UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended
December 31, 2006
or
o
|
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
(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)
|
|
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
x Yes
No
Indicate
by check mark whether the registrant is 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
|
Accelerated
filer x
|
Non-accelerated
filer
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.)
Yes
x
No
As
of
January 19, 2007, there were 10,738,645 shares of common stock outstanding
which
excludes shares which may still be issued upon exercise of stock
options.
INDEX
|
|
PAGE
NO.
|
|
|
|
|
|
|
|
|
|
|
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|
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3
|
|
|
|
|
|
4
|
|
|
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|
|
5
|
|
|
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|
6-13
|
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|
|
|
14-19
|
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|
|
|
19
|
|
|
|
|
|
20
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|
|
|
|
|
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|
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|
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21
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|
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21
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|
|
23
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|
|
|
|
|
24
|
CSS
INDUSTRIES,
INC. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(In
thousands, except per share data)
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
December
31,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
SALES
|
|
$
|
264,065
|
|
$
|
251,796
|
|
$
|
485,428
|
|
$
|
473,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
197,695
|
|
|
189,367
|
|
|
360,761
|
|
|
357,808
|
|
Selling,
general and administrative expenses
|
|
|
26,424
|
|
|
23,867
|
|
|
73,917
|
|
|
66,868
|
|
Restructuring
expenses
|
|
|
1,745
|
|
|
3
|
|
|
1,745
|
|
|
37
|
|
Interest
expense, net
|
|
|
1,446
|
|
|
1,483
|
|
|
2,663
|
|
|
2,982
|
|
Other
income, net
|
|
|
(130
|
)
|
|
(47
|
)
|
|
(358
|
)
|
|
(182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
227,180
|
|
|
214,673
|
|
|
438,728
|
|
|
427,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAXES
|
|
|
36,885
|
|
|
37,123
|
|
|
46,700
|
|
|
45,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAX PROVISION
|
|
|
13,595
|
|
|
13,199
|
|
|
17,214
|
|
|
16,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
23,290
|
|
$
|
23,924
|
|
$
|
29,486
|
|
$
|
29,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.19
|
|
$
|
2.27
|
|
$
|
2.79
|
|
$
|
2.81
|
|
Diluted
|
|
$
|
2.13
|
|
$
|
2.18
|
|
$
|
2.71
|
|
$
|
2.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
10,641
|
|
|
10,538
|
|
|
10,565
|
|
|
10,483
|
|
Diluted
|
|
|
10,931
|
|
|
10,979
|
|
|
10,863
|
|
|
10,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
DIVIDENDS PER SHARE OF COMMON STOCK
|
|
$
|
.12
|
|
$
|
.12
|
|
$
|
.36
|
|
$
|
.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
23,290
|
|
$
|
23,924
|
|
$
|
29,486
|
|
$
|
29,508
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
3
|
|
|
-
|
|
Comprehensive
income
|
|
$
|
23,290
|
|
$
|
23,924
|
|
$
|
29,489
|
|
$
|
29,508
|
|
See
notes
to consolidated financial statements.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In
thousands)
|
|
December
31,
|
|
March
31,
|
|
|
|
2006
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
10,303
|
|
$
|
57,656
|
|
Accounts
receivable, net
|
|
|
223,944
|
|
|
35,582
|
|
Inventories
|
|
|
66,455
|
|
|
103,770
|
|
Deferred
income taxes
|
|
|
7,718
|
|
|
7,898
|
|
Assets
held for sale
|
|
|
2,796
|
|
|
-
|
|
Other
current assets
|
|
|
13,234
|
|
|
18,906
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
324,450
|
|
|
223,812
|
|
|
|
|
|
|
|
|
|
PROPERTY,
PLANT AND EQUIPMENT, NET
|
|
|
61,307
|
|
|
70,868
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
Goodwill
|
|
|
30,952
|
|
|
30,952
|
|
Intangible
assets, net
|
|
|
4,351
|
|
|
4,422
|
|
Other
|
|
|
3,807
|
|
|
4,095
|
|
|
|
|
|
|
|
|
|
Total
other assets
|
|
|
39,110
|
|
|
39,469
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
424,867
|
|
$
|
334,149
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Notes
payable
|
|
$
|
42,400
|
|
$
|
-
|
|
Current
portion of long-term debt
|
|
|
10,195
|
|
|
10,169
|
|
Accrued
customer programs
|
|
|
16,516
|
|
|
10,791
|
|
Accrued
restructuring expenses
|
|
|
1,232
|
|
|
4
|
|
Other
current liabilities
|
|
|
61,498
|
|
|
41,366
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
131,841
|
|
|
62,330
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT, NET OF CURRENT PORTION
|
|
|
20,441
|
|
|
30,518
|
|
|
|
|
|
|
|
|
|
LONG-TERM
OBLIGATIONS
|
|
|
3,300
|
|
|
3,533
|
|
|
|
|
|
|
|
|
|
DEFERRED
INCOME TAXES
|
|
|
5,080
|
|
|
5,258
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
264,205
|
|
|
232,510
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
424,867
|
|
$
|
334,149
|
|
See
notes
to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(In
thousands)
|
|
Nine
Months Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
29,486
|
|
$
|
29,508
|
|
Adjustments
to reconcile net income to net cash used for operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
10,564
|
|
|
10,460
|
|
Provision
for doubtful accounts
|
|
|
202
|
|
|
479
|
|
Asset
impairments
|
|
|
422
|
|
|
-
|
|
Deferred
tax provision (benefit)
|
|
|
1
|
|
|
(224
|
)
|
(Gain)
loss on sale of assets
|
|
|
(16
|
)
|
|
61
|
|
Share-based
compensation expense
|
|
|
2,131
|
|
|
172
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Increase
in accounts receivable
|
|
|
(188,564
|
)
|
|
(163,400
|
)
|
Decrease
in inventory
|
|
|
37,315
|
|
|
16,936
|
|
Decrease
in other assets
|
|
|
5,855
|
|
|
361
|
|
Increase
in other liabilities
|
|
|
20,070
|
|
|
14,876
|
|
Increase
in accrued taxes
|
|
|
6,802
|
|
|
15,934
|
|
|
|
|
|
|
|
|
|
Total
adjustments
|
|
|
(105,218
|
)
|
|
(104,345
|
)
|
|
|
|
|
|
|
|
|
Net
cash used for operating activities
|
|
|
(75,732
|
)
|
|
(74,837
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(4,036
|
)
|
|
(6,930
|
)
|
Proceeds
from sale of assets
|
|
|
16
|
|
|
335
|
|
|
|
|
|
|
|
|
|
Net
cash used for investing activities
|
|
|
(4,020
|
)
|
|
(6,595
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Borrowings
on long-term obligations
|
|
|
-
|
|
|
729
|
|
Payments
on long-term obligations
|
|
|
(10,080
|
)
|
|
(10,373
|
)
|
Borrowings
on notes payable
|
|
|
168,560
|
|
|
227,795
|
|
Repayments
on notes payable
|
|
|
(126,160
|
)
|
|
(169,895
|
)
|
Dividends
paid
|
|
|
(3,801
|
)
|
|
(3,783
|
)
|
Purchase
of treasury stock
|
|
|
(303
|
)
|
|
(6,101
|
)
|
Proceeds
from exercise of stock options
|
|
|
2,987
|
|
|
4,103
|
|
Tax
benefit realized for stock options exercised
|
|
|
1,193
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
32,396
|
|
|
42,475
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
3
|
|
|
-
|
|
Net
decrease in cash and cash equivalents
|
|
|
(47,353
|
)
|
|
(38,957
|
)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
57,656
|
|
|
57,333
|
|
Cash
and cash equivalents at end of period
|
|
$
|
10,303
|
|
$
|
18,376
|
|
See
notes
to consolidated financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 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.
Reclassification
-
Certain
prior period amounts have been reclassified to conform with the current year
classification.
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 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 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):
|
|
December
31,
|
|
March
31,
|
|
|
|
2006
|
|
2006
|
|
|
|
|
|
|
|
Raw
material
|
|
$
|
15,932
|
|
$
|
22,881
|
|
Work-in-process
|
|
|
16,141
|
|
|
35,741
|
|
Finished
goods
|
|
|
34,382
|
|
|
45,148
|
|
|
|
$
|
66,455
|
|
$
|
103,770
|
|
Assets
Held for Sale -
Assets
held for sale in the amount of $2,796,000 represents two former manufacturing
facilities and a separate distribution facility which the Company is in the
process of selling. The Company expects to sell these facilities within the
next
12 months for an amount greater than the current carrying value. The Company
ceased depreciating these facilities at the time they were 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 nine months ended December 31, 2006 and 2005
(in
thousands, except per share data):
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
December 31,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
23,290
|
|
$
|
23,924
|
|
$
|
29,486
|
|
$
|
29,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding for basic income per common
share
|
|
|
10,641
|
|
|
10,538
|
|
|
10,565
|
|
|
10,483
|
|
Effect
of dilutive stock options
|
|
|
290
|
|
|
441
|
|
|
298
|
|
|
484
|
|
Adjusted
weighted average shares outstanding for diluted income per common
share
|
|
|
10,931
|
|
|
10,979
|
|
|
10,863
|
|
|
10,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per common share
|
|
$
|
2.19
|
|
$
|
2.27
|
|
$
|
2.79
|
|
$
|
2.81
|
|
Diluted
net income per common share
|
|
$
|
2.13
|
|
$
|
2.18
|
|
$
|
2.71
|
|
$
|
2.69
|
|
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 December 31, 2006 become exercisable at the rate
of
25% per year commencing one year after the date of grant. At December 31,
2006,
options to acquire 1,337,775 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 are 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 December
31,
2006, options to acquire 180,000 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, and c) compensation cost for all share-based payments modified,
repurchased, or cancelled subsequent to April 1, 2006. 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) be classified as financing cash flows. The $1,193,000 excess
tax
benefit classified as a financing cash inflow for the nine months ended December
31, 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 $719,000 and $2,131,000
in the
three and nine months ended December 31, 2006, respectively. The associated
future income tax benefit recognized was $172,000 and $497,000 in the three
and
nine months ended December 31, 2006, respectively. For the three and nine
months
ended December 31, 2006, basic and diluted income per share was $.05 and
$.15
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 plans for the three and nine
months ended December 31, 2005:
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
December
31, 2005
|
|
December
31, 2005
|
|
(in
thousands, except per share data)
|
|
|
|
|
|
Net
income, as reported
|
|
$
|
23,924
|
|
$
|
29,508
|
|
Add:
Total stock-based employee compensation expense included in the
determination of net income as reported, net of tax
effects
|
|
|
-
|
|
|
111
|
|
Deduct:
Total stock-based employee compensation expense determined under
fair-value based method for all awards, net of related tax
effects
|
|
|
(588
|
)
|
|
(1,825
|
)
|
Pro
forma net income
|
|
$
|
23,336
|
|
$
|
27,794
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
Basic
- as reported
|
|
$
|
2.27
|
|
$
|
2.81
|
|
Basic
- pro forma
|
|
$
|
2.21
|
|
$
|
2.65
|
|
|
|
|
|
|
|
|
|
Diluted
- as reported
|
|
$
|
2.18
|
|
$
|
2.69
|
|
Diluted
- pro forma
|
|
$
|
2.13
|
|
$
|
2.53
|
|
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
|
|
For
the Nine Months
|
|
|
|
Ended
December 31,
|
|
Ended
December 31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Expected
dividend yield at time of grant
|
|
|
1.52
|
%
|
|
1.39
|
%
|
|
1.60
|
%
|
|
1.43
|
%
|
Expected
stock price volatility
|
|
|
31
|
%
|
|
36
|
%
|
|
25
|
%
|
|
35
|
%
|
Risk-free
interest rate
|
|
|
4.52
|
%
|
|
4.43
|
%
|
|
4.91
|
%
|
|
4.06
|
%
|
Expected
life of option
|
|
|
4.7
years
|
|
|
6.3
years
|
|
|
4.7
years
|
|
|
4.9
years
|
|
Transactions
from April 1, 2006 through December 31, 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
|
|
|
394,100
|
|
|
27.60
- 33.24
|
|
|
30.01
|
|
|
|
|
|
|
|
Exercised
|
|
|
(291,846
|
)
|
|
12.71
- 34.12
|
|
|
17.23
|
|
|
|
|
|
|
|
Canceled
|
|
|
(146,138
|
)
|
|
16.70
- 35.00
|
|
|
32.32
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2006
|
|
|
1,693,722
|
|
$
|
12.71
- 36.60
|
|
$
|
26.22
|
|
|
4.0
years
|
|
$
|
15,538
|
|
Options
exercisable at December 31, 2006
|
|
|
916,468
|
|
$
|
12.71
- 36.60
|
|
$
|
21.97
|
|
|
3.7
years
|
|
$
|
12,294
|
|
The
weighted average fair value of options granted during the nine months ended
December 31, 2006 and 2005 was $7.85 and $10.81, respectively.
The
total
intrinsic value of options exercised during the nine months ended December
31,
2006 was $3,936,000. As of December 31, 2006, there was $6,086,000 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 December 31, 2006,
the
notional amount of open foreign currency forward contracts was $19,184,000
and
the related unrealized gain was $714,000. As of March 31, 2006, the notional
amount of open foreign currency forward contracts was $494,000 and the related
unrealized loss was immaterial.
(4)
|
BUSINESS
RESTRUCTURING:
|
On
November 27, 2006, the Board of Directors of the Company approved a
restructuring plan to combine the operations of its Cleo Inc (“Cleo”) and
Berwick Offray LLC (“Berwick Offray”) subsidiaries, to close Cleo’s Maysville,
Kentucky production facility and to exit a non-material, non-core business.
This
restructuring was undertaken in order to improve profitability and efficiency
through the elimination of redundant back office functions, certain senior
management positions and excess manufacturing capacity. In connection with
the
restructuring plan, the Company estimates that it will incur pre-tax
restructuring expenses of approximately $2,600,000, including termination
costs
of approximately $1,545,000 and other restructuring costs of $1,055,000.
Also,
in connection with the restructuring plan, the Company recorded an impairment
of
fixed assets at the effected facilities of $422,000 which is included in
restructuring expenses. The Company expects to complete the restructuring
plan
by September 30, 2007. During the three months ended December 31, 2006, total
costs of $1,745,000 are included in restructuring expenses. As part of the
restructuring plan, the Company recorded a restructuring reserve of $1,323,000,
including severance related to 29 employees. During the third quarter and
nine
months ended December 31, 2006, the Company made payments of
$91,000.
Selected
information relating to the aforementioned restructuring follows (in
thousands):
|
|
Termination
Costs
|
|
Other
Costs
|
|
Total
|
|
|
|
|
|
|
|
|
|
Initial
accrual
|
|
$
|
1,200
|
|
$
|
123
|
|
$
|
1,323
|
|
Cash
paid - fiscal 2007
|
|
|
(26
|
)
|
|
(65
|
)
|
|
(91
|
)
|
Restructuring
reserve as of December 31, 2006
|
|
$
|
1,174
|
|
$
|
58
|
|
$
|
1,232
|
|
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):
|
|
December
31,
|
|
March
31,
|
|
|
|
2006
|
|
2006
|
|
|
|
|
|
|
|
Tradenames
|
|
$
|
4,290
|
|
$
|
4,290
|
|
Non-compete
and other, net
|
|
|
61
|
|
|
132
|
|
|
|
$
|
4,351
|
|
$
|
4,422
|
|
Amortization
expense related to intangible assets was $24,000 and $23,000 for the quarters
ended December 31, 2006 and 2005, respectively, and $71,000 and $70,000 for
the
nine months ended December 31, 2006 and 2005, respectively. The aggregate
estimated amortization expense for intangible assets remaining as of December
31, 2006 is as follows (in thousands):
Fiscal
2007
|
|
$
|
23
|
|
Fiscal
2008
|
|
|
38
|
|
Total
|
|
$
|
61
|
|
(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 maximum 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
the
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 measurements.
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
(if
any) 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 effected by a change in accounting principle. The provisions
of this statement were effective for the Company beginning April 1, 2006.
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.
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 a relatively high market share 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.
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 maximum liability
of
the Company’s Cleo Inc (“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 the 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; the valuation of share-based
awards
and resolution of litigation and other proceedings. 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 Payment,” 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, compensation cost 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.
Nine
Months Ended December 31, 2006 Compared to Nine Months Ended December 31,
2005
Sales
for
the nine months ended December 31, 2006 increased 3% to $485,428,000 from
$473,333,000 in 2005 primarily due to higher sales of Christmas gift wrap
and
boxed greeting cards, partially offset by lower sales of all-occasion cards,
tissue, gift bags and ribbons and bows.
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, gift bag and tissue product lines and the impact of higher
sales
of gift wrap and Christmas boxed greeting cards, partially offset by lower
margins on Halloween products and incremental costs of $604,000 associated
with
the restructuring plan which includes $570,000 related to the write-down
of
inventory.
Selling,
general and administrative (“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 incremental share-based compensation expense
related to the adoption of SFAS No. 123R, increases in severance, incentive
compensation and consulting costs and incremental costs of $285,000 associated
with the restructuring plan established in the current year.
Restructuring
expenses were $1,745,000 in 2006 and $37,000 in 2005. The increase in
restructuring expenses was due to the establishment of a restructuring plan
in
the current year to combine the operations of the Cleo and Berwick Offray
(“Berwick Offray”) subsidiaries, to close Cleo’s Maysville, Kentucky production
facility and to exit a non-material, non-core business. See Note 4 to the
consolidated financial statements for further discussion.
Interest
expense, net was $2,663,000 in 2006 and $2,982,000 in 2005. The
decrease in interest expense was primarily due to lower borrowing levels
during
2006 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 a portion of the
stock option expense recorded as a result of the adoption of SFAS No. 123R
not
being deductible for tax purposes.
Net
income for the nine months ended December 31, 2006 was $29,486,000, or $2.71
per
diluted share, compared to $29,508,000, or $2.69 per diluted share in 2005.
The
impact of improved margins was substantially offset by the expensing of stock
options due to the current year adoption of SFAS No. 123R, restructuring
costs
and higher severance, incentive compensation and consulting costs. Excluding
costs relating to the restructuring plan and incremental stock option expense
related to the Company’s adoption of SFAS No. 123R, net income increased 11% to
$32,780,000, or $3.02 per diluted share, for the nine months ended December
31,
2006.
Three
Months Ended December 31, 2006 Compared to Three Months Ended December 31,
2005
Sales
for
the three months ended December 31, 2006 increased 5% to $264,065,000 from
$251,796,000 in 2005 primarily due to increased sales of gift wrap, Christmas
boxed greeting cards and ribbons and bows as well as the earlier timing of
Easter shipments from the fourth quarter to the third quarter in the current
fiscal year, partially offset by lower sales of all-occasion cards, tissue,
gift
tags and gift bags.
Cost
of
sales, as a percentage of sales, was 75% in 2006 and 2005. Improved margins
achieved in the gift bag, gift wrap and tissue product lines were substantially
offset by lower margins on ribbons and bows and incremental costs of $604,000
associated with the restructuring plan which includes $570,000 related to
the
write-down of inventory.
SG&A
expenses, as a percentage of sales, were 10% in 2006 and 9% in 2005. The
increase in SG&A expenses, as a percentage of sales, is primarily due to
incremental share-based compensation expense related to the adoption of SFAS
No.
123R, increases in incentive compensation and incremental costs of $285,000
associated with the restructuring plan established in the current
year.
Restructuring
expenses were $1,745,000 in 2006 and $3,000 in 2005. The increase in
restructuring expenses was due to the establishment of a restructuring plan
in
the current year to combine the operations of the Cleo and Berwick Offray
subsidiaries, to close Cleo’s Maysville, Kentucky production facility and to
exit a non-material, non-core business. See Note 4 to the consolidated financial
statements for further discussion.
Interest
expense, net of $1,446,000 in 2006 was relatively consistent with interest
expense, net of $1,483,000 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 a portion of the
stock option expense recorded as a result of the adoption of SFAS No. 123R
not
being tax deductible for tax purposes.
Net
income for the three months ended December 31, 2006 was $23,290,000, or $2.13
per diluted share, compared to $23,924,000, or $2.18 per diluted share in
2005.
The decrease in net income is primarily attributable to the expensing of
stock
options due to the current year adoption of SFAS No. 123R, higher incentive
compensation cost and restructuring costs as described above, partially offset
by improved margins. Excluding costs relating to the restructuring plan and
incremental stock option expense related to the Company’s adoption of SFAS No.
123R, net income increased 7% to $25,503,000, or $2.33 per diluted share,
for
the quarter ended December 31, 2006.
LIQUIDITY
AND CAPITAL RESOURCES
At
December 31, 2006, the Company had working capital of $192,609,000 and
stockholders' equity of $264,205,000. The increase in accounts receivable
from
March 31, 2006 reflects seasonal billings of current year Christmas accounts
receivables, net of current year collections. The decrease in inventories
reflects the normal seasonal shipments during the fiscal 2007 shipping season.
The increase in accrued restructuring expenses is due to the establishment
of a
restructuring plan in the current year to combine the operations of the Cleo
and
Berwick Offray subsidiaries, to close Cleo’s Maysville, Kentucky production
facility and to exit a non-material, non-core business. The increase in other
current liabilities was due to increased accruals for income taxes, sales
commissions, royalties and employee benefits. 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 $30,000,000 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 December 31, 2006, there
was
$30,000,000 of long-term borrowings outstanding related to the senior notes
and
$42,400,000 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
December 31, 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.
RECONCILIATION
OF CERTAIN NON-GAAP MEASURES
Management
believes that presentation of results of operations adjusted to eliminate
the
affects of incremental, non-recurring costs related to a restructuring plan
and
the impact of the Company’s adoption of SFAS No. 123R in fiscal 2007 provides
useful information to investors because it enhances comparability between
the
current year and prior year reporting periods.
(in
thousands, except per share data)
|
|
Nine
Months Ended December 31,
2006
|
|
|
|
Income
Before
Income
Taxes
|
|
Net
Income
|
|
Diluted
Earnings
Per
Share
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
46,700
|
|
$
|
29,486
|
|
$
|
2.71
|
|
-
Restructuring expenses
|
|
|
1,745
|
|
|
1,102
|
|
|
.10
|
|
-
Inventory write-downs due to facility closure
|
|
|
570
|
|
|
360
|
|
|
.03
|
|
-
Other incremental costs related to restructuring plan
|
|
|
319
|
|
|
201
|
|
|
.02
|
|
-
Expensing stock options - SFAS No. 123R
|
|
|
2,131
|
|
|
1,631
|
|
|
.15
|
|
Non-GAAP
measurement
|
|
$
|
51,465
|
|
$
|
32,780
|
|
$
|
3.02
|
|
|
|
Three
Months Ended December 31, 2006
|
|
|
|
Income
Before
Income
Taxes
|
|
Net
Income
|
|
Diluted
Earnings
Per
Share
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
36,885
|
|
$
|
23,290
|
|
$
|
2.13
|
|
-
Restructuring expenses
|
|
|
1,745
|
|
|
1,102
|
|
|
.10
|
|
-
Inventory write-downs due to facility closure
|
|
|
570
|
|
|
360
|
|
|
.03
|
|
-
Other incremental costs related to restructuring plan
|
|
|
319
|
|
|
201
|
|
|
.02
|
|
-
Expensing stock options - SFAS No. 123R
|
|
|
719
|
|
|
550
|
|
|
.05
|
|
Non-GAAP
measurement
|
|
$
|
40,238
|
|
$
|
25,503
|
|
$
|
2.33
|
|
Diluted
earnings per share for the nine months ended December 31, 2006 does not add
due
to rounding.
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 December 31, 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. A new
collective bargaining agreement with the labor union representing the
Hagerstown-based production and maintenance employees was concluded in the
third
quarter of fiscal 2007 and remains in effect until December 31, 2009.
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
Company’s expectation that it will sell facilities held for sale within the next
12 months for an amount greater than the current carrying value; improved
profitability and efficiency from the Company’s restructuring plan to combine
the operations of its Cleo and Berwick Offray subsidiaries; estimated future
expenses in connection with such restructuring plan; continued use of
acquisitions to stimulate further growth; the Company’s expected ultimate
liabilities from lawsuits and claims; the expected future impact of changes
in
accounting principles; and 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 the combination of the operations of the Company’s Cleo and
Berwick Offray subsidiaries, including restructuring costs and the risk that
such costs may exceed the expected amounts described herein, 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.
ITEM
3. 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 December 31, 2006 have 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).
ITEM
4.
CONTROLS AND PROCEDURES
(a)
|
Evaluation
of Disclosure Controls and Procedures.
As
of the end of the period covered by this report, the Company’s management,
with the participation of the Company’s President and Chief Executive
Officer and Vice President - Finance and Chief Financial Officer,
evaluated the effectiveness of the Company’s disclosure controls and
procedures in accordance with Rule 13a-15 of the Securities Exchange
Act
of 1934 (the “Exchange Act”). Based upon that evaluation, the President
and Chief Executive Officer and Vice President - Finance and Chief
Financial Officer concluded that the Company’s disclosure controls and
procedures are effective in providing reasonable assurance that
information required to be disclosed by the Company in reports
that it
files under the Exchange Act is recorded, processed, summarized
and
reported within the time periods specified in the Securities and
Exchange
Commission’s rules and 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
third quarter of fiscal year 2007 that has materially affected,
or is
reasonably likely to materially affect, the Company’s internal control
over financial reporting.
|
PART
II - OTHER INFORMATION
Risk
factors included in the Company’s Annual Report on Form 10-K for the fiscal year
ended March 31, 2006 have not changed with the exception of the
following:
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.
Item.
2.Unregistered
Sales of Equity Securities and Use of Proceeds
Unregistered
Sales of Equity Securities
On
November 30, 2006, CSS issued options to purchase 20,000 shares of its common
stock ($.10 par value) to the non-employee members of the Board of Directors
of
CSS pursuant to CSS’ 2006 Stock Option Plan for Non-Employee Directors (the
“2006 Plan”). The 2006 Plan provides for the automatic issuance of an option to
purchase 4,000 shares of CSS common stock to each non-employee director of
CSS
on the last trading day of November of each year from 2006 to 2010. In
accordance with the automatic grant provisions of the 2006 Plan, each of
the
options granted on November 30, 2006: (i) has an exercise price of $30.86
per
share, the closing price for shares of CSS common stock on the date of the
grant; (ii) becomes exercisable in four equal installments, commencing on
the
first anniversary of the date of grant and annually thereafter; and (iii)
expires five years after the date of grant. No consideration is required
to be
paid to the Company in connection with the issuance of options under the
2006
Plan, and none was received.
On
November 21, 2006, CSS issued 6,000 shares of its common stock ($.10 par
value)
to a member of the Board of Directors of CSS, upon such director’s exercise of
stock options previously granted to such director pursuant to CSS’ 1995 Stock
Option Plan for Non-Employee Directors (the “1995 Plan”). The aggregate purchase
price for these 6,000 shares of CSS common stock was $96,480, which was paid
in
cash.
On
December 22, 2006, CSS issued 36,000 shares of its common stock ($.10 par
value)
to a member of the Board of Directors of CSS, upon such director’s exercise of
stock options previously granted to such director pursuant to the 1995 Plan
and
CSS’ 2000 Stock Option Plan for Non-Employee Directors (the “2000 Plan”). The
aggregate purchase price for these 36,000 shares of CSS common stock was
$664,800, which was paid in cash.
The
options granted pursuant to the 1995 Plan, 2000 Plan and 2006 Plan were not
registered under the Securities Act of 1933, as amended (the “Securities Act”),
and the shares of CSS common stock issued upon exercise of the aforementioned
options were not registered under the Securities Act. CSS believes that the
issuance of the options, and the issuance of the aforementioned shares of
CSS
common stock in connection with the exercise of options, was exempt from
registration under (a) Section 4(2) of the Securities Act as transactions
not
involving any public offering and such securities having been acquired for
investment and not with a view to distribution, or (b) Rule 701 under the
Securities Act as transactions made pursuant to a written compensatory benefit
plan or pursuant to a written contract relating to compensation. All recipients
had adequate access to information about CSS. CSS did not engage an underwriter
in connection with the foregoing stock option grants and stock issuances.
Share
Repurchase Program
A
total
of 9,200 shares were repurchased at an average price of $32.90 in the third
quarter of fiscal 2007. As of December 31, 2006, there remained an outstanding
authorization to repurchase 248,024 shares of outstanding CSS common stock
as
represented in the table below.
|
|
Total
Number
of
Shares
Purchased (1)
|
|
Average
Price
Paid
Per Share
|
|
Total
Number of
Shares
Purchased as
Part
of Publicly
Announced
Program (2)
|
|
Maximum
Number
of Shares that May Yet Be Purchased Under the
Program (2)
|
|
|
|
|
|
|
|
|
|
|
|
October
1 through October 31, 2006
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
|
257,224
|
|
November
1 through November 30, 2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
257,224
|
|
December
1 through December 31, 2006
|
|
|
9,200
|
|
|
32.90
|
|
|
9,200
|
|
|
248,024
|
|
Total
Third Quarter
|
|
|
9,200
|
|
$
|
32.90
|
|
|
9,200
|
|
|
248,024
|
|
|
(1)
|
All
share repurchases were effected in open-market transactions and
in
accordance with the safe harbor provisions of Rule 10b-18 of
the Exchange
Act.
|
|
(2)
|
The
Company’s Board of Directors authorized on February 18, 1998 the
repurchase of up to 1,000,000 shares of the Company’s common stock (the
“Repurchase Program”). Thereafter, the Company’s Board of Directors
increased the number of shares authorized to be repurchased by
the Company
pursuant to the Repurchase Program as follows: November 9, 1998
(500,000
additional shares); May 4, 1999 (500,000 additional shares);
September 28,
1999 (500,000 additional shares); September 26, 2000 (500,000
additional
shares); and February 27, 2003 (400,000 additional shares). As
a result of
the Company’s three-for-two stock split distributed on July 10, 2003, the
number of shares authorized for repurchase pursuant to the Repurchase
Program was automatically increased to 5,100,000 shares. The
aggregate
number of shares repurchased by the Company pursuant to the Repurchase
Program as of December 31, 2006 was 4,851,976 on a split-adjusted
basis.
An expiration date has not been established for the Repurchase
Program.
|
|
Exhibit
10.1 CSS Industries, Inc. Severance Pay Plan
for Senior Management and Summary Plan
Description.
|
|
Exhibit
10.2 Employment Agreement dated as of
November 21, 2006 between CSS Industries, Inc. and Robert
Collins.
|
|
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:
February 1, 2007
|
By:
|
/s/Christopher
J. Munyan
|
|
|
|
Christopher
J. Munyan
|
|
|
|
President
and Chief Executive Officer
|
|
|
|
(principal
executive officer)
|
|
|
|
|
|
|
|
|
|
Date:
February 1, 2007
|
By:
|
/s/Clifford
E. Pietrafitta
|
|
|
|
Clifford
E. Pietrafitta
|
|
|
|
Vice
President - Finance and Chief Financial Officer
|
|
|
|
(principal
financial and accounting officer)
|
|