<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
20549
FORM 10-Q
For the Quarter Ended Commission file number 1-2661
September 30, 1996
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CSS INDUSTRIES, INC.
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(Exact name of registrant as specified in its Charter)
Delaware 13-1920657
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
1845 Walnut Street, Philadelphia, PA 19103
- ---------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
(215) 569-9900
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
----- -----
As of September 30, 1996, there were 10,737,909 shares of Common Stock
outstanding which excludes shares which may still be issued upon exercise of
stock options.
Page 1 of 11
<PAGE>
CSS INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
In the opinion of management, the accompanying unaudited consolidated condensed
financial statements contain all adjustments necessary to present fairly the
financial position as of September 30, 1996 and December 31, 1995 and the
results of operations and cash flows for the three months and nine months ended
September 30, 1996 and 1995. The results for the three months and nine months
ended September 30, 1996 and 1995 are not necessarily indicative of the expected
results for the full year. As certain previously reported notes and footnote
disclosures have been omitted, these financial statements should be read in
conjunction with the latest annual report on Form 10-K and with the June 30,
1996 quarterly report on Form 10-Q.
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Consolidated Statements of Operations - Three months and nine months ended
September 30, 1996 and 1995 3
Consolidated Condensed Balance Sheets - September 30, 1996 and
December 31, 1995 4
Consolidated Statements of Cash Flows - Nine months ended
September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6-8
Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-10
PART II - OTHER INFORMATION
Items 1 through 6 - Not Applicable
SIGNATURE 11
</TABLE>
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<PAGE>
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except
per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1996 1995 1996 1995
----------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
SALES $ 147,527 $ 100,736 $ 242,102 $ 186,303
---------- ----------- ----------- -----------
COSTS AND EXPENSES
Cost of sales 97,975 64,043 153,991 111,783
Selling, general and administrative expenses 27,930 22,581 69,887 57,069
Interest expense, net 2,366 877 5,321 1,429
Rental and other expense (income), net 184 (472) (70) (1,064)
---------- ----------- ----------- -----------
128,455 87,029 229,129 169,217
---------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND MINORITY INTEREST 19,072 13,707 12,973 17,086
INCOME TAXES 7,878 5,481 5,359 6,855
---------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS
BEFORE MINORITY INTEREST 11,194 8,226 7,614 10,231
MINORITY INTEREST IN INCOME OF
SUBSIDIARIES, NET 53 106 315 350
---------- ----------- ----------- -----------
NET INCOME $ 11,141 $ 8,120 $ 7,299 $ 9,881
========== =========== =========== ===========
NET INCOME PER COMMON SHARE
Primary $ 1.01 $ .75 $ .66 $ .91
========== =========== =========== ===========
Fully diluted $ 1.01 $ .74 $ .66 $ .89
========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING
Primary 10,990 10,854 10,993 10,914
========== =========== =========== ===========
Fully diluted 11,019 10,997 11,013 11,147
========== =========== =========== ===========
CASH DIVIDENDS PER SHARE OF
COMMON STOCK $ - $ - $ - $ -
========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and temporary investments $ 4,101 $ 3,102
Marketable securities 290 800
Accounts receivable, net 129,844 174,832
Inventories 117,950 76,397
Deferred taxes 7,234 --
Other current assets 8,980 8,349
-------- --------
Total current assets 268,399 263,480
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 51,741 44,995
-------- --------
OTHER ASSETS
Intangible assets 48,787 50,019
Deferred income taxes 1,803 1,829
Other 14,835 14,638
-------- --------
Total other assets 65,425 66,486
-------- --------
Total assets $385,565 $374,961
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
TOTAL CURRENT LIABILITIES $193,333 $197,085
LONG-TERM OBLIGATIONS 27,425 20,412
MINORITY INTEREST 3,755 3,608
CONTINGENCIES AND COMMITMENTS -- --
SHAREHOLDERS' EQUITY 161,052 153,856
-------- --------
Total liabilities and shareholders' equity $385,565 $374,961
======== ========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,299 $ 9,881
-------- --------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 6,339 6,032
Loss (gain) on sale of assets 52 (54)
Gain on sale of marketable securities (146) (277)
Deferred tax benefit (9,307) --
Provision for doubtful accounts 1,269 982
Minority interest in income of subsidiaries 315 350
Changes in assets and liabilities, net of effects of business
combinations:
Decrease (increase) in accounts receivable 43,719 (31,099)
(Increase) in inventories (41,553) (23,528)
(Increase) decrease in other assets (1,084) 270
Increase in current liabilities 5,926 5,935
-------- --------
Total adjustments 5,530 (41,389)
-------- --------
Net cash provided by (used for) operating activities 12,829 (31,508)
-------- --------
Cash flows from investing activities:
Purchase of marketable securities -- (2,080)
Purchases of businesses -- (8,740)
Purchase of property, plant and equipment (13,162) (7,173)
Proceeds on sale of marketable securities 424 788
Proceeds on sale of property, plant and equipment 983 181
-------- --------
Net cash (used for) investing activities (11,755) (17,024)
-------- --------
Cash flows from financing activities:
Payments on long-term obligations (19,610) (1,850)
Borrowings on note payable 19,593 48,181
Purchase of treasury stock (736) (5,254)
Redemption of subsidiary stock from minority shareholders (168) --
Proceeds from exercise of stock options 864 4
-------- --------
Net cash (used for) provided by financing activities (57) 41,081
-------- --------
Effect of exchange rate changes on cash (18) 13
-------- --------
Net increase (decrease) in cash and temporary investments 999 (7,438)
Cash and temporary investments at beginning of period 3,102 8,774
-------- --------
Cash and temporary investments at end of period $ 4,101 $ 1,336
======== ========
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE>
CSS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation-
The consolidated financial statements include the accounts of the Company
and all subsidiaries. All significant intercompany transactions and
accounts have been eliminated in consolidation and all adjustments are
of a normal recurring nature. Translation adjustments of a foreign
subsidiary are charged or credited to a separate component of
shareholders' equity.
Nature of Business-
CSS is a diversified company with two groups of businesses - the Consumer
Products Group and the Direct Mail Business Products Group. The Consumer
Products Group is primarily engaged in the manufacture and sale to mass
market retailers of seasonal gift wrap, gift bags, boxed greeting cards,
gift tags, tissue paper and vinyl decorations, classroom exchange
Valentines, decorative ribbons and bows, Halloween masks, costumes,
make-ups and novelties and Easter egg dyes and novelties. Due to the
seasonality of the Consumer Products Group with the majority of sales
occurring in the third and fourth quarters, a material portion of the
Company's trade receivables are due in December and January of each
year. The Consumer Products Group is comprised of The Paper Magic Group,
Inc. ("Paper Magic"), acquired by the Company in August 1988, Berwick
Industries, Inc. ("Berwick"), acquired in May 1993, and Cleo Inc.
("Cleo"), acquired in November 1995. The Direct Mail Business Products
Group, composed of Rapidforms, Inc. and its subsidiaries ("Rapidforms"),
develops and sells business forms, business supplies, in-store retail
merchandising products, holiday greeting cards and advertising
specialties to small and medium sized businesses in the United States,
the United Kingdom and France, primarily through the direct mailing of
catalogs and brochures. Rapidforms was acquired by CSS in January 1985.
Use of Estimates-
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Inventories-
Inventories are stated primarily at the lower of first-in, first-out
(FIFO) cost or market. The remaining portion of the inventory is valued
at the lower of last-in, first-out cost or market. Inventories consisted
of the following:
-6-
<PAGE>
September 30, December 31,
1996 1995
------------ ------------
Raw material................... $17,986,000 $21,926,000
Work-in-process................ 19,316,000 13,196,000
Finished goods................. 80,648,000 41,275,000
------------ ------------
$117,950,000 $76,397,000
============ ===========
Revenue Recognition-
The Company recognizes revenues in accordance with its shipping terms.
Returns and allowances are reserved for based on current customer
program estimates and the Company's historical experience.
Net Income Per Common Share-
Primary net income per common share is based on the weighted average
number of common and common equivalent shares outstanding during the
third quarter and nine months ended September 30, 1996 and 1995 -
10,990,155 and 10,993,254 in 1996 and 10,854,316 and 10,913,987 in
1995. Average outstanding shares used in the computation of fully
diluted net income per share were 11,019,038 and 11,013,117 for the
quarter and nine months ended September 30, 1996 and 10,996,699 and
11,147,365 for the quarter and nine months ended September 30, 1995.
Statements of Cash Flows-
For purposes of the statements of cash flows, the Company considers all
holdings of highly liquid debt instruments with original maturity of
less than 3 months to be temporary investments.
Reclassifications
Certain reclassifications have been reflected in the financial statements
in order to conform prior years to the current presentation.
See Note 2 for supplemental disclosure of noncash investing
activities.
(2) BUSINESS ACQUISITION:
CSS acquired all of the outstanding stock of Cleo, effective November 15,
1995, for approximately $108,500,000 in cash and $24,547,000 in short-term
notes. The purchase price includes $12,000,000 held in escrow for certain post
closing adjustments and indemnification obligations which is included in other
assets in the consolidated balance sheet. The Company and the seller have
disagreed on the disbursement of the escrow and have engaged an independent
public accounting firm to resolve the disputed items. Cleo designs, manufactures
and distributes a wide range of promotional gift wrap and gift wrap accessories
to mass market retailers in the United States and Canada. The acquisition was
accounted for as a purchase and the excess of historical book value over the
purchase price resulted in a $28,528,000 reduction to fixed assets, an accrual
for restructuring expenses of $11,000,000, and a credit to goodwill of
$7,562,000. Negative goodwill is included in intangible assets in the
accompanying consolidated balance sheet and is being amortized over ten years.
-7-
<PAGE>
(3) FINANCING ACTIVITIES:
On August 1, 1996, CSS utilized proceeds from its $195,000,000
unsecured revolving credit facility to redeem the outstanding principal balance
of $12,880,000 related to economic development revenue bonds assumed in
connection with the acquisition of Cleo.
On August 13, 1996, CSS entered into an interest rate swap agreement
to reduce the impact of changes in interest rates on its floating rate revolving
credit facility. At September 30, 1996 the Company has a swap agreement with a
total notional amount of $20,000,000. This agreement fixes the interest rate on
$20,000,000 of the borrowings under the revolving credit facility to 7.125%. The
interest rate swap agreement matures on February 13, 1998. The counter party to
the interest rate swap agreement is a major financial institution. Management
believes the risk of incurring losses related to credit risk is remote and any
losses would be immaterial.
On September 18, 1996, CSS entered into a $20,000,000 term loan with
a bank which matures on December 31, 1996. The proceeds from the term loan were
used to repay a portion of the amount outstanding on the revolving credit
facility and will be used for seasonal requirements and to provide the Company
additional flexibility for general corporate purposes.
-8-
<PAGE>
CSS INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
On November 15, 1995 CSS acquired all of the outstanding stock of Cleo.
Cleo designs, manufactures and distributes a wide range of promotional gift wrap
and gift wrap accessories to mass market retailers in the United States and
Canada. As over 90% of Cleo's business is Christmas related, the seasonality of
the Company's operating results will be more pronounced then in the past, with
losses in the first half and higher profits in the second half. Comparisons with
prior periods will be distorted until Cleo has been a part of CSS for more than
a year.
Concurrent with the acquisition of Cleo, CSS divided its businesses
into two distinct business units - the Consumer Products Group ("CPG"),
comprised of Paper Magic, Berwick and Cleo, and the Direct Mail Business
Products Group ("BPG"), comprised of Rapidforms.
First Nine Months of 1996 Compared to First Nine Months of 1995
Consolidated sales for the nine months ended September 30, 1996 increased
by 30% to $242,102,000 from $186,303,000 in 1995. The increase was driven by a
43% increase in CPG sales largely as a result of incremental sales of Cleo,
acquired by CSS in the fourth quarter of 1995. Excluding the impact of Cleo, CPG
sales decreased 9% as certain key customers deferred shipments (historically
made in the third quarter) until the fourth quarter of 1996. BPG sales increased
3% for the nine months largely as a result of year to year pricing increases.
Cost of sales, as a percentage of sales, was 64% in 1996 and 60% in 1995.
The increase in the cost of sales percentage was primarily attributable to the
inclusion of Cleo and its lower margin sales. Excluding the impact of Cleo,
lower material costs positively impacted CPG margins, while these benefits were
somewhat offset by higher paper costs and lower margins on BPG sales. Selling,
general and administrative expenses, as a percentage of sales, decreased to 29%
in 1996 from 31% in 1995 resulting from the leverage provided by 1996 Cleo
sales.
Interest expense, net of $5,321,000 increased from $1,429,000 in 1995 due
to higher seasonal borrowing needs and the acquisition debt associated with
Cleo. Rental and other income, net decreased to $70,000 from $1,064,000 in 1995
due to the absence in 1996 of sublease income related to a leasehold interest
which expired in late 1995, incremental Cleo expenses and lower gains from sales
of marketable securities.
Income taxes as a percentage of income before taxes and minority interest
was 41% in 1996 and 40% in 1995. The increase was primarily due to the absence
in 1996 of certain tax benefits related to 1995 permanent differences.
Net income for the nine months ended September 30, 1996 was $7,299,000, or
$.66 per share compared to net income of $9,881,000, or $.89 per share. The
decrease in year to date earnings reflects the more pronounced seasonality of
the Company's business since the acquisition of Cleo.
-9-
<PAGE>
Third Quarter 1996 Compared to Third Quarter 1995
Third quarter 1996 sales increased 46% to $147,527,000 from $100,736,000 in
1995. The increase was due to incremental sales of Cleo and a 4% improvement in
BPG sales. Excluding the Cleo acquisition, sales of the other CPG companies
declined 10% due to certain customer requested deferrals, into the fourth
quarter, of orders historically shipped in the third quarter.
Cost of sales, as a percentage of sales increased to 66% in 1996 from 64%
in 1995, reflecting the inclusion of Cleo lower margin sales. Excluding Cleo,
cost of sales of the other CPG companies improved due to lower material costs
and the achievement of higher production efficiencies. The percentage of cost of
sales of BPG remained relatively unchanged from the third quarter of 1995.
Selling, general and administrative expenses, as a percentage of sales,
decreased to 19% from 22% in 1995. The decrease was primarily attributable to
the leverage provided by Cleo's sales in 1996.
The increase in interest expense, net to $2,366,000 from $877,000 was due
to increased borrowings for higher seasonal requirements and the Cleo
acquisition debt. Rental and other expense (income), net of $184,000 in 1996
compared to $(472,000) in 1995 due to the absence in 1996 of sublease income
related to a leasehold interest which expired in late 1995, incremental Cleo
expenses and lower gains from sales of marketable securities.
Income taxes as a percentage of income before taxes and minority interest
increased to 41% from 40% in the third quarter of 1995. The increase is
explained in the nine month comparisons above.
Net income was $11,141,000, or $1.01 per share in 1996, compared to
$8,120,000, or $.74 per share in 1995. The increase reflects the impact of Cleo
and the heightened seasonality of the Company's operations.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had working capital of $75,066,000 and
shareholders' equity of $161,052,000. The decrease in accounts receivable and
the increase in inventories compared to December 31, 1995 reflected the seasonal
effect of CPG shipments scheduled for the fourth quarter. The increase in
current deferred taxes is due to the timing of payments made to taxing
authorities which will reverse in later years.
The Company relies primarily on cash generated from its operations and
seasonal borrowings to meet its liquidity requirements. Most CPG revenues are
seasonal with more than 80% of sales generated in the second half of the year.
Payment for Christmas related products is usually not received until after the
holiday in accordance with general industry practice. As a result, short-term
borrowing needs increase throughout the second and third quarters, and will peak
prior to Christmas. Seasonal borrowings are made under a $195,000,000 unsecured
revolving credit facility with thirteen banks and financial institutions. To
supplement the revolver, the Company also entered into a $20,000,000 term note
maturing on December 31, 1996. The facilities are available to fund seasonal
borrowing needs and provide the Company with a source of capital for general
corporate purposes. At September 30, 1996, there was $146,750,000 outstanding
under these facilities.
Based on its current operating plan, the Company believes its sources of
available capital are adequate to meet its ongoing cash needs for the
foreseeable future.
-10-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CSS INDUSTRIES, INC.
------------------------
(Registrant)
Date: November 12, 1996 By: /s/ James G. Baxter
----------------------------
James G. Baxter
Chief Financial Officer and
Principal Accounting Officer
-11-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000020629
<NAME> CSS INDUSTRIES
<MULTIPLIER> 1,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,101
<SECURITIES> 290
<RECEIVABLES> 134,051
<ALLOWANCES> 4,207
<INVENTORY> 117,950
<CURRENT-ASSETS> 268,399
<PP&E> 106,990
<DEPRECIATION> 55,249
<TOTAL-ASSETS> 385,565
<CURRENT-LIABILITIES> 193,333
<BONDS> 24,869
0
0
<COMMON> 1,225
<OTHER-SE> 159,827
<TOTAL-LIABILITY-AND-EQUITY> 385,565
<SALES> 242,102
<TOTAL-REVENUES> 242,102
<CGS> 153,991
<TOTAL-COSTS> 153,991
<OTHER-EXPENSES> 68,548
<LOSS-PROVISION> 1,269
<INTEREST-EXPENSE> 5,321
<INCOME-PRETAX> 12,973
<INCOME-TAX> 5,359
<INCOME-CONTINUING> 7,299
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,299
<EPS-PRIMARY> .66
<EPS-DILUTED> .66
</TABLE>
