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EX-32.2 - EXHIBIT 32.2 - CSS INDUSTRIES INCfy201810-kxex322.htm
EX-32.1 - EXHIBIT 32.1 - CSS INDUSTRIES INCfy201810-kxex321.htm
EX-31.2 - EXHIBIT 31.2 - CSS INDUSTRIES INCfy201810-kxex312.htm
EX-31.1 - EXHIBIT 31.1 - CSS INDUSTRIES INCfy201810-kxex311.htm
EX-23 - EXHIBIT 23 - CSS INDUSTRIES INCfy201810-kxex23.htm
EX-21 - EXHIBIT 21 - CSS INDUSTRIES INCfy201810-kxex21.htm
EX-10.16 - EXHIBIT 10.16 - CSS INDUSTRIES INCexhibit1016.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
(Mark one)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2018
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 1-2661
csslogoa10.jpg
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 No.)
 
 
450 Plymouth Road, Suite 300, Plymouth Meeting, PA
 
19462
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (610) 729-3959
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
 
Title of each class 
 
Name of each exchange on which registered
Common Stock, $.10 par value
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
(Title of class) 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer
 
¨
  
Accelerated filer
 
ý
Non-accelerated filer
 
¨  
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The aggregate market value of the voting stock held by non-affiliates of the registrant is $255,661,557. Such aggregate market value was computed by reference to the closing price of the common stock of the registrant on the New York Stock Exchange on September 29, 2017, being the last trading day of the registrant’s most recently completed second fiscal quarter. Such calculation excludes the shares of common stock beneficially owned at such date by certain directors and officers of the registrant, as described under the section entitled “Ownership of CSS Common Stock” in the proxy statement to be filed by the registrant for its 2018 Annual Meeting of Stockholders. In making such calculation, registrant does not determine the affiliate or non-affiliate status of any holders of the shares of common stock for any other purpose.
At June 1, 2018, there were outstanding 9,119,746 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for its 2018 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.



CSS INDUSTRIES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 2018
INDEX
 
 
 
Page
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
 
Item 15.




PART I
Item 1. Business.
General
CSS Industries, Inc. (“CSS” or the “Company”) is a creative consumer products company, focused on the seasonal, gift and craft categories. For these design-driven categories, the Company engages in the creative development, manufacture, procurement, distribution and sale of our products with an omni-channel approach focused primarily on mass market retailers.
Seasonal The seasonal category includes gift packaging items such as ribbon, bows, greeting cards, wrapping paper, bags, boxes, tags and gift card holders, in addition to specific holiday-themed decorations, accessories, and activities, such as Easter egg dyes and novelties and Valentine's Day classroom exchange cards. These products are sold to mass market retailers, and production forecasts for these products are generally known well in advance of shipment.
Gift The gift category (formerly described by the Company as its celebrations category) includes products designed to celebrate certain life events or special occasions, such as weddings, birthdays, anniversaries, graduations, or the birth of a child. Products include ribbons and bows, floral accessories, infant products, journals, gift card holders, all occasion boxed greeting cards, memory books, scrapbooks, stationery, stickers and other items that commemorate life's celebrations. Products in this category are primarily sold into mass and specialty retailers, floral and packaging wholesalers and distributors, and are generally ordered on a replenishment basis throughout the year.
Craft The craft category includes ribbons, trims, buttons, sewing patterns, knitting needles, needle arts and kids' crafts. These products are sold to mass market and specialty retailers, and are generally ordered on a replenishment basis throughout the year.
CSS’ product breadth provides its retail customers the opportunity to use a single vendor for much of their seasonal, gift and craft product requirements. A substantial portion of CSS’ products are manufactured and packaged in the United States and warehoused and distributed from facilities in the United States, the United Kingdom and Australia, with the remainder sourced from foreign suppliers, primarily in Asia. The Company also has a manufacturing facility in India that produces certain craft products, including trims, braids and tassels, and also has a distribution facility in India. The Company’s products are sold to its customers by national and regional account sales managers, sales representatives, product specialists and by a network of independent manufacturers’ representatives. CSS maintains purchasing offices in Hong Kong and China to administer Asian sourcing opportunities.
A key aspect of the Company’s strategy is to reposition its portfolio primarily through acquisitions within the categories that the Company currently operates. The highly fragmented nature of the categories in which the Company operates creates opportunities to grow through acquisition. As a result, the Company actively meets with craft, gift and seasonal companies to assess potential fit against our pre-defined parameters, seeking to deploy its cash to grow through acquisition.
The overall objective of the Company is to grow profitable sales and improve return on invested capital ("ROIC") through five strategic pillars. These strategic pillars include:
*Defend the base business - Design, product innovation, category leadership
*
Identify adjacent product categories with a focus on brands - Focus on fragmented markets, brands, omni-channel
*Build an omni-channel business model - Dedicated resources, leverage technology
*
Improve ROIC by maximizing margins while minimizing capital investment - Fix underperforming product lines, focus on working capital
*Build a collaborative, dynamic One CSS culture - Communication, accountability, talent infusion
Principal Products CSS designs, manufactures, procures, distributes and sells a broad range of craft and gift consumer products. Craft and gift consumer products include ribbons and bows, trims, buttons, sewing patterns, knitting needles, needle arts, kids' crafts, floral accessories, infant products, journals, gift card holders, all occasion boxed greeting cards, memory books, scrapbooks, stationery, stickers and other gift and craft items, sold to its mass market, craft, specialty and floral retail and wholesale distribution customers. CSS also designs, manufactures, procures, distributes and sells a broad range of seasonal consumer products primarily through the mass market distribution channel. Christmas products include packaging ribbons and bows, boxed greeting cards, gift wrap, gift bags, gift boxes, gift tags, gift card holders, tissue paper and decorations. CSS’ Valentine's Day product offerings include classroom exchange Valentine's Day cards and other related

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Valentine's Day products, while its Easter product offerings include Dudley’s® brand of Easter egg dyes and related Easter seasonal products. Its back-to-school products include teachers’ aids and other learning oriented products to the education market sold through mass market retailers, school supply distributors and teachers’ stores.
Key brands include Paper Magic®, Berwick®, Offray®, C.R. Gibson®, McCall’s®, Butterick®, Kwik Sew®, Vogue Patterns®, Markings®, Stepping Stones®, Tapestry®, Seastone®, Dudley’s®, Eureka®, Stickerfitti®, Favorite Findings®, La Mode®, Simplicity®, Wrights®, Boye®, Dimensions® and Perler®.
CSS operates nineteen manufacturing and/or distribution facilities located in Pennsylvania, Maryland, New Hampshire, South Carolina, Alabama, Illinois, Kansas, the United Kingdom, Australia and India. A description of the Company’s product lines and related manufacturing and/or distribution facilities is as follows:
Ribbon and bows are primarily manufactured and warehoused in eight facilities located in Pennsylvania, Maryland, South Carolina and Alabama. The manufacturing process is vertically integrated. Non-woven ribbon and bow products are primarily made from polypropylene resin, a petroleum-based product, which is mixed with color pigment, melted and pressed through an extruder. Large rolls of extruded film go through various combinations of manufacturing processes before being made into bows or packaged on ribbon spools or reels as required by various markets and customers. Woven fabric ribbons are manufactured domestically or imported from Mexico and Asia. Imported woven products are either narrow woven or converted from bulk rolls of wide width textiles. Domestic woven products are narrow woven.
Infant products, journals, educational products, memory books, scrapbooks, stationery, and other gift items are imported from Asian manufacturers and warehoused and distributed from two distribution facilities in Alabama.
Floral accessories, including pot covers, foil, waxed tissue, shred, aisle runners, corsage bags and other paper and film products, are manufactured in a facility located in New Hampshire or imported from Mexico. Manufacturing includes gravure and flexo printing, waxing and converting. Products are warehoused and distributed from a distribution facility in Pennsylvania.
Sewing patterns are purchased and distributed from a third party printer and are also manufactured and distributed from a facility located in Kansas. Sewing patterns are also warehoused and distributed from two distribution facilities in the United Kingdom and two distribution facilities in Australia.
Certain craft items, including trims, braids and tassels, are manufactured and distributed from two facilities in India.
Other products including, but not limited to, buttons, knitting needles, needle arts, kids crafts, boxed greeting cards, gift tags, gift card holders, gift bags, gift wrap, decorative tissue paper, classroom exchange Valentine's Day products, Easter products, and decorations are produced to the specifications of CSS and are imported primarily from Asian manufacturers.
During our 2018 fiscal year, CSS experienced no material difficulties in obtaining raw materials or finished goods from suppliers.
Intellectual Property Rights CSS has a number of copyrights, patents, tradenames, trademarks and intellectual property licenses which are used in connection with its products. Substantially all of its designs and artwork are protected by copyright. Intellectual property license rights which CSS has obtained are viewed as especially important to the success of its classroom exchange Valentine's Day cards and stickers. It is CSS’ view that its operations are not dependent upon any individual patent, tradename, trademark, copyright or intellectual property license. The collective value of CSS’ intellectual property is viewed as substantial, and CSS seeks to protect its rights in all patents, copyrights, tradenames, trademarks and intellectual property licenses.
Sales and Marketing Most of CSS’ products are sold in the United States and Canada by national and regional account sales managers, sales representatives, product specialists and by a network of independent manufacturers’ representatives. CSS maintains permanent showrooms in Pennsylvania, Georgia, Arkansas, Ohio, Tennessee, Texas, Hong Kong and Australia where buyers for major retail customers will typically visit for a presentation and review of the new lines. Products are also displayed and presented in showrooms maintained by various independent manufacturers’ representatives in major cities in the United States and Canada. Relationships are developed with key retail customers by CSS sales personnel and independent manufacturers’ representatives. Social stationery products are sold by a national organization of sales representatives that specialize in the gift and specialty channel, as well as by key account representatives. Craft ribbon and bow products are also sold through sales representatives or independent manufacturers’ representatives to wholesale distributors and independent small retailers who serve the floral, craft and retail packaging trades. The Company also sells custom products to private label customers, to other social expression companies, and to converters of the Company’s ribbon products. Custom products are sold by both independent manufacturers’ representatives and CSS sales managers.

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Customers are generally mass market retailers, discount department stores, specialty chains, warehouse clubs, drug and food chains, dollar stores, office supply stores, independent card, gift and floral shops and retail teachers’ stores. Net sales to Walmart Stores, Inc. and its affiliates accounted for approximately 25% of total net sales during fiscal 2018. No other customer accounted for 10% or more of the Company’s net sales in fiscal 2018. Our ten largest customers, which include mass market retailers, warehouse clubs and national drug store chains, accounted for approximately 61% of our sales in our 2018 fiscal year. Approximately 66% of the Company’s sales are attributable to gift and craft products with the remainder attributable to seasonal (Christmas, Valentine’s Day, Easter and back to-school) products. Approximately 24% of CSS’ sales relate to the Christmas season. Seasonal products are generally designed and marketed beginning up to 18 to 20 months before the holiday event and manufactured during an eight to ten month production cycle. Due to these long lead time requirements, timely communication with third party factories, licensors, customers and independent manufacturers’ representatives is critical to the timely production of seasonal products. Sales terms for our seasonal products do not generally require payment until just before or just after the holiday, in accordance with industry practice. CSS products, with some customer specific exceptions, are not sold under guaranteed or return privilege terms. The Company has certain limited products, primarily sewing patterns, that are on consignment at mass market retailers and the Company recognizes the sale as products are sold to end consumers at point-of-sale terminals.
Competition among retailers in the sale of the Company’s products to end users is intense. CSS seeks to assist retailers in developing merchandising programs designed to enable the retailers to meet their revenue and profit objectives while appealing to their consumers’ tastes. These objectives are met through the development and manufacture of custom configured and designed products and merchandising programs. CSS’ years of experience in merchandising program development and product quality are key competitive advantages in helping retailers meet their objectives.
Competition CSS competes with various domestic and foreign companies in each of its seasonal, gift and craft categories. Some of our competitors are larger and have greater resources than the Company while many are smaller, private companies that we compete with across our product lines. CSS believes its products are competitively positioned in their primary markets. Since competition is based primarily on category knowledge, timely delivery, creative design, price and, with respect to seasonal products, the ability to serve major retail customers with single, combined product shipments for each holiday event, CSS believes that its focus on products, combined with consistent service levels, allows it to compete effectively in its core markets.
Backlog Production forecasts for products within our seasonal category are generally known well in advance of shipment. Orders for products within our gift and craft categories are generally ordered on a just-in-time replenishment basis by our customers and an order backlog does not typically exist, except when major program resets occur.
The Company’s fiscal year ends on March 31. References to a particular year refer to the fiscal year ending in March of that year. For example, fiscal 2018 refers to the fiscal year ended March 31, 2018.
Employees
At June 1, 2018, approximately 2,000 persons were employed by CSS (increasing to approximately 2,075 as seasonal employees are added). The Company believes that relationships with its employees are good.
With the exception of the bargaining unit at the ribbon manufacturing facility in Hagerstown, Maryland, which totaled 80 employees as of June 1, 2018, 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 the Hagerstown-based production and maintenance employees remains in effect until December 31, 2020. Historically, we have been successful in renegotiating expiring agreements without any disruption of operating activities.
Acquisitions
The Company will continue to build on existing relationships with seasonal, gift and craft customers by expanding and diversifying its product lines and thereby growing its presence in the largest retailers in North America. This includes both capitalizing on opportunities for organic growth in existing businesses as well as acquiring companies which fit into appropriate acquisition parameters. We actively meet with seasonal, gift and craft companies to review and assess potential acquisition targets.
On November 3, 2017, the Company completed the acquisition of substantially all of the net assets and business of Simplicity Creative Group ("Simplicity") from Wilton Brands LLC ("Wilton") for a total consideration of $69,617,000 and transaction costs of approximately $3,411,000. Simplicity is a leading provider of home sewing patterns, decorative trims, knitting and crocheting tools, needle arts and kids' crafts products under the Simplicity®, Wrights®, Boye®, Dimensions®, and

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Perler® brand names. Simplicity's products are sold to mass-market retailers, specialty fabric and craft chains, wholesale distributors and online customers. The Company primarily financed the acquisition with borrowings of $60,000,000 under its revolving credit facility and has recorded a working capital adjustment due to Wilton of $2,500,000, which is recorded in other current liabilities in the accompanying consolidated balance sheet and was paid on April 4, 2018. A portion of the purchase price is being held in escrow for certain post closing adjustments and indemnification obligations. The acquisition was accounted for using the acquisition method and the excess of cost over the fair market value of the net tangible and identifiable intangible assets acquired of $9,642,000 was recorded as goodwill. This goodwill was subsequently written off as a result of the Company’s annual impairment testing performed in the fourth quarter of fiscal 2018 as further described in Note 3 to the consolidated financial statements.
On December 13, 2016, the Company completed the acquisition of substantially all of the net assets and business of The McCall Pattern Company and certain affiliated subsidiaries ("McCall"), for approximately $13,914,000 in cash, plus transaction costs of approximately $1,484,000. McCall designs, manufactures, and sells home sewing patterns under the McCall’s®, Butterick®, Kwik Sew® and Vogue Patterns® brand names. McCall is a leading provider of home sewing patterns, selling to mass market retailers, specialty fabric and craft chains, and wholesale distributors. A portion of the purchase price is being held in escrow for certain post closing adjustments and indemnification obligations. The acquisition was accounted for using the acquisition method and resulted in a bargain purchase due to the fair value of the net assets acquired of approximately $33,528,000 exceeding the amount paid. In connection with this bargain purchase, the Company recorded a gain of approximately $19,614,000 in the consolidated statements of operations in the fiscal year ended March 31, 2017.
On July 8, 2016, a subsidiary of the Company completed the acquisition of substantially all of the assets of Lawrence Schiff Silk Mills, Inc. ("Schiff") for $1,125,000 in cash. Schiff was a leading U.S. manufacturer and distributor of narrow woven ribbon prior to its April 2016 Chapter 11 bankruptcy filing. The acquisition was accounted for using the acquisition method and resulted in a bargain purchase due to the fair value of the net assets acquired of approximately $1,501,000 exceeding the amount paid. In connection with this bargain purchase, the Company recorded a gain of approximately $376,000 in the consolidated statements of operations in the fiscal year ended March 31, 2017.
On February 2, 2016, a subsidiary of the Company completed the acquisition of substantially all of the net assets and business of Blumenthal Lansing Company, LLC ("Blumenthal") for approximately $19,626,000 in cash, including transaction costs of approximately $81,000. The Company also incurred costs of approximately $1,028,000 in fiscal 2016, primarily related to severance. Blumenthal was a leading provider of buttons to the sewing and craft markets in the United States, selling to mass market retailers and wholesale distributors that service independent retail stores. The acquisition was accounted for using the acquisition method, and $4,017,000, which is the excess of cost over fair value of the net tangible and identifiable intangible assets acquired, was recorded as goodwill. This goodwill was subsequently written off as a result of the Company’s annual impairment testing performed in fiscal 2018 as further described in Note 3 to the consolidated financial statements.
SEC Filings
The Company’s Internet address is www.cssindustries.com. Through its website, the following filings are made available free of charge as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission: its annual report on Form 10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
Item 1A. Risk Factors.
You should carefully consider each of the risk factors we describe below, as well as other factors described in this annual report on Form 10-K and elsewhere in our SEC filings.
Our results of operations fluctuate on a seasonal basis, and quarter to quarter comparisons may not be a good indicator of our performance. Seasonal demand fluctuations may adversely affect our cash flow and our ability to sell our products.
Approximately 66% of the Company’s sales are attributable to products within our gift and craft categories, with the remainder attributable to products in the seasonal category. Approximately 24% of our sales relate to the Christmas season. The seasonal nature of our business has historically resulted in lower sales levels and operating losses in our first and fourth quarters, and higher sales levels and operating profits in our second and third quarters. As a result, our quarterly results of operations fluctuate during our fiscal year, and a quarter to quarter comparison is not a good indication of our performance or how we will perform in the future. For example, our overall results of operations in the future may fluctuate substantially based on seasonal demand for our products. Such variations in demand could have a material adverse effect on the timing of cash flow and therefore our ability to meet our obligations with respect to our debt and other financial commitments. Seasonal

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fluctuations also affect our inventory levels. We must carry significant amounts of inventory, especially before the Christmas retail selling period. If we are not successful in selling the inventory during the relevant period, we may have to sell the inventory at significantly reduced prices, or we may not be able to sell the inventory at all.

We rely on a few mass market retailers, warehouse clubs and national drug store chains for a significant portion of our sales. The loss of sales, or a significant reduction of sales, to one or more of our large customers may adversely affect our business, results of operations and financial condition. Past and future consolidation within the retail sector also may lead to reduced profit margins, which may adversely affect our business, results of operations and financial condition.
A few of our customers are material to our business and operations. Our sales to Walmart Stores, Inc. and its affiliates accounted for approximately 25% of our sales during our 2018 fiscal year. No other single customer accounted for 10% or more of our sales in fiscal 2018. Our ten largest customers, which include mass market retailers, warehouse clubs and national drug store chains, accounted for approximately 61% of our sales in our 2018 fiscal year. Our business depends, in part, on our ability to identify and define product and market trends, and to anticipate, understand and react to changing consumer demands in a timely manner. There can be no assurance that our large customers will continue to purchase our products in the same quantities that they have in the past. The loss of sales, or a significant reduction of sales, with one or more of our large customers, including without limitation a loss or significant reduction in sales resulting from our failure or inability to comply with one or more of any of our customers’ sourcing requirements, may adversely affect our business, results of operations and financial condition. Further, in recent years there has been consolidation among our retail customer base. As the retail sector consolidates, our customers become larger, and command increased leverage in negotiating prices and other terms of sale of our products, including credits, discounts, allowances and other incentive considerations to these customers. Past and future consolidation may lead to reduced profit margins, which may adversely affect our business, results of operations and financial condition.

A portion of our products, primarily sewing patterns, are sold on a consignment basis by third party consignment sellers, including certain mass market retailers. Because of the nature of the consignment arrangement, we may be adversely affected if third party consignment sellers, including mass market retailers, experience difficulties in recording sales of the products to end consumers, or in accounting for, or paying us for, the sales of such products. Additionally, while the consigned products are physically stored with third parties, including third party consignment sellers, we do not have custody or control of such products, and the consigned products are subject to damage or loss, including, but not limited to, theft. Any failure or inability by third parties, including third party consignment sellers, to appropriately manage the consignment arrangement may adversely affect our business, results of operations and financial condition.
A portion of our products, primarily sewing patterns, are sold on a consignment basis by third party consignment sellers, including certain mass market retailers. Under the consignment arrangement, the applicable products are physically stored at third party locations, including mass market retailer store locations, and we retain title to the consigned products until such products are purchased by an end consumer. We recognize the sale of such consigned products at the time that the products are sold to the end consumer, as recorded at the applicable seller’s point-of-sale terminals. Under this arrangement, we are subject to the ability of third party consignment sellers, including mass market retailers, to appropriately record the sales of our consigned products to end consumers, and to appropriately account for, and pay us for, such recorded sales. The failure or inability of third party consignment sellers, including mass market retailers, to record sales of our consigned products, and to appropriately account for, and pay us for, such recorded sales may adversely affect our business, results of operations and financial condition. Additionally, while our consigned products are physically stored with third parties, including third party consignment sellers, we do not have custody or control of such products, and the consigned products are subject to damage or loss, including, but not limited to, theft. There can be no assurance that third parties, including third party consignment sellers, will appropriately handle, monitor, secure or protect our consigned products, and any failure or inability to do so may adversely affect our business, results of operations and financial condition.

Increases in raw material and energy costs, resulting from general economic conditions, acts of nature, such as hurricanes, earthquakes or pandemics, acts of war, threats of war, terrorism, civil unrest, or other factors, may raise our cost of goods sold and adversely affect our business, results of operations and financial condition.
Paper and petroleum-based materials are essential in the manufacture of some of our products, such as our stationery and plastic decorative ribbons products, and the cost of such materials is significant to our cost of goods sold. Energy costs, especially fuel costs, also are significant expenses in the production and delivery of our products. Increased costs of raw materials or energy resulting from general economic conditions, acts of nature, such as hurricanes, earthquakes or pandemics, acts of war, threats of war, terrorism, civil unrest, or other factors, may result in declining margins and operating results if market conditions prevent us from passing these increased costs on to our customers through timely price increases on our products.

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Risks associated with our use of foreign suppliers may adversely affect our business, results of operations and financial condition.
For a large portion of our product lines, with the exception of our decorative ribbon and bow product lines and sewing patterns, we use foreign suppliers to manufacture a significant portion of our products. Approximately 58% of our sales in fiscal 2018 were related to products sourced from foreign suppliers. Our use of foreign suppliers exposes us to risks inherent in doing business outside of the United States, including risks associated with foreign currency fluctuations, transportation costs and delays or disruptions, difficulties in maintaining and monitoring quality control (including without limitation risks associated with defective products), enforceability of agreed upon contract terms, compliance with existing and new United States and foreign laws and regulations, such as the United States Foreign Corrupt Practices Act and legislation and regulations relating to imported products, costs relating to the imposition or retrospective application of antidumping and countervailing duties or other trade-related sanctions on imported products, economic, civil or political instability, acts of war, threats of war, terrorism, civil unrest, labor-related issues, such as labor shortages or wage disputes or increases, international public health issues, and restrictions on the repatriation of profits and assets.

Increased overseas sourcing by our competitors and our customers may reduce our market share and profit margins, adversely affecting our business, results of operations and financial condition.
We have relatively high market share in many of our seasonal product categories. Most of our product markets have shown little or no growth, and some of our product markets have declined in recent years, and we continue to confront significant cost pressure as our competitors source certain products from overseas and certain customers increase direct sourcing from overseas factories. Increased overseas sourcing by our competitors and certain customers may result in a reduction of our market share and profit margins, adversely affecting our business, results of operations and financial condition.

Difficulties encountered by our key customers may cause them to reduce their purchases from us and/or increase our exposure to losses from bad debts, and adversely affect our business, results of operations and financial condition.
Many of our largest customers are national and regional retail chains. The retail channel in the United States has experienced significant shifts in market share among competitors in recent years, including as a result of the presence and continued growth of e-commerce retailers. Any current or future economic slowdown, slow economic recovery, or uncertain economic outlook could further adversely affect our key customers. Our business, results of operations and financial condition may be adversely affected if our customers file for bankruptcy protection and/or cease doing business, significantly reduce the number of stores they operate, significantly reduce their purchases from us, do not pay us for their purchases, or if their payments to us are delayed or reduced because of bankruptcy or other factors beyond our control.

Our inability to effectively develop, manufacture, procure, distribute and sell our products with an omni-channel approach may adversely affect our business, results of operations and financial condition.

The retail channel in the United States is rapidly evolving, and consumers are increasingly embracing online shopping, including through mobile commerce applications.  Many of our retail customers are experiencing a shift of their total consumer expenditures from sales at physical retail locations to sales on digital platforms.  Our retail customers expect us, as a product supplier, to assist them to deliver a seamless omni-channel shopping experience.   Additionally, our strategy includes a greater focus on our own direct-to-consumer online shopping opportunities.   We continue to invest in e-commerce technology, including the development of our digital platforms and mobile commerce applications.  Our business, results of operations and financial condition may be adversely affected if we are unable to effectively develop, manufacture, procure, distribute and sell our products with an omni-channel approach.     

Our business, results of operations and financial condition may be adversely affected by volatility in the demand for our products.
Our success depends on the sustained demand for our products. Many factors affect the level of consumer spending on our products, including, among other things, general business conditions, interest rates, the availability of consumer credit, taxation, the effects of war, terrorism or threats of war, civil unrest, fuel prices, consumer demand for our products based upon, among other things, consumer trends and the availability of alternative products, and consumer confidence in future economic conditions. A decline in economic activity in the United States or other regions of the world, a slow economic recovery, or an uncertain outlook, in addition to adversely affecting our customers, could adversely affect our business, results of operations and financial condition because of, among other things, reduced consumer spending on discretionary items, including our products. We also routinely utilize new artwork, designs or licensed intellectual property in connection with our products, and our inability to design, select, procure, maintain or sell consumer-desired artwork, designs or

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licensed intellectual property could adversely affect the demand for our products, which could adversely affect our business, results of operations and financial condition.

Our business, results of operations and financial condition may be adversely affected if we are unable to compete successfully against our competitors.
Our success depends in part on our ability to compete against our competitors in our highly competitive markets. Our competitors, including domestic businesses, foreign manufacturers who market directly to our customer base, and importers of products, may be able to offer similar products with more favorable pricing, servicing and/or terms of sale or may be able to provide products that more readily meet customer requirements or consumer preferences. Our inability to successfully compete against our competitors could adversely affect our business, results of operations and financial condition.

Our business, results of operations and financial condition may be adversely affected if we are unable to hire and retain sufficient qualified personnel.
Our success depends, to a substantial extent, on the ability, experience and performance of our senior management. In order to hire and retain qualified personnel, including our senior management team, we seek to provide competitive compensation programs. Our inability to retain our senior management team, or our inability to attract and retain qualified replacement personnel, may adversely affect us. We also regularly hire a large number of seasonal employees. Any difficulty we may encounter in hiring seasonal employees may result in significant increases in labor costs, which may have an adverse effect on our business, results of operations and financial condition.

Employee benefit costs may adversely affect our business, results of operations and financial condition.
We seek to provide competitive employee benefit programs to our employees. Employee benefit costs, such as healthcare costs for our eligible and participating employees, may increase significantly at a rate that is difficult to forecast, in part because of the current and/or future impact of federal healthcare legislation on our employer-sponsored medical plans. Higher employee benefit costs could have an adverse effect on our business, results of operations and financial condition.

Our acquisition strategy involves risks, and difficulties in integrating potential acquisitions may adversely affect our business, results of operations and financial condition.
We regularly evaluate potential acquisition opportunities to support, strengthen and grow our business. In fiscal 2018, we completed the acquisition of substantially all of the business and net assets of Simplicity. In fiscal 2017, we completed the acquisitions of substantially all of the businesses and net assets of McCall and Schiff and in fiscal 2016, we completed the acquisition of substantially all of the business and net assets of Blumenthal. We cannot be sure that we will be able to locate suitable acquisition candidates, acquire possible acquisition candidates, acquire such candidates on commercially reasonable terms, or integrate acquired businesses successfully. Future acquisitions may require us to incur debt and contingent liabilities, which may adversely affect our business, results of operations and financial condition. The process of integrating acquired businesses into our existing operations may result in operating, contract and supply chain difficulties, such as the failure to retain customers or management personnel. Also, prior to our completion of any acquisition, we could fail to discover liabilities of the acquired business for which we may be responsible as a successor owner or operator in spite of any investigation we may make prior to the acquisition. Such difficulties may divert significant financial, operational and managerial resources from our existing operations, and make it more difficult to achieve our operating and strategic objectives. The diversion of management attention, particularly in a difficult operating environment, may adversely affect our business, results of operations and financial condition.

Our strategy to continuously review the efficiency, productivity and competitiveness of our business may result in our decision to divest or close selected operations.  Any divesture or closure involves risks, and decisions to divest or close selected operations may adversely affect our business, results of operations and financial condition.
We regularly evaluate the efficiency, productivity and competitiveness of our business, including our competitiveness within our product categories.  As part of such review, we also regularly evaluate the efficiency and productivity of our production and distribution facilities. If we decide to divest a portion of our business, we cannot be sure that we will be able to locate suitable buyers or that we will be able to complete such divestiture successfully, timely or on commercially reasonable terms. If we decide to close a portion of our business, we cannot be sure of the effect such closure would have on the productivity or effectiveness of the remaining portions of our business, including our ongoing relationships with suppliers and customers, or of the expected success, timing or costs relating to such closure. Activities associated with any divestiture or closure may divert significant financial, operational and managerial resources from our existing operations,

7


and make it more difficult to achieve our operating and strategic objectives.  Accordingly, future decisions to divest or close any portion of our business may adversely affect our business, results of operations and financial condition.

Our inability to protect our intellectual property rights, or infringement claims asserted against us by others, may adversely affect our business, results of operations and financial condition.
We have a number of copyrights, patents, tradenames, trademarks and intellectual property licenses which are used in connection with our products. While our operations are not dependent upon any individual copyright, patent, tradename, trademark or intellectual property license, we believe that the collective value of our intellectual property is substantial. We rely upon copyright, patent, tradename and trademark laws in the United States and other jurisdictions and on confidentiality agreements with some of our employees and others to protect our proprietary rights. If our proprietary rights were infringed, our business could be adversely affected. In addition, our activities could infringe upon the proprietary rights of others, who could assert infringement claims against us. We could face costly litigation to defend these claims. If we are unsuccessful in defending such claims, our business, results of operations and financial condition could be adversely affected.
We seek to register certain of our copyrights, patents, tradenames and trademarks in the United States and elsewhere. These registrations could be challenged by others or invalidated through administrative process or litigation. In addition, our confidentiality agreements with some employees or others may not provide adequate protection in the event of unauthorized use or disclosure of our proprietary information, or if our proprietary information otherwise becomes known, or is independently developed by competitors.

We are subject to cyber security risks and may incur increasing costs in efforts to minimize those risks and to comply with regulatory standards.
We use information technologies to securely manage operations and various business functions. We rely on various technologies to process, store and report on our business and interact with customers, vendors and employees. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy. Despite our efforts, and those of our third party vendors, to develop and maintain security systems to protect this information, the security of our computer networks could be compromised through circumstances beyond our control, including systems failures, viruses, security breaches or cyber incidents such as intentional cyber attacks aimed at theft of sensitive data, or inadvertent cyber-security compromises. Such events could impact operations and confidential information could be misappropriated, which could lead to negative publicity, loss of sales and profits or cause us to incur significant costs to reimburse third-parties for damages which could adversely impact profits. As a result, our business, results of operations and financial condition could be adversely affected.

Various laws and governmental regulations applicable to a manufacturer or distributor of consumer products may adversely affect our business, results of operations and financial condition.
Our business is subject to numerous federal, state, provincial, local and foreign laws and regulations, including laws and regulations with respect to labor and employment, product safety, including regulations enforced by the United States Consumer Products Safety Commission, import and export activities, the Internet and e-commerce, antitrust issues, taxes, chemical usage, air emissions, wastewater and storm water discharges and the generation, handling, storage, transportation, treatment and disposal of waste materials, including hazardous materials. Although we believe that we are in substantial compliance with all applicable laws and regulations, because legal requirements frequently change and are subject to interpretation, we are unable to predict the ultimate cost of compliance or the consequences of non-compliance with these requirements, or the affect on our operations, any of which may be significant. If we fail to comply with applicable laws and regulations, we may be subject to criminal sanctions or civil remedies, including fines, injunctions, or prohibitions on importing or exporting. A failure to comply with applicable laws and regulations, or concerns about product safety, also may lead to a recall or post-manufacture repair of selected products, resulting in the rejection of our products by our customers and consumers, lost sales, increased customer service and support costs, and costly litigation. There is risk that any claims or liabilities, including product liability claims, relating to such noncompliance may exceed, or fall outside the scope of, our insurance coverage. Further, a failure to comply with applicable laws and regulations with respect to the Internet and e-commerce activities (which cover issues relating to user privacy, data protection, copyrights and consumer protection), such as the European Union’s General Data Protection Regulation (GDPR), may subject us to significant liabilities. GDPR is a comprehensive European Union privacy and data protection reform effective in 2018. GDPR applies to companies that are organized in the European Union (or otherwise provide services to consumers who reside in the European Union), imposes strict standards regarding the sharing, storage, use, disclosure and protection of end user data and significant penalties (monetary and otherwise) for non-compliance. Any failure to comply with GDPR, or other regulatory standards, could subject us to legal and reputational risks. Misuse of or failure to secure personal information could also result in violation of data privacy laws and regulations, proceedings against the Company by governmental entities or others, damage to our reputation

8


and credibility, and as a result, our business, results of operations and financial condition could be adversely affected. We cannot be certain that existing laws or regulations, as currently interpreted or reinterpreted in the future, or future laws or regulations, will not have an adverse effect on our business, results of operations and financial condition.

Unanticipated changes to our income tax liabilities may adversely affect our business, results of operations and financial condition.
As a corporation operating in various international jurisdictions, our business is subject to a wide variety of laws, regulations and policies, including, but not limited to, those of the United States, Canada, the United Kingdom, Australia, Hong Kong, China and India. There can be no assurance that laws, regulations and policies will not be changed in ways that will impact our income tax provision or our income tax assets and liabilities. We are also subject to income tax audits in the United States and foreign jurisdictions in which we operate. The tax laws to which we are subject are inherently complex and ambiguous, and we must interpret the applicable laws and make subjective judgments about both the expected outcome upon challenge by the applicable taxing authorities and our global provision for income taxes and other tax liabilities. Although we believe that our tax estimates are reasonable, there is risk that the final determination of tax audits or tax disputes will be different from what is reflected in our historical income tax provisions and accruals. Tax authorities in the various jurisdictions in which we have a presence and conduct business may disagree with our tax positions and assess additional taxes.

Additionally, our effective tax rate in the future could be adversely affected by changes to our operating structure, changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, and the discovery of new information in the course of our tax return preparation process. The carrying value of deferred tax assets, which are predominantly in the United States, is dependent on our ability to generate future taxable income in the United States. Increases in our income tax liabilities or risks related to the realization of our deferred tax assets as a result of any of the foregoing could adversely affect our business, results of operations and financial condition.

Further, as a company based in the United States but doing business in international markets through subsidiaries, we are subject to intercompany pricing rules in the jurisdictions where we operate. Tax rates vary from country to country, and if regulators determine that our profits in one jurisdiction should be increased, we may not be able to fully offset the adjustment in the other jurisdictions, which would increase our effective tax rate. Additionally, the Organization for Economic Cooperation and Development (“OECD”) has adopted guidelines regarding base erosion and profit shifting. As a result of the adoption of these guidelines by the OECD, individual taxing jurisdictions have also adopted some form of these guidelines as well. As such, we may need to change our approach to intercompany transfer pricing in order to maintain compliance under the new rules. Our effective tax rate may increase or decrease depending on the current location of global operations at the time of the change. An increase in our effective tax rate may adversely affect our business, results of operations and financial condition.

Further, in December 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The Tax Act revises the U.S. corporate income tax by, among other things, lowering the corporate income tax rate from 35% to 21%, adopting a quasi-territorial income tax system and imposing a one-time transition tax on foreign unremitted earnings, and setting limitations on deductibility of certain costs (e.g., interest expense).

The lower U.S. corporate income tax rate became effective January 1, 2018; however, our U.S. deferred tax assets and liabilities were adjusted in the third quarter of fiscal 2018 when the new tax law was enacted. Additionally, as part of the transition to the new quasi-territorial tax system, the Tax Act imposes a one-time tax on deemed repatriation of foreign subsidiaries’ earnings, which the Company recorded in the third quarter of fiscal 2018.

Due to the complexities involved in the accounting for the Tax Act, on December 22, 2017, the Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) 118 was issued to provide guidance to companies that have not yet completed their accounting for the Tax Act in the period of enactment. SAB 118 requires us to include in our financial statements a reasonable estimate of the impact of the Tax Act on earnings to the extent such estimate has been determined. Accordingly, our U.S. provision for income tax for fiscal 2018 is based on the reasonable estimate guidance provided by SAB 118. We are continuing to assess the impact from the Tax Act and will record adjustments in fiscal 2019. The final impact on the Company from the Tax Act’s transition tax legislation may differ from the reasonable estimate due to the complexity of calculating and supporting with primary evidence such U.S. tax attributes as accumulated foreign earnings and profits, foreign tax paid, and other tax components involved in foreign tax credit calculations for prior years back to 1986. Such differences could be material, due to, among other things, changes in interpretations of the Tax Act, future legislative action to address questions that arise because of the Tax Act, changes in accounting standards for income taxes or related interpretations in

9


response to the Tax Act, or any updates or changes to estimates we have utilized to calculate the transition tax’s reasonable estimate. Such differences could have a material adverse effect upon our results of operations.

Our business, results of operations and financial condition may be adversely affected by national or global changes in economic or political conditions.
Our business, results of operations and financial condition may be adversely affected by national or global changes in economic or political conditions, including foreign currency fluctuations and fluctuations in inflation and interest rates, a national or international economic downturn, any future terrorist attacks, acts of war, threats of war, civil unrest, and the national and global military, diplomatic and financial exposure to such attacks or other threats.

We are subject to a number of restrictive covenants under our borrowing arrangement, including customary operating restrictions and customary financial covenants. Our business, results of operations and financial condition may be adversely affected if we are unable to maintain compliance with such covenants.
Our borrowing arrangement contains a number of restrictive covenants, including customary operating restrictions that limit our ability to engage in activities such as incurring additional debt, making investments, granting liens on our assets, making capital expenditures, paying dividends and making other distributions on our capital stock, and engaging in mergers, acquisitions, asset sales and repurchases of our capital stock. Under such arrangements, we are also subject to customary financial covenants, including covenants requiring us to maintain our capital expenditures below a maximum permitted amount each year and to keep our tangible net worth and our interest coverage ratio at or above certain minimum levels. Compliance with the financial covenants contained in our borrowing arrangements is based on financial measures derived from our operating results.
If our business, results of operations or financial condition is adversely affected by one or more of the risk factors described above, or other factors described in this annual report on Form 10-K or elsewhere in our filings with the SEC, we may be unable to maintain compliance with these covenants. If we fail to comply with such covenants, our lenders under our borrowing arrangements could stop advancing funds to us under these arrangements and/or demand immediate payment of amounts outstanding under such arrangements. Under such circumstances, we may need to seek alternate financing sources to fund our ongoing operations and to repay amounts outstanding and satisfy our other obligations under our existing borrowing arrangements. Such financing may not be available on favorable terms, if at all. Consequently, we may be restricted in how we fund ongoing operations and strategic initiatives and deploy capital, and in our ability to make acquisitions and to pay dividends. As a result, our business, results of operations and financial condition may be further adversely affected if we are unable to maintain compliance with the covenants under our borrowing arrangements.

If our business, results of operations or financial condition is adversely affected as a result of any of the risk factors described above or elsewhere in this annual report on Form 10-K or our other SEC filings, we may be required to incur financial statement charges, such as asset or goodwill impairment charges, which may, in turn, have a further adverse effect on our results of operations and financial condition.
In the fourth quarter of fiscal 2018, we recorded a non-cash pre-tax impairment charge of $33,358,000 due to a full impairment of goodwill and partial impairment of a tradename. If our business, results of operations or financial condition are adversely affected by one or more circumstances, such as any one or more of the risk factors above or other factors described in this annual report on Form 10-K and elsewhere in our SEC filings, we then may be required under applicable accounting rules to incur additional charges associated with reducing the carrying value on our financial statements of certain assets, such as goodwill, intangible assets or tangible assets.
Goodwill is subject to an assessment for impairment which must be performed at least annually, or more frequently if events or circumstances indicate that goodwill might be impaired. We perform our required annual assessment as of our fiscal year end. Effective April 1, 2017, the Company early adopted Accounting Standards Update 2017-04, "Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"), which replaced the two-step impairment test for goodwill with a one-step test that both identifies and measures goodwill impairment. Under ASU 2017-04, entities still have the option to assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the quantitative goodwill impairment test is not necessary. However, if an entity concludes otherwise, then it is required to perform the quantitative goodwill impairment test, which identifies both the existence of impairment and the amount of impairment loss by comparing the fair value of the reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds the fair value, an impairment loss shall be recognized in an amount equal to that excess. Additionally, an entity shall consider the income tax effect from any tax deductible goodwill on the carrying value of the reporting unit when measuring the

10


impairment loss. Additionally, the Company uses quoted market prices in active markets as the basis for measurement of fair value with consideration given to a control premium. We believe the use of multiple valuation techniques results in a more accurate indicator of the fair value of the reporting unit. If the fair value of the goodwill is less than the carrying amount of the goodwill, an impairment loss will be reported.

Other indefinite lived intangible assets, such as our tradenames, also are required to be tested annually for impairment. Authoritative guidance gives an entity the option to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. To perform a qualitative assessment, an entity must identify and evaluate changes in economic, industry and entity-specific events and circumstances that could affect the significant inputs used to determine the fair value of an indefinite-lived intangible asset. If the result of the qualitative analysis indicates it is more likely than not that an indefinite-lived intangible asset is impaired, a more detailed fair value calculation will need to be performed which is used to identify potential impairments and to measure the amount of impairment losses to be recognized, if any. We calculate the fair value of our tradenames using a “relief from royalty payments” methodology. We also review long-lived assets, except for goodwill and indefinite lived intangible assets, for impairment when circumstances indicate the carrying value of an asset may not be recoverable. If such assets are considered to be impaired, we will recognize, for impairment purposes, an amount by which the carrying amount of the assets exceeds the fair value of the assets.
If we are required to incur any of the foregoing financial charges, our results of operations and financial condition may be further adversely affected.
Item 1B. Unresolved Staff Comments.
None.

11


Item 2. Properties.
The following table sets forth the location and approximate square footage of the Company’s manufacturing and distribution facilities:
 
 
Use

Approximate Square Feet
 
 
Owned

Leased
U.S. Properties:
 
 
 
 
 
 
Florence, Alabama
 
Distribution



100,000

Florence, Alabama
 
Distribution



180,000

Shorewood, Illinois
 
Distribution
 

 
493,000

Manhattan, Kansas
 
Manufacturing and distribution
 
282,000

 

Hagerstown, Maryland
 
Manufacturing and distribution

284,000



Milford, New Hampshire
 
Manufacturing



58,000

Danville, Pennsylvania
 
Distribution

133,000



Berwick, Pennsylvania
 
Manufacturing and distribution

213,000



Berwick, Pennsylvania
 
Manufacturing and distribution

220,000



Berwick, Pennsylvania
 
Distribution

226,000



Berwick, Pennsylvania
 
Distribution



431,000

Newville, Pennsylvania
 
Distribution
 

 
137,000

Batesburg, South Carolina
 
Manufacturing

229,000



Total U.S. Properties
 


1,587,000


1,399,000

 
 
 
 
 
 
 
International Properties:
 
 
 
 
 
 
Bankstown, Australia
 
Distribution
 

 
17,000

Revesby, Australia
 
Distribution
 

 
22,000

Coimbatore, India
 
Manufacturing and distribution
 
100,000

 

Coimbatore, India
 
Manufacturing
 

 
31,000

Hampshire, United Kingdom
 
Distribution
 
58,000

 

Stockport, United Kingdom
 
Distribution
 

 
20,000

Total International Properties
 
 
 
158,000

 
90,000

Total Properties
 
 
 
1,745,000

 
1,489,000

In addition to the above facilities, the Company also utilizes owned and leased space aggregating approximately 255,000 square feet for various marketing and administrative purposes in the United States. Additionally, the Company utilizes approximately 9,000 square feet as an office and showroom in Hong Kong and approximately 5,000 square feet as an office in China. The headquarters and principal executive office of the Company are located in Plymouth Meeting, Pennsylvania.
Item 3. Legal Proceedings.
CSS and its subsidiaries are 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 legal proceedings will not materially affect the consolidated financial position of the Company or its results of operations or cash flows.
Item 4. Mine Safety Disclosures.
Not applicable.


12


PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The common stock of the Company is listed for trading on the New York Stock Exchange. The following table sets forth the high and low sales prices per share of that stock, and the dividends declared per share, for each of the quarters during fiscal 2018 and fiscal 2017.
 
Fiscal 2018
 

 

Dividends
Declared
 
High

Low

First Quarter
$
27.77


$
24.60


$
0.20

Second Quarter
28.97


26.02


0.20

Third Quarter
30.13


26.54


0.20

Fourth Quarter
28.20


17.50


0.20

 
 
 
 
 
 
Fiscal 2017
 

 

Dividends
Declared
 
High

Low

First Quarter
$
28.45


$
26.06


$
0.20

Second Quarter
28.49


24.85


0.20

Third Quarter
28.97


24.35


0.20

Fourth Quarter
28.71


23.48


0.20

At June 1, 2018, there were approximately 3,950 holders of the Company’s common stock and there were no shares of preferred stock outstanding.
The ability of the Company to pay any cash dividends on its common stock is dependent on the Company’s earnings and cash requirements and is further limited by maintaining compliance with financial covenants contained in the Company’s credit facilities. The Company anticipates that quarterly cash dividends will continue to be paid in the future.

13


Performance Graph
The graph below compares the cumulative total stockholders’ return on the Company’s common stock for the period from April 1, 2013 through March 31, 2018, with (i) the cumulative total return on the Standard and Poors 500 (“S&P 500”) Index and (ii) two peer groups, as described below (assuming the investment of $100 in our common stock, the S&P 500 Index, and the peer group on April 1, 2013 and reinvestment of all dividends).
chart-47909cfe0661518ebc9.jpg
The peer group utilized consists of Bassett Furniture Industries, Incorporated, Flexsteel Industries, Inc., Hamilton Beach Brands Holding Company, JAKKS Pacific, Inc., Libbey Inc., Lifetime Brands, Inc., Nautilus, Inc., Perry Ellis International, Inc., Unifi, Inc., Vera Bradley, Inc. and ZAGG Inc (the "Peer Group"). The Peer Group selected by the Company was revised this year to include companies in the peer group that we use for executive compensation purposes. It includes consumer durables companies headquartered in North America with similar revenues and business operations. The Peer Group previously used by the Company, which consisted of Ennis, Inc., JAKKS Pacific, Inc. and Lifetime Brands, Inc. (the "Old Peer Group"), is shown in the chart above for comparative purposes.

14


Item 6. Selected Financial Data.
 
 
Years Ended March 31,
 
2018 (a)

2017 (b)

2016

2015

2014
 
(in thousands, except per share amounts)
Statement of Operations Data:









Net sales
$
361,896


$
322,431


$
317,017


$
313,044


$
320,459

Income (loss) from continuing operations before income taxes
(46,059
)

29,687


26,641


26,641


27,700

Income (loss) from continuing operations
(36,520
)

28,504


17,236


16,954


18,564

Income from discontinued operations, net of tax








205

Net income (loss)
(36,520
)

28,504


17,236


16,954


18,769

 
 
 
 
 
 
 
 
 
 
Net income (loss) per common share:
 








Basic:
 








Continuing operations
$
(4.01
)

$
3.14


$
1.88


$
1.82


$
1.98

Discontinued operations
$


$


$


$


$
0.02

Total
$
(4.01
)

$
3.14


$
1.88


$
1.82


$
2.00

Diluted:
 

 

 

 

 
Continuing operations
$
(4.01
)

$
3.13


$
1.87


$
1.80


$
1.97

Discontinued operations
$


$


$


$


$
0.02

Total
$
(4.01
)

$
3.13


$
1.87


$
1.80


$
1.99

 
 
 
 
 
 
 
 
 
 
Balance Sheet Data:









Working capital
$
176,701


$
196,106


$
176,886


$
190,047


$
183,395

Total assets
365,188


339,194


309,926


309,473


293,535

Current portion of long-term debt
228

 
220

 

 

 

Long-term debt, net of current portion
40,228

 
456

 

 

 

Stockholders’ equity
253,695

 
294,154


271,490


270,255


257,216

 
 
 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.80


$
0.80


$
0.74


$
0.63


$
0.60

 
(a)
In the fourth quarter of fiscal 2018, the Company recorded a non-cash pre-tax impairment charge of $33,358,000 due to a full impairment of goodwill and partial impairment of a tradename. The foregoing impairment charge was partially offset by a $6,233,000 tax benefit.
(b)
In fiscal 2017, the Company recorded a non-taxable bargain purchase gain of $19,990,000 related to the acquisition of substantially all of the net assets and business of McCall on December 13, 2016 and the acquisition of all of the assets of Schiff on July 8, 2016. These acquisitions were accounted for using the acquisition method and resulted in a bargain purchase due to the fair value of the net assets acquired of approximately $35,029,000 exceeding the amount paid of $15,039,000. See Note 2 to the consolidated financial statements for additional information.

15


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
The overall objective of the Company is to grow profitable sales and improve return on invested capital ("ROIC") through five strategic pillars. These strategic pillars include:
*Defend the base business - Design, product innovation, category leadership
*
Identify adjacent product categories with a focus on brands - Focus on fragmented markets, brands, omni-channel
*Build an omni-channel business model - Dedicated resources, leverage technology
*
Improve ROIC by maximizing margins while minimizing capital investment - Fix underperforming product lines, focus on working capital
*Build a collaborative, dynamic One CSS culture - Communication, accountability, talent infusion
Approximately 66% of the Company’s sales are attributable to products within both our gift category (previously described by the Company as its celebrations category) and craft category, with the remainder attributable to products in the seasonal category. The seasonal product category is defined as products designed, produced and sold to mass market retailers for holidays and seasonal events, including Christmas, Valentine’s Day, Easter and back-to-school. Production forecasts for these products are known well in advance of shipment. The gift product category is defined as products primarily designed to celebrate certain life events or special occasions such as weddings, birthdays, anniversaries, graduations, or the birth of a child. Gift products are primarily sold into mass and specialty retailers, floral and packaging wholesalers and distributors, and are generally ordered on a replenishment basis throughout the year. The craft product category reflects products used for craft activities and includes ribbons, trims, buttons, sewing patterns, knitting needles, needle arts and kids crafts. Craft products are sold to mass market and specialty retailers and are generally ordered on a replenishment basis throughout the year.
The Company has relatively high market share in many products across its categories. Most of these markets have shown little growth and in some cases have declined in recent years. The Company continues to confront significant price pressure as its competitors source certain products from overseas and its customers increase direct sourcing from overseas factories. Increasing customer concentration has augmented customers' bargaining power, which has also contributed to price pressure. In recent fiscal years, the Company has experienced lower sales in certain Christmas product lines, craft ribbon product lines and in our non-retail packaging and floral product lines due to factors such as continued price pressure, inventory destocking, as well as a decline in retail traffic.
The Company has taken several measures to respond to sales volume, cost and price pressures. The Company believes it continues to have strong core product offerings which have allowed it to compete effectively in this competitive market. In addition, the Company is pursuing new product initiatives related to seasonal, gift and craft products, including new licensed and non-licensed product offerings. CSS continually invests in product and packaging design and product knowledge to assure that it can continue to provide unique added value to its customers. In addition, CSS maintains purchasing offices in Hong Kong and China to be able to provide foreign-sourced products at competitive prices. CSS continually evaluates the efficiency and productivity of its production and distribution facilities and of its back office operations to maintain its competitiveness.
Our domestically-manufactured decorative plastic ribbon product lines have experienced price pressure and reduced sales volume due to competition from low-priced imports from China.  In December 2017, our Berwick Offray company filed trade remedy petitions with the U.S. International Trade Commission (“ITC”) and the U.S. Department of Commerce (“Commerce Department”) asserting that the competing Chinese products are being imported at less-than-fair-value and that they benefit from unfair governmental subsidies.  In the petitions, Berwick Offray requested the imposition of trade remedies in the form of antidumping and countervailing duties on decorative plastic ribbon from China.  We expect that the proceedings before the ITC and Commerce Department will conclude by not later than January 2019.  If the petition is successful, duties potentially may be imposed on import shipments arriving in the U.S. beginning anywhere from June 2018 to July 2018.  The potential impact of these proceedings is not determinable at this time.
The seasonal nature of CSS’ business has historically resulted in lower sales levels and operating losses in the first and fourth quarters and comparatively higher sales 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.

16


The Company will continue to build on existing relationships with seasonal, gift and craft customers by expanding and diversifying its product lines and thereby growing its presence in the largest retailers in North America. This includes both capitalizing on opportunities for organic growth in existing businesses as well as acquiring companies which fit into appropriate acquisition parameters. We actively meet with seasonal, gift and craft companies to review and assess potential acquisition targets. Historically, significant revenue growth at CSS has come through acquisitions. Management anticipates that it will continue to consider acquisitions as a strategy to stimulate growth.
On November 3, 2017, the Company completed the acquisition of substantially all of the net assets and business of Simplicity Creative Group from Wilton for a total consideration of $69,617,000 and transaction costs of approximately $3,411,000. Simplicity is a leading provider of home sewing patterns, decorative trims, knitting and crocheting tools, needle arts and kids' crafts products under the Simplicity®, Wrights®, Boye®, Dimensions®, and Perler® brand names. Simplicity's products are sold to mass-market retailers, specialty fabric and craft chains, wholesale distributors and online customers. The Company primarily financed the acquisition with borrowings of $60,000,000 under its revolving credit facility and has recorded a working capital adjustment due to Wilton of $2,500,000, which is recorded in other current liabilities in the accompanying consolidated balance sheet and was paid on April 4, 2018. A portion of the purchase price is being held in escrow for certain post closing adjustments and indemnification obligations. The acquisition was accounted for using the acquisition method and the excess of cost over the fair market value of the net tangible and identifiable intangible assets acquired of $9,642,000 was recorded as goodwill. This goodwill was subsequently written off as a result of the Company’s annual impairment testing performed in the fourth quarter of fiscal 2018 as further described in Note 3 to the consolidated financial statements.
On December 13, 2016, the Company completed the acquisition of substantially all of the net assets and business of The McCall Pattern Company and certain subsidiaries for approximately $13,914,000 in cash plus transaction costs of approximately $1,484,000. McCall designs, manufactures, and sells home sewing patterns under the McCall’s®, Butterick®, Kwik Sew® and Vogue Patterns® brand names. McCall is a leading provider of home sewing patterns, selling to mass market retailers, specialty fabric and craft chains, and wholesale distributors. A portion of the purchase price is being held in escrow for certain post closing adjustments and indemnification obligations. The acquisition was accounted for using the acquisition method and resulted in a bargain purchase due to the fair value of the net assets acquired of approximately $33,528,000 exceeding the amount paid. In connection with this bargain purchase, the Company recorded a gain of approximately $19,614,000 in the consolidated statements of operations in the fiscal year ended March 31, 2017.
On July 8, 2016, a subsidiary of the Company completed the acquisition of substantially all of the assets of Schiff for $1,125,000 in cash. Schiff was a leading U.S. manufacturer and distributor of narrow woven ribbon prior to its April 2016 Chapter 11 bankruptcy filing. The acquisition was accounted for using the acquisition method and resulted in a bargain purchase due to the fair value of the net assets acquired of approximately $1,501,000 exceeding the amount paid. In connection with this bargain purchase, the Company recorded a gain of approximately $376,000 in the consolidated statements of operations in the fiscal year ended March 31, 2017.
On February 2, 2016, a subsidiary of the Company completed the acquisition of substantially all of the net assets and business of Blumenthal for approximately $19,626,000 in cash, including transaction costs of approximately $81,000. The Company also incurred costs of approximately $1,028,000 in fiscal 2016, primarily related to severance. Blumenthal was a leading provider of buttons to the sewing and craft markets in the United States, selling to mass market retailers and wholesale distributors that service independent retail stores. The acquisition was accounted for using the acquisition method, and $4,017,000, which is the excess of cost over fair value of the net tangible and identifiable intangible assets acquired, was recorded as goodwill. This goodwill was subsequently written off as a result of the Company’s annual impairment testing performed in fiscal 2018 as further described in Note 3 to the consolidated financial statements.
Litigation
CSS and its subsidiaries are 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 legal proceedings will not materially affect the consolidated financial position of the Company or its results of operations or cash flows.
Results of Operations
Fiscal 2018 Compared to Fiscal 2017
Consolidated net sales for fiscal 2018 increased to $361,896,000 from $322,431,000 in fiscal 2017. The increase in net sales was due to incremental sales of $35,581,000 related to the acquisition of Simplicity on November 3, 2017 and incremental sales of $20,174,000 related to the acquisition of McCall on December 13, 2016. There was a decline in seasonal sales of $11,558,000, consisting primarily of Christmas gift tags of $5,422,000, ribbons and bows of $2,186,000, school

17


products of $1,458,000, seasonal gift card holders of $1,052,000 and Valentines of $915,000. In our gift category, we had a sales decline of $2,969,000 in packaging and wholesale products, $2,810,000 in infant products and $1,342,000 in journals, which was partially offset by higher sales of gift card holders of $1,714,000, everyday ribbons, bags and bows of $1,335,000, and all occasion cards of $1,256,000. The remaining sales decline was primarily associated with lower craft sales of $1,925,000.
Cost of sales, as a percentage of net sales, increased to 74% in fiscal 2018 compared to 71% in fiscal 2017 due to the recognition of the incremental McCall and Simplicity inventory step-up through cost of sales of $13,337,000 and $4,544,000, respectively, in fiscal 2018 and $3,577,000 of incremental McCall inventory step-up through cost of sales in fiscal 2017, which relates to the portion of acquired inventory that was sold during the period. In connection with the acquisitions of McCall and Simplicity, the inventory acquired was marked up to estimated fair value and is being recognized through cost of sales as the inventory turns. Excluding the recognition of the McCall and Simplicity inventory step-up, cost of sales, as a percentage of net sales, was 69% in fiscal 2018 and 70% in fiscal 2017. The decrease in fiscal 2018 is attributable to higher margin mix of Simplicity and McCall products sold compared to the prior fiscal year.
Selling, general and administrative (“SG&A”) expenses, as a percentage of net sales, increased to 29% in fiscal 2018 compared to 26% in fiscal 2017 primarily due to incremental costs related to the acquired Simplicity business of $13,409,000 (which includes transaction costs of $3,411,000), incremental costs related to the acquired McCall business of $6,735,000 and higher payroll and employee expenses of $4,115,000, partially offset by lower commissions of $819,000, selling and marketing expenses of $773,000, professional fees of $718,000, and travel expenses of $305,000.
An impairment of goodwill and intangible assets of $33,358,000 was recorded in fiscal 2018 as a result of the full impairment of goodwill and partial impairment of a tradename. The impairment of goodwill was due to the decline in the Company's trading price of its common stock during the fourth quarter of fiscal 2018 and related decrease in the Company's market capitalization. See further discussion in Note 3 to the consolidated financial statements. There was no such impairment recorded in fiscal 2017.
Gain on bargain purchases of $19,990,000 in fiscal 2017 related to the acquisitions of McCall on December 13, 2016 and Schiff on July 8, 2016. These acquisitions were accounted for using the acquisition method and resulted in a bargain purchase due to the fair value of the net assets acquired of approximately $35,029,000 exceeding the amount paid of $15,039,000. There was no such gain recorded in fiscal 2018.
Interest expense, net for fiscal 2018 increased to $681,000 from $29,000 in fiscal 2017. The increase in interest expense was primarily due to the Company's borrowings under its revolving credit facility due to its acquisition of Simplicity on November 3, 2017, as well as lower average balances of funds invested in short-term investments compared to the prior year. The Company had no borrowings outstanding under its revolving credit facility during fiscal 2017.
Other income, net for fiscal 2018 increased to $352,000 from $12,000 in fiscal 2017 primarily due to incremental rental income associated with McCall properties acquired on December 13, 2016.
Income taxes, as a percentage of income (loss) before income taxes, were 21% in fiscal 2018 and 4% in 2017. The increase in income taxes, as a percentage of income (loss) before taxes, was primarily attributable to the non-taxable bargain purchase gain related to the McCall and Schiff acquisitions in the prior fiscal year, partially offset by the impact of the new U.S. tax legislation enacted on December 22, 2017, commonly referred to as the Tax Cuts and Jobs Act ("Tax Act").
The net loss for the fiscal year ended March 31, 2018 was $36,520,000, or $4.01 per diluted share compared to net income of $28,504,000, or $3.13 per diluted share in fiscal 2017.
Fiscal 2017 Compared to Fiscal 2016
Consolidated net sales for fiscal 2017 increased to $322,431,000 from $317,017,000 in fiscal 2016. The increase in net sales was substantially due to incremental sales of buttons of $11,609,000 related to the Blumenthal acquisition on February 2, 2016. Also contributing to the sales increase were sales of sewing patterns of $8,133,000 related to the McCall acquisition on December 13, 2016. There was a decline in sales of Christmas products, primarily cards of $5,895,000 and ribbons and bows of $2,173,000, which was offset by higher sales of $3,310,000 in Christmas gift wrap and gift bags. In our gift category, we had a decline of $3,643,000 in sales of packaging and floral supplies which was partially offset by higher sales of journals and stationery products of $1,497,000. The remaining sales decline was primarily associated with lower craft sales of $9,341,000, particularly craft ribbons and bows, which was partially attributable to shipping issues encountered in our warehouse consolidation project discussed further below.
Cost of sales, as a percentage of net sales, increased to 71% in fiscal 2017 compared to 68% in fiscal 2016 partially due to the recognition of the McCall inventory step-up through cost of sales in the amount of $3,577,000, which relates to the

18


portion of acquired inventory that was sold during the period. In connection with the acquisition of McCall, the inventory acquired was marked up to estimated fair value, which will be recognized through cost of sales as the inventory turns. Also contributing to the increase were higher distribution and freight costs of $3,015,000 related to costs and inefficiencies of two warehouse consolidation projects. The warehouse consolidation projects involved the closing of a distribution facility in El Paso, Texas in the fourth quarter of fiscal 2016 and the closing of a manufacturing and distribution facility in Lansing, Iowa, which was acquired as part of the Blumenthal acquisition, in the second quarter of fiscal 2017. The Company consolidated the distribution operations of the two closed facilities into the Company's existing distribution facilities in Florence, Alabama.
SG&A expenses, as a percentage of net sales, increased to 26% in fiscal 2017 compared to 24% in fiscal 2016 primarily due to incremental costs related to the McCall and Blumenthal acquisitions of $7,184,000 (of which $2,473,000 represents transaction and transition costs) and $1,225,000, respectively; higher recruiting and relocation costs of $517,000; higher legal fees of $506,000, partially relating to the Company's participation in "sunset" review proceedings conducted by the Commerce Department and the ITC in connection with the fifth anniversary of the initiation of trade remedies on certain imported narrow woven ribbon products, which proceedings concluded in the Company's favor in August 2016; higher professional fees of $384,000 primarily related to tax consulting services; and higher product development costs of $270,000. Partially offsetting these increases were lower payroll related expenses of $3,002,000.
Gain on bargain purchases of $19,990,000 in fiscal 2017 related to the acquisitions of McCall on December 13, 2016 and Schiff on July 8, 2016. These acquisitions were accounted for using the acquisition method and resulted in a bargain purchase due to the fair value of the net assets acquired of approximately $35,029,000 exceeding the amount paid of $15,039,000. There was no such gain recorded in fiscal 2016.

Interest expense, net was $29,000 in fiscal 2017 compared to interest income, net $112,000 in fiscal 2016. The change was primarily due to lower average balances of funds invested in short-term investments compared to the prior year.
Income taxes, as a percentage of income (loss) before income taxes, were 4% in fiscal 2017 and 35% in 2016. The decrease in income taxes, as a percentage of income (loss) before taxes, was primarily attributable to the non-taxable bargain purchase gain related to the McCall and Schiff acquisitions in the current fiscal year, representing an approximately 21% decrease in tax rate compared to the prior year. There was also a decrease of approximately 8% related to the permanent reinvestment of current year foreign earnings that will not be taxed in the United States.
Net income for the fiscal year ended March 31, 2017 was $28,504,000, or $3.13 per diluted share compared to $17,236,000, or $1.87 per diluted share in fiscal 2016.
Liquidity and Capital Resources
At March 31, 2018 and 2017, the Company had working capital of $176,701,000 and $196,106,000, respectively, and stockholders’ equity of $253,695,000 and $294,154,000, respectively. Operating activities provided net cash of $31,368,000 in fiscal 2018 compared to $14,871,000 in fiscal 2017 and $15,123,000 in fiscal 2016. Net cash provided by operating activities in fiscal 2018 reflects our working capital requirements which resulted in an increase in accounts receivable of $6,409,000, a decrease in inventory of $16,082,000 and an increase in accrued expenses and long-term obligations of $5,164,000. Included in the fiscal 2018 net loss were non-cash charges for impairment of $33,358,000 related to goodwill and an intangible asset, amortization of inventory step-up of $17,881,000, depreciation and amortization of $10,487,000, deferred tax benefit of $14,125,000, provision for accounts receivable allowances of $4,035,000 and share-based compensation of $1,938,000. Net cash provided by operating activities in fiscal 2017 reflects our working capital requirements which resulted in an increase in accounts receivable of $6,095,000, an increase in inventory of $3,607,000, a decrease in prepaid expenses and other assets of $2,506,000, a decrease in accounts payable of $1,153,000 and a decrease in accrued expenses and long-term obligations of $2,473,000. Included in fiscal 2017 net income was a non-cash gain on bargain purchases of $19,990,000 related to the acquisitions of McCall and Schiff on December 13, 2016 and July 8, 2016, respectively, and non-cash charges for depreciation and amortization of $8,477,000, provision for accounts receivable allowances of $5,188,000, amortization of inventory step-up of $3,577,000, share-based compensation of $1,653,000 and a deferred tax benefit of $1,608,000. Net cash provided by operating activities in fiscal 2016 reflects our working capital requirements which resulted in an increase in accounts receivable of $4,268,000, an increase in inventory of $4,674,000, an increase in other assets of $4,627,000 and a decrease in accrued expenses and long-term obligations of $3,176,000. Included in fiscal 2016 net income were non-cash charges for depreciation and amortization of $8,308,000, provision for accounts receivable allowances of $2,712,000, a deferred tax provision of $1,868,000 and share-based compensation of $1,654,000.
Net cash used for our investing activities was $53,233,000 in fiscal 2018, consisting primarily of the purchase of businesses of $65,228,000, capital expenditures of $7,291,000 and the purchase of a company-owned life insurance policy of $750,000, partially offset by maturities of investment securities of $20,000,000. Net cash provided by our investing activities was $20,287,000 in fiscal 2017, consisting primarily of maturities of investment securities of $60,000,000, partially offset by

19


the purchase of held-to-maturity investment securities of $19,928,000, purchase of businesses of $15,039,000 and capital expenditures of $4,957,000. In fiscal 2016, our investing activities consisted primarily of the purchase of held-to-maturity investment securities of $84,632,000, purchase of businesses of $19,545,000 and capital expenditures of $6,411,000, partially offset by maturities of investment securities of $95,000,000 and proceeds from sale of assets of $1,530,000.
Net cash provided by our financing activities was $32,688,000 in fiscal 2018, consisting primarily of net borrowings under our revolving credit facility of $40,000,000, partially offset by payments of cash dividends of $7,293,000. Net cash used for financing activities in in fiscal 2017 consisted primarily of payments of cash dividends of $7,273,000. In fiscal 2016, our financing activities consisted primarily of purchases of treasury stock of $11,274,000 and payments of cash dividends of $6,764,000.
On March 4, 2016, the Company agreed to purchase, under its stock repurchase program, 45,000 shares of its common stock from a charitable foundation of which the Company's former Chairman of the Board, who retired as a director and officer of the Company on July 28, 2015, is a founder, director and officer. The purchase price was lower than the closing market price on the preceding trading day. The transaction was approved by the Company's Board of Directors on March 4, 2016 and completed on March 8, 2016. The total amount of this transaction was $1,274,000.
Under a stock repurchase program authorized by the Company’s Board of Directors, the Company repurchased 397,789 shares (inclusive of the 45,000 shares described above) of the Company’s common stock for $11,274,000 (inclusive of the $1,274,000 described above) in fiscal 2016. There were no repurchases of the Company's common stock by the Company during fiscal 2018 and 2017. As of March 31, 2018, the Company had 303,166 shares remaining available for repurchase under the Board’s authorization.
The Company relies primarily on cash on hand, cash generated from its operations and, if needed, seasonal borrowings under its revolving credit facility to meet its liquidity requirements throughout the year. Historically, a significant portion of the Company’s revenues have been seasonal, primarily Christmas related, with approximately 64% of sales recognized in the second and third quarters. As payment for sales of Christmas related products is usually not received until just before or just after the holiday selling season in accordance with general industry practice, working capital has historically increased in the second and third quarters, peaking prior to Christmas and dropping thereafter. Seasonal financing requirements are available under a revolving credit facility with two banks. Reflecting the seasonality of the Company’s business, the maximum credit available at any one time under the credit facility (“Commitment Level”) adjusts to $50,000,000 from February to June (“Low Commitment Period”), $100,000,000 from July to October (“Medium Commitment Period”) and $150,000,000 from November to January (“High Commitment Period”) in each respective year over the term of the facility. The Company has the option to increase the Commitment Level during part of any Low Commitment Period from $50,000,000 to an amount not less than $62,500,000 and not in excess of $125,000,000; provided, however, that the Commitment Level must remain at $50,000,000 for at least three consecutive months during each Low Commitment Period. The Company has the option to increase the Commitment Level during all or part of any Medium Commitment Period from $100,000,000 to an amount not in excess $125,000,000. Fifteen days prior written notice is required for the Company to exercise an option to increase the Commitment Level with respect to a particular Low Commitment Period or Medium Commitment Period. The Company may exercise an option to increase the Commitment Level no more than three times each calendar year. This financing facility is 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. This facility is due to expire on March 16, 2020. For information concerning this credit facility, see Note 8 to the consolidated financial statements. At March 31, 2018, there was $40,000,000 outstanding under the Company’s revolving credit facility. The Company had approximately $262,000 of other debt outstanding and approximately $194,000 of capital leases outstanding at March 31, 2018.
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.

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As of March 31, 2018, the Company’s contractual obligations and commitments are as follows (in thousands):
 
Contractual Obligations
Less than 1 Year
 
1-3 Years
 
4-5 Years
 
After 5 Years
 
Total
Note payable to seller
$
2,500

 
$

 
$

 
$

 
$
2,500

Long-term debt (1)
1,195

 
42,170

 
1,888

 

 
45,253

Capital lease obligations
82

 
124

 
1

 

 
207

Operating leases
8,975

 
12,711

 
8,301

 
14,105

 
44,092

Other long-term obligations (2)
251

 
1,222

 
470

 
3,543

 
5,486

Royalty obligations (3) 
1,561

 
1,925

 

 

 
3,486

 
$
14,564

 
$
58,152

 
$
10,660

 
$
17,648

 
$
101,024

 
(1) 
Long-term debt includes interest payments on outstanding borrowings of $40,000,000 which the Company intends to maintain outstanding through the term of an interest rate swap agreement which expires February 1, 2023. Such interest is calculated at the swap interest rate of 2.575% through February 1, 2023. Also includes interest related to an equipment financing agreement at a rate of 5.72%.
(2) 
Other long-term obligations consist primarily of postretirement medical liabilities, deferred compensation arrangements and pension obligations. Future timing of payments for other long-term obligations is estimated by management.
(3) 
The Company is committed to pay guaranteed minimum royalties attributable to sales of certain intellectual property licensed products.

The above table excludes any potential uncertain income tax liabilities that may become payable upon examination of the Company’s income tax returns by taxing authorities. Such amounts and periods of payment cannot be reliably estimated. See Note 7 to the consolidated financial statements for further explanation of the Company’s uncertain tax positions.
As of March 31, 2018, the Company’s other commitments are as follows (in thousands):
 
 
Less than 1 Year
 
1-3 Years
 
4-5 Years
 
After 5 Years
 
Total
Letters of credit
$
1,853

 
$

 
$

 
$

 
$
1,853

The Company has a reimbursement obligation with respect to stand-by letters of credit that guarantee the funding of workers’ compensation claims and a lease security deposit. The Company has no financial guarantees or other similar arrangements with any third parties or related parties other than its subsidiaries.
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 canceled.
Critical Accounting Policies
In preparing our consolidated financial statements, management is required to make estimates and assumptions that, among other things, affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are most significant where they involve levels of subjectivity and judgment necessary to account for highly uncertain matters or matters susceptible to change, and where they can have a material impact on our financial condition and operating performance. Below are the most significant estimates and related assumptions used in the preparation of our consolidated financial statements. If actual results were to differ materially from the estimates made, the reported results could be materially affected.
Revenue
Revenue is recognized from most product sales when goods are shipped, title and risk of loss have been transferred to the customer and collection is reasonably assured. The Company has certain limited products, primarily sewing patterns, that are on consignment at mass market retailers and the Company recognizes the sale as products are sold to end consumers at point-of-sale terminals. The Company records estimated reductions to revenue for customer programs, which may include special pricing agreements for specific customers, volume incentives and other promotions. In limited cases, the Company may provide the right to return product as part of its customer programs with certain customers. The Company also records

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estimated reductions to revenue, based primarily on historical experience, for customer returns and chargebacks that may arise as a result of shipping errors, product damaged in transit or for other reasons that become known subsequent to recognizing the revenue. These provisions are recorded in the period that the related sale is recognized and are reflected as a reduction from gross sales. The related reserves are shown as a reduction of accounts receivable, except for reserves for customer programs which are shown as a current or long term liability. If the amount of actual customer returns and chargebacks were to increase or decrease significantly from the estimated amount, revisions to the estimated allowance would be required.

Accounts Receivable
The Company offers seasonal dating programs related to certain seasonal product offerings pursuant to which customers that qualify for such programs are offered extended payment terms. While some customers are granted return rights as part of their sales program, customers generally do not have the right to return product except for reasons the Company believes are typical of our industry, including damaged goods, shipping errors or similar occurrences. The Company is generally not required to repurchase products from its customers, nor does the Company have any regular practice of doing so. In addition, the Company endeavors to mitigate its exposure to bad debts by evaluating the creditworthiness of its major customers utilizing established credit limits and purchasing credit insurance when warranted in management’s judgment and available on terms that management deems satisfactory. Bad debt and returns and allowances reserves are recorded as an offset to accounts receivable while reserves for customer programs are recorded as accrued liabilities. The Company evaluates accounts receivable related reserves and accruals monthly by specifically reviewing customers’ creditworthiness, historical recovery percentages and outstanding customer deductions and program arrangements. Customer account balances are charged off against the allowance reserve after reasonable means of collection have been exhausted and the potential for recovery is considered unlikely.

Inventory Valuation
Inventories are valued at the lower of cost or net realizable value. Cost is primarily determined by the first-in, first-out method although certain inventories are valued based on the last-in, first-out method. The Company writes down its inventory for estimated obsolescence in an amount equal to the difference between the cost of the inventory and the estimated net realizable value based upon assumptions about future demand, market conditions, customer planograms and sales forecasts. Additional inventory write downs could result from unanticipated additional carryover of finished goods and raw materials, or from lower proceeds offered by parties in our traditional closeout channels. In connection with the acquisition of McCall on December 13, 2016 and the acquisition of Simplicity on November 3, 2017, there was a step-up to fair value of the inventory acquired of $21,773,000 and $10,214,000, respectively, recorded at the applicable dates of acquisition. This was a result of the inventory acquired being marked up to estimated net selling price in purchase accounting, and is recognized through cost of sales as the inventory turns. The amount of step-up to fair value of the acquired inventory remaining as of March 31, 2018 and 2017 was $10,683,000 and $18,187,000. The Company expects the acquired McCall inventory to be sold through the second quarter of fiscal 2019 and the acquired Simplicity inventory to be sold through the first quarter of fiscal 2020. See Note 2 to the consolidated financial statements for further discussion of the McCall and Simplicity acquisitions.
Goodwill, Other Intangibles and Long-Lived Assets
When a company is acquired, the difference between the fair value of its net assets, including intangibles, and the purchase price is recorded as goodwill. Goodwill is subject to an assessment for impairment which must be performed at least annually or more frequently if events or circumstances indicate that goodwill might be impaired. Effective April 1, 2017, the Company early adopted Accounting Standards Update 2017-04, "Simplifying the Test for Goodwill Impairment," ("ASU 2017-04"), which replaced the two-step impairment test for goodwill with a one-step test that both identifies and measures goodwill impairment. Under ASU 2017-04, entities still have the option to assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the quantitative goodwill impairment test is not necessary. However, if an entity concludes otherwise, then it is required to perform the quantitative goodwill impairment test, which identifies both the existence of impairment and the amount of impairment loss by comparing the fair value of the reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds the fair value, an impairment loss shall be recognized in an amount equal to that excess. Additionally, an entity shall consider the income tax effect from any tax deductible goodwill on the carrying value of the reporting unit when measuring the impairment loss. The Company uses a dual approach including both a market approach and an income approach. The market approach computes fair value using a multiple of earnings before interest, income taxes, depreciation and amortization which was developed considering both the multiples of recent transactions as well as trading multiples of consumer products companies. The income approach is based on the present value of discounted cash flows and a terminal value projected for the reporting unit. The

22


income approach requires significant judgments including the Company’s projected net cash flows, the weighted average cost of capital (“WACC”) used to discount the cash flows and terminal value assumptions. The projected net cash flows are derived using the next fiscal year budget and multi-year strategic plan of the Company for the reporting unit. The WACC rate is based on an average of the capital structure, cost of capital and inherent business risk profiles of the Company. Additionally, the Company uses quoted market prices in active markets as the basis for measurement of fair value with consideration given to a control premium. We believe the use of multiple valuation techniques results in a more accurate indicator of the fair value of each reporting unit.
The Company then corroborates the reasonableness of the total fair value of the reporting units by reconciling the aggregate fair values of the reporting units to the Company’s total market capitalization adjusted to include an estimated control premium. The estimated control premium is derived from reviewing observable transactions involving the purchase of controlling interests in comparable companies. The market capitalization is calculated using the relevant shares outstanding and an average closing stock price which considers volatility around the test date. The exercise of reconciling the market capitalization to the computed fair value further supports the Company’s conclusion on the fair value. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss would be reported. The Company performs its required annual assessment as of the fiscal year end. Changes to our judgments regarding assumptions and estimates could result in a significantly different estimate of the fair market value of the reporting units.
Effective April 1, 2017, the Company combined its four former operating segments, which represented our one historical reportable segment, into one operating segment which reflects the manner in which our chief operating decision maker reviews operating performance and allocates resources. This was a result of the change in the Company's strategy to a One CSS structure and reflects how the businesses are now managed and operating results are assessed. Effective with the change from four operating segments and reporting units to one, the Company evaluated whether there was an impairment as of April 1, 2017 and concluded that there was no impairment based on the assessment that was performed as of March 31, 2017 which was reconciled to the Company’s market capitalization as of March 31, 2017.
Other indefinite lived intangible assets consist primarily of tradenames, which are also required to be tested annually for impairment. An entity has the option to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. To perform a qualitative assessment, an entity must identify and evaluate changes in economic, industry and entity-specific events and circumstances that could affect the significant inputs used to determine the fair value of an indefinite-lived intangible asset. If the result of the qualitative analysis indicates it is more likely than not that an indefinite-lived intangible asset is impaired, a more detailed fair value calculation will need to be performed which is used to identify potential impairments and to measure the amount of impairment losses to be recognized, if any. The fair value of the Company’s tradenames is calculated using a “relief from royalty payments” methodology. This approach involves first estimating reasonable royalty rates for each trademark then applying these royalty rates to a net sales stream and discounting the resulting cash flows to determine the fair value. The royalty rate is estimated using both a market and income approach. The market approach relies on the existence of identifiable transactions in the marketplace involving the licensing of tradenames similar to those owned by the Company. The income approach uses a projected pretax profitability rate relevant to the licensed income stream. We believe the use of multiple valuation techniques results in a more accurate indicator of the fair value of each tradename. This fair value is then compared with the carrying value of each tradename.
Long-lived assets (including property, plant and equipment), except for goodwill and indefinite lived intangible assets, are reviewed for impairment when circumstances indicate the carrying value of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset group to future net cash flows estimated by the Company to be generated by such assets. If such asset group is considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. Assets to be disposed of are recorded at the lower of their carrying value or estimated net realizable value.
In the fourth quarter of fiscal 2018, the Company recorded a non-cash pre-tax impairment charge of $33,358,000 due to the full impairment of goodwill and partial impairment of a tradename. See Note 3 to the consolidated financial statements for further discussion.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our actual current tax expense or benefit (state, federal and foreign), including the impact of permanent and temporary differences resulting from differing bases and treatment of items for tax and accounting purposes, such as the carrying value of intangibles, deductibility of expenses, depreciation of property, plant and equipment, and valuation of inventories. Temporary differences and operating loss and credit carryforwards result in deferred tax assets and liabilities, which are included within the Company's consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from

23


future taxable income. Actual results could differ from this assessment if sufficient taxable income is not generated in future periods. To the extent we determine the need to establish a valuation allowance or increase (decrease) such allowance in a period, the Company would record additional tax expense (benefit) in the accompanying consolidated statements of operations. The management of the Company periodically estimates the probable tax obligations of the Company using historical experience in tax jurisdictions and informed judgments. There are inherent uncertainties related to the interpretation of tax regulations. The judgments and estimates made at a point in time may change based on the outcome of tax audits, as well as changes to or further interpretations of regulations. If such changes take place, there is a risk that the tax rate may increase or decrease in any period.

New tax legislation in the U.S., commonly referred to as the Tax Act, was enacted on December 22, 2017. Accounting Standards Codification 740, "Accounting for Income Taxes," requires companies to recognize the effect of tax law changes in the period of enactment even though the effective date for most provisions is for tax years beginning after December 31, 2017, or in the case of certain other provisions, January 1, 2018. Though certain key aspects of the new law are effective January 1, 2018 and have an immediate accounting effect, other significant provisions are not effective or may not result in accounting effects for the Company until April 1, 2018.

Given the significance of the legislation, the Securities and Exchange Commission staff issued Staff Accounting Bulletin 118, "Income Tax Accounting Implications of the Tax Cuts and Jobs Act" ("SAB 118"), which allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. However, the measurement period is deemed to have ended earlier when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed.

The Company has estimated the impact of the Tax Act incorporating assumptions made based upon our current interpretations of its provisions. We have recognized the tax impacts related to deemed repatriated earnings (provisional) and revaluation of our deferred tax assets and liabilities, and included those amounts in our consolidated financial statements for fiscal 2018. The actual impact of the Tax Act may differ from the Company's estimates due to, among other things, further refinement of our calculations, changes in interpretations and assumptions we have made, guidance that may be issued and actions we may take as a result of the Tax Act. The Company expects the accounting to be completed within the one year measurement period, as allowed under SAB 118. In addition, we also expect to adopt a policy to record any tax liability associated with the Global Intangible Low-Taxed Income (“GILTI”) provision of the Tax Act as either a period cost or a deferred tax item within the one year measurement period, as allowed under SAB 118.
Accounting Pronouncements
See Note 13 to the consolidated financial statements for information concerning recent accounting pronouncements and the impact of those standards.
Forward-Looking and Cautionary Statements
This report includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding: future organic growth; future growth through acquisitions; new product initiatives; the Company's future ability to provide unique added value to its customers; the period of time over which inventory acquired as part of the Simplicity and McCall acquisitions will be sold; the future continuation of quarterly cash dividend payments; the expected future impact of legal proceedings; the expected future impact of foreign currency exchange rate fluctuations; the timing and amount of future expense recognition for amortization expense and unrecognized compensation expense; the timing and amount of future lease payments, pension payments and other contractual obligations and commitments; the expected future effect of certain accounting pronouncements; and the Company’s belief that its sources of available capital are adequate to meet its future cash needs for at least the next 12 months.
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 and economic conditions; increased competition (including competition from foreign products which may be imported at less than fair value and from foreign products which may benefit from foreign governmental subsidies); difficulties achieving organic growth; information technology risks, such as cyber attacks and data breaches; increased operating costs, including labor-related and energy costs and costs relating to the

24


imposition or retrospective application of duties on imported products; currency risks and other risks associated with international markets; risks associated with acquisitions, including difficulties identifying and evaluating suitable acquisition opportunities, realization of intangible assets and recoverability of long-lived assets, acquisition integration costs, and the risk that the Company may not be able to integrate and derive the expected benefits from acquisitions; risks associated with the combination of the facilities and/or operations of the Company's operating businesses; the risk that customers may become insolvent, may delay payments or may impose deductions or penalties on amounts owed to the Company; 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, customs laws and consumer product safety regulations; and other factors described more fully elsewhere in this annual report on Form 10-K and in the Company’s previous filings with the Securities and Exchange Commission. 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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company’s activities expose it to a variety of market risks, including the effects of changes in interest rates and foreign currency exchange rates. These financial exposures are monitored and, where considered appropriate, managed by the Company as described below.
Interest Rate Risk
The Company’s primary market risk exposure with regard to financial instruments is to changes in interest rates. Pursuant to the Company’s variable rate line of credit in effect during fiscal 2018, a change in the London Interbank Offered Rate (LIBOR) would affect the rate at which the Company could borrow funds thereunder. Based on average borrowings of $21,526,000 for the year ended March 31, 2018, a 1% increase or decrease in current market interest rates would have increased or decreased interest expense by $215,260.
On February 1, 2018, the Company entered into an interest rate swap agreement with a term of five years 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 notional amount of the interest rate swap contract subject to fixed rates was $40,000,000 in fiscal 2018. Fixed interest rate payments were at a weighted average rate of 2.575% in fiscal 2018. Interest rate differentials paid under this agreement were recognized as adjustments to interest expense and were $60,000 for the year ended March 31, 2018. This interest rate swap effectively converts $40,000,000 of the Company's variable-rate debt into fixed-rate debt with an effective interest rate of 3.525% (2.575% fixed + .95% spread) through the expiration of the Company's credit facility in March 2020.
Foreign Currency Risk
Approximately 4% of the Company’s sales in fiscal 2018 were denominated in a foreign currency.
The Company considers its risk exposure with regard to foreign currency fluctuations insignificant for its subsidiaries in the United States as it enters into foreign currency forward contracts to hedge the majority of firmly committed transactions and related receivables that are denominated in a foreign currency. The Company has designated its foreign currency forward contracts as fair value hedges. The gains or losses on the fair value hedges are recognized in earnings and generally offset the transaction gains or losses on the foreign denominated assets of its domestic operations that they are intended to hedge.
The Company has wholly-owned subsidiaries in Hong Kong, the United Kingdom, Australia, New Zealand, India, China and Canada. The Company is subject to risk from changes in foreign exchange rates for its subsidiaries that use a foreign currency as their functional currency and are translated into U.S. dollars. These changes result in cumulative translation adjustments, which are included in accumulated other comprehensive income (loss). We currently do not transact a material amount of business in a foreign currency and therefore fluctuations in exchange rates will not have a material impact on our financial statements. However, if we pursue additional opportunities in international markets, our international presence could grow. If we enter into any material transactions in a foreign currency or establish or acquire additional subsidiaries that measure and record their financial condition and results of operation in a foreign currency, we will be exposed to currency transaction risk and/or currency translation risk. Changes in the various exchange rates against the U.S. dollar may positively or negatively affect our operating results. Accordingly, we may decide in the future to undertake hedging strategies to minimize the effect of currency fluctuations on our financial condition and results of operations.

25


Item 8. Financial Statements and Supplementary Data.

CSS INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
 


26


Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
CSS Industries, Inc.:

Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of CSS Industries, Inc. and subsidiaries (the Company) as of March 31, 2018 and 2017, the related consolidated statements of operations and comprehensive income (loss), cash flows and stockholders’ equity for each of the years in the three‑year period ended March 31, 2018, and the related notes and financial statement schedule II - valuation and qualifying accounts (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three‑year period ended March 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of March 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated June 4, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ KPMG LLP


We have served as the Company’s auditor since 2002.

Philadelphia, PA
June 4, 2018


27


CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
 
 
March 31,
 
2018
 
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
58,560

 
$
47,693

Short-term investments

 
19,931

Accounts receivable, net of allowances of $1,576 and $1,283
63,083

 
48,814

Inventories
102,436

 
105,258

Prepaid expenses and other current assets
11,962

 
10,793

Total current assets
236,041

 
232,489

Net property, plant and equipment
52,126

 
35,764

Deferred income taxes
10,439

 

Goodwill

 
19,916

Intangible assets, net of accumulated amortization of $21,960 and $17,928
57,029

 
43,879

Other assets
9,553

 
7,146

Total assets
$
365,188

 
$
339,194

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
228

 
$
220

Accounts payable
20,581

 
14,223

Accrued payroll and other compensation
11,496

 
7,884

Accrued customer programs
12,284

 
5,030

Accrued other expenses
14,751

 
9,026

Total current liabilities
59,340

 
36,383

Long-term debt, net of current portion
40,228

 
456

Deferred income taxes
1,639

 
4,430

Other long-term obligations
10,286

 
3,771

Total liabilities
111,493

 
45,040

Commitments and contingencies (Notes 9 and 11)

 

Stockholders’ equity:
 
 
 
Preferred stock, Class 2, $.01 par, 1,000,000 shares authorized, no shares issued

 

Common stock, $.10 par, 25,000,000 shares authorized, 14,703,084 shares issued at March 31, 2018 and 2017
1,470

 
1,470

Additional paid-in capital
58,877

 
57,997

Retained earnings
339,088

 
382,807

Accumulated other comprehensive income (loss), net of tax
1,163

 
(63
)
Common stock in treasury, 5,583,338 and 5,616,319 shares, at cost
(146,903
)
 
(148,057
)
Total stockholders’ equity
253,695

 
294,154

Total liabilities and stockholders’ equity
$
365,188

 
$
339,194

See accompanying notes to consolidated financial statements.


28


CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share amounts)
 
 
For the Years Ended March 31,
 
2018
 
2017
 
2016
Net sales
$
361,896

 
$
322,431

 
$
317,017

Cost of sales
269,067

 
229,342

 
214,746

Gross profit
92,829

 
93,089

 
102,271

Selling, general and administrative expenses
105,201

 
83,375

 
76,047

Impairment of goodwill and intangible assets
33,358

 

 

Operating income (loss)
(45,730
)
 
9,714

 
26,224

Gain on bargain purchases

 
(19,990
)
 

Interest expense (income), net
681

 
29

 
(112
)
Other expense (income), net
(352
)
 
(12
)
 
(305
)
Income (loss) before income taxes
(46,059
)
 
29,687

 
26,641

Income tax expense (benefit)
(9,539
)
 
1,183

 
9,405

Net income (loss)
$
(36,520
)
 
$
28,504

 
$
17,236

 
 
 
 
 
 
Net income (loss) per common share:
 
 
 
 
 
Basic
$
(4.01
)
 
$
3.14

 
$
1.88

Diluted
$
(4.01
)
 
$
3.13

 
$
1.87

 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
Basic
9,108

 
9,074

 
9,147

Diluted
9,108

 
9,115

 
9,239

 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
$
(36,520
)
 
$
28,504

 
$
17,236

Other comprehensive income (loss), net of tax:
 
 
 
 
 
Currency translation adjustments
943

 
45

 

Pension and postretirement benefits
367

 
(46
)
 
29

Fair value of interest rate swap agreements
(84
)
 

 

Other comprehensive income (loss)
1,226

 
(1
)
 
29

Comprehensive income (loss)
$
(35,294
)
 
$
28,503

 
$
17,265


See accompanying notes to consolidated financial statements.

29


CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
For the Years Ended March 31,
 
2018
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
 
Net income (loss)
$
(36,520
)
 
$
28,504

 
$
17,236

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
10,487

 
8,477

 
8,308

Amortization of inventory step-up
17,881

 
3,577

 

Accretion of asset retirement obligation
51

 

 

Accretion of investment discount
(69
)
 
(196
)
 
(329
)
Impairment of goodwill and intangible assets
33,358

 

 

Provision for accounts receivable allowances
4,035

 
5,188

 
2,712

Deferred tax provision (benefit)
(14,125
)
 
(1,608
)
 
1,868

Share-based compensation expense
1,938

 
1,653

 
1,654

Gain on bargain purchases

 
(19,990
)
 

(Gain) loss on sale or disposal of assets
(12
)
 
88

 
(120
)
Changes in assets and liabilities, net of effects of purchase of businesses:
 
 
 
 
 
Accounts receivable
(6,409
)
 
(6,095
)
 
(4,268
)
Inventories
16,082

 
(3,607
)
 
(4,674
)
Prepaid expenses and other assets
(273
)
 
2,506

 
(4,627
)
Accounts payable
(220
)
 
(1,153
)
 
539

Accrued expenses and long-term obligations
5,164

 
(2,473
)
 
(3,176
)
Net cash provided by operating activities
31,368

 
14,871

 
15,123

Cash flows from investing activities:
 
 
 
 
 
Maturities of investment securities
20,000

 
60,000

 
95,000

Purchase of held-to-maturity investment securities

 
(19,928
)
 
(84,632
)
Purchase of businesses, net of cash received of $1,889 in 2018
(65,228
)
 
(15,039
)
 
(19,545
)
Purchase of property, plant and equipment
(7,291
)
 
(4,957
)
 
(6,411
)
Purchase of company owned life insurance policy
(750
)
 

 

Purchase of intangibles

 
(100
)
 

Proceeds from sale of assets
36

 
311

 
1,530

Net cash (used for) provided by investing activities
(53,233
)
 
20,287

 
(14,058
)
Cash flows from financing activities:
 
 
 
 
 
Borrowings on revolving credit facility
87,476

 

 

Repayments on revolving credit facility
(47,476
)
 

 

Payments on long-term debt
(220
)
 
(65
)
 

Dividends paid
(7,293
)
 
(7,273
)
 
(6,764
)
Purchase of treasury stock

 

 
(11,274
)
Proceeds from exercise of stock options
201

 
123

 
770

Payments for tax withholding on net restricted stock settlements

 
(527
)
 
(520
)
Tax effect of stock awards

 
286

 
221

Net cash provided by (used for) financing activities
32,688

 
(7,456
)
 
(17,567
)
Effect of exchange rate changes on cash
44

 
64

 

Net increase (decrease) in cash and cash equivalents
10,867

 
27,766

 
(16,502
)
Cash and cash equivalents at beginning of period
47,693

 
19,927

 
36,429

Cash and cash equivalents at end of period
$
58,560

 
$
47,693

 
$
19,927

See accompanying notes to consolidated financial statements.

30


CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share and per share amounts)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
Other
 
Common Stock
 
 
 
Preferred Stock
 
Common Stock
 
Paid-in
 
Retained
 
Comprehensive
 
in Treasury
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Earnings
 
Income (Loss)
 
Shares
 
Amount
 
Total
Balance, March 31, 2015

 

 
14,703,084

 
$
1,470

 
$
54,399

 
$
356,467

 
$
(91
)
 
(5,359,334
)
 
$
(141,990
)
 
$
270,255

Share-based compensation expense

 

 

 

 
1,654

 

 

 

 

 
1,654

Issuance of common stock upon exercise of stock options

 

 

 

 

 
(895
)
 

 
47,560

 
1,665

 
770

Issuance of common stock under equity plan

 

 

 

 

 
(2,014
)
 

 
38,744

 
1,494

 
(520
)
Purchase of treasury shares

 

 

 

 

 

 

 
(397,789
)
 
(11,274
)
 
(11,274
)
Tax effect of stock awards

 

 

 

 
221

 

 

 

 

 
221

Reduction of deferred tax assets due to expired stock options

 

 

 

 
(117
)
 

 

 

 

 
(117
)
Cash dividends ($.74 per common share)

 

 

 

 

 
(6,764
)
 

 

 

 
(6,764
)
Other comprehensive income

 

 

 

 

 

 
29

 

 

 
29

Net income

 

 

 

 

 
17,236

 

 

 

 
17,236

Balance, March 31, 2016

 

 
14,703,084

 
1,470

 
56,157

 
364,030

 
(62
)
 
(5,670,819
)
 
(150,105
)
 
271,490

Share-based compensation expense

 

 

 

 
1,653

 

 

 

 

 
1,653

Issuance of common stock upon exercise of stock options

 

 

 

 

 
(373
)
 

 
14,177

 
496

 
123

Issuance of common stock under equity plan

 

 

 

 

 
(2,079
)
 

 
40,323

 
1,552

 
(527
)
Tax effect of stock awards

 

 

 

 
286

 

 

 

 

 
286

Reduction of deferred tax assets due to expired stock options

 

 

 

 
(99
)
 

 

 

 

 
(99
)
Cash dividends ($.80 per common share)

 

 

 

 

 
(7,275
)
 

 

 

 
(7,275
)
Other comprehensive loss

 

 

 

 

 

 
(1
)
 

 

 
(1
)
Net income

 

 

 

 

 
28,504

 

 

 

 
28,504

Balance, March 31, 2017

 

 
14,703,084

 
1,470

 
57,997

 
382,807

 
(63
)
 
(5,616,319
)
 
(148,057
)
 
294,154

Cumulative effect of change in accounting principle

 

 

 

 
(1,059
)
 
1,059

 

 

 

 

Share-based compensation expense

 

 

 

 
1,939

 

 

 

 

 
1,939

Issuance of common stock upon exercise of stock options

 

 

 

 

 
(346
)
 

 
15,629

 
547

 
201

Issuance of common stock under equity plan

 

 

 

 

 
(607
)
 

 
17,352

 
607

 

Cash dividends ($.80 per common share)

 

 

 

 

 
(7,305
)
 

 

 

 
(7,305
)
Other comprehensive income

 

 

 

 

 

 
1,226

 

 

 
1,226

Net loss

 

 

 

 

 
(36,520
)
 

 

 

 
(36,520
)
Balance, March 31, 2018

 

 
14,703,084

 
$
1,470

 
$
58,877

 
$
339,088

 
$
1,163

 
(5,583,338
)
 
$
(146,903
)
 
$
253,695

See accompanying notes to consolidated financial statements.

31


CSS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018
(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’s fiscal year ends on March 31. References to a particular year refer to the fiscal year ending in March of that year. For example fiscal 2018 refers to the fiscal year ended March 31, 2018.
Principles of Consolidation
The consolidated financial statements include the accounts of CSS Industries, Inc. and all of its subsidiaries. All intercompany transactions and accounts have been eliminated in consolidation.
Nature of Business
CSS is a creative consumer products company, focused on the seasonal, gift and craft categories. For these design-driven categories, the Company engages in the creative development, manufacture, procurement, distribution and sale of our products with an omni-channel approach focused primarily on mass market retailers.
Seasonal The seasonal category includes gift packaging items such as ribbon, bows, greeting cards, wrapping paper, bags, boxes, tags and gift card holders, in addition to specific holiday-themed decorations, accessories, and activities, such as Easter egg dyes and novelties and Valentine's Day classroom exchange cards. These products are sold to mass market retailers, and production forecasts for these products are generally known well in advance of shipment.
Gift The gift category (formerly described by the Company as its celebrations category) includes products designed to celebrate certain life events or special occasions, such as weddings, birthdays, anniversaries, graduations, or the birth of a child. Products include ribbons and bows, floral accessories, infant products, journals, gift card holders, all occasion boxed greeting cards, memory books, scrapbooks, stationery, stickers and other items that commemorate life's celebrations. Products in this category are primarily sold into mass and specialty retailers, floral and packaging wholesalers and distributors, and are generally ordered on a replenishment basis throughout the year.
Craft The craft category includes ribbons, trims, buttons, sewing patterns, knitting needles, needle arts and kids crafts. These products are sold to mass market and specialty retailers, and are generally ordered on a replenishment basis throughout the year.
CSS’ product breadth provides its retail customers the opportunity to use a single vendor for much of their seasonal, gift and craft product requirements. A substantial portion of CSS’ products are manufactured, packaged and/or warehoused in facilities located in the United States, the United Kingdom and Australia, with the remainder purchased primarily from manufacturers in Asia and Mexico. The Company also has a manufacturing facility in India that produces certain craft products, including trims, braids and tassels, and also has a distribution facility in India. The Company’s products are sold to its customers by national and regional account sales managers, sales representatives, product specialists and by a network of independent manufacturers’ representatives. CSS maintains purchasing offices in Hong Kong and China to administer Asian sourcing opportunities.
As further discussed in Note 2 to the consolidated financial statements, the Company acquired substantially all of the net assets and business of Simplicity Creative Group ("Simplicity") on November 3, 2017.
Of its 2,000 employees (increasing to approximately 2,075 as seasonal employees are added), there are 80 employees that are represented by a labor union. The collective bargaining agreement with the labor union representing the production and maintenance employees in Hagerstown, Maryland remains in effect until December 31, 2020. Historically, we have been successful in renegotiating expiring agreements without any disruption of operating activities.
Foreign Currency Translation and Transactions
The Company's foreign subsidiaries use the local currency as the functional currency. The Company translates all assets and liabilities at year-end exchange rates and all income and expense accounts at average rates during the year. Translation adjustments are recorded in accumulated other comprehensive income (loss) in stockholders’ equity. Gains and

32


losses on foreign currency transactions (denominated in currencies other than the local currency) are not material and are included in other expense (income), net in the consolidated statements of operations.
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 to revenue recognition, the valuation of inventory and accounts receivable, the assessment of the recoverability of goodwill and other intangible and long-lived assets, income tax accounting and resolution of litigation and other proceedings. Actual results could differ from these estimates.
Short-Term Investments
The Company categorized and accounted for its short-term investment holdings as held-to-maturity securities. Held-to-maturity securities were recorded at amortized cost which approximated fair market value at March 31, 2017. This categorization was based upon the Company's positive intent and ability to hold these securities until maturity. Short-term investments at March 31, 2017 consisted of commercial paper with an amortized cost of $19,931,000 and matured in fiscal 2018. There were no short-term investments at March 31, 2018.
Accounts Receivable
The Company offers seasonal dating programs related to certain seasonal product offerings pursuant to which customers that qualify for such programs are offered extended payment terms. With some exceptions, customers do not have the right to return product except for reasons the Company believes are typical of our industry, including damaged goods, shipping errors or similar occurrences. The Company generally is not required to repurchase products from its customers, nor does the Company have any regular practice of doing so. In addition, the Company mitigates its exposure to bad debts by evaluating the creditworthiness of its major customers, utilizing established credit limits, and purchasing credit insurance when appropriate and available on terms satisfactory to the Company. Bad debt and returns and allowances reserves are recorded as an offset to accounts receivable while reserves for customer programs are recorded as accrued liabilities. The Company evaluates accounts receivable related reserves and accruals monthly by specifically reviewing customers’ creditworthiness, historical recovery percentages and outstanding customer deductions and program arrangements. Customer account balances are charged off against the allowance reserve after reasonable means of collection have been exhausted and the potential for recovery is considered unlikely.

Inventories
The Company records inventory when title is transferred, which occurs upon receipt or prior to receipt dependent on supplier shipping terms. The Company adjusts unsaleable and slow-moving inventory to its estimated net realizable value. Substantially all of the Company’s inventories are stated at the lower of first-in, first-out (FIFO) cost or net realizable value. The remaining portion of the inventory is valued at the lower of last-in, first-out (LIFO) cost or net realizable value, which was $98,000 and $134,000 at March 31, 2018 and 2017, respectively. Had all inventories been valued at the lower of FIFO cost or market, inventories would have been greater by $524,000 and $578,000 at March 31, 2018 and 2017, respectively. Inventories consisted of the following (in thousands):
 
 
March 31,
 
2018
 
2017
Raw material
$
11,602

 
$
11,210

Work-in-process
17,809

 
18,316

Finished goods
73,025

 
75,732

 
$
102,436

 
$
105,258


Finished goods inventory includes $18,720,000 and $18,417,000 of inventory on consignment at March 31, 2018 and 2017, respectively. In connection with the acquisition of McCall on December 13, 2016 and the acquisition of Simplicity on November 3, 2017, there was a step-up to fair value of the inventory acquired of $21,773,000 and $10,214,000, respectively, recorded at the dates of acquisition. This was a result of the inventory acquired being marked up to estimated fair value in purchase accounting and is recognized through cost of sales as the inventory turns. The amount of step-up to fair value of the acquired inventory remaining as of March 31, 2018 and 2017 was $10,683,000 and $18,187,000, respectively. The Company

33


expects the acquired McCall inventory to be sold through the second quarter of fiscal 2019 and the acquired Simplicity inventory to be sold through the first quarter of fiscal 2020. See Note 2 to the consolidated financial statements for further discussion of the McCall and Simplicity acquisitions.

Property, Plant and Equipment
Property, plant and equipment are stated at cost and include the following (in thousands):
 
 
March 31,
 
2018

2017
Land
$
7,100


$
5,838

Buildings, leasehold interests and improvements
45,164


40,661

Machinery, equipment and other
104,497


89,917


156,761


136,416

Less – Accumulated depreciation and amortization
(104,635
)

(100,652
)
Net property, plant and equipment
$
52,126


$
35,764

Depreciation is provided generally on the straight-line method and is based on estimated useful lives or terms of leases as follows:
 
Buildings, leasehold interests and improvements
  
 
Lease term to 45 years
  
Machinery, equipment and other
  
 
3 to 15 years
  
When property is retired or otherwise disposed of, the related cost and accumulated depreciation and amortization are eliminated from the consolidated balance sheet. Any gain or loss from the disposition of property, plant and equipment is included in other expense (income), net. Maintenance and repairs are expensed as incurred while improvements are capitalized and depreciated over their estimated useful lives.
With the acquisition of McCall, there were assets acquired under capital lease obligations. Depreciation expense was $6,455,000, $5,173,000 and $5,643,000 for the years ended March 31, 2018, 2017 and 2016, respectively.
The Company maintains various operating leases and records rent expense on a straight-line basis over the lease term. See Note 9 for further discussion.

Impairment of Long-Lived Assets including Goodwill, Other Intangible Assets and Property, Plant and Equipment
When a company is acquired, the difference between the fair value of its net assets, including intangibles, and the purchase price is recorded as goodwill. Goodwill is subject to an assessment for impairment which must be performed at least annually or more frequently if events or circumstances indicate that goodwill might be impaired. Effective April 1, 2017, the Company early adopted Accounting Standards Update 2017-04, "Simplifying the Test for Goodwill Impairment," ("ASU 2017-04"), which replaced the two-step impairment test for goodwill with a one-step test that both identifies and measures goodwill impairment. Under ASU 2017-04, entities still have the option to assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the quantitative goodwill impairment test is not necessary. However, if an entity concludes otherwise, then it is required to perform the quantitative goodwill impairment test, which identifies both the existence of impairment and the amount of impairment loss by comparing the fair value of the reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds the fair value, an impairment loss shall be recognized in an amount equal to that excess. Additionally, an entity shall consider the income tax effect from any tax deductible goodwill on the carrying value of the reporting unit when measuring the impairment loss. The Company uses a dual approach including both a market approach and an income approach. The market approach computes fair value using a multiple of earnings before interest, income taxes, depreciation and amortization which was developed considering both the multiples of recent transactions as well as trading multiples of consumer products companies. The income approach is based on the present value of discounted cash flows and a terminal value projected for the reporting unit. The income approach requires significant judgments including the Company’s projected net cash flows, the weighted average cost of capital (“WACC”) used to discount the cash flows and terminal value assumptions. The projected net cash flows are derived using the next fiscal year budget and multi-year strategic plan of the Company for the reporting unit. The WACC rate is based on an average of the capital structure, cost of capital and inherent business risk profiles of the Company. Additionally, the

34


Company uses quoted market prices in active markets as the basis for measurement of fair value with consideration given to a control premium. We believe the use of multiple valuation techniques results in a more accurate indicator of the fair value of each reporting unit.

The Company then corroborates the reasonableness of the total fair value of the reporting units by reconciling the aggregate fair values of the reporting units to the Company’s total market capitalization adjusted to include an estimated control premium. The estimated control premium is derived from reviewing observable transactions involving the purchase of controlling interests in comparable companies. The market capitalization is calculated using the relevant shares outstanding and an average closing stock price which considers volatility around the test date. The exercise of reconciling the market capitalization to the computed fair value further supports the Company’s conclusion on the fair value. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss would be reported. The Company performs its required annual assessment as of the fiscal year end. Changes to our judgments regarding assumptions and estimates could result in a significantly different estimate of the fair market value of the reporting units.
Effective April 1, 2017, the Company combined its four former operating segments, which represented our one historical reportable segment, into one operating segment which reflects the manner in which our chief operating decision maker reviews operating performance and allocates resources. This was a result of the change in the Company's strategy to a One CSS structure and reflects how the businesses are now managed and operating results are assessed. Effective with the change from four operating segments and reporting units to one, the Company evaluated whether there was an impairment as of April 1, 2017 and concluded that there was no impairment based on the assessment that was performed as of March 31, 2017 which was reconciled to the Company’s market capitalization as of March 31, 2017.
Other indefinite lived intangible assets consist primarily of tradenames which are also required to be tested annually for impairment. An entity has the option to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. To perform a qualitative assessment, an entity must identify and evaluate changes in economic, industry and entity-specific events and circumstances that could affect the significant inputs used to determine the fair value of an indefinite-lived intangible asset. If the result of the qualitative analysis indicates it is more likely than not that an indefinite-lived intangible asset is impaired, a more detailed fair value calculation will need to be performed which is used to identify potential impairments and to measure the amount of impairment losses to be recognized, if any. The fair value of the Company’s tradenames is calculated using a “relief from royalty payments” methodology. This approach involves first estimating reasonable royalty rates for each trademark then applying these royalty rates to a net sales stream and discounting the resulting cash flows to determine the fair value. The royalty rate is estimated using both a market and income approach. The market approach relies on the existence of identifiable transactions in the marketplace involving the licensing of tradenames similar to those owned by the Company. The income approach uses a projected pretax profitability rate relevant to the licensed income stream. We believe the use of multiple valuation techniques results in a more accurate indicator of the fair value of each tradename. This fair value is then compared with the carrying value of each tradename.
Long-lived assets (including property, plant and equipment), except for goodwill and indefinite lived intangible assets, are reviewed for impairment when events or circumstances indicate the carrying value of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset group to future net cash flows estimated by the Company to be generated by such assets. If such asset group is considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. Assets to be disposed of are recorded at the lower of their carrying value or estimated net realizable value.
In the fourth quarter of fiscal 2018, the Company performed the required annual impairment test of the carrying amount of goodwill and indefinite lived intangible assets. The decline in the Company's trading price of its common stock at and around the end of fiscal 2018, and related decrease in the Company's market capitalization, was determined to be a triggering event for potential goodwill impairment. Accordingly, the Company also performed an assessment of its other long-lived assets for impairment. Refer to Note 3 for the results of the annual impairment testing performed in fiscal 2018. The Company determined that no impairment of intangible assets existed in fiscal 2017 or in fiscal 2016.
Derivative Financial Instruments
The Company uses certain derivative financial instruments as part of its risk management strategy to reduce interest rate and foreign currency risk. Derivatives are not used for trading or speculative activities.
The Company recognizes all derivatives on the consolidated balance sheet at fair value. On the date the derivative instrument is entered into, the Company generally designates the derivative as either (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), or (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow

35


hedge”). Changes in the fair value of a derivative that is designated as, and meets all the required criteria for, a fair value hedge, along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings. Changes in the fair value of a derivative that is designated as, and meets all the required criteria for, a cash flow hedge are recorded in accumulated other comprehensive income and reclassified into earnings as the underlying hedged item affects earnings. The portion of the change in fair value of a derivative associated with hedge ineffectiveness or the component of a derivative instrument excluded from the assessment of hedge effectiveness is recorded currently in earnings. Also, changes in the entire fair value of a derivative that is not designated as a hedge are recorded immediately in earnings. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes relating all derivatives that are designated as fair value or cash flow hedges to specific assets and liabilities on the consolidated balance sheet or to specific firm commitments or forecasted transactions.
The Company also formally assesses, both at the inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in fair values or cash flows of the hedged item. If it is determined that a derivative is not highly effective as a hedge or if a derivative ceases to be a highly effective hedge, the Company will discontinue hedge accounting prospectively.
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 forward exchange contracts. Gains and losses arising from foreign currency forward contracts are recorded in other expense (income), net as offsets of gains and losses resulting from the underlying hedged transactions. A realized loss of $108,000 was recorded in the fiscal year ended March 31, 2018 and realized gains of $56,000 and $151,000 were recorded in the fiscal year ended March 31, 2017 and 2016, respectively. There were no open foreign currency forward exchange contracts as of March 31, 2018 and 2017.

On February 1, 2018, the Company entered into an interest rate swap agreement with a term of five years 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 notional amount of the interest rate swap contract subject to fixed rates was $40,000,000 in fiscal 2018. Fixed interest rate payments were at a weighted average rate of 2.575% in fiscal 2018. Interest rate differentials paid under this agreement were recognized as adjustments to interest expense and were $60,000 for the year ended March 31, 2018. This interest rate swap effectively converts $40,000,000 of the Company's variable-rate debt into fixed-rate debt with an effective interest rate of 3.525% (2.575% fixed + .95% spread) through the expiration of the Company's credit facility in March 2020. There were no interest rate swap agreements in fiscal 2017.
 Interest Expense (Income)
Interest expense was $904,000, $298,000 and $288,000 in the years ended March 31, 2018, 2017 and 2016, respectively. Interest income was $223,000, $269,000 and $400,000 in the years ended March 31, 2018, 2017 and 2016, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company recognizes the impact of an uncertain tax position, if it is more likely than not that such position will be sustained on audit, based solely on the technical merits of the position. See Note 7 for further discussion.
Revenue Recognition
Revenue is recognized from most product sales when goods are shipped, title and risk of loss have been transferred to the customer and collection is reasonably assured. The Company has certain limited products, primarily sewing patterns, that are on consignment at mass market retailers and the Company recognizes the sale as products are sold to end consumers as recorded at point-of-sale terminals. The Company records estimated reductions to revenue for customer programs, which may include special pricing agreements for specific customers, volume incentives and other promotions. In limited cases, the Company may provide the right to return product as part of its customer programs with certain customers. The Company also records estimated reductions to revenue, based primarily on historical experience, for customer returns and chargebacks that

36


may arise as a result of shipping errors, product damaged in transit or for other reasons that become known subsequent to recognizing the revenue. These provisions are recorded in the period that the related sale is recognized and are reflected as a reduction from gross sales. The related reserves are shown as a reduction of accounts receivable, except for reserves for customer programs which are shown as a current or long term liability. If the amount of actual customer returns and chargebacks were to increase or decrease significantly from the estimated amount, revisions to the estimated allowance would be required.
Product Development Costs
Product development costs consist of purchases of outside artwork, printing plates, cylinders, catalogs and samples. For seasonal products, the Company typically begins to incur product development costs 18 to 20 months before the applicable holiday event. These costs are amortized monthly over the selling season, which is generally within two to four months of the holiday event. Development costs related to gift and craft products are incurred within a period beginning six to nine months prior to the applicable sales period. These costs generally are amortized over a six to twelve month selling period. The expense of certain product development costs that are related to the manufacturing process are recorded in cost of sales while the portion that relates to creative and selling efforts are recorded in selling, general and administrative expenses.
Product development costs capitalized as of March 31, 2018 were $3,835,000, of which $3,350,000 was recorded in other current assets and $485,000 was recorded in other long-term assets in the consolidated financial statements. Product development costs capitalized as of March 31, 2017 were $4,116,000, of which $3,636,000 was recorded in prepaid expenses and other current assets and $480,000 was recorded in other long-term assets in the consolidated financial statements. Product development expense of $8,296,000, $8,268,000 and $6,902,000 was recognized in the years ended March 31, 2018, 2017 and 2016, respectively.
Shipping and Handling Costs
Shipping and handling costs are reported in cost of sales in the consolidated statements of operations.
Share-Based Compensation
Share-based compensation cost is estimated at the grant date based on a fair-value model. Calculating the fair value of share-based awards at the grant date requires judgment, including estimating stock price volatility and expected option life.
The Company uses the Black-Scholes option valuation model to value service-based stock options and uses Monte Carlo simulation to value performance-based stock options and restricted stock units. The fair value of each service-based restricted stock unit is estimated on the day of grant based on the closing price of the Company's common stock reduced by the present value of the expected dividend stream during the vesting period using the risk-free interest rate. The Company estimates stock price volatility based on historical volatility of its common stock. Estimated option life assumptions are also derived from historical data. Had the Company used alternative valuation methodologies and assumptions, compensation cost for share-based payments could be significantly different. The Company recognizes compensation cost over the stated vesting period consistent with the terms of the arrangement (i.e. either on a straight-line or graded-vesting basis).
Net Income (Loss) Per Common Share
The following table sets forth the computation of basic net income (loss) per common share and diluted net income (loss) per common share for the years ended March 31, 2018, 2017 and 2016.
 

37


 
For the Years Ended March 31,
 
2018
 
2017
 
2016
 
(in thousands, except per share amounts)
Numerator:
 
 
 
 
 
Net income (loss)
$
(36,520
)
 
$
28,504

 
$
17,236

 
 
 
 
 
 
Denominator:
 
 
 
 
 
Weighted average shares outstanding for basic income (loss) per common share
9,108

 
9,074

 
9,147

Effect of dilutive stock options

 
41

 
92

Adjusted weighted average shares outstanding for diluted income (loss) per common share
9,108

 
9,115

 
9,239

 
 
 
 
 
 
Basic net income (loss) per common share
$
(4.01
)
 
$
3.14

 
$
1.88

Diluted net income (loss) per common share
$
(4.01
)
 
$
3.13

 
$
1.87

The Company has excluded 495,000 shares, 505,175 shares, and 253,000 shares, consisting of outstanding stock options and unearned restricted stock units, in computing diluted net income (loss) per common share for the years ended March 31, 2018, 2017 and 2016, respectively, because their effects were antidilutive.
Statements of Cash Flows
For purposes of the consolidated statements of cash flows, the Company considers all holdings of highly liquid investments with a maturity at time of purchase of three months or less to be cash equivalents.
Supplemental Schedule of Cash Flow Information
 
 
For the Years Ended March 31,
 
2018
 
2017
 
2016
 
(in thousands)
Cash paid during the year for:
 
 
 
 
 
Interest
$
511

 
$
264

 
$
210

Income taxes
$
1,484

 
$
2,270

 
$
9,736

 
 
 
 
 
 
Details of acquisitions:
 
 
 
 
 
Fair value of assets acquired
$
92,666

 
$
50,445

 
$
20,796

Liabilities assumed
23,049

 
15,416

 
1,251

Net assets acquired
69,617

 
35,029

 
19,545

Amount due seller
2,500

 

 

Cash paid
67,117

 
35,029

 
19,545

Less cash acquired
1,889

 

 

Less gain on bargain purchases