<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
For the Quarter Ended Commission file number 1-2661
September 30, 1997
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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
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(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, 1997, there were 10,875,072 shares of Common Stock
outstanding which excludes shares which may still be issued upon exercise of
stock options.
Page 1 of 11
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CSS INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
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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, 1997, December 31, 1996, the
results of operations for the three months and nine months ended September 30,
1997 and 1996 and the cash flows for the nine months ended September 30, 1997
and 1996. The results for the three months and nine months ended September 30,
1997 and 1996 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, with the June 30, 1997 quarterly report
on Form 10-Q and with Part II of this document.
PAGE NO.
--------
Consolidated Statements of Operations - Three Months and Nine Months
ended September 30, 1997 and 1996 3
Consolidated Condensed Balance Sheets - September 30, 1997
and December 31, 1996 4
Consolidated Statements of Cash Flows - Nine months ended
September 30, 1997 and 1996 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
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Items 1 through 6 - Not Applicable
SIGNATURE 11
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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,
----------------------- -----------------------
1997 1996 1997 1996
-------- -------- -------- -------
<S> <C> <C> <C> <C>
SALES $143,040 $147,527 $243,606 $242,102
-------- -------- -------- -------
COSTS AND EXPENSES
Cost of sales 92,276 97,975 149,655 153,991
Selling, general and administrative expenses 29,266 27,930 77,499 69,887
Interest expense, net 2,243 2,366 4,629 5,321
Rental and other (income) expense, net (188) 184 (1,081) (70)
-------- -------- -------- -------
123,597 128,455 230,702 229,129
-------- -------- -------- -------
INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST 19,443 19,072 12,904 12,973
INCOME TAX EXPENSE 7,343 7,878 4,874 5,359
-------- -------- -------- -------
INCOME BEFORE MINORITY INTEREST 12,100 11,194 8,030 7,614
MINORITY INTEREST IN INCOME OF
SUBSIDIARIES 93 53 405 315
-------- -------- -------- -------
NET INCOME $ 12,007 $ 11,141 $ 7,625 $ 7,299
======== ======== ======== =======
NET INCOME PER COMMON SHARE
Primary $ 1.04 $ 1.01 $ .67 $ .66
======== ======== ======== =======
Fully diluted $ 1.04 $ 1.01 $ .66 $ .66
======== ======== ======== =======
WEIGHTED AVERAGE SHARES OUTSTANDING
Primary 11,497 10,990 11,368 10,993
======== ======== ======== =======
Fully diluted 11,565 11,019 11,535 11,013
======== ======== ======== =======
CASH DIVIDENDS PER SHARE OF
COMMON STOCK $ - $ - $ - $ -
======== ======== ======== =======
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
September 30, December 31,
1997 1996
-------- --------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and temporary investments $ 722 $ 2,755
Accounts receivable, net 120,912 159,008
Inventories 136,510 58,189
Deferred taxes 1,883 1,883
Other current assets 11,522 7,269
-------- --------
Total current assets 271,549 229,104
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 58,662 53,246
-------- --------
OTHER ASSETS
Intangible assets 60,786 49,388
Other 14,843 14,626
-------- --------
Total other assets 75,629 64,014
-------- --------
Total assets $405,840 $346,364
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $148,140 $ 99,264
Other current liabilities 59,303 58,060
-------- --------
Total current liabilities 207,443 157,324
-------- --------
LONG-TERM OBLIGATIONS 7,252 7,436
DEFERRED INCOME TAXES 990 990
MINORITY INTEREST 4,177 3,862
SHAREHOLDERS' EQUITY 185,978 176,752
-------- --------
Total liabilities and shareholders' equity $405,840 $346,364
======== ========
See notes to consolidated financial statements.
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<PAGE>
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,625 $ 7,299
-------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,100 6,339
(Gain) loss on sale of assets, net (302) 52
Gain on sale of marketable securities - (146)
Deferred tax benefit - (9,307)
Provision for doubtful accounts 1,333 1,269
Minority interest in income of subsidiaries 405 315
Changes in assets and liabilities, net of effects from
purchase and disposal of businesses:
Decrease in accounts receivable 41,626 43,719
(Increase) in inventory (71,610) (41,553)
(Increase) in other assets (3,171) (1,084)
(Decrease) increase in accrued expenses (11,327) 5,926
-------- --------
Total adjustments (34,946) 5,530
-------- --------
Net cash (used for) provided by operating activities (27,321) 12,829
-------- --------
Cash flows from investing activities:
Purchase of businesses, net of cash received of $976 in 1997 (17,564) -
Purchase of property, plant and equipment (12,734) (13,162)
Proceeds from sale of business 4,083 -
Proceeds on sale of marketable securities - 424
Proceeds on sale of property, plant and equipment 2,395 983
-------- --------
Net cash used for investing activities (23,820) (11,755)
-------- --------
Cash flows from financing activities:
Payments on long-term obligations (2,074) (19,610)
Borrowings on notes payable 49,859 19,593
Purchase of treasury stock (644) (736)
Redemption of subsidiary stock from minority shareholders (91) (168)
Proceeds from exercise of stock options 2,058 864
-------- --------
Net cash provided by (used for) financing activities 49,108 (57)
-------- --------
Effect of exchange rate changes on cash - (18)
-------- --------
Net (decrease) increase in cash and temporary investments (2,033) 999
Cash and temporary investments at beginning of period 2,755 3,102
-------- --------
Cash and temporary investments at end of period $ 722 $ 4,101
======== ========
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
CSS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(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 were charged or credited to a
separate component of shareholders' equity. This subsidiary was sold
in January, 1997 (see Note 2).
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, paper and vinyl
decorations, classroom exchange Valentines, decorative ribbons and
bows, Halloween masks, costumes, make-ups and novelties and Easter
egg dyes and novelties. The seasonal nature of most of CSS' business
results in low sales and net losses for the first two quarters and
high shipments levels and net income for the second half of the
year, thereby causing significant fluctuations in the quarterly
results of operations of the Company. 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 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 generally stated at the lower of first-in, first-out
(FIFO) cost or market. The remaining portion of the inventory is
valued at the lower of last-in, first-out (LIFO) cost or market.
Inventories consisted of the following:
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<PAGE>
September 30, December 31,
1997 1996
------------ ------------
Raw material ................ $ 19,512,000 $17,372,000
Work-in-process ............. 28,801,000 8,025,000
Finished goods .............. 88,197,000 32,792,000
------------ -----------
$136,510,000 $58,189,000
============ ===========
Revenue Recognition -
The Company recognizes revenues in accordance with its shipping terms.
Returns and allowances are reserved for based on 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
second quarter and nine months ended September 30, 1997 and 1996 -
11,497,000 and 11,368,000 in 1997 and 10,990,000 and 10,993,000 in
1996. Average outstanding shares used in the computation of fully
diluted net income per share were 11,565,000 and 11,535,000 in 1997
and 11,019,000 and 11,013,000 in 1996.
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 three months to be temporary investments.
See Note 2 for supplemental disclosure of noncash investing activities.
(2) BUSINESS ACQUISITIONS AND DIVESTITURES:
On January 17, 1997, Paper Magic acquired all of the outstanding stock of
Color-Clings, Inc. ("Color-Clings") for $7,875,000 and repaid $10,665,000 of
debt. Color-Clings, headquartered in Bloomington, Minnesota, is a designer and
marketer of seasonal and everyday vinyl home decorations sold primarily to
mass market retailers in the United States and Canada. The acquisition was
accounted for as a purchase and the excess of cost over fair market value of
$15,698,000 was recorded as goodwill and is being amortized over twenty years.
On January 8, 1997, Rapidforms sold its Standard Forms, Ltd. ("Standard
Forms") subsidiary for $4,083,000, resulting in an immaterial financial gain.
Sales and operating income (loss) for Standard Forms were $8,237,000 and
$19,000 in 1996, $7,925,000 and $220,000 in 1995 and $6,672,000 and $(203,000)
in 1994.
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(3) FUTURE ACCOUNTING CHANGES:
In February 1997, Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings per Share," was issued. This statement specified the
computation, presentation and disclosure requirements for earnings per share
(EPS). The main objectives of the statement were to simplify the EPS
calculation and to make EPS comparable on an international basis. Effective in
the 1997 Annual Report, primary and fully diluted EPS will be replaced by
basic and diluted EPS. Prior period results will be restated. The most
significant difference is that basic EPS no longer assumes potentially
dilutive securities in the computation. Calculating EPS under the new method
did not have a material impact on EPS figures for 1997 and 1996.
In 1997, CSS will also adopt SFAS No. 129, "Disclosure of Information
about Capital Structure." This statement was issued in conjunction with the
earnings per share statement discussed above and is intended to centralize
capital structure disclosure requirements and to expand the number of
companies subject to the requirements. Since the Company was in compliance
with the existing capital structure disclosure requirements, disclosure under
the new standard is not expected to change materially.
-8-
<PAGE>
CSS INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
First Nine Months of 1997 Compared to First Nine Months of 1996
Consolidated sales for the nine months ended September 30, 1997 increased
by 1% to $243,606,000 from $242,102,000 in 1996. The increase was comprised of
a 4% increase in sales of the Consumer Products Group ("CPG") and a 9% decline
in sales of the Direct Mail Business Products Group ("BPG"). The increase in
CPG sales includes sales of Color-Clings, Inc., acquired by the Company's
Paper Magic subsidiary on January 17, 1997. Absent Color-Clings, CPG
experienced a 9% reduction in sales caused by 1) customer requested deferrals
of Christmas shipments to the fourth quarter that historically shipped in the
third quarter of 1996, 2) later receipt of customer orders, 3) sales erosion
in the gift tag category and 4) disruptions in production and distribution at
Cleo primarily resulting from start-up problems associated with the
implementation of a new, fully integrated business management system. The
sales decline of the BPG was primarily caused by the sale of Standard Forms
Ltd. ("SFL") on January 8, 1997. Excluding the impact of SFL, BPG sales were
flat.
Cost of sales, as a percentage of sales, was 61% in 1997 and 64% in 1996.
The decrease in the cost of sales percentage was attributable to 1) improved
efficiencies at Cleo and Berwick, 2) reduced closeout sales of Cleo products
in 1997 due to improved inventory management after Cleo's November 1995
acquisition and 3) improved BPG margins due to the absence of lower margin
Standard Forms sales. Cleo will incur higher than normal costs and expenses in
the fourth quarter to relieve the backlog in manufacturing and distribution
noted above.
Selling, general and administrative ("S,G&A") expenses, as a percentage
of sales, increased to 32% from 29% in 1996. S,G&A, as a percentage of sales,
for the CPG increased to 25% from 21% in 1996 primarily as a result of
incrementally higher S,G&A expenses associated with Color-Clings and the
deferral of certain Cleo and Paper Magic sales into the fourth quarter.
Interest expense, net decreased from $5,321,000 in 1996 to $4,629,000 as
the cash generated from operations in 1996 and the first quarter of 1997 and
cash received from the sale of Standard Forms was only partially offset by the
cash used to acquire and fund the seasonal requirements of Color-Clings.
Rental and other income increased to $1,081,000 from $70,000 in 1996. The
increase is attributable to the gain on the sale of Standard Forms and other
miscellaneous, non-recurring income.
Income taxes, as a percentage of income before taxes and minority
interest was 38% in 1997 and 41% in 1996. The full year effective tax rate in
1996 was 39%. The decrease was attributable to lower projected state taxes and
the tax benefit on the sale of Standard Forms.
Net income for the nine months ended September 30, 1997 was $7,625,000,
or $.66 per share, compared to net income of $7,299,000, or $.66 per share in
1996.
-9-
<PAGE>
Third Quarter 1997 Compared to Third Quarter 1996
Third quarter 1997 sales decreased 3% to $143,040,000 from $147,527,000
in 1996. The decreased was comprised of a 2% decline in CPG sales and a 9%
decline in BPG sales. Excluding the Color-Clings acquisition, sales of the CPG
declined 14% due to 1) customer requested deferrals of Christmas shipments to
the fourth quarter that historically shipped in the third quarter of 1996, 2)
late receipt of customer orders, 3) sales erosion in the gift tag category, and
4) disruptions in production and distribution at Cleo primarily resulting from
start-up problems associated with the implementation of a new, fully
integrated business management system. Excluding the impact of the sale of
Standard Forms, BPG sales were flat with third quarter 1996 sales.
Cost of sales, as a percentage of sales, decreased to 65% from 66% in
1996. CPG cost of sales, as a percentage of sales, decreased to 68% from 70%,
while BPG cost of sales, as a percentage of sales, decreased to 43% in 1997
from 45% in 1996. The decrease in the CPG cost of sales percentage was due to
improved efficiencies at Cleo and Berwick and reduced closeout sales of Cleo
products in 1997 due to improved inventory management after Cleo's November 1995
acquisition. The improvement in the BPG cost of sales percentage was due to
the absence of lower margins on Standard Forms sales in 1997. Cleo will incur
higher than normal costs and expenses in the fourth quarter to relieve the
backlog in manufacturing and distribution noted above.
SG&A expenses, as a percentage of sales, were 20% in the third quarter of
1997 compared to 19% in 1996. The increase reflected incrementally higher SG&A
expenses associated with Color-Clings and the deferral of certain Cleo and
Paper Magic sales into the fourth quarter. BPG S,G&A expenses, as a percentage
of sales, rose to 51% from 50% in 1996 due to higher spending primarily
related to increased investment in product development and information
systems.
Interest expense, net of $2,243,000 decreased from $2,366,000 in 1996,
reflecting slightly lower borrowing levels.
Income tax, as a percentage of income before taxes and minority interest
decreased to 38% from 41% in 1996. The full year effective tax rate for 1996
was 39%. The decrease in 1997 was attributable to lower projected state taxes
and the tax benefit on the sale of Standard Forms.
Net income was $12,007,000, or $1.04 per share in 1997 compared to
$11,141,000, or $1.01 per share in 1996.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had working capital of $64,106,000 and
shareholders' equity of $185,978,000. The decrease in accounts receivable and
the increase in inventories from December 31, 1996 reflected seasonal
collections of 1996 Christmas accounts receivables and normal seasonal
inventory increases in preparation for the 1997 shipping season. The increase
in other current assets reflected spending for artwork which will be expensed
as product is shipped. The increase in intangibles was a result of the
acquisition of Color-Clings by Paper Magic on January 17, 1997.
The Company relies primarily on cash generated from operations and
seasonal borrowings to meet its liquidity requirements. Most of the CPG
revenues are seasonal with approximately 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 of September 30, 1997, borrowings were made under a $300,000,000 unsecured
revolving credit facility. At September 30, 1997, there was $148,140,000
outstanding under this facility. This facility will be used to fund seasonal
borrowings and to provide the Company with a source of capital for general
corporate purposes and to invest in future growth.
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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, 1997 By: /s/ James G. Baxter
----------------------------------
James G. Baxter
President - Consumer Products Group,
Chief Financial Officer and
Principal Accounting Officer
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<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000020629
<NAME> CSS INDUSTRIES
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 722
<SECURITIES> 0
<RECEIVABLES> 124,931
<ALLOWANCES> 4,019
<INVENTORY> 136,510
<CURRENT-ASSETS> 271,549
<PP&E> 104,545
<DEPRECIATION> 45,883
<TOTAL-ASSETS> 405,840
<CURRENT-LIABILITIES> 207,443
<BONDS> 3,898
<COMMON> 1,237
0
0
<OTHER-SE> 184,741
<TOTAL-LIABILITY-AND-EQUITY> 405,840
<SALES> 243,606
<TOTAL-REVENUES> 243,606
<CGS> 149,655
<TOTAL-COSTS> 149,655
<OTHER-EXPENSES> 75,085
<LOSS-PROVISION> 1,333
<INTEREST-EXPENSE> 4,629
<INCOME-PRETAX> 12,904
<INCOME-TAX> 4,874
<INCOME-CONTINUING> 7,625
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,625
<EPS-PRIMARY> .67
<EPS-DILUTED> .66
</TABLE>
