<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
20549
FORM 10-Q
For the Quarter Ended Commission file number 1-2661
March 31, 1999
---------------------
CSS INDUSTRIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its Charter)
Delaware 13-1920657
- ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification 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 March 31, 1999, there were 9,859,250 shares of Common Stock outstanding
which excludes shares which may still be issued upon exercise of stock options.
Page 1 of 12
<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 March 31, 1999 and December 31, 1998, the results of
operations for the three months ended March 31, 1999 and 1998 and the cash flows
for the three months ended March 31, 1999 and 1998. The results for the three
months ended March 31, 1999 and 1998 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 Part II
of this document.
PAGE NO.
--------
Consolidated Statements of Operations - Three months ended
March 31, 1999 and 1998 3
Consolidated Condensed Balance Sheets - March 31, 1999 and
December 31, 1998 4
Consolidated Statements of Cash Flows - Three months ended
March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-8
Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-11
PART II - OTHER INFORMATION
Items 1 through 6 - Not applicable
SIGNATURE 12
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<PAGE>
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except
per share amounts)
Three Months Ended
March 31,
----------------------
1999 1998
------- -------
SALES $26,367 $27,959
------- -------
COSTS AND EXPENSES
Cost of sales 19,356 18,309
Selling, general and administrative expenses 15,328 16,960
Restructuring and other special items - 2,082
Interest expense, net 570 401
Rental and other income, net (1,163) (578)
-------- -------
34,091 37,174
-------- -------
LOSS BEFORE INCOME TAXES (7,724) (9,215)
INCOME TAX BENEFIT (2,889) (3,456)
-------- -------
NET LOSS $(4,835) $(5,759)
======== =======
NET INCOME PER COMMON SHARE
Basic $(.48) $(.52)
===== =====
Diluted $(.48) $(.52)
===== =====
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 10,094 11,002
======= =======
Diluted 10,094 11,002
======= =======
CASH DIVIDENDS PER SHARE OF COMMON STOCK $ - $ -
======= =======
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<PAGE>
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
March 31, December 31,
1999 1998
--------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and temporary investments $ 4,865 2,214
Accounts receivable, net 29,846 182,983
Inventories 109,139 81,406
Deferred income taxes 6,721 3,389
Other current assets 10,927 20,583
-------- --------
Total current assets 161,498 290,575
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 51,802 49,409
-------- --------
OTHER ASSETS
Intangible assets 34,272 34,508
Other 2,739 2,098
-------- --------
Total other assets 37,011 36,606
-------- --------
Total assets $250,311 $376,590
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ - $ 95,320
Other current liabilities 33,089 50,090
-------- --------
Total current liabilities 33,089 145,410
-------- --------
LONG-TERM OBLIGATIONS 7,646 8,758
-------- --------
DEFERRED INCOME TAXES 1,929 1,929
-------- --------
SHAREHOLDERS' EQUITY 207,647 220,493
-------- --------
Total liabilities and shareholders' equity $250,311 $376,590
======== ========
See notes to consolidated financial statements.
-4-
<PAGE>
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
(In thousands)
Three Months Ended
March 31,
-----------------------------
1999 1998
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,835) $ (5,759)
-------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,312 2,359
Gain on sale of assets (14) (2)
Provision for doubtful accounts 110 132
Deferred tax benefit (3,332) --
Changes in assets and liabilities:
Decrease in accounts receivable 153,027 130,157
(Increase) in inventory (27,733) (33,435)
Decrease (Increase) in other assets 8,930 (1,647)
(Decrease) in other current liabilities (10,674) (4,789)
(Decrease) in accrued income taxes (6,939) (22,193)
-------- --------
Total adjustments 115,687 70,582
-------- --------
Net cash provided by operating activities 110,852 64,823
-------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment (4,430) (3,499)
Proceeds on sale of property, plant and equipment 26 37
-------- --------
Net cash used for investing activities (4,404) (3,462)
-------- --------
Cash flows from financing activities:
Payments on long-term obligations (464) (667)
Net payments on notes payable (95,320) (51,519)
Purchase of treasury stock (8,714) (470)
Proceeds from exercise of stock options 701 1,263
-------- --------
Net cash used for financing activities (103,797) (51,393)
-------- --------
Net increase in cash and temporary investments 2,651 9,968
Cash and temporary investments at beginning of period 2,214 1,365
-------- --------
Cash and temporary investments at end of period $ 4,865 $ 11,333
======== ========
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
CSS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(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.
Nature of Business -
CSS is a consumer products company primarily engaged in the manufacture
and sale to mass market retailers of seasonal, social expression
products, including 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. Due to the
seasonality of the Company's business, the majority of sales occur in
the third and fourth quarters and a material portion of the Company's
trade receivables are due in December and January of each year.
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:
March 31, December 31,
1999 1998
------------ -----------
Raw material................... $ 31,792,000 $30,636,000
Work-in-process................ 25,895,000 12,992,000
Finished goods................. 51,452,000 37,778,000
------------ -----------
$109,139,000 $81,406,000
============ ===========
-6-
<PAGE>
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 -
Basic net loss per common share is based on the weighted average number of
common shares outstanding during the first quarter - 10,094,183 in 1999
and 11,001,728 in 1998. Average outstanding shares used in the
computation of diluted net loss per share were 10,094,183 in 1999 and
11,001,728 in 1998.
As of March 31, 1999, the numerator and denominator in the basic and
diluted earnings per share computations are equal as the Company has a
net loss for the three months ended March 31, 1999. Common stock
equivalents are not used in the computation of diluted earnings per
share as they would have an anti-dilutive effect in the periods
presented.
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.
Reclassifications -
Certain prior period amounts have been reclassified to conform with
current year classifications.
(2) RESTRUCTURING AND OTHER SPECIAL ITEMS:
In 1998 the Company implemented a restructuring program consisting of the
sale of under utilized real estate, the integration of certain management
functions, the discontinuance of under-performing product lines and the
reduction of overhead costs. For the three months ended March 31, 1998, the
Company incurred pre-tax charges of $2,082,000 related to the restructuring
program. The restructuring program was completed in 1998.
(3) TREASURY STOCK TRANSACTIONS:
On February 19, 1998, the Company announced that its Board of Directors had
authorized the buy back of up to 1,000,000 shares of the Company's Common Stock.
On November 6, 1998, the Executive Committee of the Board of Directors
authorized an additional repurchase of up to 500,000 shares on terms acceptable
to management. As of March 31, 1999, the Company had repurchased 1,338,800
shares for $37,485,000, including the purchase of 352,400 shares for $8,714,000
in the first quarter of 1999. Subsequent to March 31, 1999, the Company's Board
of Directors authorized the buy back of up to 500,000 additional shares. Any
such buy back is subject to compliance with regulatory requirements and relevant
covenants of the Company's $300,000,000 unsecured revolving credit facility.
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<PAGE>
(4) FUTURE ACCOUNTING CHANGES:
The FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," in 1998, which establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires an
entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. FAS
No. 133 is effective for fiscal quarters of all fiscal years beginning after
June 15, 1999. Based on current operations, the Company does not expect the
adoption of this statement to have a material effect on its financial position
and results of operations. The Company has not yet determined when it will adopt
this statement.
(5) SUBSEQUENT EVENT:
In February 1999, CSS was awarded approximately $11,200,000, including
interest, in settlement of a dispute primarily related to the valuation of
inventory acquired in the 1995 acquisition of Cleo Inc from Gibson Greetings
Inc. ("Gibson"). The funds were subsequently released from escrow. The award
increased slightly the goodwill recorded on the 1998 balance sheet and had no
impact on 1998 or 1999 results of operations. Upon receipt of the award, CSS
moved for judicial confirmation. In March 1999, Gibson filed an objection to
confirmation seeking to vacate the award. In April 1999, the Common Pleas Court
of Pennsylvania denied the objection and entered judgment in favor of the
Company.
-8-
<PAGE>
CSS INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Seasonality
The seasonal nature of CSS' business results in low sales and operating
losses for the first two quarters and high shipment levels and operating profits
for the second half of the year, thereby causing significant fluctuations in the
quarterly results of operations of the Company.
Stock Repurchase Program
On February 19, 1998, the Company announced that its Board of Directors had
authorized the buy back of up to 1,000,000 shares of the Company's Common Stock.
On November 6, 1998, the Executive Committee of the Board of Directors
authorized an additional repurchase of up to 500,000 shares on terms acceptable
to management. As of March 31, 1999, the Company had repurchased 1,338,800
shares for $37,485,000, including the purchase of 352,400 shares for $8,714,000
in the first quarter of 1999. Subsequent to March 31, 1999, the Company's Board
of Directors authorized the buy back of up to an additional 500,000 shares. Any
such buy back is subject to compliance with regulatory requirements and relevant
covenants of the Company's $300,000,000 unsecured revolving credit facility.
First Quarter 1999 Compared to First Quarter 1998
Consolidated sales for the three months ended March 31, 1999 were
$26,367,000 or 6% below 1998 sales of $27,959,000. The decrease in sales was
primarily attributable to lower sales of Easter decorations and egg dye kits.
The decrease in sales was partially offset by increased close-out sales volume,
particularly in the Christmas product categories.
Cost of sales, as percentage of sales, was 73% in 1999 and 65% in 1998. The
increase in cost of sales was due to lower margins on sales of Easter products
due to competitive pressures. Selling, general and administrative ("SG&A")
expenses, as a percent of sales, decreased to 58% in 1999 from 61% in 1998. The
decrease in SG&A expenses was due to reduced salaries.
In 1998 the Company implemented a restructuring program consisting of the
sale of under utilized real estate, the integration of certain management
functions, the discontinuance of under-performing product lines and the
reduction of overhead costs. For the three months ended March 31, 1998, the
Company incurred pre-tax charges of $2,082,000 related to the restructuring
program. The restructuring program was completed in 1998.
-9-
<PAGE>
Interest expense, net increased to $570,000 from $401,000 in 1998. The
increase in interest expense was due to higher borrowing levels as a result of
the Company's stock repurchase program. The effects of increased borrowings were
partially offset by lower interest rates. The increase in rental and other
income from $578,000 in 1998 to $1,163,000 in 1999 was due to a pre-tax gain
related to the restructuring of a portion of the Company's deferred compensation
liability. The pre-tax gain was offset by increased income tax expense.
Income taxes, as a percentage of income before taxes, were 37.5% in 1999
and 1998.
The net loss for the three months ended March 31, 1999 was $4,835,000, or
$.48 per share, compared to a net loss of $5,759,000, or $.52 per share, in
1998. The decreased loss was due to the absence of special charges and lower
SG&A expenses, partially offset by lower sales and lower margins.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had working capital of $128,409,000 and
shareholders' equity of $207,647,000. The decrease in accounts receivable and
the increase in inventories from December 31, 1998 reflected seasonal
collections of Christmas accounts receivables net of current year billings and
normal seasonal inventory increases necessary for the 1999 shipping season. The
decrease in other current assets was due to the receipt of proceeds awarded in
the resolution of a dispute with Gibson Greetings, Inc. related to the purchase
price of the Company's Cleo Inc subsidiary. The decrease in other current
liabilities reflected payment of income taxes, sales commissions, royalties and
employee benefits. The decrease in shareholders' equity was primarily
attributable to the repurchase of 352,400 shares of the Company's common stock
for $8,714,000 and to the first quarter net loss.
The Company relies primarily on cash generated from operations and seasonal
borrowings to meet its liquidity requirements. Historically, most revenues are
seasonal with over 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 decreased to $0 in the first quarter but will increase through
the remainder of the year, peaking prior to Christmas. Seasonal borrowings are
made under a $300,000,000 unsecured revolving credit facility with thirteen
banks and financial institutions. The credit facility is available to fund the
seasonal borrowing needs and to provide the Company with a source of capital for
general corporate purposes. As of March 31, 1999, the Company had no borrowings
outstanding under this facility. 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.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations. These problems, in an extreme case, could render the
Company unable to process transactions and engage in the normal course of
business.
-10-
<PAGE>
To guard against these events, the Company initiated a comprehensive Year
2000 review and remediation program (the "Year 2000 Program") in 1998. Each of
the Company's subsidiaries and CSS' corporate headquarters established teams,
which included members of executive management, to identify and correct Year
2000 issues. Attention was given to computer hardware and software,
communications equipment, manufacturing equipment and facilities to achieve
compliance in all these areas. The teams were also charged with investigating
the Year 2000 capabilities of suppliers, customers and other external entities,
and with developing contingency plans where necessary. Significant vendors
(including, but not limited to, suppliers of materials and manufacturing
equipment, freight carriers, landlords, financial institutions and computer
hardware and software manufacturers) and customers were contacted to assess
their ability to meet the Year 2000 challenges. These entities are being asked
to represent to CSS that they will be able to correctly process transactions
with regard to the Year 2000.
A detailed accounting and assessment of all computer systems and
application software utilized throughout the Company's operations was completed,
and plans for establishing compliance have been developed. These plans identify
which non-compliant hardware and software will be remediated, upgraded or
replaced and the timetable and resource requirements to achieve those
objectives. As of May 1, 1999, remediation and testing of the Company's primary
transaction processing systems have been completed at all of the Company's
subsidiaries and at corporate headquarters. Auxiliary systems are currently
being remediated and tested. CSS anticipates completing the Year 2000 project
prior to any anticipated impact on its operations. The cumulative external cost
of this effort is not expected to exceed $250,000 and will be funded through
operating cash flows and expensed as incurred.
The Company maintains contingency plans for computer failures, power
outages, natural disasters, etc. Year 2000 contingency plans for mission
critical systems will be developed and integrated with the existing contingency
plans where appropriate by December 1999.
The costs of the Year 2000 Program and the time table on which the Company
believes it will complete the Year 2000 Program are based on management's best
estimates, which were derived using assumptions of future events. However, there
can be no guarantee that these estimates will be achieved, and actual results
could differ materially from those anticipated. Although the Company believes
the program outlined above should be adequate to address the Year 2000 issue,
there can be no assurances to that effect.
-11-
<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: May ___, 1999 By: /s/Clifford E. Pietrafitta
-------------------------------
Clifford E. Pietrafitta
Vice President - Finance,
Chief Financial Officer and
Principal Accounting Officer
-12-
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<CIK>0000020629
<NAME> CSS INDUSTRIES
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,865
<SECURITIES> 370
<RECEIVABLES> 31,051
<ALLOWANCES> 1,205
<INVENTORY> 109,139
<CURRENT-ASSETS> 13,946
<PP&E> 90,894
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<TOTAL-ASSETS> 246,979
<CURRENT-LIABILITIES> 29,757
<BONDS> 1,990
<COMMON> 1,237
0
0
<OTHER-SE> 206,410
<TOTAL-LIABILITY-AND-EQUITY> 246,979
<SALES> 26,367
<TOTAL-REVENUES> 26,367
<CGS> 19,356
<TOTAL-COSTS> 19,356
<OTHER-EXPENSES> 14,055
<LOSS-PROVISION> 110
<INTEREST-EXPENSE> 570
<INCOME-PRETAX> (7,724)
<INCOME-TAX> (2,889)
<INCOME-CONTINUING> (4,835)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,835)
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<EPS-DILUTED> (.48)
</TABLE>
