SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
20549
FORM 10-Q
| For the Quarter Ended December 31, 2003 |
Commission file number 1-2661 |
| Delaware | 13-1920657 | |
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| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification number) |
| 1845 Walnut Street, Philadelphia, PA | 19103 | ||
| (Address of principal executive offices) | (Zip 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___ |
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
| Yes x | No___ |
As of February 11, 2004, there were 11,882,433 shares of common stock outstanding which excludes shares which may still be issued upon exercise of stock options.
1
CSS INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PART I – FINANCIAL INFORMATION
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the Company’s financial position as of December 31, 2003 and March 31, 2003, and the results of its operations and cash flows for the three and nine months ended December 31, 2003 and 2002. The results for the three and nine months ended December 31, 2003 are not necessarily indicative of the expected results for the full year. As certain previously reported footnote disclosures have been omitted, these financial statements should be read in conjunction with the Company’s latest annual report on Form 10-K and with Part II of this document.
| PAGE NO. | ||||
| Consolidated Statements of Operations and Comprehensive Income – Three and nine months ended December 31, 2003 and 2002 | 3 | |||
| Condensed Consolidated Balance Sheets – December 31, 2003 and March 31, 2003 | 4 | |||
| Consolidated Statements of Cash Flows – Nine months ended December 31, 2003 and 2002 | 5 | |||
| Notes to Consolidated Financial Statements | 6-13 | |||
| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
14-16 | |||
| Item 3. Quantitive and Qualitative Disclosures About Market Risk | 16 | |||
| Item 4. Controls and Procedures | 17 | |||
| PART II – OTHER INFORMATION | ||||
| Item 6. Exhibits and Reports on Form 8-K | 18 | |||
| Signatures | 19 |
2
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Unaudited)
| (In thousands, except per share data) |
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| Three Months Ended December 31, |
Nine Months Ended December 31, |
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| 2003 | 2002 | 2003 | 2002 | ||||||||||
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| SALES | $ | 247,394 | $ | 250,682 | $ | 484,846 | $ | 476,691 | |||||
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| COSTS AND EXPENSES | |||||||||||||
Cost
of sales |
176,075 | 181,296 | 349,056 | 349,013 | |||||||||
Selling,
general and administrative expenses |
27,416 | 27,906 | 74,698 | 74,386 | |||||||||
Interest
expense, net |
1,185 | 1,496 | 2,874 | 2,903 | |||||||||
Other
expense (income), net |
192 | (118 | ) | (310 | ) | (139 | ) | ||||||
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| 204,868 | 210,580 | 426,318 | 426,163 | ||||||||||
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| INCOME BEFORE INCOME TAXES | 42,526 | 40,102 | 58,528 | 50,528 | |||||||||
| INCOME TAX EXPENSE | 15,129 | 14,436 | 20,954 | 18,190 | |||||||||
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INCOME
BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE |
27,397 | 25,666 | 37,574 | 32,338 | |||||||||
CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (NET OF TAX) |
— | — | — | (8,813 | ) | ||||||||
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| NET INCOME | $ | 27,397 | $ | 25,666 | $ | 37,574 | $ | 23,525 | |||||
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| BASIC NET INCOME PER COMMON SHARE | |||||||||||||
Before
cumulative effect of accounting change |
$ | 2.31 | $ | 2.24 | $ | 3.20 | $ | 2.73 | |||||
Cumulative
effect of accounting change |
— | — | — | (.75 | ) | ||||||||
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Basic
net income per common share |
$ | 2.31 | $ | 2.24 | $ | 3.20 | $ | 1.98 | |||||
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| DILUTED NET INCOME PER COMMON SHARE | |||||||||||||
Before
cumulative effect of accounting change |
$ | 2.18 | $ | 2.12 | $ | 3.05 | $ | 2.59 | |||||
Cumulative
effect of accounting change |
— | — | — | (.71 | ) | ||||||||
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Diluted
net income per common share |
$ | 2.18 | $ | 2.12 | $ | 3.05 | $ | 1.88 | |||||
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| WEIGHTED AVERAGE SHARES OUTSTANDING | |||||||||||||
| BASIC | 11,841 | 11,457 | 11,730 | 11,860 | |||||||||
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| DILUTED | 12,592 | 12,086 | 12,335 | 12,483 | |||||||||
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| CASH DIVIDENDS PER SHARE OF COMMON STOCK | $ | .08 | $ | — | $ | .227 | $ | - | |||||
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| COMPREHENSIVE INCOME | |||||||||||||
Net
income |
$ | 27,397 | $ | 25,666 | $ | 37,574 | $ | 23,525 | |||||
Change
in fair value of interest rate swap agreements, net |
149 | 209 | 269 | (3 | ) | ||||||||
Foreign
currency translation adjustment |
— | — | 17 | (1 | ) | ||||||||
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Comprehensive
income |
$ | 27,546 | $ | 25,875 | $ | 37,860 | $ | 23,521 | |||||
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See notes to consolidated financial statements.
3
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| (In thousands) | |||||||
| December 31, 2003 |
March 31, 2003 |
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| (Unaudited) | |||||||
ASSETS |
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| CURRENT ASSETS | |||||||
Cash
and cash equivalents |
$ | 12,158 | $ | 51,981 | |||
Accounts
receivable, net |
215,377 | 47,583 | |||||
Inventories |
76,187 | 106,648 | |||||
Current
income taxes |
— | 2,398 | |||||
Deferred
income taxes |
7,179 | 6,226 | |||||
Other
current assets |
11,934 | 13,771 | |||||
Total
current assets |
322,835 | 228,607 | |||||
| PROPERTY, PLANT AND EQUIPMENT, NET | 82,959 | 82,731 | |||||
| OTHER ASSETS | |||||||
Intangible
assets, net |
36,995 | 36,045 | |||||
Other |
4,473 | 4,578 | |||||
Total
other assets |
41,468 | 40,623 | |||||
Total
assets |
$ | 447,262 | $ | 351,961 | |||
LIABILITIES
AND STOCKHOLDERS’ EQUITY |
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| CURRENT LIABILITIES | |||||||
Notes
payable |
$ | 28,980 | $ | — | |||
Other
current liabilities |
95,653 | 69,645 | |||||
Total
current liabilities |
124,633 | 69,645 | |||||
| LONG-TERM DEBT, NET OF CURRENT PORTION | 50,000 | 50,063 | |||||
| LONG-TERM OBLIGATIONS | 3,564 | 3,684 | |||||
| DEFERRED INCOME TAXES | 9,098 | 7,706 | |||||
| STOCKHOLDERS’ EQUITY | 259,967 | 220,863 | |||||
Total
liabilities and stockholders’ equity |
$ | 447,262 | $ | 351,961 | |||
See notes to consolidated financial statements.
4
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Unaudited)
| (In thousands) | |||||||
| Nine Months Ended December 31, |
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| 2003 | 2002 | ||||||
| Cash flows from operating activities: | |||||||
Net
income |
$ | 37,574 | $ | 23,525 | |||
Adjustments
to reconcile net income to net cash |
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used
for operating activities: |
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Cumulative
effect of accounting change, net of tax |
— | 8,813 | |||||
Depreciation
and amortization |
10,252 | 9,974 | |||||
Loss
(gain) on disposal of assets, net |
255 | (7 | ) | ||||
Provision
for doubtful accounts |
917 | 1,725 | |||||
Deferred
taxes |
439 | 1,272 | |||||
Changes
in assets and liabilities, net of effects of |
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purchase
and disposal of businesses: |
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(Increase)
in accounts receivable |
(168,711 | ) | (154,945 | ) | |||
Decrease
in inventory |
28,230 | 30,629 | |||||
(Increase)
decrease in other assets |
(662 | ) | 8,655 | ||||
Increase
in other current liabilities |
13,929 | 5,346 | |||||
Increase
in accrued taxes |
14,734 | 14,777 | |||||
Total
adjustments |
(100,617 | ) | (73,761 | ) | |||
Net
cash (used for) operating activities |
(63,043 | ) | (50,236 | ) | |||
| Cash flows from investing activities: | |||||||
Purchase
of property, plant and equipment |
(10,551 | ) | (7,829 | ) | |||
Purchase
of a business, net of cash received of $1 |
— | (22,891 | ) | ||||
Proceeds
from sale of assets |
3,702 | 30 | |||||
Net
cash (used for) investing activities |
(6,849 | ) | (30,690 | ) | |||
| Cash flows from financing activities: | |||||||
Payments
on long-term obligations |
(172 | ) | (599 | ) | |||
Borrowings
on notes payable |
188,795 | 458,215 | |||||
Repayments
on notes payable |
(159,815 | ) | (382,315 | ) | |||
Repayment
of acquisition debt |
— | (18,828 | ) | ||||
Proceeds
from the issuance of long-term debt |
— | 50,000 | |||||
Payment
of private placement transaction costs |
— | (294 | ) | ||||
Dividends
paid |
(2,668 | ) | — | ||||
Payment
of fractional shares related to 3 for 2 stock split |
(2 | ) | — | ||||
Purchase
of treasury stock |
— | (36,510 | ) | ||||
Proceeds
from exercise of stock options |
3,914 | 3,719 | |||||
Net
cash provided by financing activities |
30,052 | 73,388 | |||||
| Effect of exchange rate changes on cash | 17 | (1 | ) | ||||
| Net (decrease) in cash and temporary investments | (39,823 | ) | (7,539 | ) | |||
| Cash and cash equivalents at beginning of period | 51,981 | 20,006 | |||||
| Cash and cash equivalents at end of period | $ | 12,158 | $ | 12,467 | |||
See notes to consolidated financial statements.
5
CSS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003
(Unaudited)
| (1) | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: |
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. Translation adjustments are charged or credited to a separate component of stockholders’ equity. Gains and losses on foreign currency transactions are included in other expense (income), net in the consolidated statements of operations.
Nature of Business -
CSS is a consumer products company primarily engaged in the design, 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-up and novelties, Easter egg dyes and novelties and educational products. Due to the seasonality of the Company’s business, the majority of sales occur in the second and third quarters of the Company’s fiscal year which ends March 31, 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 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 include valuation reserves for inventory and accounts receivable, the assessment of the recoverability of goodwill and other intangible assets, income tax valuation and resolution of litigation. Actual results could differ from those estimates.
6
Inventories-
The Company records inventory at the date of taking title which generally occurs upon receipt or prior to receipt of in-transit inventory of overseas product. The Company adjusts unsalable and slow-moving inventory to its 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, 2003 |
March 31, 2003 |
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| Raw material | $ | 18,867 | $ | 24,260 | |||
| Work-in-process | 16,614 | 30,183 | |||||
| Finished goods | 40,706 | 52,205 | |||||
| $ | 76,187 | $ | 106,648 | ||||
Revenue Recognition-
The Company recognizes revenue from product sales when the goods are shipped and title and risk of loss pass to the customer. Provisions for allowances and rebates to customers, returns and other adjustments are provided in the same period that the related sales are recorded.
Stock-Based Compensation-
The Company applies Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its stock options plans. Accordingly, compensation expense is generally not recognized for its stock-based compensation plans. Had compensation expense for the Company’s stock option plans been determined based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed under Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” the Company’s net income and net income per share would have changed as follows:
| Three Months Ended December 31, |
Nine Months Ended December 31, |
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| 2003 | 2002 | 2003 | 2002 | ||||||||||
| (in thousands, except per share data) | |||||||||||||
| Net income, as reported | |||||||||||||