CSS Industries Inc 10-Q 9-30-06
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-Q
(Mark
One)
T
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended
September 30, 2006
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
CSS
INDUSTRIES, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
13-1920657
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
1845
Walnut Street, Philadelphia, PA
|
|
19103
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(215)
569-9900
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
x
Yes o
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o
|
Accelerated
filer x
|
Non-accelerated
filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.)
o
Yes x
No
As
of
October 30, 2006, there were 10,623,105 shares of common stock outstanding
which
excludes shares which may still be issued upon exercise of stock
options.
CSS
INDUSTRIES, INC. AND SUBSIDIARIES
|
|
PAGE
NO.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
4
|
|
|
|
|
|
5
|
|
|
|
|
|
6-12
|
|
|
|
|
|
13-18
|
|
|
|
|
|
17
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
18
|
|
|
|
|
|
18-19
|
|
|
|
|
|
19
|
|
|
|
|
|
20
|
CSS
INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME
(Unaudited)
(In
thousands, except per share data)
|
|
Three
Months Ended
September
30,
|
|
Six
Months Ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
SALES
|
|
$
|
173,830
|
|
$
|
164,043
|
|
$
|
221,363
|
|
$
|
221,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
129,003
|
|
|
125,676
|
|
|
163,066
|
|
|
168,441
|
|
Selling,
general and administrative expenses
|
|
|
25,289
|
|
|
23,050
|
|
|
47,493
|
|
|
43,035
|
|
Interest
expense, net
|
|
|
1,083
|
|
|
1,057
|
|
|
1,217
|
|
|
1,499
|
|
Other
income, net
|
|
|
(66
|
)
|
|
(130
|
)
|
|
(228
|
)
|
|
(135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155,309
|
|
|
149,653
|
|
|
211,548
|
|
|
212,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAXES
|
|
|
18,521
|
|
|
14,390
|
|
|
9,815
|
|
|
8,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAX PROVISION
|
|
|
6,818
|
|
|
5,151
|
|
|
3,619
|
|
|
3,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
11,703
|
|
$
|
9,239
|
|
$
|
6,196
|
|
$
|
5,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.11
|
|
$
|
.88
|
|
$
|
.59
|
|
$
|
.53
|
|
Diluted
|
|
$
|
1.08
|
|
$
|
.84
|
|
$
|
.57
|
|
$
|
.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
10,559
|
|
|
10,496
|
|
|
10,528
|
|
|
10,455
|
|
Diluted
|
|
|
10,838
|
|
|
11,017
|
|
|
10,831
|
|
|
10,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
DIVIDENDS PER SHARE OF COMMON STOCK
|
|
$
|
.12
|
|
$
|
.12
|
|
$
|
.24
|
|
$
|
.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
11,703
|
|
$
|
9,239
|
|
$
|
6,196
|
|
$
|
5,584
|
|
Foreign
currency translation adjustment
|
|
|
3
|
|
|
3
|
|
|
3
|
|
|
-
|
|
Comprehensive
income
|
|
$
|
11,706
|
|
$
|
9,242
|
|
$
|
6,199
|
|
$
|
5,584
|
|
See
notes
to consolidated financial statements.
CSS
INDUSTRIES,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In
thousands)
|
|
September
30,
2006
|
|
March
31,
2006
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
11,182
|
|
$
|
57,656
|
|
Accounts
receivable, net
|
|
|
140,450
|
|
|
35,582
|
|
Inventories
|
|
|
167,699
|
|
|
103,770
|
|
Deferred
income taxes
|
|
|
7,328
|
|
|
7,898
|
|
Asset
held for sale
|
|
|
1,599
|
|
|
-
|
|
Other
current assets
|
|
|
16,929
|
|
|
18,906
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
345,187
|
|
|
223,812
|
|
|
|
|
|
|
|
|
|
PROPERTY,
PLANT AND EQUIPMENT, NET
|
|
|
65,315
|
|
|
70,868
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
Goodwill
|
|
|
30,952
|
|
|
30,952
|
|
Intangible
assets, net
|
|
|
4,375
|
|
|
4,422
|
|
Other
|
|
|
3,873
|
|
|
4,095
|
|
|
|
|
|
|
|
|
|
Total
other assets
|
|
|
39,200
|
|
|
39,469
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
449,702
|
|
$
|
334,149
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Notes
payable
|
|
$
|
73,510
|
|
$
|
-
|
|
Current
portion of long-term debt
|
|
|
10,195
|
|
|
10,169
|
|
Accrued
customer programs
|
|
|
11,992
|
|
|
10,791
|
|
Other
current liabilities
|
|
|
75,219
|
|
|
41,370
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
170,916
|
|
|
62,330
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT, NET OF CURRENT PORTION
|
|
|
30,490
|
|
|
30,518
|
|
|
|
|
|
|
|
|
|
LONG-TERM
OBLIGATIONS
|
|
|
3,211
|
|
|
3,533
|
|
|
|
|
|
|
|
|
|
DEFERRED
INCOME TAXES
|
|
|
5,298
|
|
|
5,258
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
239,787
|
|
|
232,510
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
449,702
|
|
$
|
334,149
|
|
See
notes
to consolidated financial statements.
CSS
INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(In
thousands)
|
|
Six
Months Ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
6,196
|
|
$
|
5,584
|
|
Adjustments
to reconcile net income to net cash used for operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
7,096
|
|
|
6,937
|
|
Provision
for doubtful accounts
|
|
|
(134
|
)
|
|
339
|
|
Deferred
tax provision (benefit)
|
|
|
610
|
|
|
(332
|
)
|
(Gain)
loss on sale of assets
|
|
|
(16
|
)
|
|
174
|
|
Share-based
compensation expense
|
|
|
1,412
|
|
|
172
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Increase
in accounts receivable
|
|
|
(104,734
|
)
|
|
(89,789
|
)
|
Increase
in inventory
|
|
|
(63,929
|
)
|
|
(75,945
|
)
|
Decrease
(increase) in other assets
|
|
|
2,126
|
|
|
(3,158
|
)
|
Increase
in other liabilities
|
|
|
37,075
|
|
|
33,223
|
|
(Decrease)
increase in accrued taxes
|
|
|
(2,355
|
)
|
|
2,912
|
|
|
|
|
|
|
|
|
|
Total
adjustments
|
|
|
(122,849
|
)
|
|
(125,467
|
)
|
|
|
|
|
|
|
|
|
Net
cash used for operating activities
|
|
|
(116,653
|
)
|
|
(119,883
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(2,971
|
)
|
|
(4,664
|
)
|
Proceeds
from sale of assets
|
|
|
16
|
|
|
307
|
|
|
|
|
|
|
|
|
|
Net
cash used for investing activities
|
|
|
(2,955
|
)
|
|
(4,357
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Payments
on long-term obligations
|
|
|
(47
|
)
|
|
(267
|
)
|
Borrowings
on notes payable
|
|
|
128,710
|
|
|
166,435
|
|
Repayments
on notes payable
|
|
|
(55,200
|
)
|
|
(90,035
|
)
|
Dividends
paid
|
|
|
(2,526
|
)
|
|
(2,516
|
)
|
Purchase
of treasury stock
|
|
|
-
|
|
|
(3,235
|
)
|
Proceeds
from exercise of stock options
|
|
|
1,454
|
|
|
3,462
|
|
Tax
benefit realized for stock options exercised
|
|
|
740
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
73,131
|
|
|
73,844
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
3
|
|
|
-
|
|
Net
decrease in cash and cash equivalents
|
|
|
(46,474
|
)
|
|
(50,396
|
)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
57,656
|
|
|
57,333
|
|
Cash
and cash equivalents at end of period
|
|
$
|
11,182
|
|
$
|
6,937
|
|
See
notes
to consolidated financial statements.
CSS
INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2006
(Unaudited)
(1)
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES:
|
Basis
of Presentation
-
CSS
Industries, Inc. (collectively with its subsidiaries, “CSS” or the “Company”)
has prepared the consolidated financial statements included herein pursuant
to
the rules and regulations of the Securities and Exchange Commission. The Company
has condensed or omitted certain information and footnote disclosures normally
included in consolidated financial statements prepared in accordance with
accounting principles generally accepted in the United States pursuant to such
rules and regulations. In the opinion of management, the statements include
all
adjustments (which include normal recurring adjustments) required for a fair
presentation of financial position, results of operations and cash flows for the
interim periods presented. These consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company’s Annual Report on Form 10-K for the fiscal year ended
March 31, 2006. The results of operations for the interim periods are not
necessarily indicative of the results for the full year.
Principles
of Consolidation
-
The
consolidated financial statements include the accounts of the Company and all
of
its subsidiaries. All significant intercompany transactions and accounts have
been eliminated in consolidation.
Nature
of Business
-
CSS
is a
consumer products company primarily engaged in the design, manufacture,
procurement, distribution and sale of seasonal and social expression products,
principally to mass market retailers. These products include gift wrap, gift
bags, boxed greeting cards, gift tags, tissue paper, paper and vinyl
decorations, classroom exchange Valentines, decorative ribbons and bows,
Halloween masks, costumes, make-up and novelties, Easter egg dyes and novelties,
and craft and educational products. 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.
Foreign
Currency Translation and Transactions
-
Translation
adjustments are charged or credited to a separate component of stockholders’
equity. Gains and losses on foreign currency transactions are not material
and
are included in other income, net in the consolidated statements of operations.
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 the valuation of inventory and accounts receivable, the assessment of the
recoverability of goodwill and other intangible assets, income tax accounting,
the valuation of share-based awards and resolution of litigation and other
proceedings. Actual results could differ from these estimates.
Inventories
-
The
Company records inventory at the date of taking title which generally occurs
upon receipt or prior to receipt with regard to in-transit inventory. 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 market. The remaining
portion
of the inventory is valued at the lower of last-in, first-out (LIFO) cost or
market. Inventories consisted of the following (in thousands):
|
|
September
30, 2006
|
|
March
31, 2006
|
|
|
|
|
|
|
|
Raw
material
|
|
$
|
28,625
|
|
$
|
22,881
|
|
Work-in-process
|
|
|
23,719
|
|
|
35,741
|
|
Finished
goods
|
|
|
115,355
|
|
|
45,148
|
|
|
|
$
|
167,699
|
|
$
|
103,770
|
|
Asset
Held for Sale
-
Asset
held for sale in the amount of $1,599,000 represents a former warehouse facility
which the Company is in the process of selling. The Company expects to sell
this
facility within the next 12 months for an amount greater than its current
carrying value. The Company ceased depreciating the facility at the time it
was
classified as held for sale.
Revenue
Recognition
-
The
Company recognizes revenue from product sales when the goods are shipped and
title and risk of loss passes to the customer. Provisions for returns,
allowances, rebates to customers and other adjustments are provided in the
same
period that the related sales are recorded.
Net
Income Per Common Share
-
The
following table sets forth the computation of basic and diluted net income
per
common share for the three and six months ended September 30, 2006 and 2005
(in
thousands, except per share data):
|
|
Three
Months Ended
September
30,
|
|
Six
Months Ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
11,703
|
|
$
|
9,239
|
|
$
|
6,196
|
|
$
|
5,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding for basic income per common
share
|
|
|
10,559
|
|
|
10,496
|
|
|
10,528
|
|
|
10,455
|
|
Effect
of dilutive stock options
|
|
|
279
|
|
|
521
|
|
|
303
|
|
|
511
|
|
Adjusted
weighted average shares outstanding for diluted income per
common
share
|
|
|
10,838
|
|
|
11,017
|
|
|
10,831
|
|
|
10,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per common share
|
|
$
|
1.11
|
|
$
|
.88
|
|
$
|
.59
|
|
$
|
.53
|
|
Diluted
net income per common share
|
|
$
|
1.08
|
|
$
|
.84
|
|
$
|
.57
|
|
$
|
.51
|
|
Statements
of Cash Flows
-
For
purposes of the consolidated statements of cash flows, the Company considers
all
holdings of highly liquid debt instruments with a purchased maturity of three
months or less to be cash equivalents.
(2)
|
SHARE-BASED
COMPENSATION:
|
Under
the
terms of the 2004 Equity Compensation Plan (“2004 Plan”), the Human Resources
Committee (“Committee”) of the Board of Directors may grant incentive stock
options, non-qualified stock options, restricted stock grants, stock
appreciation rights, stock bonuses and other awards to officers and other
employees. Grants under the 2004 Plan may be made through August 3, 2014. The
term of each grant is at the discretion of the Committee, but in no event
greater than ten years from the date of grant. The Committee has discretion
to
determine the date or dates on which granted options become exercisable. All
options outstanding as of September 30, 2006 become exercisable at the rate
of
25% per year commencing one year after the date of grant. At September 30,
2006,
options to acquire 1,340,500 shares were available for grant under the 2004
Plan.
Under
the
terms of the CSS Industries, Inc. 2006 Stock Option Plan for Non-Employee
Directors (“2006 Plan”), non-qualified stock options to purchase up to 200,000
shares of common stock are available for grant to non-employee directors
at
exercise prices of not less than fair market value of the underlying common
stock on the date of grant. Under the 2006 Plan, options to purchase 4,000
shares of the Company’s common stock will be granted automatically to each
non-employee director on the last day that the Company’s common stock is traded
in November from 2006 to 2010. Each option will expire five years after the
date
the option is granted and commencing one year after the date of grant, options
begin vesting and are exercisable at the rate of 25% per year. At September
30,
2006, options to acquire 200,000 shares were available for grant under the
2006
Plan.
Prior
to
April 1, 2006, the Company accounted for its equity incentive plans under the
recognition and measurement provisions of Accounting Principles Board (“APB”)
Opinion No. 25, “Accounting for Stock Issued to Employees,” and related
Interpretations, as permitted by Statement of Financial Accounting Standards
(“SFAS”) No. 123, “Accounting for Stock-Based Compensation.” Effective April 1,
2006, the Company adopted the fair value recognition provisions of SFAS No.
123R, “Share-Based Payment,” using the modified prospective transition method.
Under that transition method, stock compensation cost recognized in fiscal
2007
includes: (a) compensation cost for all share-based payments granted prior
to,
but not vested as of April 1, 2006, based on the grant date fair value estimated
in accordance with the original provisions of SFAS No. 123, and (b) compensation
cost for all share-based payments granted subsequent to April 1, 2006, based
on
the grant date fair value estimated in accordance with the provisions of SFAS
No. 123R. Compensation cost is recognized on a straight-line basis over the
vesting period during which employees perform related services. In accordance
with the modified prospective transition method, the consolidated financial
statements for fiscal 2006 have not been restated to reflect the impact of
SFAS
No. 123R.
Prior
to
the adoption of SFAS No. 123R, the Company presented all tax benefits of
deductions resulting from share-based payment arrangements as operating cash
flows in the Consolidated Statements of Cash Flows. SFAS No. 123R requires
that
the cash flows resulting from the tax benefits from tax deductions in excess
of
the compensation cost recognized for those share awards (referred to as excess
tax benefits) to be classified as financing cash flows. The $740,000 excess
tax
benefit classified as a financing cash inflow for the six months ended September
30, 2006 would have been classified as an operating cash inflow if the Company
had not adopted SFAS No. 123R.
Compensation
cost related to stock options recognized in operating results (included in
selling, general and administrative expenses) was $668,000 and $1,412,000 in
the
three and six months ended September 30, 2006, respectively. The associated
future income tax benefit recognized was $157,000 and $325,000 in the three
and
six months ended September 30, 2006, respectively. For the three and six months
ended September 30, 2006, basic and diluted income per share was $.05 and $.10
lower, respectively, than if the Company had continued to account for
share-based compensation under APB Opinion No. 25.
The
following table illustrates the effect on net income and net income per share
if
the Company had applied the fair value recognition provisions of SFAS No. 123
to
options granted under the Company’s stock option plan for the three and six
months ended September 30, 2005:
|
|
Three
Months Ended September 30, 2005
|
|
Six
Months Ended September 30, 2005
|
|
(in
thousands, except per share data)
|
|
|
|
|
|
Net
income, as reported
|
|
$
|
9,239
|
|
$
|
5,584
|
|
Add:
Total stock-based employee compensation expense included in the
determination of net income as reported, net of tax
effects
|
|
|
172
|
|
|
172
|
|
Deduct:
Total stock-based employee compensation expense determined under
fair-value based method for all awards, net of related tax
effects
|
|
|
(755
|
)
|
|
(1,450
|
)
|
Pro
forma net income
|
|
$
|
8,656
|
|
$
|
4,306
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
Basic
- as reported
|
|
$
|
.88
|
|
$
|
.53
|
|
Basic
- pro forma
|
|
$
|
.82
|
|
$
|
.41
|
|
|
|
|
|
|
|
|
|
Diluted
- as reported
|
|
$
|
.84
|
|
$
|
.51
|
|
Diluted
- pro forma
|
|
$
|
.80
|
|
$
|
.40
|
|
Upon
exercise of stock options, the Company issues shares from treasury stock.
Expected volatilities are based on historical volatility of the Company’s common
stock. The expected life of the option is estimated using historical data
pertaining to option exercises and employee terminations. The risk-free interest
rate is based on U.S. Treasury yields in effect at the time of grant.
The
fair
value of each stock option granted was estimated on the date of grant using
the
Black-Scholes option pricing model with the following average
assumptions:
|
|
For
the Three Months
Ended
September 30,
|
|
For
the Six Months
Ended
September 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Expected
dividend yield at time of grant
|
|
|
1.51
|
%
|
|
1.33
|
%
|
|
1.61
|
%
|
|
1.44
|
%
|
Expected
stock price volatility
|
|
|
26
|
%
|
|
35
|
%
|
|
24
|
%
|
|
34
|
%
|
Risk-free
interest rate
|
|
|
4.77
|
%
|
|
4.01
|
%
|
|
4.96
|
%
|
|
3.97
|
%
|
Expected
life of option
|
|
|
4.6
years
|
|
|
4.6
years
|
|
|
4.7
years
|
|
|
4.6
years
|
|
Transactions
from April 1, 2006 through September 30, 2006 under the Company’s stock option
plans were as
follows:
|
|
Number
of
Shares
|
|
Option
Price
per
Share
|
|
Weighted
Average
Price
|
|
Weighted
Average
Life
Remaining
|
|
Aggregate
Intrinsic
Value
(in
thousands)
|
|
Options
outstanding at April 1, 2006
|
|
|
1,737,606
|
|
$
|
12.71
- 36.60
|
|
$
|
24.35
|
|
|
|
|
|
|
|
Granted
|
|
|
352,100
|
|
|
27.60
- 32.74
|
|
|
29.88
|
|
|
|
|
|
|
|
Exercised
|
|
|
(199,155
|
)
|
|
14.33
- 23.83
|
|
|
16.64
|
|
|
|
|
|
|
|
Canceled
|
|
|
(111,588
|
)
|
|
16.70
- 34.72
|
|
|
32.20
|
|
|
|
|
|
|
|
Options
outstanding at September 30, 2006
|
|
|
1,778,963
|
|
$
|
12.71
- 36.60
|
|
$
|
25.81
|
|
|
4.3
years
|
|
$
|
9,436
|
|
Options
exercisable at September 30, 2006
|
|
|
963,646
|
|
$
|
12.71
- 36.60
|
|
$
|
21.21
|
|
|
4.0
years
|
|
$
|
8,900
|
|
The
weighted average fair value of options granted during the six months ended
September 30, 2006 and 2005 was $7.64 and $10.36, respectively.
The
total
intrinsic value of options exercised during the six months ended September
30,
2006 was $2,484,000. As of September 30, 2006, there was $6,412,000 of total
unrecognized compensation cost related to non-vested stock option awards granted
under the Company’s equity incentive plans.
(3)
|
DERIVATIVE
FINANCIAL INSTRUMENTS:
|
The
Company enters into foreign currency forward contracts in order to reduce the
impact of certain foreign currency fluctuations. Firmly committed transactions
and the related receivables and payables may be hedged with foreign currency
forward contracts. Gains and losses arising from foreign currency forward
contracts are recognized in income or expense as offsets of gains and losses
resulting from the underlying hedged transactions. As of September 30, 2006,
the
notional amount of open foreign currency forward contracts was $19,432,000
and
the related unrealized gain was $13,000.
(4)
|
BUSINESS
RESTRUCTURING:
|
On
May 5,
2004, a subsidiary of the Company announced a restructuring of its business
and
established a restructuring reserve related to its administrative office located
in Minneapolis, Minnesota. This restructuring was undertaken in order to gain
efficiencies within the business unit and was substantially completed by the
first quarter of fiscal 2006. As part of this restructuring plan, the Company
accrued $377,000 for termination costs and costs related to the restructuring
of
the administrative office. As of the end of fiscal 2005, the Company had
communicated termination of employment to 33 employees. In fiscal 2005, the
Company increased the restructuring reserve in the amount of $255,000 related
to
the ratable recognition of retention bonuses for employees providing service
until their termination date. Additionally, during fiscal 2005, there was an
increase in the restructuring reserve in the amount of $177,000 related to
unutilized office space and of $398,000 related to other restructuring expenses.
The Company increased the restructuring reserve by $37,000 during fiscal 2006
primarily related to the ratable recognition of retention bonuses for employees
providing service until their termination. Final payments for termination costs
of $4,000 were made in the first quarter of fiscal 2007.
(5)
|
GOODWILL
AND INTANGIBLES:
|
The
Company performs the required annual impairment test of the carrying amount
of
goodwill and indefinite-lived intangible assets in the fourth quarter of its
fiscal year.
Included
in intangible assets, net in the accompanying condensed consolidated balance
sheets are the following acquired intangible assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames
|
|
$
|
4,290
|
|
$
|
4,290
|
|
Non-compete
and other, net
|
|
|
85
|
|
|
132
|
|
|
|
$
|
4,375
|
|
$
|
4,422
|
|
Amortization
expense related to intangible assets was $24,000 for the quarters ended
September 30, 2006 and 2005 and was $47,000 for the six months ended September
30, 2006 and 2005. The aggregate estimated amortization expense for intangible
assets remaining as of September 30, 2006 is as follows (in
thousands):
Fiscal
2007
|
|
$
|
47
|
|
Fiscal
2008
|
|
|
38
|
|
Total
|
|
$
|
85
|
|
(6)
|
COMMITMENTS
AND CONTINGENCIES:
|
On
August
31, 2006, the United States Court of International Trade (“CIT”) denied the
Company’s appeal challenging the imposition of antidumping duties on certain
tissue paper products imported from China. As described in Part I, Item 3 of
the
Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006,
in the proceedings before the CIT the Company was seeking reversal of the March
2005 final determination of the United States International Trade Commission
(“ITC”) that, in part, resulted in the imposition of such duties. The Company is
now contesting the final determination of the ITC in proceedings before the
United States Court of Appeals for the Federal Circuit, which proceedings were
initiated by the Company on October 27, 2006.
In
the
fiscal year ended March 31, 2005, the Company recognized an expense of
approximately $2,300,000 for these duties, reflecting the estimated liability
of
the Company’s Cleo subsidiary for duties relating to subject tissue paper
products imported from China during the 2005 fiscal year based on the applicable
deposit rates established by the United States Commerce Department. The amount
of Cleo’s actual liability for tissue duties pertaining to the fiscal year ended
March 31, 2005, which liability is capped at the deposit rates in effect with
respect to the period of time that the subject products were imported by Cleo,
will be determined at the time of “liquidation” of the applicable entries
by
United
States Customs & Border Protection. Liquidation of the applicable entries
has been enjoined pending the outcome of the Company’s appeal.
CSS
and
its subsidiaries are also involved in ordinary, routine legal proceedings that
are not considered by management to be material. In the opinion of Company
counsel and management, the ultimate liabilities resulting from such lawsuits
and claims will not materially affect the financial position of the Company
or
its results of operations or cash flows.
(7)
|
ACCOUNTING
PRONOUNCEMENTS:
|
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, “Fair Value Measurements.” SFAS No. 157 establishes a framework for
measuring fair value in accordance with accounting principles generally accepted
in the United States, and expands disclosure about such fair value instruments.
SFAS No. 157 is effective for fiscal years beginning after November 15, 2007
(fiscal 2009 for the Company). The Company is currently assessing the impact of
SFAS No. 157 on its financial position and results of operations.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 108, “Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements.” SAB 108
requires that public companies utilize a “dual-approach” to assessing the
quantitative effects of financial misstatements. This dual approach includes
both an income statement focused assessment and a balance sheet focused
assessment. The guidance in SAB 108 must be applied to annual financial
statements for fiscal years ending after November 15, 2006. The Company does
not
expect SAB 108 will have a material impact on the Company’s financial position
or results of operations.
In
June
2006, the FASB issued FASB Interpretation No. (“FIN”) 48, “Accounting for
Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in
income taxes. FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The interpretation
requires that the Company recognize in the financial statements the impact
of a
tax position, if that position is more likely than not of being sustained on
audit, based solely on the technical merits of the position. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods and disclosure. The provisions of FIN 48 will
be
effective for the Company beginning April 1, 2007 with the cumulative effect
of
the change in accounting principle recorded as an adjustment to opening retained
earnings. The Company is currently evaluating the impact of adopting FIN 48
on
its consolidated financial statements.
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.”
SFAS No. 154 requires retrospective application to prior periods’ financial
statements for voluntary changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. This statement also requires that retrospective
application of a change in accounting principle be limited to the direct effects
of the change. Indirect effects of a change in accounting principle, such as
a
change in non-discretionary profit-sharing payments resulting from an accounting
change, should be recognized in the period of the accounting change. SFAS No.
154 also requires that a change in depreciation, amortization or depletion
method for long-lived non-financial assets be accounted for as a change in
accounting estimate affected by a change in accounting principle. This statement
is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. The Company’s financial position,
results of operations or cash flows will only be impacted by SFAS No. 154 if
it
implements changes in accounting principles that are addressed by the standard
or corrects accounting errors in future periods.
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs,” which amends the
guidance in Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing”
to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs and spoilage. SFAS No. 151 now requires that these
costs
be expensed as current period charges. In addition, this statement requires
that
the allocation of fixed production overhead to the costs of conversion be based
on the normal capacity of the production facilities. The provisions of this
statement were effective for the Company beginning April 1, 2006. The adoption
of this statement did not have a material impact on the Company’s financial
position or results of operations.
CSS
INDUSTRIES, INC. AND SUBSIDIARIES
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
STRATEGIC
OVERVIEW
Approximately
75% of the Company’s sales are attributable to seasonal (Christmas, Valentine’s
Day, Easter and Halloween) products, with the remainder being attributable
to
everyday products. Seasonal products are sold primarily to mass market retailers
and the Company typically has relatively high market shares in many of these
categories. Most of these markets have shown little or no growth in recent
years, and the Company continues to confront significant cost pressure as its
competitors source certain products from overseas and its customers increase
direct sourcing from overseas factories. Increasing customer concentration
has
increased their bargaining power which has also contributed to price
pressure.
The
Company has taken several measures to respond to cost and price pressures.
CSS
has increased its investment in product and packaging design and product
knowledge to assure it can continue to provide unique added value to its
customers. In addition, CSS substantially expanded an office and showroom in
Hong Kong to better meet customers’ buying needs and to be able to provide
alternatively sourced products at competitive prices. CSS also increased its
focus on efficiency and productivity in its North American production and
distribution facilities to maintain its competitiveness
domestically.
The
Company’s everyday craft and floral product lines have higher inherent growth
potential due to CSS’ relatively low current market share. The Company has
established project teams to pursue top line sales growth in these and other
areas.
The
Company has experienced cost increases in certain key materials, supplies and
logistics services. These increases will continue to impact fiscal 2007 and
will
require that management either obtain price increases from its customers or
find
other means of reducing product and delivery costs.
Historically,
significant growth at CSS has come through acquisitions. Management anticipates
that it will continue to utilize acquisitions to stimulate further
growth.
LITIGATION
On
August
31, 2006, the United States Court of International Trade (“CIT”) denied the
Company’s appeal challenging the imposition of antidumping duties on certain
tissue paper products imported from China. As described in Part I, Item 3 of
the
Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006,
in the proceedings before the CIT the Company was seeking reversal of the March
2005 final determination of the United States International Trade Commission
(“ITC”) that, in part, resulted in the imposition of such duties. The Company is
now contesting the final determination of the ITC in proceedings before the
United States Court of Appeals for the Federal Circuit, which proceedings were
initiated by the Company on October 27, 2006.
In
the
fiscal year ended March 31, 2005, the Company recognized an expense of
approximately $2,300,000 for these duties, reflecting the estimated liability
of
the Company’s Cleo subsidiary for duties relating to subject tissue paper
products imported from China during the 2005 fiscal year based on the applicable
deposit rates established by the United States Commerce Department. The amount
of Cleo’s actual liability for tissue duties pertaining to the fiscal year ended
March 31, 2005, which liability is capped at the deposit rates in effect with
respect to the period of time that the subject products were imported by Cleo,
will be determined at the time of “liquidation” of the applicable entries by
United States Customs & Border Protection. Liquidation of the applicable
entries has been enjoined pending the outcome of the Company’s
appeal.
CSS
and
its subsidiaries are also involved in ordinary, routine legal proceedings that
are not considered by management to be material. In the opinion of Company
counsel and management, the ultimate liabilities resulting from such lawsuits
and claims will not materially affect the financial position of the Company
or
its results of operations or cash flows.
CRITICAL
ACCOUNTING POLICIES
The
consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The
significant accounting policies of the Company are described in the notes to
the
consolidated financial statements included in the Annual Report on Form 10-K
for
the fiscal year ended March 31, 2006. Judgments and estimates of uncertainties
are required in applying the Company’s accounting policies in many areas.
Following are some of the areas requiring significant judgments and estimates:
revenue; cash flow and valuation assumptions in performing asset impairment
tests of long-lived assets and goodwill; valuation reserves for inventory and
accounts receivable; income tax accounting and the valuation of share-based
awards. There have been no material changes to the critical accounting policies
affecting the application of those accounting policies as noted in the Company’s
Annual Report on Form 10-K for the fiscal year ended March 31, 2006, except
for
the accounting for share-based compensation as described below.
Share-Based
Compensation
Effective
April 1, 2006, the Company adopted Statement of Financial Accounting Standards
(“SFAS”) No. 123R, “Share-Based Compensation,” using the modified prospective
transition method and began accounting for its share-based compensation using
a
fair-value based recognition method. Under the provisions of SFAS No. 123R,
share-based compensation cost is estimated at the grant date based on the
fair-value of the award and is expensed ratably over the requisite service
period of the award. Determining the appropriate fair-value model and
calculating the fair value of share-based awards at the grant date requires
considerable judgment, including estimating stock price volatility, expected
option life and forfeiture rates. The Company develops its estimates based
on
historical data and market information which can change significantly over
time.
The
Company uses the Black-Scholes option valuation model to value employee stock
awards. The Company estimates stock price volatility based on historical
volatility of its common stock. Estimated option life and forfeiture rate
assumptions are also derived from historical data. The Company recognizes
compensation expense using the straight-line amortization method for share-based
compensation awards with graded vesting. Had the Company used alternative
valuation methodologies and assumptions, the amount it expensed for share-based
payments could be significantly different.
RESULTS
OF OPERATIONS
Seasonality
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
shipment levels and operating profits in the second and third quarters of the
Company’s fiscal year which ends March 31, thereby causing significant
fluctuations in the quarterly results of operations of the Company.
Six
Months Ended September 30, 2006 Compared to Six Months Ended September 30,
2005
Sales
for
the six months ended September 30, 2006 of $221,363,000 were relatively flat
compared to sales of $221,537,000 in 2005 primarily due to the later timing
of
shipments of ribbon and bow products, gift bags and tissue and lower sales
of
Halloween products, substantially offset by increased sales of Christmas boxed
greeting cards, all occasion cards and gift wrap.
Cost
of
sales, as a percentage of sales, was 74% in 2006 and 76% in 2005. The
improvement in cost of sales is primarily due to improved margins achieved
in
the gift wrap and tissue product lines, partially offset by lower margins on
Halloween products.
Selling,
general and administrative (“SG&A”) expenses, as a percentage of sales, were
21% in 2006 and 19% in 2005. The increase in SG&A expenses, as a percentage
of sales, is primarily due to share-based compensation expense related to the
adoption of SFAS No. 123R and expected increases in severance, incentive
compensation and consulting costs.
Interest
expense, net was $1,217,000 in 2006 and $1,499,000 in 2005. The
decrease in interest expense was primarily due to lower borrowing levels during
the six months compared to the same period in the prior year.
Income
taxes, as a percentage of income before taxes, were 37% in 2006 and 36% in
2005.
The increase in the effective tax rate is primarily due to the portion of stock
option expense recorded as a result of the adoption of SFAS No. 123R which
is
not tax deductible.
Net
income for the six months ended September 30, 2006 was $6,196,000, or $.57
per
diluted share compared to $5,584,000, or $.51 per diluted share in 2005. The
increase in net income is primarily attributable to the impact of improved
margins, partially offset by the expensing of stock options due to the current
year adoption of SFAS No. 123R and higher severance, compensation and consulting
costs.
Three
Months Ended September 30, 2006 Compared to Three Months Ended September 30,
2005
Sales
for
the three months ended September 30, 2006 increased 6% to $173,830,000 from
$164,043,000 in 2005 primarily due to a shift of seasonal sales from the first
quarter to the second quarter compared to the prior year and increased sales
of
Christmas boxed greeting cards to a major retailer, which was partially offset
by lower sales of gift bags and tissue during the quarter compared to the prior
year.
Cost
of
sales, as a percentage of sales, was 74% in 2006 and 77% in 2005. The decrease
in cost of sales is primarily due to improved margins achieved in the gift
bag,
gift wrap and tissue product lines, partially offset by lower margins on
Halloween products.
SG&A
expenses, as a percentage of sales, were 15% in 2006 and 14% in 2005. The
increase in SG&A expenses, as a percentage of sales, is primarily due to
share-based compensation expense related to the adoption of SFAS No. 123R and
expected increases in incentive compensation.
Interest
expense, net of $1,083,000 in 2006 was consistent with interest expense, net
of
$1,057,000 in 2005.
Income
taxes, as a percentage of income before taxes, were 37% in 2006 and 36% in
2005.
The increase in the effective tax rate is primarily due to the portion of stock
option expense recorded as a result of the adoption of SFAS No. 123R which
is
not tax deductible.
Net
income for the three months ended September 30, 2006 was $11,703,000, or $1.08
per diluted share compared to $9,239,000, or $.84 per diluted share in 2005.
The
increase in net income is primarily attributable to the impact of higher sales
volume and improved margins, partially offset by the expensing of stock options
due to the current year adoption of SFAS No. 123R and higher incentive
compensation cost.
LIQUIDITY
AND CAPITAL RESOURCES
At
September 30, 2006, the Company had working capital of $174,271,000 and
stockholders' equity of $239,787,000. The increase in accounts receivable from
March 31, 2006 reflects seasonal billings of current year Halloween and
Christmas accounts receivables, net of current year collections. The increase
in
inventories and other current liabilities from March 31, 2006 reflected the
normal seasonal inventory build necessary for the fiscal 2007 shipping season.
The increase in stockholders’ equity was primarily attributable to year-to-date
net income and capital contributed upon exercise of employee stock options,
partially offset by payments of cash dividends.
The
Company relies primarily on cash generated from its operations and seasonal
borrowings to meet its liquidity requirements. Historically, a significant
portion of the Company’s revenues are seasonal with approximately 80% of sales
recognized in the second and third quarters. As payment for sales of Christmas
related products is usually not received until after the holiday selling season
in accordance with general industry practice, short-term borrowing needs
increase throughout the second and third quarters peaking prior to Christmas
and
dropping thereafter. Seasonal financing requirements are met under a $50,000,000
revolving credit facility with five banks and an accounts receivable
securitization facility with an issuer of receivables-backed commercial paper.
This facility has a funding limit of $100,000,000 during peak seasonal periods
and $25,000,000 during off-peak seasonal periods. In addition, the Company
has
outstanding $40,000,000 of 4.48% senior notes due ratably in annual $10,000,000
installments through December 2009. These financing facilities are available
to
fund the Company’s seasonal borrowing needs and to provide the Company with
sources of capital for general corporate purposes, including acquisitions as
permitted under the revolving credit facility. At September 30, 2006, there
was
$40,000,000 of long-term borrowings outstanding related to the senior notes
and
$73,510,000 outstanding under the Company’s short-term credit facilities. In
addition, the Company has a minor amount of capital leases outstanding. Based
on
its current operating plan, the Company believes its sources of available
capital are adequate to meet its future cash needs for at least the next 12
months.
As
of
September 30, 2006, the Company’s letter of credit commitments are as follows
(in thousands):
|
|
Less
than 1
Year
|
|
1-3
Years
|
|
4-5
Years
|
|
After
5
Years
|
|
Total
|
|
Letters
of credit
|
|
$
|
6,383
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
6,383
|
|
The
Company has letters of credit that guarantee funding of workers compensation
claims as well as obligations to certain vendors. The Company has no financial
guarantees or other 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
cancelled.
LABOR
RELATIONS
With
the
exception of the bargaining units at the gift wrap facilities in Memphis,
Tennessee and the ribbon manufacturing facilities in Hagerstown, Maryland,
which
totaled approximately 880 employees as of September 30, 2006, CSS employees
are
not represented by labor unions. Because of the seasonal nature of certain
of
its businesses, the number of production employees fluctuates during the year.
The collective bargaining agreement with the labor union representing Cleo’s
production and maintenance employees at the Cleo gift wrap plant and warehouses
in Memphis, Tennessee remains in effect until December 31, 2007. The collective
bargaining agreement with the labor union representing the Hagerstown-based
production and maintenance employees remains in effect until December 31, 2006.
The Company is presently in negotiations with the labor union representing
the
Hagerstown-based production and maintenance employees regarding the terms of
a
new collective bargaining agreement to replace the current agreement. The
Company believes that it will be able to reach agreement on the terms of a
new
collective bargaining agreement prior to the expiration of the existing
collective bargaining agreement.
ACCOUNTING
PRONOUNCEMENTS
See
Note
7 to the Consolidated Financial Statements for information concerning recent
accounting pronouncements and the impact of those standards.
FORWARD-LOOKING
STATEMENTS
This
report includes “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995, including statements regarding the
expected outcome of ongoing negotiations with the labor union representing
Hagerstown-based production and maintenance employees regarding the provisions
of a new collective bargaining agreement; those relating to sources of available
capital being adequate to meet its future cash needs; those relating to the
expected future impact of changes in accounting principles; and those relating
to the anticipated effects of measures taken by the Company to respond to cost
and price pressures. Forward-looking statements are based on the beliefs of
the
Company’s management as well as assumptions made by and information currently
available to the Company’s management as to future events and financial
performance with respect to the Company’s operations. Forward-looking statements
speak only as of the date made. The Company undertakes no obligation to update
any forward-looking statements to reflect the events or circumstances arising
after the date as of which they were made. Actual events or results may differ
materially from those discussed in forward-looking statements as a result of
various factors, including without limitation, general market conditions,
increased competition, increased operating costs, including labor-related and
energy costs and costs relating to the imposition or retrospective application
of duties on imported products, currency risks and other risks associated with
international markets, risks associated with acquisitions, including acquisition
integration costs, the risk that customers may become insolvent, costs of
compliance with governmental regulations and government investigations,
liability associated with non-compliance with governmental regulations,
including regulations pertaining to the environment, Federal and state
employment laws, and import and export controls and customs laws, and other
factors described more fully in the Company’s Annual Report on Form 10-K for the
fiscal year ended March 31, 2006 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.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
The
Company is exposed to the impact of interest rate changes and manages this
exposure through the use of variable-rate and fixed-rate debt. The Company
does
not enter into contracts for trading purposes and does not use leveraged
instruments. The market risks associated with debt obligations and other
significant instruments as of September 30, 2006 has not materially changed
from
March 31, 2006 (see Item 7A of the Company’s Annual Report on Form 10-K for the
fiscal year ended March 31, 2006).
(a)
|
Evaluation
of Disclosure Controls and Procedures.
As
of the end of the period covered by this report, the Company’s management,
with the participation of the Company’s President and Chief Executive
Officer and Vice President - Finance and Chief Financial Officer,
evaluated the effectiveness of the Company’s disclosure controls and
procedures in accordance with Rule 13a-15 of the Securities Exchange
Act
of 1934 (the “Exchange Act”). Based upon that evaluation, the President
and Chief Executive Officer and Vice President - Finance and Chief
Financial Officer concluded that the Company’s disclosure controls and
procedures are effective in providing reasonable assurance that
information required to be disclosed by the Company in reports that
it
files under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange
Commission’s rules and forms.
|
(b)
|
Changes
in Internal Controls.
There was no change in the Company’s internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) as promulgated
by
the Securities and Exchange Commission under the Exchange Act) during
the
second quarter of fiscal year 2007 that has materially affected,
or is
reasonably likely to materially affect, the Company’s internal control
over financial reporting.
|
CSS
INDUSTRIES, INC. AND SUBSIDIARIES
PART
II - OTHER INFORMATION
On
August
31, 2006, the United States Court of International Trade (“CIT”) denied the
Company’s appeal challenging the imposition of antidumping duties on certain
tissue paper products imported from China. As described in Part I, Item 3 of
the
Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006,
in the proceedings before the CIT the Company was seeking reversal of the March
2005 final determination of the United States International Trade Commission
(“ITC”) that, in part, resulted in the imposition of such duties. The Company is
now contesting the final determination of the ITC in proceedings before the
United States Court of Appeals for the Federal Circuit, which proceedings were
initiated by the Company on October 27, 2006.
In
the
fiscal year ended March 31, 2005, the Company recognized an expense of
approximately $2,300,000 for these duties, reflecting the estimated liability
of
the Company’s Cleo subsidiary for duties relating to subject tissue paper
products imported from China during the 2005 fiscal year based on the applicable
deposit rates established by the United States Commerce Department. The amount
of Cleo’s actual liability for tissue duties pertaining to the fiscal year ended
March 31, 2005, which liability is capped at the deposit rates in effect with
respect to the period of time that the subject products were imported by Cleo,
will be determined at the time of “liquidation” of the applicable entries by
United States Customs & Border Protection. Liquidation of the applicable
entries has been enjoined pending the outcome of the Company’s
appeal.
CSS
and
its subsidiaries are also involved in ordinary, routine legal proceedings that
are not considered by management to be material. In the opinion of Company
counsel and management, the ultimate liabilities resulting from such lawsuits
and claims will not materially affect the consolidated financial position of
the
Company or its results of operations or cash flows.
Risks
associated with our use of foreign suppliers may adversely affect our business,
results of operations and financial condition.
For
some
of our product lines, particularly our Halloween, Easter, Christmas boxed
greeting cards, gift bags, gift tags and tissue paper product lines, we use
foreign suppliers to manufacture a portion of our products. Approximately 37%
of
our sales in fiscal 2006 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, difficulties in
maintaining and monitoring quality control, compliance with foreign laws and
regulations, costs relating to the imposition or retrospective application
of
duties on imported products, economic or political instability, international
public health issues, and restrictions on the repatriation of profits and
assets.
|
Submission
of Matters to a Vote of Security
Holders
|
|
(a)
|
The
annual meeting of stockholders of the Company was held on August
2, 2006.
The only matters voted upon at the annual meeting were the election
of
directors and a proposal to approve the CSS Industries, Inc. 2006
Stock
Option Plan for Non-Employee Directors in the form adopted by the
Board of
Directors of the Company on May 31,
2006.
|
|
(b)
|
The
result of the vote of the stockholders for the election of directors
was
as set forth in the table that follows. The individuals listed in
the
table below were elected to serve as Directors of the Company until
the
next annual meeting and until their successors shall be elected and
qualify:
|
|
SHARES
OF VOTING STOCK
|
|
FOR
|
|
WITHHELD
|
Scott
A. Beaumont
|
9,725,965
|
|
104,247
|
James
H. Bromley
|
9,436,436
|
|
393,776
|
Jack
Farber
|
9,708,987
|
|
121,225
|
Leonard
E. Grossman
|
9,582,123
|
|
248,089
|
James
E. Ksansnak
|
9,436,436
|
|
393,776
|
Rebecca
C. Matthias
|
9,509,707
|
|
320,505
|
Christopher
J. Munyan
|
9,709,244
|
|
120,968
|
|
(c)
|
The
result of the vote of the stockholders on the proposal to approve
the CSS
Industries, Inc. 2006 Stock Option Plan for Non-Employee Directors
was as
follows:
|
For
|
6,115,054
|
Against
|
2,937,898
|
Abstain
|
3,628
|
Broker
non-votes
|
773,632
|
Exhibit
31.1 Certification of the Chief Executive Officer
of CSS Industries, Inc. required by Rule 13a-14(a) under the Securities Exchange
Act of 1934.
Exhibit
31.2 Certification of the Chief Financial Officer
of CSS Industries, Inc. required by Rule 13a-14(a) under the Securities Exchange
Act of 1934.
Exhibit
32.1 Certification of the Chief Executive Officer
of CSS Industries, Inc. required by Rule 13a-14(b) under the Securities Exchange
Act of 1934 and 18 U. S. C. Section 1350.
Exhibit
32.2 Certification of the Chief Financial Officer
of CSS Industries, Inc. required by Rule 13a-14(b) under the Securities Exchange
Act of 1934 and 18 U. S. C. Section 1350.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
CSS
INDUSTRIES, INC.
|
|
(Registrant)
|
Date:
November 1, 2006
|
By:
|
/s/Christopher
J. Munyan
|
|
|
Christopher
J. Munyan
|
|
|
President
and Chief
|
|
|
Executive
Officer
|
|
|
(principal
executive officer)
|
Date:
November 1, 2006
|
By:
|
/s/Clifford
E. Pietrafitta
|
|
|
Clifford
E. Pietrafitta
|
|
|
Vice
President - Finance and
|
|
|
Chief
Financial Officer
|
|
|
(principal
financial and accounting officer)
|
20