total assets $ 361,861 $ 351,961
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued customer programs $ 12,963 $ 13,334
Other current liabilities 69,230 56,311
----------- ---------
Total current liabilities 82,193 69,645
----------- ---------
LONG-TERM DEBT, NET OF CURRENT PORTION 50,000 50,063
----------- ---------
LONG-TERM OBLIGATIONS 3,785 3,684
----------- ---------
DEFERRED INCOME TAXES 7,939 7,706
----------- ---------
STOCKHOLDERS' EQUITY 217,944 220,863
----------- ---------
Total liabilities and stockholders' equity $ 361,861 $ 351,961
========== =========
See notes to consolidated financial statements.
4
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
June 30,
------------------------
(In thousands) 2003 2002
---------- ----------
Cash flows from operating activities:
Net loss $ (4,039) $ (13,153)
---------- ----------
Adjustments to reconcile net loss to net cash
used for operating activities:
Cumulative effect of accounting change, net of tax - 8,813
Depreciation and amortization 3,407 3,243
Provision for doubtful accounts 33 311
Deferred taxes 265 -
Changes in assets and liabilities:
Decrease in accounts receivable 1,810 1,307
(Increase) in inventory (56,385) (53,134)
(Increase) decrease in other assets (523) 8,917
(Decrease) increase in accrued customer programs (371) 2,326
Increase in other current liabilities 13,118 10,352
(Decrease) in accrued taxes (2,714) (493)
---------- ----------
Total adjustments (41,360) (18,358)
---------- ----------
Net cash (used for) operating activities (45,399) (31,511)
---------- ----------
Cash flows from investing activities:
Purchase of property, plant and equipment (2,261) (2,437)
Proceeds on assets held for sale 156 -
---------- ----------
Net cash (used for) investing activities (2,105) (2,437)
---------- ----------
Cash flows from financing activities:
Payments on long-term obligations (172) (267)
Borrowings on notes payable - 50,520
Dividends paid (778) -
Purchase of treasury stock - (36,500)
Proceeds from exercise of stock options 1,899 1,916
---------- ----------
Net cash provided by financing activities 949 15,669
---------- ----------
Effect of exchange rate changes on cash - 42
---------- ----------
Net (decrease) in cash and temporary investments (46,555) (18,237)
Cash and cash equivalents at beginning of period 51,981 20,006
---------- ----------
Cash and cash equivalents at end of period $ 5,426 $ 1,769
========== ==========
See notes to consolidated financial statements.
5
CSS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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.
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 rental and other
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 which ends March 31, and a material portion of the
Company's trade receivables are due in December and January of each
year.
Use of Estimates -
The preparation of financial statements in conformity with 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 include the valuation
of inventory and accounts receivable reserves, the assessment of
goodwill, income tax valuation and resolution of litigation. Actual
results could differ from those estimates.
Inventories -
Inventories are generally stated at the lower of first-in, first-out
(FIFO) cost or market. The remaining portion of the inventory is valued
at the lower of last-in, first-out (LIFO) cost or market. Inventories
consisted of the following (in thousands):
June 30, March 31,
2003 2003
--------- ---------
Raw material............... $ 29,924 $ 24,260
Work-in-process............ 29,096 30,183
Finished goods............. 104,013 52,205
--------- ---------
$ 163,033 $ 106,648
========= =========
6
Revenue Recognition -
The Company recognizes revenue from product sales when the goods are
shipped and 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.
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 options 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 loss and
loss per share would have been increased as follows:
Three Months Ended
June 30,
----------------------
(in thousands, except per share data) 2003 2002
--------- ---------
Net loss, as reported ............................. $ (4,039) $ (13,153)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects ....... 627 904
--------- ---------
Pro forma net loss ................................ $ (4,666) $ (14,057)
========= =========
Loss per share:
Basic and diluted - as reported ................... $ (.35) $ (1.05)
Basic and diluted - pro forma ..................... $ (.40) $ (1.12)
7
Net Income Per Common Share -
The following table sets forth the computation of basic loss per common
share and diluted loss per common share for the three months ended June
30, 2003 and 2002 (in thousands, except per share data):
Three Months Ended
June 30,
--------------------
2003 2002
-------- --------
Numerator:
Loss before cumulative effect of
accounting change ......................... $ (4,039) $ (4,340)
Cumulative effect of accounting change ..... - (8,813)
-------- --------
Net loss ................................... $ (4,039) $(13,153)
======== ========
Denominator:
Weighted average shares outstanding
for basic loss per common share ........... 11,632 12,522
Effect of dilutive stock options ........... - -
-------- --------
Adjusted weighted average shares outstanding
for diluted loss per common share ......... 11,632 12,522
======== ========
Basic and diluted loss per common share:
Loss before cumulative effect of
accounting change ......................... $ (.35) $ (.35)
Cumulative effect of accounting change ..... - (.70)
-------- --------
Net loss per common share .................. $ (.35) $ (1.05)
======== ========
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.
Reclassifications -
Certain prior period amounts have been reclassified to conform with the
current year classification.
(2) DERIVATIVE FINANCIAL INSTRUMENTS:
The Company enters into foreign currency forward contracts in order to
reduce the impact of certain foreign currency fluctuations. Firmly
committed transactions and the related receivables and payables may be
hedged with foreign currency forward contracts. Gains and losses arising
from foreign currency forward contracts are recognized in income or
expense as offsets of gains and losses resulting from the underlying
hedged transactions. As of June 30, 2003, the notional amount of open
foreign currency forward contracts was $14,615,000 and the related loss
was $93,000.
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 outstanding as of June 30, 2003 for the remainder of fiscal
year 2004 was $14,239,000. 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 5.09% for fiscal year 2004. Variable
8
rate payments are based on one month U.S. dollar LIBOR. Interest rate
differentials paid under these agreements are recognized as adjustments
to interest expense and amounted to $11,000 and $16,000 for the quarters
ended June 30, 2003 and 2002, respectively.
The Company designates all of its interest rate swap agreements as cash
flow hedges and records the fair value of its interest rate swap
agreements in its consolidated balance sheet. Changes in the fair value
of these agreements are recorded in other comprehensive income and
reclassified into earnings as the underlying hedged item affects
earnings. Unrealized after tax net losses of $1,000 and $243,000 were
recorded in other comprehensive income during the first quarter of
fiscal 2004 and fiscal 2003, respectively. The fair value of interest
rate swap agreements is included in other current liabilities and
totaled $277,000 and $437,000 as of June 30, 2003 and March 31, 2003,
respectively.
(3) BUSINESS ACQUISITIONS AND DIVESTITURES:
Crystal Creative Products, Inc.
On October 18, 2002, a subsidiary of the Company acquired all of the
capital stock of Crystal Creative Products, Inc. ("Crystal") for
approximately $22,891,000, including transaction costs, 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
for in-store packaging of retailers and for industrial applications. 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 tangible assets acquired of $10,151,000 was recorded as
intangible assets, in the accompanying consolidated balance sheet. Of
the $10,151,000 of acquired intangible assets, $4,500,000 was assigned
to trade names that are not subject to amortization, $5,351,000 was
assigned to goodwill and $300,000 was assigned to a covenant not to
compete which has a useful life of five years.
In July 2003, the Company finalized a restructuring plan, related to the
Crystal acquisition, under which the Company will restructure its
business to integrate the acquired entity with its current businesses.
In connection with this plan, the Company sold a non-core portion of the
Crystal business in July 2003, and will close Crystal's primary
manufacturing facility in Maysville, Kentucky and a separate
administration building in Middletown, Ohio. The Company will record a
restructuring reserve of approximately $1,000,000 as part of purchase
accounting, in the second quarter of fiscal 2004, including severance
related to approximately 150 employees. As a result of this
restructuring and other adjustments, goodwill is expected to increase by
approximately $1,750,000.
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; therefore, no goodwill was recorded.
In conjunction with the acquisition of Offray, the Company's management
approved a restructuring plan. As part of this plan, the Company accrued
$2,385,000 for severance and costs related to the closure of certain
facilities. As of June 30, 2003, the Company had closed Offray's
distribution facility in Quebec, Canada and its warehouse in Antietam,
Maryland and has communicated
9
termination of employment to approximately 125 employees. Payments,
mainly for severance costs, of approximately $302,000 were made in the
first quarter ended June 30, 2003. As of June 30, 2003, the remaining
liability of approximately $813,000 was classified as a current
liability in the accompanying consolidated balance sheet and will be
paid during fiscal 2004.
Selected information relating to the restructuring reserve follows (in
thousands):
Contractual
Obligations and
Severance Facility Exit Costs Total
--------- ------------------- --------
Restructuring reserve as of March 31, 2003 $ 713 $ 402 $ 1,115
Cash paid (247) (55) (302)
--------- -------- --------
Restructuring reserve as of June 30, 2003 $ 466 $ 347 $ 813
========= ======== ========
(4) GOODWILL AND INTANGIBLES:
Effective July 1, 2001 and April 1, 2002, the Company adopted 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
was required as of the adoption date. These impairment tests are
conducted on each business of the Company where goodwill is recorded,
and may 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 negative goodwill
related entirely to the acquisition of Cleo Inc ("Cleo"). Cleo was
purchased on November 15, 1995 at a discount to fair value and after all
long-term assets were reduced to $0 in purchase accounting, the
remaining discount was recorded as negative goodwill and amortized over
ten years. The $2,393,000 in negative goodwill within the Cleo 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
fiscal 2003 to record this impairment as well as the removal of negative
goodwill and was classified as the cumulative effect of a change in
accounting principle. In the fourth quarter of fiscal 2003, the Company
performed the required annual impairment test of the carrying amount of
goodwill and determined that no additional goodwill impairment existed.
The carrying amount of goodwill at June 30, 2003 of $31,017,000 remained
unchanged from March 31, 2003. In addition to goodwill, the Company has
$4,500,000 of other intangible assets relating to trade names that are
not subject to amortization and $500,000 of other intangible assets, net
of accumulated amortization of $157,000, relating primarily to a
covenant not to compete, that are
10
being amortized over periods of three to five years. Amortization
expense for the quarter was $28,000. Based on the current composition of
intangibles, amortization expense for each of the succeeding five years
is projected to be as follows: nine months ending March 31, 2004:
$113,000; years ending March 31, 2005: $151,000; 2006: $94,000; 2007:
$94,000; and 2008: $38,000.
(5) ACCOUNTING PRONOUNCEMENTS:
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 was adopted by the Company
at the beginning of fiscal year 2004 with no impact to the Company's
financial position or results of operations.
In April 2002, the Financial Accounting Standards Board ("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 was adopted by the Company at the beginning of fiscal
year 2004 with no impact to the Company's financial position or results
of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities." Interpretation No. 46 clarifies the
application of Accounting Research Bulletin No. 51 and applies
immediately to any variable interest entities created after January 31,
2003 and to variable interest entities in which an interest is obtained
after that date. This Interpretation is applicable for the Company in
the second quarter of fiscal year 2004, which ends September 30, 2003,
for interests acquired in variable interest entities prior to February
1, 2003. Based on current operations, the Company does not expect the
adoption of Interpretation No. 46 to have a material effect on its
financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." SFAS No. 149
clarifies under what circumstances a contract with an initial investment
meets the characteristics of a derivative and when a derivative contains
a financing component. This statement is effective for contracts entered
into or modified after June 30, 2003. 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 May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity," which requires that certain financial instruments be presented
as liabilities that were previously presented as equity or as temporary
equity. Such instruments include mandatory redeemable preferred and
common stock, and certain options and warrants. SFAS No. 150 is
effective for financial instruments entered into or modified after May
31, 2003 and must be applied to the Company's existing financial
instruments effective July 1, 2003, the beginning of the first fiscal
period after June 15, 2003. The Company adopted SFAS No. 150 on June 1,
2003. The adoption of this statement did not have a material effect on
the Company's financial position or results of operations.
11
(6) SUBSEQUENT EVENT:
On May 27, 2003 the Board of Directors authorized a three-for-two split
of the Company's common stock, effected by a distribution on July 10,
2003 of one share for each two shares held of record at the close of
business on June 30, 2003. All earnings per share and common stock
information is presented as if the stock split occurred prior to the
earliest year included in these financial statements.
12
CSS INDUSTRIES, INC. AND SUBSIDIARIES
ITEM 2. 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. 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 which ends March
31, thereby causing significant fluctuations in the quarterly results of
operations of the Company.
Stock Split
On May 27, 2003 the Board of Directors authorized a three-for-two common stock
split, effected by a distribution on July 10, 2003 of one share for each two
shares held of record at the close of business on June 30, 2003. All earnings
per share and common stock information is presented as if the stock split
occurred prior to the earliest year included in these financial statements.
Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002
Sales for the quarter ended June 30, 2003 increased 15% to $58,290,000 from
$50,557,000 in 2002. The increase was primarily attributable to incremental
sales of Crystal Creative Products, Inc. ("Crystal"), which was acquired on
October 18, 2002. Excluding Crystal, sales increased $446,000, or 1%, due to
increased sales of educational and other everyday products, partially offset by
the shift of Christmas shipments from the first quarter into the second quarter
of fiscal 2004.
Cost of sales, as a percentage of sales, was 73% in 2003 compared to 72% in
2002. Excluding the impact of the Crystal acquisition, cost of sales, as a
percentage of sales, improved to 70% as a result of higher margins on everyday
and Halloween products.
13
Selling, general and administrative ("SG&A") expenses, as a percentage of sales,
were 37% in 2003 compared to 42% in 2002. Excluding the impact of the Crystal
acquisition, SG&A improved from 42% to 40% as a result of acquisition
integration benefits related to the March 15, 2002 acquisition of Offray and
other cost cutting measures.
Interest expense, net was $705,000 in 2003 and $275,000 in 2002. The increase in
interest expense was primarily due to increased borrowings, compared to the same
quarter in prior year, related to the purchase of Crystal on October 18, 2002,
the June 24, 2002 stock repurchase and the incremental interest related to the
$50,000,000 senior notes issued on December 13, 2002. Partially offsetting these
increased borrowings was cash generated from fiscal 2003 operations.
Income taxes, as a percentage of loss before taxes, were 36% in 2003 and 2002.
Loss before cumulative effect of change in accounting principle improved 7% to a
loss of $4,039,000, or $.35 per diluted share in 2003 compared to $4,340,000, or
$.35 per diluted share in 2002. The disproportionate impact in loss per diluted
share reflects the lagging effect of a repurchase of 1,100,000 shares in June
2002. Upon adoption of SFAS No. 142, "Goodwill and Other Intangible Assets",
effective with the beginning of its prior fiscal year, April 1, 2002, the
Company recorded a non-cash write-off of goodwill and negative goodwill in the
amount of $8,813,000, net of taxes, or $.70 per share.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003, the Company had working capital of $157,786,000 and
stockholders' equity of $217,944,000. The increase in inventories and other
current liabilities and the decrease in cash from March 31, 2003 reflected the
normal seasonal inventory build necessary for the fiscal 2004 shipping season.
The decrease in stockholders' equity was primarily attributable to the first
quarter net loss and payment of the quarterly dividend, partially offset by
capital contributed upon exercise of employee stock options.
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 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 $100,000,000 unsecured revolving
credit facility with five banks and a receivable purchase agreement in an amount
up to $100,000,000 with an issuer of receivables-backed commercial paper. 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
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. At June 30, 2003, there was $50,000,000 of long-term borrowings
outstanding related to the senior notes and no amounts 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 the foreseeable future.
The Company has no financial guarantees or other arrangements with any third
parties or related parties other than its subsidiaries. All significant
intercompany transactions are eliminated in the consolidated financial
statements.
ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset
Retirement Obligations." In April
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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 January
2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest
Entities." In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." In May 2003, the FASB
issued SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." See the notes to the
consolidated financial statements for information concerning the Company's
implementation and impact of these standards.
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 June 30, 2003 has
not materially changed from March 31, 2003 (See Item 7A of the Annual Report on
Form 10-K).
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. As of the end of the
period covered by this report, 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-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 period specified in the Commission's rules and procedures.
(b) Changes in Internal Controls. The evaluation referred to above did not
identify any changes in the Company's internal control over financial
reporting that occurred during the quarter ended June 30, 2003 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
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CSS INDUSTRIES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) 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.
(b) On May 22, 2003, the Company furnished (not filed) pursuant to
Item 12 under Item 9 (in accordance with the interim filing
guidance for these Items) the press release announcing its
financial results for the year and quarter ended March 31, 2003,
which was also filed as an exhibit under Item 7.
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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: August 13, 2003 By: /s/ David J. M. Erskine
------------------------
David J. M. Erskine
President and Chief
Executive Officer
Date: August 13, 2003 By: /s/ Clifford E. Pietrafitta
---------------------------------------
Clifford E. Pietrafitta
Vice President - Finance,
Chief Financial Officer and
Principal Accounting Officer
17