UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
| FORM 10-K |
(Mark one)
| ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the fiscal year ended March 31, 2014
OR
| ¨ | 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 | (I.R.S. Employer | ||
| incorporation or organization) | Identification No.) | ||
| 1845 Walnut Street, Philadelphia, PA | 19103 | ||
| (Address of principal executive offices) | (Zip Code) | ||
Registrant’s telephone number, including area code:
(215) 569-9900
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
| Common Stock, $.10 par value | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o¨ No þý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o¨ No þý
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 þý No o¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such period that the registrant was required to submit and post such files). Yes oý No o¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K. þý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” inRule 12b-2 of the Exchange Act. (Check one):Act:
| Large accelerated filer | ||||||
| Accelerated filer | ý | |||||
| Non-accelerated filer | Smaller reporting company | ¨ | ||||
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes o¨ No þý
The aggregate market value of the voting stock held by non-affiliates of the registrant is $150,033,335.$208,456,141. Such aggregate market value was computed by reference to the closing price of the common stock of the registrant on the New York Stock Exchange on September 30, 2010,2013, being the last trading day of the registrant’s most recently completed second fiscal quarter. Such calculation excludes the shares of common stock beneficially owned at such date by certain directors and officers of the registrant, by the Farber Foundation and by the Farber Family Foundation, as described under the section entitled “Ownership of CSS Common Stock” in the proxy statement to be filed by the registrant for its 20112014 Annual Meeting of Stockholders. In making such calculation, registrant does not determine the affiliate or non-affiliate status of any holders of the shares of common stock for any other purpose.
At May 17, 2011,22, 2014, there were outstanding 9,733,4059,294,838 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for its 20112014 Annual Meeting of Stockholders are incorporated by reference into Part III of thisForm 10-K.
CSS INDUSTRIES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 2011
2014
2014
INDEX
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| Item 1A. | ||||||||
| Item 1B. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 9B. | ||||||||
| Item 10. | ||||||||
| Item 15. | ||||||||
PART I
Item 1.Business.
General
CSS Industries, Inc. (“CSS” or the “Company”) is a consumer products company primarily engaged in the design, manufacture, procurement, distribution and sale of seasonalall occasion and all occasionseasonal social expression products, principally to mass market retailers. These seasonalall occasion and all occasionseasonal products include decorative ribbons and bows, boxed greeting cards, gift tags, gift wrap, gift bags, gift boxes, gift card holders, decorative tissue paper, decorations, classroom exchange Valentines, decorative ribbons and bows, floral accessories, Halloween masks, costumes,make-up and novelties, Easter egg dyes and novelties, craft and educational products, stickers, memory books, stationery, journals, notecards, infant and wedding photo albums, scrapbooks, and other gift items that commemorate life’s celebrations. CSS’ product breadth provides its retail customers the opportunity to use a single vendor for much of their seasonal product requirements. A substantial portion of CSS’ products are manufactured, packagedand/or warehoused in eleventen facilities located in the United States, with the remainder purchased primarily from manufacturers in Asia and Mexico. The Company’s products are sold to its customers by national and regional account sales managers, sales representatives, product specialists and by a network of independent manufacturers’ representatives. CSS maintains a purchasing officeshowroom in Hong Kong as well as a purchasing office to administer Asian sourcing opportunities. The Company’s principal operating subsidiaries include Berwick Offray LLC (“Berwick Offray”), Paper Magic Group, Inc. (“Paper Magic”), BOC Design Group (consisting of Berwick Offray LLC (“Berwick Offray”) and Cleo Inc (“Cleo”)) and C.R. Gibson, LLC (“C.R. Gibson”).
The Company’s fiscal year ends on March 31. References to a particular year refer to the fiscal year ending in March of that year. For example, fiscal 20112014 refers to the fiscal year ended March 31, 2011.2014.
On September 5, 2012, the Company and its Paper Magic subsidiary sold the Halloween portion of Paper Magic’s business and certain Paper Magic assets relating to such business, including certain tangible and intangible assets associated with Paper Magic’s Halloween business, to Gemmy Industries (HK) Limited (“Gemmy”). Paper Magic’s remaining Halloween assets, including accounts receivable and inventory, were excluded from the sale. Paper Magic retained the right and obligation to fulfill all customer orders for Paper Magic Halloween products (such as Halloween masks, costumes, make-up and novelties) for the Halloween 2012 season. The sale price of $2,281,000 was paid to Paper Magic at closing. The Company incurred $523,000 of transaction costs (included within disposition of product line further discussed in Note 4 to the consolidated financial statements), yielding net proceeds of $1,758,000. The Company is satisfying the liabilities through December 2015.
On September 9, 2011, the Company and its Cleo Inc (“Cleo”) subsidiary sold the Christmas gift wrap portion of Cleo’s business and certain of its assets relating to such business, including certain equipment, contract rights, customer lists, intellectual property and other intangible assets to Impact Innovations, Inc. (“Impact”). Cleo’s remaining assets, including accounts receivable and inventory, were excluded from the sale. The purchase price was $7,500,000, of which $2,000,000 was paid in cash at closing. The remainder of the purchase price was paid through the eliminationissuance by Impact of redundant back office functionsan unsecured subordinated promissory note, which provided for quarterly payments of interest at 7% and certain management positions. The Company consolidated its accounts receivable, accounts payableprincipal payments as follows: $500,000 on March 1, 2012; $2,500,000 on March 1, 2013; and payroll functions into a combined back office operation, which was substantially completed inall remaining principal and interest on March 1, 2014. In the firstfourth quarter of fiscal 2010. Also completed2013, the Company received a $2,000,000 principal payment in the first quarter of fiscal 2010 was the implementation of a phaseadvance of the Company’s enterprise resource planning systems standardization project.March 1, 2014 due date. All interest payments were paid timely and the final principal payment of $500,000 was received in March 2014. This transaction resulted in a pre-tax gain of $5,849,000 in fiscal 2012. As part of the approved plan to close its manufacturing facility located in Memphis, Tennessee, the Company incurred pre-tax expenses of $8,141,000 during fiscal 2012, of which $706,000 is recorded in continuing operations (see Note 3 to the consolidated financial statements) and $7,435,000 is recorded in discontinued operations (see Note 2 to the consolidated financial statements). The results of operations for the years ended March 31, 2014, 2013 and 2012 reflect the historical operations of the Christmas gift wrap business as discontinued operations and the discussion herein is presented on the basis of continuing operations, unless otherwise stated.
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indemnification obligations.
The Company’s goal is to expand by developing new or complementary products, by entering new markets and by acquiring companies that are complementary with its existing operating businesses and by acquiring other businesses with leading market positions.businesses.
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Principal Products CSS designs, manufactures, procures, distributes and sells a broad range of seasonal consumer products primarily through the mass market distribution channel. Christmas products include decorative ribbons and bows, boxed greeting cards, gift tags, gift wrap, gift bags, gift boxes, gift card holders, decorative tissue paper and decorations. CSS’ Valentine product offerings include classroom exchange Valentine cards and other related Valentine products, while its Easter product offerings include Dudley’s® brand of Easter egg dyes and related Easter seasonal products. For Halloween, CSS offers a full line of Halloween merchandise includingmake-up, costumes, masks and novelties. In addition to seasonal products, CSS also designs and markets decorative ribbons and bows, all occasion boxed greeting cards, gift wrap, gift bags, gift boxes, gift card holders, decorative and waxed tissue paper, decorative films and foils, stickers, memory books, stationery, journals, notecards, infant and wedding photo albums, scrapbooks, floral accessories and other gift and craft items to its mass market, craft, specialty and floral retail and wholesale distribution customers, and teachers’ aids and other learning oriented products to the education market through mass market retailers, school supply distributors and teachers’ stores. CSS also designs, manufactures, procures, distributes and sells a broad range of seasonal consumer products primarily through the mass market distribution channel. Christmas products include decorative ribbons and bows, boxed greeting cards, gift tags, gift bags, gift boxes, gift card holders, tissue paper and decorations. CSS’ Valentine product offerings include classroom exchange Valentine cards and other related Valentine products, while its Easter product offerings include Dudley’s® brand of Easter egg dyes and related Easter seasonal products.
Key brands include Paper Magic®, Berwick®, Offray®, Cleo®, C.R. Gibson®, Markings®, Creative PapersStepping Stones®, Tapestry®, Seastone®, Dudley’s®, Don Post StudiosEureka® and Stickerfitti®, Eureka®, Learning Playground®, Stickerfitti® and iota®.
CSS operates eleventen manufacturingand/or distribution facilities located in Pennsylvania, Maryland, New Hampshire, South Carolina, Alabama Tennessee and Texas. A description of the Company’s product lines and related manufacturingand/or distribution facilities is as follows:
| Boxed greeting cards are produced by Asian manufacturers to our specifications. Domestically distributed products are warehoused in a distribution facility in Pennsylvania. Easter egg dye products are manufactured in Asia to specific formulae by contract manufacturers who meet regulatory requirements for the formularization and packaging of such products. Domestically distributed products are warehoused in a distribution facility in Pennsylvania. Ribbons and bows are primarily manufactured and warehoused in seven facilities located in Pennsylvania, Maryland, South Carolina and Texas. The manufacturing process is vertically integrated. Non-woven ribbon and bow products are primarily made from polypropylene resin, a petroleum-based product, which is mixed with color pigment, melted and pressed through an extruder. Large rolls of extruded film go through various combinations of manufacturing processes before being made into bows or packaged on ribbon spools or reels as required by various markets and customers. Woven fabric ribbons are manufactured domestically or imported from Mexico and Asia. Imported woven products are either narrow woven or converted from bulk rolls of wide width textiles. Domestic woven products are narrow woven. Memory books, stationery, journals and notecards, infant and wedding photo albums, scrapbooks, and other gift items are imported from Asian manufacturers and warehoused and distributed from a distribution facility in Florence, Alabama. Floral accessories, including pot covers, foil, waxed tissue, shred, aisle runners, corsage bags and other paper and film products, are manufactured in facilities located in New Hampshire or imported from Mexico. Manufacturing includes gravure and flexo printing, waxing and converting. Products are warehoused and distributed from a distribution facility in Pennsylvania. | ||
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Other products including, but not limited to, decorative tissue paper, all occasion gift wrap, gift tags, gift bags, gift boxes, gift card holders, Halloween masks, costumes and novelties,classroom exchange Valentine products, Easter products, decorations and school products are designed to the specifications of CSS and are imported primarily from Asian manufacturers.
During our 20112014 fiscal year, CSS experienced no material difficulties in obtaining raw materials or finished goods from suppliers.
Intellectual Property Rights CSS has a number of copyrights, patents, tradenames, trademarks and intellectual property licenses which are used in connection with its products. Substantially all of its designs and artwork are protected by copyright. Intellectual property license rights which CSS has obtained are viewed as especially important to the success of its classroom exchange Valentines stickers and juvenile gift wrap.stickers. It is CSS’ view that its operations are not dependent upon any individual patent, tradename, trademark, copyright or intellectual property license. The collective value of CSS’ intellectual property is viewed as substantial and CSS seeks to protect its rights in all patents, copyrights, tradenames, trademarks and intellectual property licenses.
Sales and Marketing Most of CSS’ products are sold in the United States and Canada by national and regional account sales managers, sales representatives, product specialists and by a network of independent manufacturers’ representatives. CSS maintains permanent showrooms in New York City, Memphis,Moosic, PA; Dallas, TX; Atlanta, Las VegasGA and Hong Kong where buyers for major retail customers will typically visit for a presentation and review of the new lines. Products are also displayed and
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presented in showrooms maintained by various independent manufacturers’ representatives in major cities in the United States and Canada. Relationships are developed with key retail customers by CSS sales personnel and independent manufacturers’ representatives. Customers are generally mass market retailers, discount department stores, specialty chains, warehouse clubs, drug and food chains, dollar stores, office supply stores, independent card, gift and floral shops and retail teachers’ stores. Net sales to Walmart Stores, Inc. and its affiliates and Target Corporation accounted for approximately 24%27% and 12% of total net sales, respectively, during fiscal 2011.2014. No other customer accounted for 10% or more of the Company’s net sales in fiscal 2011.2014. Our ten largest customers, which include mass market retailers, warehouse clubs and national drug store chains, accounted for approximately 60% of our sales in our 2014 fiscal year. Approximately 59%61% of the Company’s sales are attributable to seasonal (Christmas, Halloween, Valentine’s Day and Easter) products,all occasion with the remainder attributable to all occasionseasonal (Christmas, Valentine’s Day and Easter) products. Approximately 46%31% of CSS’ sales relate to the Christmas season. Seasonal products are generally designed and marketed beginning up to 18 to 20 months before the holiday event and manufactured during an eight to ten month production cycle. Due to these long lead time requirements, timely communication with third party factories, retail customers and independent manufacturers’ representatives is critical to the timely production of seasonal products. Because the products themselves are primarily seasonal, sales terms do not generally require payment until just before or just after the holiday, in accordance with industry practice. C.R. Gibson’s social stationery products are sold by a national organization of sales representatives that specialize in the gift and specialty channel, as well as by C.R. Gibson’s key account representatives. The Company also sells custom products to private label customers, to other social expression companies, and to converters of the Company’s ribbon products. Custom products are sold by both independent manufacturers’ representatives and CSS sales managers. CSS products, with some customer specific exceptions, are not sold under guaranteed or return privilege terms. All occasion ribbon and bow products are also sold through sales representatives or independent manufacturers’ representatives to wholesale distributors and independent small retailers who serve the floral, craft and retail packaging trades.
Competition among retailers in the sale of the Company’s products to end users is intense. CSS seeks to assist retailers in developing merchandising programs designed to enable the retailers to meet their revenue objectives while appealing to their consumers’ tastes. These objectives are met through the development and manufacture of custom configured and designed products and merchandising programs. CSS’ years of experience in merchandising program development and product quality are key competitive advantages in helping retailers meet their objectives.
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Competition CSS’ principal competitor in Christmas products is American Greetings Corporation. Image Arts, Inc., a subsidiary of Hallmark Cards, Incorporated (“Hallmark”), is also a competitor in the boxed greeting card business. CSS competes, to a limited extent, with other product offerings of Hallmark and American Greetings Corporation. These competitors are larger and have greater resources than the Company. In addition, CSS also competes with various domestic and foreign companies in each of its other product offerings.
Some of our competitors, such as American Greetings Corporation and Hallmark Cards, Incorporated (“Hallmark”), are larger and have greater resources than the Company. CSS believes its products are competitively positioned in their primary markets. Since competition is based primarily on category knowledge, timely delivery, creative design, price and, with respect to seasonal products, the ability to serve major retail customers with single, combined product shipments for each holiday event, CSS’ focus on products combined with consistent service levels allows it to compete effectively in its core markets.
Employees
At May 17, 2011,22, 2014, approximately 1,8301,200 persons were employed by CSS (increasing to approximately 2,5501,500 as seasonal employees are added). The Company believes that relationships with its employees are satisfactory.
With the exception of the bargaining unitsunit at the gift wrap facilities in Memphis, Tennessee and the ribbon manufacturing facility in Hagerstown, Maryland, which totaled approximately 60095 employees as of May 17, 2011,22, 2014, 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 the Hagerstown-based production and maintenance employees remains in effect until December 31, 2011. The collective bargaining agreement with the labor union representing Cleo’s production and maintenance employees at the Cleo gift wrap plant and warehouse2014. Historically, we have been successful in Memphis, Tennessee also remains in effect until December 31, 2011. The Company plans to close its Cleo manufacturing facility located in Memphis, Tennessee, with an exit to be completed by no later than December 31, 2011. As partrenegotiating expiring agreements without any disruption of such closing, the Company plans to transition the sourcing of all gift wrap products to foreign suppliers.operating activities.
SEC Filings
The Company’s Internet address iswww.cssindustries.com. Through its website, the following filings are made available free of charge as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission: its annual report onForm 10-K, its quarterly reports onForm 10-Q, its current reports onForm 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
| Item 1A.Risk Factors. |
You should carefully consider each of the risk factors we describe below, as well as other factors described in this annual report onForm 10-K and elsewhere in our SEC filings.
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Our results of operations fluctuate on a seasonal basis, and quarter to quarter comparisons may not be a good indicator of our performance. Seasonal demand fluctuations may adversely affect our cash flow and our ability to sell our products.
Approximately 59%61% of our sales are all occasion with the remainder attributable to seasonal (Christmas, Halloween, Valentine’s Day and Easter) products, with the remainder being attributable to all occasion products. Approximately 46%31% of our sales relate to the Christmas season. The seasonal nature of our business has historically resulted in lower sales levels and operating losses in our first and fourth quarters, and higher sales levels and operating profits in our second and third quarters. As a result, our quarterly results of operations fluctuate during our fiscal year, and a quarter to quarter comparison is not a good indication of our performance or how we will perform in the future. For example, our overall results of operations in the future may fluctuate substantially based on seasonal demand for our products. Such variations in demand could have a material adverse effect on the timing of cash flow and therefore our ability to meet our obligations with respect to our debt and other financial commitments. Seasonal fluctuations also affect our inventory levels. We must carry significant amounts of inventory, especially before the Christmas retail selling period. If we are not successful in selling the inventory during the relevant period, we may have to sell the inventory at significantly reduced prices, or we may not be able to sell the inventory at all.
We rely on a few mass market retailers, warehouse clubs and national drug store chains for a significant portion of our sales. The loss of sales, or a significant reduction of sales, to one or more of our large customers may adversely affect our business, results of operations and financial condition. Past and future consolidation within the retail sector also may lead to reduced profit margins, which may adversely affect our business, results of operations and financial condition.
A few of our customers are material to our business and operations. Our sales to Walmart Stores, Inc. and its affiliates and Target Corporation accounted for approximately 24%27% and 12% of our sales, respectively, during our 20112014 fiscal year. No other single customer accounted for 10% or more of our sales in fiscal 2011.2014. Our ten largest customers, which include mass market retailers, warehouse clubs and national drug store chains, accounted for approximately 57%60% of our sales in our 20112014 fiscal year. Our business depends, in part, on our ability to identify and define product and market trends, and to anticipate, understand and react to changing consumer demands in a timely manner. There can be no assurance that our large customers will continue to purchase our products in the same quantities that they have in the past. The loss of sales, or a significant reduction of sales, towith one or more of our large customers, including without limitation a loss or significant reduction in sales resulting from our failure or inability to comply with one or more of any of our customers’ sourcing requirements, may adversely affect our business, results of operations and financial condition. Further, in recent years there has been consolidation among our retail customer base. As the retail sector consolidates, our customers become larger, and command increased leverage in negotiating prices and other terms of sale of our products, including credits, discounts, allowances and other incentive considerations to these customers. Past and future consolidation may lead to reduced profit margins, which may adversely affect our business, results of operations and financial condition.
Increases in raw material and energy costs, resulting from general economic conditions, acts of nature, such as hurricanes, earthquakes or pandemics, or other factors, may raise our cost of goods sold and adversely affect our business, results of operations and financial condition.
Paper and petroleum-based materials are essential in the manufacture of our products, and the cost of such materials is significant to our cost of goods sold. Energy costs, especially fuel costs, also are significant expenses in the production and delivery of our products. Increased costs of raw materials or energy resulting from general economic conditions, acts of nature, such as hurricanes, earthquakes or pandemics, or other factors, may result in declining margins and operating results if market conditions prevent us from passing these increased costs on to our customers through timely price increases on our products.
Risks associated with our use of foreign suppliers may adversely affect our business, results of operations and financial condition.
For a large portion of our product lines, particularly our Halloween, Easter, Christmas boxed greeting cards, gift bags, gift tags, gift boxes, gift card holders, decorative tissue paper, classroom exchange Valentines, Easter egg dyes and novelties, craft and educational products, stickers, memory books, stationery, journals, notecards, infant and wedding photo albums and scrapbook product lines, we use foreign suppliers to manufacture a significant portion of our products. Approximately 56%61% of our sales in fiscal 20112014 were related to products sourced from foreign suppliers. Further, on May 24, 2011, the Company approved a plan to close its Cleo manufacturing facility located in Memphis, Tennessee, with an exit to be completed by no later than December 31, 2011. As part of such closing, the Company plans to transition the sourcing of all gift wrap products to 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 or disruptions, difficulties in maintaining and monitoring quality control (including without limitation risks associated with defective products), enforceability of agreed upon contract terms, compliance with existing and new United States and foreign laws and regulations, such as the United States Foreign Corrupt Practices Act and legislation and regulations relating to imported products, costs relating to the imposition or retrospective application of antidumping and countervailing duties or other trade-related sanctions on imported products, economic, civil or political instability, labor-related issues, such as
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labor shortages or wage disputes or increases, international public health issues, and restrictions on the repatriation of profits and assets.
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Increased overseas sourcing by our competitors and our customers may reduce our market share and profit margins, adversely affecting our business, results of operations and financial condition.
We have relatively high market share in many of our seasonal product categories. Most of our product markets have shown little or no growth, and some of our product markets have declined, in recent years, and we continue to confront significant cost pressure as our competitors source certain products from overseas and certain customers increase direct sourcing from overseas factories. Increased overseas sourcing by our competitors and certain customers may result in a reduction of our market share and profit margins, adversely affecting our business, results of operations and financial condition.
Difficulties encountered by our key customers may cause them to reduce their purchases from us and/or increase our exposure to losses from bad debts, and adversely affect our business, results of operations and financial condition.
Many of our largest customers are national and regional retail chains. The retail channel in the United States has experienced significant shifts in market share among competitors in recent years. In addition, leveraged buyoutsyears, including as a result of certain large retailers in recent years have left these companies with significant levelsthe emergence of debt. Furthermore, effects from the worldwidee-commerce retailers. Any current or future economic slowdown, that began in our 2009 fiscal year, including reduced, delayed or foregone consumer spending and increased difficulty and costs associated with obtaining the financing and capital needed by retailers to operate their businesses, has adversely affected retailers in general, including our key customers. A prolonged economic slowdown or a slow economic recovery, or even an uncertain economic outlook could further adversely affect our key customers. Our business, results of operations and financial condition may be adversely affected if, as a result of these factors, our customers file for bankruptcy protectionand/or cease doing business, significantly reduce the number of stores they operate, significantly reduce their purchases from us, do not pay us for their purchases, or if their payments to us are delayed because of bankruptcy or other factors beyond our control.
Our business, results of operations and financial condition may be adversely affected by volatility in the demand for our products.
Our success depends on the sustained demand for our products. Many factors affect the level of consumer spending on our products, including, among other things, general business conditions, interest rates, the availability of consumer credit, taxation, the effects of war, terrorism or threats of war, fuel prices, consumer demand for our products based upon, among other things, consumer trends and the availability of alternative products, and consumer confidence in future economic conditions. The worldwideA decline in economic slowdown that beganactivity in our 2009 fiscal year,the United States or other regions of the world, a slow economic recovery, or an uncertain outlook, in addition to adversely affecting our customers, has adversely affected consumer spending on discretionary items, including our products, which, in turn, has adversely affected our business, results of operations and financial condition. A prolonged economic slowdown or a slow economic recovery, or even an uncertain economic outlook, could further adversely affect consumer spending on discretionary items, including our products, which, in turn, could further adversely affect our business, results of operations and financial condition.condition because of, among other things, reduced consumer spending on discretionary items, including our products. We also routinely utilize new artwork, designs or licensed intellectual property in connection with our products, and our inability to design, select, procure, maintain or sell consumer-desired artwork, designs or licensed intellectual property could adversely affect the demand for our products, which could adversely affect our business, results of operations and financial condition.
Our business, results of operations and financial condition may be adversely affected if we are unable to compete successfully against our competitors.
Our success depends in part on our ability to compete against our competitors in our highly competitive markets. Our competitors, including large domestic corporations,businesses, such as Hallmark and American Greetings Corporation, foreign manufacturers who market directly to our customer base, and importers of products produced overseas, and small privately owned businesses, may be able to offer similar products with more favorable pricingand/or terms of sale or may be able to provide products that more readily meet customer requirements or consumer preferences. Our inability to successfully compete against our competitors could adversely affect our business, results of operations and financial condition.
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Our business, results of operations and financial condition may be adversely affected if we are unable to hire and retain sufficient qualified personnel.
Our success depends, to a substantial extent, on the ability, experience and performance of our senior management. In order to hire and retain qualified personnel, including our senior management team, we seek to provide competitive compensation programs. Our inability to retain our senior management team, or our inability to attract and retain qualified replacement personnel, may adversely affect us. We also regularly hire a large number of seasonal employees. Any difficulty we may encounter in hiring seasonal employees may result in significant increases in labor costs, which may have an adverse effect on our business, results of operations and financial condition.
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Our business, results of operations and financial condition may be adversely affected if we fail to extend or renegotiate our collective bargaining contractscontract with our labor unions,union, if disputes with our union arise, or if our unionized employees were to engage in a strike, or other work stoppage.
Approximately 60095 of our employees at our ribbon manufacturing facility in Hagerstown, Maryland and at our gift wrap facilities in Memphis, Tennessee are represented by a labor unions.union. The collective bargaining agreement with the labor union representing the Hagerstown-based production and maintenance employees will expire on December 31, 2011. The collective bargaining agreement with the labor union representing Cleo’s production and maintenance employees at the Cleo gift wrap plant and warehouse in Memphis, Tennessee also will expire on December 31, 2011. The Company plans to close its Cleo manufacturing facility located in Memphis, Tennessee, with an exit to be completed by no later than December 31, 2011. As part of such closing, the Company plans to transition the sourcing of all gift wrap products to foreign suppliers.2014. Although we believe our relations with our employees are satisfactory, no assurance can be given that we will be able to successfully extend or renegotiate our collective bargaining agreements.agreement. If we fail to extend or renegotiate our collective bargaining agreements,agreement, if disputes with our unionsunion arise, or if our unionized workers engage in a strike or other work related stoppage, we could incur higher ongoing labor costs or experience a significant disruption of operations, which could have an adverse effect on our business, results of operations and financial condition.
Employee benefit costs may adversely affect our business, results of operations and financial condition.
We seek to provide competitive employee benefit programs to our employees. Employee benefit costs, such as healthcare costs of our eligible and participating employees, may increase significantly at a rate that is difficult to forecast, in part because we are unable to determineof the future impact that newly enactedof federal healthcare legislation may have on our employer-sponsored medical plans. Higher employee benefit costs could have an adverse effect on our business, results of operations and financial condition.
Our acquisition strategy involves risks, and difficulties in integrating potential acquisitions may adversely affect our business, results of operations and financial condition.
We regularly evaluate potential acquisition opportunities to support, strengthen and grow our business. We cannot be sure that we will be able to locate suitable acquisition candidates, acquire possible acquisition candidates, acquire such candidates on commercially reasonable terms, or integrate acquired businesses successfully. Future acquisitions may require us to incur additional debt and contingent liabilities, which may adversely affect our business, results of operations and financial condition. The process of integrating acquired businesses into our existing operations may result in operating, contract and supply chain difficulties, such as the failure to retain customers or management personnel. Also, prior to our completion of any acquisition, we could fail to discover liabilities of the acquired business for which we may be responsible as a successor owner or operator in spite of any investigation we may make prior to the acquisition. Such difficulties may divert significant financial, operational and managerial resources from our existing operations, and make it more difficult to achieve our operating and strategic objectives. The diversion of management attention, particularly in a difficult operating environment, may adversely affect our business, results of operations and financial condition.
Our strategy to continuously review the efficiency, productivity and competitiveness of our business may result in our decision to divest or close selected operations. Any divesture or closure involves risks, and decisions to divest or close selected operations may adversely affect our business, results of operations and financial condition.
We regularly evaluate the efficiency, productivity and competitiveness of our business, including our competitiveness within our product categories. As part of such review, we also regularly evaluate the efficiency and productivity of our production and distribution facilities. In fiscal 2013, we sold the Halloween portion of our Paper Magic business. In fiscal 2012, we sold the Christmas gift wrap portion of our Cleo business and closed our former gift wrap manufacturing facility that was located in Memphis, Tennessee. If we decide to divest a portion of our business, we cannot be sure that we will be able to locate suitable buyers or that we will be able to complete such divestiture successfully, timely or on commercially reasonable terms. If we decide to close a portion of our business, we cannot be sure of the effect such closure would have on the productivity or effectiveness of the remaining portions of our business, including our ongoing relationships with suppliers and customers, or of the expected success, timing or costs relating to such closure. Activities associated with any divestiture or closure may divert significant financial, operational and managerial resources from our existing operations, and make it more difficult to achieve our operating and strategic objectives. Accordingly, future decisions to divest or close any portion of our business may adversely affect our business, results of operations and financial condition.
Our inability to protect our intellectual property rights, or infringement claims asserted against us by others, may adversely affect our business, results of operations and financial condition.
We have a number of copyrights, patents, tradenames, trademarks and intellectual property licenses which are used in connection with our products. While our operations are not dependent upon any individual copyright, patent, tradename, trademark or intellectual property license, we believe that the collective value of our intellectual property is substantial. We rely upon copyright, patent, tradename and trademark laws in the United States and other jurisdictions and on confidentiality agreements with some of our employees and others to protect our proprietary rights. If our proprietary rights were infringed, our business could be adversely affected. In addition, our activities could infringe upon the proprietary rights of others, who
6
could assert infringement claims against us. We could face costly litigation if we are forced to defend these claims. If we are unsuccessful in defending such claims, our business, results of operations and financial condition could be adversely affected.
We seek to register certain of our copyrights, patents, tradenames and trademarks in the United States and elsewhere. These registrations could be challenged by others or invalidated through administrative process or litigation. In addition, our confidentiality agreements with some employees or others may not provide adequate protection in the event of unauthorized use or disclosure of our proprietary information, or if our proprietary information otherwise becomes known, or is independently developed by competitors.
Various laws and governmental regulations applicable to a manufacturer or distributor of consumer products may adversely affect our business, results of operations and financial condition.
Our business is subject to numerous federal, state, provincial, local and foreign laws and regulations, including laws and regulations with respect to labor and employment, product safety, including regulations enforced by the United States Consumer Products Safety Commission, import and export activities, the Internet ande-commerce, antitrust issues, taxes, chemical usage, air emissions, wastewater and storm water discharges and the generation, handling, storage, transportation, treatment and disposal of waste materials, including hazardous materials. Although we believe that we are in substantial compliance with all applicable laws and regulations, because legal requirements frequently change and are subject to interpretation, we are unable to predict the ultimate cost of compliance or the consequences of non-compliance with these requirements, or the affect on our operations, any of which may be significant. If we fail to comply with applicable laws and regulations, we may be subject to criminal sanctions or civil remedies, including fines, injunctions, or prohibitions on importing or exporting. A failure to comply with applicable laws and regulations, or concerns about product safety, also may lead to a recall or post-manufacture repair of selected products, resulting in the rejection of our products by our customers and consumers, lost sales, increased customer service and support costs, and costly litigation. There is risk that any claims or liabilities, including product liability claims, relating to such noncompliance may exceed, or fall outside the scope of, our insurance coverage. Further, a failure to comply with applicable laws and regulations with respect to the Internet ande-commerce activities, which cover issues relating to user privacy, data protection, copyrights and consumer protection, may subject us to significant liabilities. We cannot be certain that existing laws or regulations, as currently interpreted or reinterpreted in the future, or future laws or regulations, will not have an adverse effect on our business, results of operations and financial condition.
Our business, results of operations and financial condition may be adversely affected by national or global changes in economic or political conditions.
Our business, results of operations and financial condition may be adversely affected by national or global changes in economic or political conditions, including foreign currency fluctuations and fluctuations in inflation and interest rates, a national or international economic downturn, and any future terrorist attacks, and the national and global military, diplomatic and financial exposure to such attacks or other threats.
Our business, results of operations and financial condition may be adversely affected by our ability to successfully manage our information technology (“IT”) infrastructure.
We rely upon our IT infrastructure to operate our business. If we suffer damage, interruption, or impairment of our IT infrastructure resulting from human error, theft, vandalism, fire, flood, power loss, telecommunications failure,
8
terrorist attacks, a computer virus, hacker attack or a malfunction of an IT application, we could experience substantial operational issues, including loss of data or information, misuse of data or information by a third party, unanticipated increases in costs, disruption of operations or business interruption. Our inability to successfully manage our IT infrastructure could adversely affect our business, results of operations and financial condition.
We are subject to a number of restrictive covenants under our borrowing arrangements, including customary operating restrictions and customary financial covenants. Our business, results of operations and financial condition may be adversely affected if we are unable to maintain compliance with such covenants.
Our borrowing arrangements contain a number of restrictive covenants, including customary operating restrictions that limit our ability to engage in activities such as incurring additional debt, making investments, granting liens on our assets, making capital expenditures, paying dividends and making other distributions on our capital stock, and engaging in mergers, acquisitions, asset sales and repurchases of our capital stock. Under such arrangements, we are also subject to customary financial covenants, including covenants requiring us to maintain our capital expenditures below a maximum permitted amount each year and to keep our tangible net worth and our interest coverage ratio at or above certain minimum levels. Compliance with the financial covenants contained in our borrowing arrangements is based on financial measures derived from our operating results.
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If our business, results of operations or financial condition is adversely affected by one or more of the risk factors described above, or other factors described in this annual report onForm 10-K or elsewhere in our filings with the SEC, we may be unable to maintain compliance with these covenants. If we fail to comply with such covenants, our lenders under our borrowing arrangements could stop advancing funds to us under these arrangementsand/or demand immediate payment of amounts outstanding under such arrangements. Under such circumstances, we would need to seek alternate financing sources to fund our ongoing operations and to repay amounts outstanding and satisfy our other obligations under our existing borrowing arrangements. Such financing may not be available on favorable terms, if at all. Consequently, we may be restricted in how we fund ongoing operations and strategic initiatives and deploy capital, and in our ability to make acquisitions and to pay dividends. As a result, our business, results of operations and financial condition may be further adversely affected if we are unable to maintain compliance with the covenants under our borrowing arrangements.
If our business, results of operations or financial condition is adversely affected as a result of any of the risk factors described above or elsewhere in this annual report onForm 10-K or our other SEC filings, we may be required to incur financial statement charges, such as asset or goodwill impairment charges, which may, in turn, have a further adverse affect on our results of operations and financial condition.
Goodwill is subject to an assessment for impairment using a two-step fair value-based test, the first step of which must be performed at least annually, or more frequently if events or circumstances indicate that goodwill might be impaired. We perform our required annual assessment as of our fiscal year end. Authoritative guidance provides entities with the option of first assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is determined, on the qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, the two step impairment test would be required. The first step of the test compares the fair value of a reporting unit to its carrying amount, including goodwill, as of the date of the test. We use both a market approach and an income approach to determine the fair value of our reporting units because we believe that the use of multiple valuation techniques results in a more accurate indicator of the fair value of each of our reporting units. If the carrying amount of the reporting unit exceeds its fair value, the second step is performed. The second step compares the carrying amount of the goodwill to the implied fair value of the goodwill. If the implied fair value of the goodwill is less than the carrying amount of the goodwill, an impairment loss will be reported.
Other indefinite lived intangible assets, such as our tradenames, also are required to be tested annually.annually for impairment. Authoritative guidance gives an entity the option to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. To perform a qualitative assessment, an entity must identify and evaluate changes in economic, industry and entity-specific events and circumstances that could affect the significant inputs used to determine the fair value of an indefinite-lived intangible asset. If the result of the qualitative analysis indicates it is more likely than not that an indefinite-lived intangible asset is impaired, a more detailed fair value calculation will need to be performed which is used to identify potential impairments and to measure the amount of impairment losses to be recognized, if any. We calculate the fair value of our tradenames using a “relief from royalty payments” methodology. We also review long-lived assets, except for goodwill and indefinite lived intangible assets, for impairment when circumstances indicate the carrying value of an asset may not be recoverable. If such assets are considered to be impaired, we will recognize, for impairment purposes, an amount by which the carrying amount of the assets exceeds the fair value of the assets.
If we are required to incur any of the foregoing financial charges, our results of operations and financial condition may be further adversely affected.
Item 1B.Unresolved Staff Comments. |
None.
8 Item 2.Properties. |
The following table sets forth the location and approximate square footage of the Company’s manufacturing and distribution facilities:
| Approximate Square Feet | ||||||||||
Location | Use | Owned | Leased | |||||||
| Danville, PA | Distribution | 133,000 | — | |||||||
| Berwick, PA | Manufacturing and distribution | 213,000 | — | |||||||
| Berwick, PA | Manufacturing and distribution | 220,000 | — | |||||||
| Berwick, PA | Distribution | 226,000 | — | |||||||
| Berwick, PA | Distribution | — | 451,000 | |||||||
| Memphis, TN(1) | Manufacturing and distribution | — | 1,006,000 | |||||||
| Hagerstown, MD | Manufacturing and distribution | 284,000 | — | |||||||
| Batesburg, SC | Manufacturing | 229,000 | — | |||||||
| El Paso, TX | Distribution | — | 100,000 | |||||||
| Florence, AL | Distribution | — | 180,000 | |||||||
| Milford, NH | Manufacturing | — | 58,000 | |||||||
| Total | 1,305,000 | 1,795,000 | ||||||||
| Use | Approximate Square Feet | ||||||
| Location | Owned | Leased | |||||
| Danville, PA | Distribution | 133,000 | — | ||||
| Berwick, PA | Manufacturing and distribution | 213,000 | — | ||||
| Berwick, PA | Manufacturing and distribution | 220,000 | — | ||||
| Berwick, PA | Distribution | 226,000 | — | ||||
| Berwick, PA | Distribution | — | 451,000 | ||||
| Hagerstown, MD | Manufacturing and distribution | 284,000 | — | ||||
| Batesburg, SC | Manufacturing | 229,000 | — | ||||
| El Paso, TX | Distribution | — | 100,000 | ||||
| Florence, AL | Distribution | — | 180,000 | ||||
| Milford, NH | Manufacturing | — | 58,000 | ||||
| Total | 1,305,000 | 789,000 | |||||
The Company also owns a former manufacturing facility aggregating approximately 253,000 square feet which it is in the process of selling, and utilizes owned and leased space aggregating approximately 213,000160,000 square feet for various marketing and administrative purposes, including approximately 21,0009,000 square feet utilized as an office and showroom in Hong Kong. The Company also owns administrative office space of approximately 2,000 square feet which has been leased to a third party. The headquarters and principal executive office of the Company are located in Philadelphia, Pennsylvania.
Item 3.Legal Proceedings. |
CSS and its subsidiaries are 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 legal proceedings will not materially affect the consolidated financial position of the Company or its results of operations or cash flows.
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Item 4.Mine Safety Disclosures.
Not applicable.
9
PART II
Item 5.
| Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
The common stock of the Company is listed for trading on the New York Stock Exchange. The following table sets forth the high and low sales prices per share of that stock, and the dividends declared per share, for each of the quarters during fiscal 20112014 and fiscal 2010.2013.
| Dividends | ||||||||||||
Fiscal 2011 | High | Low | Declared | |||||||||
| First Quarter | $ | 21.92 | $ | 16.29 | $ | .15 | ||||||
| Second Quarter | 19.13 | 14.87 | .15 | |||||||||
| Third Quarter | 21.55 | 15.94 | .15 | |||||||||
| Fourth Quarter | 21.54 | 16.07 | .15 | |||||||||
| Dividends | ||||||||||||
Fiscal 2010 | High | Low | Declared | |||||||||
| First Quarter | $ | 23.53 | $ | 15.20 | $ | .15 | ||||||
| Second Quarter | 27.28 | 18.25 | .15 | |||||||||
| Third Quarter | 21.93 | 17.19 | .15 | |||||||||
| Fourth Quarter | 21.85 | 16.09 | .15 | |||||||||
| Fiscal 2014 | Dividends Declared | ||||||||||
| High | Low | ||||||||||
| First Quarter | $ | 30.97 | $ | 24.57 | $ | 0.15 | |||||
| Second Quarter | 27.91 | 21.82 | 0.15 | ||||||||
| Third Quarter | 31.14 | 22.85 | 0.15 | ||||||||
| Fourth Quarter | 28.53 | 24.60 | 0.15 | ||||||||
| Fiscal 2013 | Dividends Declared | ||||||||||
| High | Low | ||||||||||
| First Quarter | $ | 20.55 | $ | 18.43 | $ | 0.15 | |||||
| Second Quarter | 20.97 | 18.06 | 0.15 | ||||||||
| Third Quarter | 21.89 | 18.81 | 0.15 | ||||||||
| Fourth Quarter | 25.97 | 21.80 | 0.15 | ||||||||
At May 17, 2011,22, 2014, there were approximately 2,4004,175 holders of the Company’s common stock and there were no shares of preferred stock outstanding.
The ability of the Company to pay any cash dividends on its common stock is dependent on the Company’s earnings and cash requirements and is further limited by maintaining compliance with financial covenants contained in the Company’s credit facilities. The Company anticipates that quarterly cash dividends will continue to be paid in the future.
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10
Performance Graph
The graph below compares the cumulative total stockholders’ return on the Company’s common stock for the period from April 1, 20062009 through March 31, 2011,2014, with (i) the cumulative total return on the Standard and Poors 500 (“S&P 500”) Index and (ii) atwo peer group,groups, as described below (assuming the investment of $100 in our common stock, the S&P 500 Index, and the peer group on April 1, 20062009 and reinvestment of all dividends).
The peer group utilized consists of American Greetings Corporation, Blyth, Inc., Kid Brands,Checkpoint Systems, Inc. (formerly known as Russ Berrie and Company,, Ennis, Inc.), JAKKS Pacific, Inc. and Lifetime Brands, Inc. (the “Peer Group”). The Peer Group selected by the Company was revised this year to exclude American Greetings Corporation and Kid Brands, Inc. because they are no longer publicly-traded on the New York Stock Exchange, and to include Checkpoint Systems, Inc. and Ennis, Inc. The Company selected this group as its Peer Group because they are engaged in businesses that are sometimes categorized with the Company’s business. However, management believes that a comparison of the Company’s performance to this Peer Group will be flawed, because the businesses of the Peer Group companies are in large part different from the Company’s business. In this regard, the Company competes with only certain smaller product lines of American Greetings; Blyth is principally focused on fragranced candle products and related candle accessories, competing only with some of the Company’s products; Lifetime Brands is principally focused on food preparation, tabletop and home décor, competing only with some of the Company’s products; and the other companies principally engage in retail security solutions, printing services or sell toyand/or juvenile products. The peer group previously used by the Company, which consisted of American Greetings Corporation, Blyth, Inc., JAKKS Pacific, Inc., Kid Brands, Inc. and Lifetime Brands, Inc. ("the Old Peer Group"), is shown in the chart above for comparative purposes.
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Item 6.Selected Financial Data. |
| Years Ended March 31, | ||||||||||||||||||||||||
| 2011(a) | 2010(b) | 2009 | 2008 | 2007 | ||||||||||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||||||
| Net sales | $ | 450,700 | $ | 448,450 | $ | 482,424 | $ | 498,253 | $ | 530,686 | ||||||||||||||
| Income (loss) before income taxes | 8,751 | (30,987 | ) | 25,890 | 38,833 | 36,804 | ||||||||||||||||||
| Net income (loss) | 5,611 | (23,739 | ) | 16,986 | 25,358 | 23,889 | ||||||||||||||||||
| Net income (loss) per common share: | ||||||||||||||||||||||||
| Basic | $ | .58 | $ | (2.46 | ) | $ | 1.71 | $ | 2.36 | $ | 2.25 | |||||||||||||
| Diluted | $ | .58 | $ | (2.46 | ) | $ | 1.70 | $ | 2.31 | $ | 2.19 | |||||||||||||
Balance Sheet Data: | ||||||||||||||||||||||||
| Working capital | $ | 146,896 | $ | 130,897 | $ | 114,371 | $ | 136,000 | $ | 188,309 | ||||||||||||||
| Total assets | 286,923 | 281,762 | 322,259 | 345,041 | 343,070 | |||||||||||||||||||
| Current portion of long-term debt | 66 | 481 | 10,479 | 10,246 | 10,195 | |||||||||||||||||||
| Long-term debt | — | 66 | 485 | 10,192 | 20,392 | |||||||||||||||||||
| Stockholders’ equity | 235,659 | 233,045 | 259,254 | 262,353 | 261,110 | |||||||||||||||||||
Cash dividends declared per common share | $ | .60 | $ | .60 | $ | .60 | $ | .56 | $ | .48 | ||||||||||||||
| Years Ended March 31, | |||||||||||||||||||
| 2014 | 2013 | 2012 | 2011(a)(b) | 2010(a)(c) | |||||||||||||||
| (in thousands, except per share amounts) | |||||||||||||||||||
| Statement of Operations Data: | |||||||||||||||||||
| Net sales | $ | 320,459 | $ | 364,193 | $ | 384,663 | $ | 383,660 | $ | 375,711 | |||||||||
| Income (loss) from continuing operations before income taxes | 27,700 | 22,637 | 25,245 | 26,841 | (23,585 | ) | |||||||||||||
| Income (loss) from continuing operations | 18,564 | 15,588 | 16,229 | 17,194 | (18,984 | ) | |||||||||||||
| Income (loss) from discontinued operations, net of tax | 205 | (361 | ) | (559 | ) | (11,583 | ) | (4,755 | ) | ||||||||||
| Net income (loss) | 18,769 | 15,227 | 15,670 | 5,611 | (23,739 | ) | |||||||||||||
| Net income (loss) per common share: | |||||||||||||||||||
| Basic: | |||||||||||||||||||
| Continuing operations | $ | 1.98 | $ | 1.63 | $ | 1.67 | $ | 1.77 | $ | (1.97 | ) | ||||||||
| Discontinued operations | $ | 0.02 | $ | (0.04 | ) | $ | (0.06 | ) | $ | (1.19 | ) | $ | (0.49 | ) | |||||
| Total | $ | 2.00 | $ | 1.59 | $ | 1.61 | $ | 0.58 | $ | (2.46 | ) | ||||||||
| Diluted: | |||||||||||||||||||
| Continuing operations | $ | 1.97 | $ | 1.63 | $ | 1.67 | $ | 1.77 | $ | (1.97 | ) | ||||||||
| Discontinued operations | $ | 0.02 | $ | (0.04 | ) | $ | (0.06 | ) | $ | (1.19 | ) | $ | (0.49 | ) | |||||
| Total | $ | 1.99 | $ | 1.59 | $ | 1.61 | $ | 0.58 | $ | (2.46 | ) | ||||||||
| Balance Sheet Data: | |||||||||||||||||||
| Working capital | $ | 187,809 | $ | 175,057 | $ | 163,294 | $ | 145,814 | $ | 130,897 | |||||||||
| Total assets | 293,535 | 289,180 | 286,564 | 286,923 | 281,762 | ||||||||||||||
| Current portion of long-term debt | — | — | — | 66 | 481 | ||||||||||||||
| Long-term debt | — | — | — | — | 66 | ||||||||||||||
| Stockholders’ equity | 257,216 | 248,978 | 243,203 | 235,659 | 233,045 | ||||||||||||||
| Cash dividends declared per common share | $ | 0.60 | $ | 0.60 | $ | 0.60 | $ | 0.60 | $ | 0.60 | |||||||||
| (a) | Statement of Operations and Balance Sheet data for 2011 and 2010 has been adjusted to reclassify the results of operations of the Christmas gift wrap business to discontinued operations. |
| (b) | In the fourth quarter of fiscal 2011, the Company recorded a non-cash pre-tax impairment charge of $11,051,000 primarily due to a full impairment of |
| (c) | In the fourth quarter of fiscal 2010, the Company recorded a non-cash pre-tax impairment charge of $44,315,000 due to a full impairment of goodwill in two of its reporting units, C.R. Gibson, LLC and BOC Design Group (consisting of Berwick Offray LLC and Cleo Inc), and partial impairments of tradenames used by such entities. The foregoing impairment charge was partially offset by an $11,692,000 tax benefit. |
12 Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Overview
On September 5, 2012, the Company and its Paper Magic subsidiary sold the Halloween portion of Paper Magic’s business and certain Paper Magic assets relating to such business, including certain tangible and intangible assets associated with Paper Magic’s Halloween business, to Gemmy Industries (HK) Limited (“Gemmy”). Paper Magic’s remaining Halloween assets, including accounts receivable and inventory, were excluded from the sale. Paper Magic retained the right and obligation to fulfill all customer orders for Paper Magic Halloween products (such as Halloween masks, costumes, make-up and novelties) for the Halloween 2012 season. The sale price of $2,281,000 was paid to Paper Magic at closing. The Company incurred $523,000 of transaction costs (included within disposition of product line further discussed in Note 4 to the consolidated financial statements), yielding net proceeds of $1,758,000. The Company is satisfying the liabilities through December 2015.
On September 9, 2011, the Company sold the Christmas gift wrap portion of Cleo’s business and certain of its assets relating to such business, including certain equipment, contract rights, customer lists, intellectual property and other intangible assets to Impact Innovations, Inc. (“Impact”). Cleo’s remaining assets, including accounts receivable and inventory, were excluded from the sale. The purchase price was $7,500,000, of which $2,000,000 was paid in cash at closing. The remainder of the purchase price was paid through the issuance by Impact of an unsecured subordinated promissory note, which provided for quarterly payments of interest at 7% and principal payments as follows: $500,000 on March 1, 2012; $2,500,000 on March 1, 2013; and all remaining principal and interest on March 1, 2014. In the fourth quarter of fiscal 2013, the Company received a $2,000,000 principal payment in advance of the March 1, 2014 due date. All interest payments were paid timely and the final principal payment of $500,000 was received in March 2014. This transaction resulted in a pre-tax gain of $5,849,000 in fiscal 2012. In addition, as part of the Company’s plan to close its manufacturing facility located in Memphis, Tennessee, the Company incurred pre-tax expenses of $8,141,000 during fiscal 2012, of which $706,000 is recorded in continuing operations (see Note 3 to the consolidated financial statements) and $7,435,000 is recorded in discontinued operations (see Note 2 to the consolidated financial statements). The results of operations for the years ended March 31, 2014, 2013 and 2012 reflect the historical operations of the Christmas gift wrap business as discontinued operations. The discussion in this Management’s Discussion and Analysis of Financial Condition and Results of Operations is presented on the basis of continuing operations, unless otherwise stated.
On May 19, 2014, a subsidiary of the Company completed the acquisition of substantially all of the business and assets of Carson & Gebel Ribbon Co., LLC for approximately $5,142,000 in cash. Carson & Gebel Ribbon Co., LLC is a manufacturer, distributor and supplier of decorative ribbon and similar products to wholesale florists, packaging distributors and bow manufacturers. Key product categories include cut edge acetate ribbon and velvet ribbon used in everyday and holiday floral arrangements. A portion of the purchase price is being held in escrow for certain post-closing adjustments and indemnification obligations.
Approximately 59%61% of the Company’s sales are attributable to all occasion with the remainder attributable to seasonal (Christmas, Valentine’s Day Easter and Halloween) products, with the remainder being attributable to all occasionEaster) products. Seasonal products are sold primarily to mass market retailers, and the Company has relatively high market share in many of these categories. Most of these markets have shown little growth and in some cases have declined in recent years, and theyears. The Company continues to confront significant price pressure as its competitors source certain products from overseas and its customers increase direct sourcing from overseas factories. Increasing customer concentration has augmented their bargaining power, which has also contributed to price pressure. In recent fiscal years, the Company experienced lower sales in its gift wrap, boxed greeting card, ribbon and bow, gift tissue and gift bag lines. In addition, both seasonal and all occasion sales declines were further exacerbated as the current economic downturn resulted in slowness or reductions in order patterns by our customers. In the fourth quarter of fiscal 2011, the Company recorded a non-cash pre-tax impairment charge of $11,051,000 primarily due to an impairment of tangible assets in its Cleo asset group. See Note 1 to the consolidated financial statements. In the fourth quarter of fiscal 2010, the Company recorded a non-cash pre-tax impairment charge of $44,315,000 due to a full impairment of goodwill in the Company’s BOC Design Group and C.R. Gibson reporting units, and partial impairments of trademarks used by such entities. See Note 3 to the consolidated financial statements.
The Company has taken several measures to respond to sales volume, cost and price pressures. The Company believes it continues to have strong core Christmas product offerings which has allowed it to compete effectively in
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this competitive market. In addition, the Company is aggressively pursuing new product initiatives related to seasonal, craft and other all occasion products, including new licensed and non-licensed product offerings. CSS continually invests in product and packaging design and product knowledge to assure that it can continue to provide unique added value to its customers. In addition, CSS maintains ana purchasing office and showroom in Hong Kong to be able to provide alternatively sourced products at competitive prices. CSS continually evaluates the efficiency and productivity of its North American production and distribution facilities and of its back office operations to maintain its competitiveness. In the last seventen fiscal years, the Company has closed fivesix manufacturing plants and seven warehouses totaling 1,674,0002,680,000 square feet. As described elsewhereAdditionally, in this annual report onForm 10-K, in May 2011the last five fiscal years, the Company announced that its Memphis, Tennessee manufacturing facility will be closed, with an exit to be completed by no later than December 31, 2011. Additionally, in fiscal 2007, the Companyhas combined the management and back office support for its Memphis, Tennessee based Cleo gift wrap operation intooperations of its Berwick Offray, ribbonPaper Magic and bow subsidiary. The CompanyC.R. Gibson subsidiaries in order to drive sales growth by providing stronger management oversight and by reallocating sourcing, sales and marketing resources in a more strategic manner; consolidated its human resources, accounts receivable, accounts payable and payroll functions into a combined back office operation, which was substantiallyoperation; and completed in the first quarter of fiscal 2010. Also completed in the first quarter of fiscal 2010 was the implementation of a phase of the Company’s enterprise resource planning systems standardization project.
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The Company’sCompany believes that its all occasion craft, gift card holder,stationery, stickers stationery and memory product lines have higher inherent growth potential due to higher market growth rates. Further, the Company’s all occasion craft, gift card holder, stickers, stationery and floral product lines have higher inherent growth potential due to CSS’ relatively low current market share. The Company continues to pursue sales growth in these and other areas.
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.
Historically, significant revenue growth at CSS has come through acquisitions. Management anticipates that it will continue to utilizeconsider acquisitions as a strategy to stimulate further growth.
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Litigation
CSS and its subsidiaries are 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 legal proceedings will not materially affect the consolidated financial position of the Company or its results of operations or cash flows.
Results of Operations
Fiscal 20112014 Compared to Fiscal 20102013
Consolidated net sales for fiscal 2011 increased 1%2014 decreased to $450,700,000$320,459,000 from $448,450,000$364,193,000 in fiscal 2010.2013. The increasedecrease in net sales was primarily due to higher sales of ribbons and bows, partially offset by lower sales of Christmas boxed greeting cards, gift wrapHalloween products of $29,548,000 as a result of our sale of the Halloween portion of Paper Magic's business on September 5, 2012, and lower sales of all occasion products.
products of $8,521,000 and Christmas products of $4,933,000 compared to the prior year.
Cost of sales, as a percentage of net sales, was 75%68% in fiscal 20112014 and 2010 as higher freight70% in 2013. This favorable decrease was primarily due to sourcing efficiencies and distribution costs were substantially offset by improved plant efficiencies.
the absence of a write-down of inventory to net realizable value of $1,266,000 related to the sale of the Halloween portion of Paper Magic's business which was recorded in the prior year.
Selling, general and administrative (“SG&A”) expenses, decreased to $93,062,000 in fiscal 2011 from $95,667,000 in fiscal 2010. The decrease in SG&A expenses is primarily due to lower payroll and stock compensation expenses.
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Disposition of sales was primarily due to lower gross margins on domestically produced Christmas products resulting from competitive pricing pressures and manufacturing inefficiencies, someproduct line, net of which were compounded by difficulties encountered from the implementation of a phase of our enterprise resource planning systems standardization project, partially offset by improved margins on imported seasonal products.
Interest expense, net was $191,000 in fiscal 2014 compared to interest income, net of $51,000 in fiscal 2013. This change was primarily due to interest income received in the prior year on the note receivable from Impact (issued by Impact as part of its purchase of the Christmas wrap business on September 9, 2011). The outstanding principal balance of such note receivable was reduced to $500,000 during fiscal 2013 and collected in March 2014.
Income from continuing operations before income taxes was $27,700,000, or 9% of net sales, in fiscal 2014 compared to $22,637,000, or 6% of net sales, in fiscal 2013. The increase was primarily due to the reduction in costs associated with the disposition of product line discussed above and favorable margins, partially offset by the impact of lower sales volume.
Income taxes, as a percentage of income from continuing operations before income taxes, were 33% in fiscal 2014 and 31% in 2013. The increase in income taxes in fiscal 2014 was primarily attributable to a lower benefit related to the changes in tax reserves and valuation allowance of approximately 5%, partially offset by the absence of the unfavorable impact of approximately 3% related to the portion of the goodwill reduction being non-deductible for tax purposes in the prior year.
Income from discontinued operations, net of tax for the fiscal year ended March 31, 2014 was $205,000 compared to a loss from discontinued operations, net of tax of $361,000 for the fiscal year ended March 31, 2013. Income from discontinued operations, net of tax of $205,000 for the fiscal year ended March 31, 2014 reflects pre-tax income of $117,000 related to the Christmas gift wrap business which was sold on September 9, 2011 and an income tax benefit of $88,000. The
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loss from discontinued operations, net of tax of $361,000 for the fiscal year ended March 31, 2013 reflects pre-tax income of $89,000 related to this business offset by income tax expense of $450,000. See further discussion in Notes 1 and 2 to the consolidated financial statements.
Fiscal 2013 Compared to Fiscal 2012
Consolidated net sales for fiscal 2013 decreased to $1,885,000$364,193,000 from $384,663,000 in fiscal 2010 from $2,551,000 in fiscal 2009.2012. The decrease in interest expense, net sales was primarily due to lower average borrowing levelssales of Christmas boxed greeting cards of $10,187,000 and ribbons and bows of $9,381,000, partially offset by higher sales of gift card holders of $2,641,000.
Cost of sales, as a resultpercentage of cash generated from operationsnet sales, was 70% in fiscal 20102013 and 71% in 2012. This favorable decrease was primarily due to manufacturing efficiencies and lower commodity and freight costs compared to the prior year, partially offset by a write-down of inventory to net realizable value of $1,266,000 related to the sale of the Halloween portion of Paper Magic’s business.
SG&A expenses, as acquisitionsa percentage of net sales, was 22% in fiscal 2013 and stock repurchases required higher average borrowing levels during2012.
Disposition of product line, net of $5,798,000 recorded in fiscal 2009.2013 primarily relates to costs associated with the sale of the Halloween portion of Paper Magic’s business, including severance of $1,282,000, facility closure costs of $1,375,000, professional fees of $1,341,000, a write-down of assets of $1,370,000 and a reduction of goodwill of $2,711,000. These costs were offset by proceeds received from the sale of $2,281,000. The Company incurred $523,000 of transaction costs, which is included in the aforementioned professional fees, yielding net proceeds of $1,758,000. A portion of the goodwill associated with the Paper Magic reporting unit was allocated to the business being sold. Such allocation was made on the basis of the fair value of the assets being sold relative to the overall fair value of the Paper Magic reporting unit. See Note 4 to the consolidated financial statements for further discussion.
Interest income, net was $51,000 in fiscal 2013 compared to interest expense, net of $195,000 in fiscal 2012. The losschange was primarily due to there being no borrowings under the Company’s revolving credit facility in fiscal 2013 versus the prior year (during which the Company had borrowings) and interest income received on the note receivable from Impact (issued by Impact as part of its purchase of the Christmas wrap business on September 9, 2011).
Income from continuing operations before income taxes was $30,987,000,$22,637,000, or 6% of net sales, in fiscal 2013 compared to $25,245,000, or 7% of net sales, in fiscal 2010 compared to income before income taxes2012 as improved margins and lower SG&A expenses in the current year were offset by the impact of $25,890,000, or 5% of netlower sales in fiscal 2009. Excludingvolume and the chargecharges related to the impairmentsale of goodwill and intangible assets in fiscal 2010, income before income taxes decreased 49% to $13,328,000 in fiscal 2010 from $25,890,000 in fiscal 2009.the Halloween portion of Paper Magic’s business.
The loss from discontinued operations, net lossof tax for the fiscal year ended March 31, 20102013 was $23,739,000$361,000 compared to net income of $16,986,000$559,000 in fiscal 2009. Excluding the charge related to the impairment2012. The loss from discontinued operations, net of goodwill and intangible assets in fiscal 2010, net income decreased 48% to $8,884,000 in fiscal 2010 from $16,986,000 in fiscal 2009 and diluted earnings per share decreased 46% to $0.92 in fiscal 2010 compared to prior year diluted earnings per sharetax of $1.70. This decline in net
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| Year Ended March 31, 2011 | ||||||||||||
| Income Before | Diluted Earnings | |||||||||||
| Income Taxes | Net Income | per Share | ||||||||||
| (In thousands, except per share amounts) | ||||||||||||
| As Reported | $ | 8,751 | $ | 5,611 | $ | .58 | ||||||
| Impairment of tangible assets | 11,051 | 7,085 | .73 | |||||||||
| Non-GAAP Measurement | $ | 19,802 | $ | 12,696 | $ | 1.31 | ||||||
| Year Ended March 31, 2010 | ||||||||||||
| (Loss) Income | Diluted (Loss) | |||||||||||
| Before Income | Net (Loss) | Earnings | ||||||||||
| Taxes | Income | per Share | ||||||||||
| (In thousands, except per share amounts) | ||||||||||||
| As Reported | $ | (30,987 | ) | $ | (23,739 | ) | $ | (2.46 | ) | |||
| Impairment of goodwill and intangible assets | 44,315 | 32,623 | 3.37 | |||||||||
| Non-GAAP Measurement | $ | 13,328 | $ | 8,884 | $ | .92 | ||||||
Liquidity and Capital Resources
At March 31, 2011,2014 and 2013, the Company had working capital of $146,896,000$187,809,000 and $175,057,000, respectively, and stockholders’ equity of $235,659,000.$257,216,000 and $248,978,000, respectively. Operating activities of continuing operations provided net cash of $32,219,000$28,240,000 in fiscal 20112014 compared to $48,676,000$31,428,000 in fiscal 2010.2013 and $13,410,000 in fiscal 2012. Net cash provided by operating activities from continuing operations in fiscal 2011 consisted primarily2014 reflects our working capital requirements which resulted in a decrease in inventory of $3,346,000, offset by an increase in accounts receivable of $3,972,000 and a decrease in accounts payable of $2,536,000. Included in fiscal 2014 net income of $5,611,000, awere non-cash impairment charge of $11,051,000 related to tangible assets,charges for depreciation and amortization of $11,146,000,$7,543,000 and share-based compensation of $1,843,000. Net cash provided by operating activities from continuing operations in fiscal 2013 reflects our working capital requirements which resulted in a decrease in inventory of $8,106,000, an increase in
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accrued expenses and long-term obligations of $1,802,000 and an increase in accrued income taxes of $1,290,000, offset by a decrease in accounts receivablepayable of $2,653,000, a decrease in other assets of $2,051,000$4,073,000 and an increase in accounts payablereceivable of $5,914,000,$2,952,000. Included in fiscal 2013 net income were non-cash charges for depreciation and amortization of $7,594,000, a reduction in goodwill of $2,711,000 related to the sale of the Halloween portion of PMG’s business, and share-based compensation of $1,783,000. Net cash provided by operating activities from continuing operations in fiscal 2012 reflects our working capital requirements which resulted in an increase in accrued expenses and long-term obligations of $1,188,000, offset by an increase in accounts receivable of $7,499,000, an increase in inventories of $2,295,000$2,578,000 and a decrease in accounts payable of $4,717,000$7,541,000. Included in accrued expensesfiscal 2012 net income were non-cash charges for depreciation and other long-term obligations.
amortization of $7,880,000 and share-based compensation of $1,683,000.
Our investing activities of continuing operations used net cash of $3,305,000$34,878,000 in fiscal 2011, as compared to $3,920,000 in fiscal 2010,2014, consisting primarily of the purchase of held-to-maturity investment securities of $29,862,000 and capital expenditures of $3,384,000.$5,024,000. In fiscal 2010,2013, our investing activities consisted primarily of capital expenditures of $4,447,000,$4,494,000, partially offset by $752,000net proceeds of $1,758,000 from salesthe sale of assets.
the Halloween portion of Paper Magic’s business. In fiscal 2012, our investing activities consisted primarily of capital expenditures of $3,532,000.
Our financing activities used net cash of $5,724,000$12,360,000 in fiscal 2011,2014, consisting primarily of payments of cash dividends of $5,823,000.$5,637,000 and purchases of treasury stock of $6,634,000. In fiscal 2010,2013, financing activities used net cash of $19,718,000,$10,671,000, consisting primarily of a $10,000,000 principal repayment on our senior notes, repayments under our short term credit facilities of $4,150,000 and payments of cash dividends of $5,784,000.$5,731,000 and purchases of treasury stock of $4,864,000. In fiscal 2012, financing activities used net cash of $7,272,000, consisting primarily of payments of cash dividends of $5,837,000 and purchases of treasury stock of $1,648,000.
On December 11, 2012, the Company purchased, under the Company’s stock repurchase program, an aggregate of 80,000 shares of its common stock from a trust established by a director of the Company. The terms of the purchase were negotiated on behalf of the Company by a Special Committee of the Board of Directors consisting of four independent, disinterested directors. The price of $20.00 per share was less than the fair market value of a share of the Company’s common stock on the date of the transaction. The Special Committee unanimously authorized the purchase. The total amount of this transaction was $1,600,000.
Under a stock repurchase program authorized by the Company’s Board of Directors, the Company repurchased 272,655 shares of the Company's common stock for $6,634,000 in fiscal 2014. There were repurchases of 251,180 shares (inclusive of the 80,000 shares described above) of the Company’s common stock for $4,864,000 (inclusive of the $1,600,000 described above) in fiscal 2013. There were repurchases of 88,210 shares of the Company’s common stock for $1,648,000 in fiscal 2012. As of March 31, 2014, the Company had 200,955 shares remaining available for repurchase under the Board’s authorization.
The Company relies primarily on cash generated from its operations and, if needed, seasonal borrowings to meet its liquidity requirements throughout the year. Historically, a significant portion of the Company’s revenues have been seasonal, primarily Christmas related, with approximately 75%68% of sales recognized in the second and third quarters. As payment for sales of Christmas related products is usually not received until just before or just after the holiday selling season in accordance with general industry practice, short-term borrowing needs increase throughoutworking capital has historically increased in the second and third
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quarters, peaking prior to Christmas and dropping thereafter. The sale of the Christmas gift wrap portion of Cleo’s business and the sale of the Halloween portion of Paper Magic’s business has reduced the Company’s seasonal working capital requirements. Seasonal financing requirements are metavailable under a revolving credit facility with two banks. Reflecting the seasonality of the Company’s business, the maximum credit available at any one time under the credit facility (“Commitment Level”) adjusts to $50,000,000 from February to June (“Low Commitment Period”), $100,000,000 from July to October (“Medium Commitment Period”) and $150,000,000 from November to January (“High Commitment Period”) in each respective year over the term of the agreement.facility. The Company has the option to increase the Commitment Level during part of any Low Commitment Period from $50,000,000 to an amount not less than $62,500,000 and not in excess of $125,000,000; provided, however, that the Commitment Level must remain at $50,000,000 for at least three consecutive months during each Low Commitment Period. The Company has the option to increase the Commitment Level during all or part of any Medium Commitment Period from $100,000,000 to an amount not in excess $125,000,000. Fifteen days prior written notice is required for the Company to exercise an option to increase the Commitment Level with respect to a particular Low Commitment Period or Medium Commitment Period. The Company may exercise an option to increase the Commitment Level no more than three times each calendar year. This facility is due to expire on March 17, 2016. This financing facility is 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. This facility is due to expire on March 17, 2016. For information concerning this credit facility, see Note 910 to the consolidated financial statements. At March 31, 2011,2014, there were no borrowings outstanding under the Company’s revolving credit facility. The Company made its final repayment of 4.48% senior notes in December 2009. In addition, the Company had approximately $66,000 of capital leases outstanding at March 31, 2011.
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Based on its current operating plan, the Company believes its sources of available capital are adequate to meet its ongoing cash needs for at least the next 12 months.
As of March 31, 2011,2014, the Company’s contractual obligations and commitments are as follows (in thousands):
| Less than 1 | 1-3 | 4-5 | After 5 | |||||||||||||||||
Contractual Obligations | Year | Years | Years | Years | Total | |||||||||||||||
| Capital lease obligations | $ | 66 | $ | — | $ | — | $ | — | $ | 66 | ||||||||||
| Operating leases | 6,877 | 6,728 | 3,518 | 1,530 | 18,653 | |||||||||||||||
| Other long-term obligations(1) | 255 | 1,018 | 614 | 2,934 | 4,821 | |||||||||||||||
| Purchase obligation(2) | 674 | — | — | — | 674 | |||||||||||||||
| Royalty obligation(3) | 713 | — | — | — | 713 | |||||||||||||||
| $ | 8,585 | $ | 7,746 | $ | 4,132 | $ | 4,464 | $ | 24,927 | |||||||||||
| Less than 1 | 1-3 | 4-5 | After 5 | ||||||||||||||||
| Contractual Obligations | Year | Years | Years | Years | Total | ||||||||||||||
| Operating leases | $ | 4,760 | $ | 3,518 | $ | 1,299 | $ | 62 | $ | 9,639 | |||||||||
Other long-term obligations (1) | 253 | 1,190 | 360 | 1,152 | 2,955 | ||||||||||||||
Royalty obligations (2) | 191 | 848 | 371 | — | 1,410 | ||||||||||||||
| $ | 5,204 | $ | 5,556 | $ | 2,030 | $ | 1,214 | $ | 14,004 | ||||||||||
(1) | Other long-term obligations consist primarily of postretirement medical liabilities, deferred compensation arrangements |
(2) | ||
| The Company is committed to pay |
The above table excludes any potential uncertain income tax liabilities that may become payable upon examination of the Company’s income tax returns by taxing authorities. Such amounts and periods of payment cannot be reliably estimated. See Note 89 to the consolidated financial statements for further explanation of the Company’s uncertain tax positions.
As of March 31, 2011,2014, the Company’s other commitments are as follows (in thousands):
| Less than 1 | 1-3 | 4-5 | After 5 | |||||||||||||||||
| Year | Years | Years | Years | Total | ||||||||||||||||
| Letters of credit | $ | 3,130 | $ | — | $ | — | $ | — | $ | 3,130 | ||||||||||
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Less than 1 Year | 1-3 Years | 4-5 Years | After 5 Years | Total | |||||||||||||||
| Letters of credit | $ | 1,800 | $ | — | $ | — | $ | — | $ | 1,800 | |||||||||
The Company has a reimbursement obligation with respect to stand-by letters of credit that guarantee the funding of workersworkers’ compensation claims. The Company has no financial guarantees or other similar 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.canceled.
Critical Accounting Policies
In preparing our consolidated financial statements, management is required to make estimates and assumptions that, among other things, affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are most significant where they involve levels of subjectivity and judgment necessary to account for highly uncertain matters or matters susceptible to change, and where they can have a material impact on our financial condition and operating performance. Below are the most significant estimates and related assumptions used in the preparation of our consolidated financial statements. If actual results were to differ materially from the estimates made, the reported results could be materially affected.
Revenue
Revenue is recognized from product sales when goods are shipped, title and risk of loss have been transferred to the customer and collection is reasonably assured. The Company records estimated reductions to revenue for customer programs, which may include special pricing agreements for specific customers, volume incentives and other promotions. In limited cases, the Company may provide the right to return product as part of its customer programs with certain customers. The Company also records estimated reductions to revenue, based primarily on historical experience, for customer returns and chargebacks that may arise as a result of shipping errors, product damaged in transit or for other reasons that become known subsequent to recognizing the revenue. These provisions are recorded in the period that the related sale is recognized and are reflected as a reduction from gross sales, and thesales. The related reserves are shown as a reduction of accounts receivable, except for reserves for customer programs which are shown as a current liability. If the amount of actual customer returns and chargebacks were to increase or decrease significantly from the estimated amount, revisions to the estimated allowance would be required.
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Accounts Receivable
The Company offers seasonal dating programs related to certain seasonal product offerings pursuant to which customers that qualify for such programs are offered extended payment terms. While some customers are granted return rights as part of their sales program, customers generally do not have the right to return product except for reasons the Company believes are typical of our industry, including damaged goods, shipping errors or similar occurrences. The Company is generally not required to repurchase products from its customers, nor does the Company have any regular practice of doing so. In addition, the Company endeavors to mitigate its exposure to bad debts by evaluating the creditworthiness of its major customers utilizing established credit limits and purchasing credit insurance when warranted in management’s judgment and available on terms that management deems satisfactory. Bad debt and returns and allowances reserves are recorded as an offset to accounts receivable while reserves for customer programs are recorded as accrued liabilities. The Company evaluates accounts receivable related reserves and accruals monthly by specifically reviewing customer’scustomers’ creditworthiness, historical recovery percentages and outstanding customer deductions and program arrangements. Customer account balances are charged off against the allowance reserve after reasonable means of collection have been exhausted and the potential for recovery is considered unlikely.
Inventory Valuation
Inventories are valued at the lower of cost or market. Cost is primarily determined by thefirst-in, first-out method although certain inventories are valued based on thelast-in, first-out method. The Company writes down its inventory for estimated obsolescence in an amount equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand, market conditions, customer planograms and sales forecasts. Additional inventory write downs could result from unanticipated additional carryover of finished goods and raw materials, or from lower proceeds offered by parties in our traditional closeout channels.
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Goodwill, Other Intangibles and Long-Lived Assets
When a company is acquired, the difference between the fair value of its net assets, including intangibles, and the purchase price is recorded as goodwill. Goodwill is subject to an assessment for impairment using a two-step fair value-based test, the first step of which must be performed at least annually or more frequently if events or circumstances indicate that goodwill might be impaired. The Financial Accounting Standards Board (“FASB”) issued updated authoritative guidance in September 2011 to amend previous guidance on the annual and interim testing of goodwill for impairment. The guidance became effective for the Company performsat the beginning of its required annual assessment as2013 fiscal year. The guidance provides entities with the option of first assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is determined, on the basis of the fiscal year end.qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, the two step impairment test would still be required. The first step of the test compares the fair value of a reporting unit to its carrying amount, including goodwill, as of the date of the test. The Company uses a dual approach to determine the fair value of its reporting units including both a market approach and an income approach. The market approach computes fair value using a multiple of earnings before interest, income taxes, depreciation and amortization which was developed considering both the multiples of recent transactions as well as trading multiples of consumer products companies. The income approach is based on the present value of discounted cash flows and a terminal value projected for each reporting unit. The income approach requires significant judgments including the Company’s projected net cash flows, the weighted average cost of capital (“WACC”) used to discount the cash flows and terminal value assumptions. The projected net cash flows are derived using the most recent available estimate for each reporting unit. The WACC rate is based on an average of the capital structure, cost of capital and inherent business risk profiles of the Company and peer consumer products companies. We believe the use of multiple valuation techniques results in a more accurate indicator of the fair value of each reporting unit. If the carrying amount of the reporting unit exceeds its fair value, the second step is performed. The second step compares the carrying amount of the goodwill to the implied fair value of the goodwill. If the implied fair value of the goodwill is less than the carrying amount of the goodwill, an impairment loss would be reported. The adoption of this updated authoritative guidance had no impact on the Company’s Consolidated Financial Statements. The Company performs its required annual assessment as of the fiscal year end. Changes to our judgments regarding assumptions and estimates could result in a significantly different estimate of the fair market value of the reporting units, which could result in an impairment of goodwill.
Other indefinite lived intangible assets consist primarily of tradenames which are also required to be tested annually.annually for impairment. In July 2012, the FASB issued amended guidance that gives an entity the option to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. The amended guidance became effective for the Company at the beginning of its 2014 fiscal year. To perform a qualitative assessment, an entity must identify and evaluate changes in economic, industry and entity-specific events and circumstances that could affect the significant inputs used to determine the fair value of an indefinite-lived intangible asset. If the result of the
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qualitative analysis indicates it is more likely than not that an indefinite-lived intangible asset is impaired, a more detailed fair value calculation will need to be performed which is used to identify potential impairments and to measure the amount of impairment losses to be recognized, if any. The fair value of the Company’s tradenames is calculated using a “relief from royalty payments” methodology. This approach involves first estimating reasonable royalty rates for each trademark then applying these royalty rates to a net sales stream and discounting the resulting cash flows to determine the fair value. The royalty rate is estimated using both a market and income approach. The market approach relies on the existence of identifiable transactions in the marketplace involving the licensing of tradenames similar to those owned by the Company. The income approach uses a projected pretax profitability rate relevant to the licensed income stream. We believe the use of multiple valuation techniques results in a more accurate indicator of the fair value of each tradename. This fair value is then compared with the carrying value of each tradename.
Long-lived assets (including property, plant and equipment), except for goodwill and indefinite lived intangible assets, are reviewed for impairment when circumstances indicate the carrying value of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset group to future net cash flows estimated by the Company to be generated by such assets. If such asset group is considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. Assets to be disposed of are recorded at the lower of their carrying value or estimated net realizable value.
In connection with the sale of the Halloween portion of Paper Magic’s business on September 5, 2012, a portion of the goodwill associated with the Paper Magic reporting unit was allocated to the business being sold. Such allocation was made on the basis of the fair value of the assets being sold relative to the overall fair value of the Paper Magic reporting unit. This resulted in the Company recording a reduction of goodwill in the amount of $2,711,000 for the Paper Magic reporting unit. See Note 5 to the consolidated financial statements for further discussion.
In connection with the Company’s review of the recoverability of its goodwill as it prepared its financial statements for the fiscal year ended March 31, 2014, the Company elected to perform the qualitative assessment as permitted by the updated accounting literature. As a result of the qualitative assessment performed, it was determined that it was not more likely than not that goodwill was impaired. Consequently, the more detailed two step impairment test was not required. In connection with the Company's review of the recoverability of other intangibles as it prepared its financial statements for the fiscal year ended March 31, 2014, the fair value of other intangible assets was in excess of the carrying value and no impairment was recorded. In connection with the recoverability of property, plant and equipment, no circumstances were identified that indicated the carrying value of the assets may not be recoverable. No impairment of assets was recorded in the fiscal year ended March 31, 2014. In connection with the Company’s review of the recoverability of its goodwill, other intangibles and long-lived assets as it prepared its financial statements for the fiscal yearyears ended March 31, 2011,2013 and 2012, the Company recorded a non-cash pre-tax impairment charge of $11,051,000 primarily due to a full impairment of the tangible assets relating to its Cleo manufacturing facility located in Memphis, Tennessee. See Note 1 for further discussion. The fair value of all goodwill, and other intangible assets and long-lived assets reflected on the Company’s consolidated balance sheetsheets as of March 31, 20112013 and 2012 was in excess of the carrying value. In the fourth quarter of fiscal 2010, the Company recorded a non-cash pre-taxvalue and no impairment charge of $44,315,000 due to a full impairment of goodwill in two of its reporting units, C.R. Gibson and BOC Design Group, and partial impairments of tradenames used by such entities.was recorded. See Note 35 to the consolidated financial statements for further discussion.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our actual current tax expense or benefit (state, federal and foreign), including the impact of permanent and temporary differences resulting from differing bases and treatment of items for tax and accounting purposes, such as the carrying value of intangibles, deductibility of expenses, depreciation of property, plant and equipment, and
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valuation of inventories. Temporary differences and operating loss and credit carryforwards result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income. Actual results could differ from this assessment if sufficient taxable income is not generated in future periods. To the extent we determine the need to establish a valuation allowance or increase (decrease) such allowance in a period, we would record additional tax expense (benefit) in the accompanying consolidated statements of operations. The management of the Company periodically estimates the probable tax obligations of the Company using historical experience in tax jurisdictions and informed judgments. There are inherent uncertainties related to the interpretation of tax regulations. The judgments and estimates made at a point in time may change based on the outcome of tax audits, as well as changes to or further interpretations of regulations. If such changes take place, there is a risk that the tax rate may increase or decrease in any period.
Share-Based Compensation
The Company accounts for its share-based compensation using a fair-value based recognition method. 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 and the expected option life.
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The Company uses the Black-Scholes option valuation model to value employeeservice-based stock options.options and uses Monte Carlo simulation to value performance-based stock options and restricted stock units. The Company estimates stock price volatility based on historical volatility of its common stock. Estimated option life assumptions are also derived from historical data. Had the Company used alternative valuation methodologies and assumptions, compensation cost for share-based payments could be significantly different. The Company recognizes compensation expense usingover the stated vesting period consistent with the terms of the arrangement (i.e. either on a straight-line amortization method for share-based compensation awards with graded vesting.or graded-vesting basis).
Accounting Pronouncements
See Note 1415 to the consolidated financial statements for information concerning recent accounting pronouncements and the impact of those standards.
Forward-Looking and Cautionary 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 goals of expanding and growing by developing new or complementary products, aggressively pursuing new product initiatives, pursuing sales growth within certain identified product categories, driving sales growth by providing stronger management oversight and by reallocating sourcing, sales and marketing resources in a more strategic manner, pursuing acquisitions, entering new markets, and acquiring other companies and businesses; the anticipated effects of measures taken by the Company to respond to sales volume, cost and price pressures; the Company’s anticipation that quarterly cash dividends will continue to be paid in the future; the expected future impact of legal proceedings; the Company’s expectation that a facility held for sale will be sold within the next 12 months for an amount greater than the current carrying value; the Company’s view that its risk exposure with regard to foreign currency fluctuations is insignificant; the expected future timing of the satisfaction of liabilities associated with the Company's former Halloween business; the expected amount and timing of future amortization expense and future compensation expense related to non-vested outstanding stock options and RSUs; the expected future effect of certain accounting pronouncements; and the Company’s belief that sourcing allits sources of available capital are adequate to meet its gift wrap products from foreign suppliers will be more efficient;future cash needs for at least the amount of costs the Company expects to incur in fiscal 2012 in connection with its plan to close the Memphis manufacturing facility; and the Company’s expectation that it will complete the restructuring plan during fiscal 2012.next 12 months. 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 and economic conditions; increased competition (including competition from foreign products which may be imported at less than fair value and from foreign products which may benefit from foreign governmental subsidies); difficulties entering new marketsand/or developing new and complementary products that drive incremental sales; increased operating costs, including labor-related and energy costs and costs relating to
21
the imposition or retrospective application of duties on imported products; currency risks and other risks associated with international markets; difficulties identifying and evaluating suitable acquisition opportunities; risks associated with acquisitions, including realization of intangible assets and recoverability of long-lived assets, and acquisition integration costs and the risk that the Company may not be able to integrate and derive the expected benefits from such acquisitions; risks associated with the combination of the operations of the Company's operating businesses; risks associated with the Company’s restructuring plan to close its Memphis manufacturing facility,activities, including the risk that the cost of implementing the plansuch activities will exceed expectations, the risk that the expected benefits of the plansuch activities will not be realized, and the risk that implementation of the plansuch activities will interfere with and adversely affect the Company’s operations, sales and financial performance; the risk that customers may become insolvent, may delay payments or may impose deductions or penalties on amounts owed to the Company; costs of compliance with governmental regulations and government investigations; liability associated with non-compliance with governmental regulations, including regulations pertaining to the environment, Federalfederal and state employment laws, and import and export controls, and customs laws and consumer product safety regulations; and other factors described more fully elsewhere in this annual report onForm 10-K 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.
20 Item 7A.Quantitative and Qualitative Disclosures About Market Risk. |
The Company’s activities expose it to a variety of market risks, including the effects of changes in interest rates and foreign currency exchange rates. These financial exposures are monitored and, where considered appropriate, managed by the Company as described below.
Interest Rate Risk
The Company’s primary market risk exposure with regard to financial instruments is to changes in interest rates. As of March 31, 2014, the Company had held-to-maturity investments of $29,862,000 consisting of commercial paper with original maturities at the date of purchase of nine months or less. These highly liquid investments are subject to interest rate and interest income risk and will decrease in value if market interest rates increase. Because the Company has the positive intent and ability to hold these investments until maturity, it does not expect any decline in value of its investments caused by market interest rate changes. Pursuant to the Company’s variable rate linesline of credit in effect during fiscal 2011,2014, a change in either the lender’s base rate or the London Interbank Offered Rate (LIBOR) would have affected the rate at which the Company could borrow funds thereunder. Based on averageHowever, the Company had no borrowings under its credit facilities of $29,912,000 for the year ended March 31, 2011, a 1% increase or decrease in floating interest rates would have increased or decreased annual interest expense by approximately $299,000. Based on an average cash balance of $9,938,000 for the year ended March 31, 2011, a 1% increase or decrease in interest rates would have increased or decreased annual interest income by approximately $99,000.facility during fiscal 2014.
Foreign Currency Risk
Approximately 2%1% of the Company’s sales in fiscal 20112014 were denominated in a foreign currency. The Company considers its risk exposure with regard to foreign currency fluctuations insignificant as it enters into foreign currency forward contracts to hedge the majority of firmly committed transactions and related receivables that are denominated in a foreign currency. The Company has designated its foreign currency forward contracts as fair value hedges. The gains or losses on the fair value hedges are recognized in earnings and generally offset the transaction gains or losses on the foreign denominated assets that they are intended to hedge.
21
Item 8.Financial Statements and Supplementary Data. |
CSS INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
| Page | |||||
| Financial Statement Schedule: | |||||
23
22
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
CSS Industries, Inc.:
We have audited the accompanying consolidated balance sheets of CSS Industries, Inc. and subsidiaries as of March 31, 20112014 and 2010,2013, and the related consolidated statements of operations and comprehensive income, (loss),cash flows and stockholders’ equity and cash flows for each of the years in the three-year period ended March 31, 2011.2014. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CSS Industries, Inc. and subsidiaries as of March 31, 20112014 and 2010,2013, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2011,2014, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), CSS Industries, Inc.’s internal control over financial reporting as of March 31, 2011,2014, based on criteria established in Internal Control —– Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated May 26, 201128, 2014 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
May 26, 201128, 2014
Philadelphia, PA
24
23
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
| March 31, | |||||||||||||||
| 2011 | 2010 | ||||||||||||||
| (In thousands, except share and per share amounts) | March 31, | ||||||||||||||
| 2014 | 2013 | ||||||||||||||
ASSETS | ASSETS | ||||||||||||||
| CURRENT ASSETS | |||||||||||||||
| Cash and cash equivalents | $ | 50,407 | $ | 27,217 | $ | 68,200 | $ | 87,108 | |||||||
| Accounts receivable, net of allowances of $3,050 and $4,742 | 42,615 | 45,711 | |||||||||||||
| Short-term investments | 29,862 | — | |||||||||||||
| Accounts receivable, net of allowances of $1,669 and $2,009 | 44,243 | 43,133 | |||||||||||||
| Inventories | 80,767 | 78,851 | 59,252 | 62,598 | |||||||||||
| Deferred income taxes | 4,051 | 6,165 | 4,414 | 4,520 | |||||||||||
| Assets held for sale | 1,323 | 1,363 | |||||||||||||
| Other current assets | 13,151 | 15,986 | 13,472 | 13,073 | |||||||||||
| Current assets of discontinued operations | 1 | 2 | |||||||||||||
| Total current assets | 192,314 | 175,293 | 219,444 | 210,434 | |||||||||||
| NET PROPERTY, PLANT AND EQUIPMENT | 32,345 | 47,786 | 27,063 | 27,956 | |||||||||||
| DEFERRED INCOME TAXES | 8,854 | 5,439 | 1,965 | 3,974 | |||||||||||
| OTHER ASSETS | |||||||||||||||
| Goodwill | 17,233 | 17,233 | 14,522 | 14,522 | |||||||||||
| Intangible assets, net of accumulated amortization of $5,382 and $3,676 | 31,408 | 32,027 | |||||||||||||
| Intangible assets, net of accumulated amortization of $10,137 and $8,511 | 26,309 | 28,004 | |||||||||||||
| Other | 4,769 | 3,984 | 4,232 | 4,290 | |||||||||||
| Total other assets | 53,410 | 53,244 | 45,063 | 46,816 | |||||||||||
| Total assets | $ | 286,923 | $ | 281,762 | $ | 293,535 | $ | 289,180 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||
| CURRENT LIABILITIES | |||||||||||||||
| Current portion of long-term debt | $ | 66 | $ | 481 | |||||||||||
| Accounts payable | 25,509 | 19,595 | $ | 10,664 | $ | 13,200 | |||||||||
| Accrued income taxes | 309 | 555 | 217 | 1,214 | |||||||||||
| Accrued payroll and other compensation | 8,061 | 7,691 | 8,754 | 8,393 | |||||||||||
| Accrued customer programs | 4,726 | 8,380 | 4,820 | 4,015 | |||||||||||
| Accrued other expenses | 6,747 | 7,694 | 6,947 | 7,911 | |||||||||||
| Current liabilities of discontinued operations | 233 | 644 | |||||||||||||
| Total current liabilities | 45,418 | 44,396 | 31,635 | 35,377 | |||||||||||
| LONG-TERM DEBT, NET OF CURRENT PORTION | — | 66 | |||||||||||||
| OTHER LONG-TERM OBLIGATIONS | 5,846 | 4,255 | |||||||||||||
| COMMITMENTS AND CONTINGENCIES (Notes 10 and 12) | |||||||||||||||
| LONG-TERM OBLIGATIONS | 4,684 | 4,825 | |||||||||||||
| COMMITMENTS AND CONTINGENCIES (Notes 11 and 13) | |||||||||||||||
| STOCKHOLDERS’ EQUITY | |||||||||||||||
| Preferred stock, Class 2, $.01 par, 1,000,000 shares authorized, no shares issued | — | — | — | — | |||||||||||
| Common stock, $.10 par, 25,000,000 shares authorized, 14,703,084 shares issued at March 31, 2011 and 2010 | 1,470 | 1,470 | |||||||||||||
| Common stock, $.10 par, 25,000,000 shares authorized, 14,703,084 shares issued at March 31, 2014 and 2013 | 1,470 | 1,470 | |||||||||||||
| Additional paid-in capital | 51,311 | 49,295 | 52,117 | 49,884 | |||||||||||
| Retained earnings | 320,024 | 321,510 | 347,469 | 338,464 | |||||||||||
| Accumulated other comprehensive loss, net of tax | (7 | ) | (74 | ) | |||||||||||
| Common stock in treasury, 4,969,679 and 5,027,306 shares, at cost | (137,139 | ) | (139,156 | ) | |||||||||||
| Accumulated other comprehensive income (loss), net of tax | (19 | ) | (40 | ) | |||||||||||
| Common stock in treasury, 5,408,246 and 5,235,312 shares, at cost | (143,821 | ) | (140,800 | ) | |||||||||||
| Total stockholders’ equity | 235,659 | 233,045 | 257,216 | 248,978 | |||||||||||
| Total liabilities and stockholders’ equity | $ | 286,923 | $ | 281,762 | $ | 293,535 | $ | 289,180 | |||||||
See accompanying notes to consolidated financial statements.
24
CSS INDUSTRIES, INC. AND SUBSIDIARIES
AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share amounts)
| For the Years Ended March 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In thousands, except per share amounts) | ||||||||||||
| NET SALES | $ | 450,700 | $ | 448,450 | $ | 482,424 | ||||||
| COSTS AND EXPENSES | ||||||||||||
| Cost of sales | 336,446 | 337,852 | 356,115 | |||||||||
| Selling, general and administrative expenses | 93,062 | 95,667 | 96,723 | |||||||||
| Impairment of tangible assets | 11,051 | — | — | |||||||||
| Impairment of goodwill and intangible assets | — | 44,315 | — | |||||||||
| Restructuring expenses, net | 164 | 207 | 1,138 | |||||||||
| Interest expense, net of interest income of $16, $14 and $137 | 1,348 | 1,885 | 2,551 | |||||||||
| Other (income) expense, net | (122 | ) | (489 | ) | 7 | |||||||
| 441,949 | 479,437 | 456,534 | ||||||||||
| INCOME (LOSS) BEFORE INCOME TAXES | 8,751 | (30,987 | ) | 25,890 | ||||||||
| INCOME TAX EXPENSE (BENEFIT) | 3,140 | (7,248 | ) | 8,904 | ||||||||
| NET INCOME (LOSS) | $ | 5,611 | $ | (23,739 | ) | $ | 16,986 | |||||
| NET INCOME (LOSS) PER COMMON SHARE | ||||||||||||
| Basic | $ | .58 | $ | (2.46 | ) | $ | 1.71 | |||||
| Diluted | $ | .58 | $ | (2.46 | ) | $ | 1.70 | |||||
| WEIGHTED AVERAGE SHARES OUTSTANDING | ||||||||||||
| Basic | 9,703 | 9,637 | 9,909 | |||||||||
| Diluted | 9,715 | 9,637 | 9,990 | |||||||||
| COMPREHENSIVE INCOME (LOSS) | ||||||||||||
| Net income (loss) | $ | 5,611 | $ | (23,739 | ) | $ | 16,986 | |||||
| Foreign currency translation adjustment | — | — | 3 | |||||||||
| Postretirement medical plan, net of tax | 65 | 7 | 6 | |||||||||
| Comprehensive income (loss) | $ | 5,676 | $ | (23,732 | ) | $ | 16,995 | |||||
| For the Years Ended March 31, | |||||||||||
| 2014 | 2013 | 2012 | |||||||||
| Net sales | $ | 320,459 | $ | 364,193 | $ | 384,663 | |||||
| Costs and expenses | |||||||||||
| Cost of sales | 217,303 | 255,102 | 273,213 | ||||||||
| Selling, general and administrative expenses | 75,204 | 80,619 | 85,698 | ||||||||
| Disposition of product line, net | — | 5,798 | — | ||||||||
| Interest expense (income), net | 191 | (51 | ) | 195 | |||||||
| Other expense, net | 61 | 88 | 312 | ||||||||
| 292,759 | 341,556 | 359,418 | |||||||||
| Income from continuing operations before income taxes | 27,700 | 22,637 | 25,245 | ||||||||
| Income tax expense | 9,136 | 7,049 | 9,016 | ||||||||
| Income from continuing operations | 18,564 | 15,588 | 16,229 | ||||||||
| Income (loss) from discontinued operations, net of tax | 205 | (361 | ) | (559 | ) | ||||||
| Net income | $ | 18,769 | $ | 15,227 | $ | 15,670 | |||||
| NET INCOME (LOSS) PER COMMON SHARE | |||||||||||
| Basic: | |||||||||||
| Continuing operations | $ | 1.98 | $ | 1.63 | $ | 1.67 | |||||
| Discontinued operations | $ | 0.02 | $ | (0.04 | ) | $ | (0.06 | ) | |||
| Total | $ | 2.00 | $ | 1.59 | $ | 1.61 | |||||
| Diluted: | |||||||||||
| Continuing operations | $ | 1.97 | $ | 1.63 | $ | 1.67 | |||||
| Discontinued operations | $ | 0.02 | $ | (0.04 | ) | $ | (0.06 | ) | |||
| Total | $ | 1.99 | $ | 1.59 | $ | 1.61 | |||||
| Weighted average shares outstanding | |||||||||||
| Basic | 9,389 | 9,562 | 9,728 | ||||||||
| Diluted | 9,436 | 9,568 | 9,732 | ||||||||
| Comprehensive income: | |||||||||||
| Net income | $ | 18,769 | $ | 15,227 | $ | 15,670 | |||||
| Foreign currency translation adjustment | — | — | 1 | ||||||||
| Postretirement medical plan, net of tax | 21 | (15 | ) | (19 | ) | ||||||
| Comprehensive income | $ | 18,790 | $ | 15,212 | $ | 15,652 | |||||
See accompanying notes to consolidated financial statements.
26
25
CSS INDUSTRIES, INC. AND SUBSIDIARIES
| For the Years Ended March 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In thousands) | ||||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income (loss) | $ | 5,611 | $ | (23,739 | ) | $ | 16,986 | |||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 11,146 | 12,560 | 13,195 | |||||||||
| Impairment of tangible assets | 11,051 | — | — | |||||||||
| Impairment of goodwill and intangible assets | — | 44,315 | — | |||||||||
| Provision for doubtful accounts | 442 | 110 | 525 | |||||||||
| Deferred tax (benefit) provision | (1,336 | ) | (10,054 | ) | 3,244 | |||||||
| Loss (gain) on sale or disposal of assets | 35 | (20 | ) | (925 | ) | |||||||
| Share-based compensation expense | 1,938 | 2,323 | 2,632 | |||||||||
| Changes in assets and liabilities, net of effects of acquisitions: | ||||||||||||
| Decrease (increase) in accounts receivable | 2,653 | (2,080 | ) | (4,012 | ) | |||||||
| (Increase) decrease in inventories | (2,295 | ) | 21,245 | 9,127 | ||||||||
| Decrease (increase) in other assets | 2,151 | (738 | ) | 537 | ||||||||
| Increase (decrease) in accounts payable | 5,914 | 5,263 | (3,943 | ) | ||||||||
| (Decrease) increase in accrued income taxes | (274 | ) | 370 | (1,968 | ) | |||||||
| Decrease in accrued expenses and other long-term obligations | (4,717 | ) | (879 | ) | (7,477 | ) | ||||||
| Net cash provided by operating activities | 32,319 | 48,676 | 27,921 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Purchase of businesses | — | (225 | ) | (11,164 | ) | |||||||
| Final payment of purchase price for a business previously acquired | — | — | (2,700 | ) | ||||||||
| Purchase of property, plant and equipment | (3,384 | ) | (4,447 | ) | (14,143 | ) | ||||||
| Proceeds from sale of assets | 79 | 752 | 3,227 | |||||||||
| Net cash used for investing activities | (3,305 | ) | (3,920 | ) | (24,780 | ) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Payments on long-term debt obligations | (722 | ) | (10,609 | ) | (10,417 | ) | ||||||
| Borrowings on notes payable | 309,075 | 346,405 | 545,385 | |||||||||
| Payments on notes payable | (309,075 | ) | (350,555 | ) | (541,235 | ) | ||||||
| Payment of financing transaction costs | (100 | ) | — | (621 | ) | |||||||
| Dividends paid | (5,823 | ) | (5,784 | ) | (5,939 | ) | ||||||
| Purchase of treasury stock | — | — | (16,687 | ) | ||||||||
| Proceeds from exercise of stock options | 743 | 825 | 435 | |||||||||
| Tax benefit realized for stock options exercised | 78 | — | 5 | |||||||||
| Net cash used for financing activities | (5,824 | ) | (19,718 | ) | (29,074 | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | — | — | 3 | |||||||||
| Net increase (decrease) in cash and cash equivalents | 23,190 | 25,038 | (25,930 | ) | ||||||||
| Cash and cash equivalents at beginning of period | 27,217 | 2,179 | 28,109 | |||||||||
| Cash and cash equivalents at end of period | $ | 50,407 | $ | 27,217 | $ | 2,179 | ||||||
| For the Years Ended March 31, | |||||||||||
| 2014 | 2013 | 2012 | |||||||||
| (in thousands) | |||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 18,769 | $ | 15,227 | $ | 15,670 | |||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 7,543 | 7,594 | 7,880 | ||||||||
| Reduction of goodwill from disposition of product line | — | 2,711 | — | ||||||||
| Gain on sale of discontinued operations | — | — | (5,849 | ) | |||||||
| Provision for accounts receivable allowances | 2,862 | 4,746 | 4,884 | ||||||||
| Deferred tax provision (benefit) | 2,511 | (4,257 | ) | 5,552 | |||||||
| (Gain) loss on sale or disposal of assets | (8 | ) | 155 | (784 | ) | ||||||
| Share-based compensation expense | 1,843 | 1,783 | 1,683 | ||||||||
| Changes in assets and liabilities: | |||||||||||
| (Increase) in accounts receivable | (3,972 | ) | (2,952 | ) | (7,499 | ) | |||||
| Decrease (increase) in inventories | 3,346 | 8,106 | (2,578 | ) | |||||||
| (Increase) decrease in other assets | (1,282 | ) | (704 | ) | 757 | ||||||
| (Decrease) in accounts payable | (2,536 | ) | (4,073 | ) | (7,541 | ) | |||||
| (Decrease) increase in accrued income taxes | (726 | ) | 1,290 | 47 | |||||||
| (Decrease) increase in accrued expenses and long-term obligations | (110 | ) | 1,802 | 1,188 | |||||||
| Net cash provided by operating activities-continuing operations | 28,240 | 31,428 | 13,410 | ||||||||
| Net cash (used for) provided by operating activities-discontinued operations | (410 | ) | (1,565 | ) | 12,386 | ||||||
| Net cash provided by operating activities | 27,830 | 29,863 | 25,796 | ||||||||
| Cash flows from investing activities: | |||||||||||
| Purchase of held-to-maturity investment securities | (29,862 | ) | — | — | |||||||
| Purchase of property, plant and equipment | (5,024 | ) | (4,494 | ) | (3,532 | ) | |||||
| Proceeds from disposition of product line, net | — | 1,758 | — | ||||||||
| Proceeds from sale of assets | 8 | 17 | 57 | ||||||||
| Net cash used for investing activities-continuing operations | (34,878 | ) | (2,719 | ) | (3,475 | ) | |||||
| Net cash provided by investing activities-discontinued operations | 500 | 4,500 | 2,509 | ||||||||
| Net cash (used for) provided by investing activities | (34,378 | ) | 1,781 | (966 | ) | ||||||
| Cash flows from financing activities: | |||||||||||
| Payments on long-term debt obligations | — | — | (66 | ) | |||||||
| Borrowings on notes payable | — | — | 74,270 | ||||||||
| Payments on notes payable | — | — | (74,270 | ) | |||||||
| Dividends paid | (5,637 | ) | (5,731 | ) | (5,837 | ) | |||||
| Purchase of treasury stock | (6,634 | ) | (4,864 | ) | (1,648 | ) | |||||
| Proceeds from exercise of stock options | 49 | 192 | 365 | ||||||||
| Payments for tax withholding on net restricted stock settlements | (563 | ) | (262 | ) | (60 | ) | |||||
| Tax effect of stock awards | 425 | (6 | ) | (26 | ) | ||||||
| Net cash used for financing activities | (12,360 | ) | (10,671 | ) | (7,272 | ) | |||||
| Net (decrease) increase in cash and cash equivalents | (18,908 | ) | 20,973 | 17,558 | |||||||
| Cash and cash equivalents at beginning of period | 87,108 | 66,135 | 48,577 | ||||||||
| Cash and cash equivalents at end of period | $ | 68,200 | $ | 87,108 | $ | 66,135 | |||||
See accompanying notes to consolidated financial statements.
27
26
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY
(in thousands, except share and per share amounts)
| Accumulated | ||||||||||||||||||||||||||||||||||||||||
| Additional | Other | Common Stock | ||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Retained | Comprehensive | in Treasury | |||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Earnings | Loss | Shares | Amount | Total | |||||||||||||||||||||||||||||||
| (In thousands, except share and per share amounts) | ||||||||||||||||||||||||||||||||||||||||
| BALANCE, APRIL 1, 2008 | — | $ | — | 14,703,084 | $ | 1,470 | 44,150 | 342,688 | (90 | ) | (4,437,325 | ) | (125,865 | ) | 262,353 | |||||||||||||||||||||||||
Cumulative effect of adoption of EITF06-10 | — | — | — | — | — | (566 | ) | — | — | — | (566 | ) | ||||||||||||||||||||||||||||
| Tax benefit associated with exercise of stock options | — | — | — | — | 31 | — | — | — | — | 31 | ||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | 2,632 | — | — | — | — | 2,632 | ||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | — | — | — | — | — | (495 | ) | — | 26,572 | 930 | 435 | |||||||||||||||||||||||||||||
| Increase in treasury shares | — | — | — | — | — | — | — | (687,000 | ) | (16,687 | ) | (16,687 | ) | |||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | — | 3 | — | — | 3 | ||||||||||||||||||||||||||||||
| Cash dividends ($.60 per common share) | — | — | — | — | — | (5,939 | ) | — | — | — | (5,939 | ) | ||||||||||||||||||||||||||||
| Postretirement medical plan, net of tax | — | — | — | — | — | — | 6 | — | — | 6 | ||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 16,986 | — | — | — | 16,986 | ||||||||||||||||||||||||||||||
| BALANCE, MARCH 31, 2009 | — | — | 14,703,084 | 1,470 | 46,813 | 352,674 | (81 | ) | (5,097,753 | ) | (141,622 | ) | 259,254 | |||||||||||||||||||||||||||
| Tax benefit associated with exercise of stock options | — | — | — | — | 159 | — | — | — | — | 159 | ||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | 2,323 | — | — | — | — | 2,323 | ||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | — | — | — | — | — | (1,641 | ) | — | 70,447 | 2,466 | 825 | |||||||||||||||||||||||||||||
| Cash dividends ($.60 per common share) | — | — | — | — | — | (5,784 | ) | — | — | — | (5,784 | ) | ||||||||||||||||||||||||||||
| Postretirement medical plan, net of tax | — | — | — | — | — | — | 7 | — | — | 7 | ||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (23,739 | ) | — | — | — | (23,739 | ) | ||||||||||||||||||||||||||||
| BALANCE, MARCH 31, 2010 | — | — | 14,703,084 | 1,470 | 49,295 | 321,510 | (74 | ) | (5,027,306 | ) | (139,156 | ) | 233,045 | |||||||||||||||||||||||||||
| Tax benefit associated with exercise of stock options | — | — | — | — | 78 | — | — | — | — | 78 | ||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | 1,938 | — | — | — | — | 1,938 | ||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | — | — | — | — | — | (1,274 | ) | — | 57,627 | 2,017 | 743 | |||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | — | 2 | — | — | 2 | ||||||||||||||||||||||||||||||
| Cash dividends ($.60 per common share) | — | — | — | — | — | (5,823 | ) | — | — | — | (5,823 | ) | ||||||||||||||||||||||||||||
| Postretirement medical plan, net of tax | — | — | — | — | — | — | 65 | — | — | 65 | ||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 5,611 | — | — | — | 5,611 | ||||||||||||||||||||||||||||||
| BALANCE, MARCH 31, 2011 | — | $ | — | 14,703,084 | $ | 1,470 | $ | 51,311 | $ | 320,024 | $ | (7 | ) | (4,969,679 | ) | $ | (137,139 | ) | $ | 235,659 | ||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||||||
| Additional | Other | Common Stock | ||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Retained | Comprehensive | in Treasury | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Earnings | Income (Loss) | Shares | Amount | Total | |||||||||||||||||||||||||||
| BALANCE, March 31, 2011 | — | $ | — | 14,703,084 | $ | 1,470 | $ | 51,311 | $ | 320,024 | $ | (7 | ) | (4,969,679 | ) | $ | (137,139 | ) | $ | 235,659 | ||||||||||||||||
| Share-based compensation expense | — | — | — | — | 1,683 | — | — | — | — | 1,683 | ||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | — | — | — | — | — | (562 | ) | — | 26,478 | 927 | 365 | |||||||||||||||||||||||||
| Issuance of common stock under equity plan | — | — | — | — | — | (374 | ) | — | 7,495 | 314 | (60 | ) | ||||||||||||||||||||||||
| Purchase of treasury shares | — | — | — | — | — | — | — | (88,210 | ) | (1,648 | ) | (1,648 | ) | |||||||||||||||||||||||
| Tax effect of stock awards | — | — | — | — | (26 | ) | — | — | — | — | (26 | ) | ||||||||||||||||||||||||
| Reduction of deferred tax assets due to expired stock options | — | — | — | — | (2,585 | ) | — | — | — | — | (2,585 | ) | ||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | — | 1 | — | — | 1 | ||||||||||||||||||||||||||
| Cash dividends ($.60 per common share) | — | — | — | — | — | (5,837 | ) | — | — | — | (5,837 | ) | ||||||||||||||||||||||||
| Postretirement medical plan, net of tax | — | — | — | — | — | — | (19 | ) | — | — | (19 | ) | ||||||||||||||||||||||||
| Net income | — | — | — | — | — | 15,670 | — | — | — | 15,670 | ||||||||||||||||||||||||||
| BALANCE, March 31, 2012 | — | — | 14,703,084 | 1,470 | 50,383 | 328,921 | (25 | ) | (5,023,916 | ) | (137,546 | ) | 243,203 | |||||||||||||||||||||||
| Adjustment (see Note 7) | — | — | — | — | (1,727 | ) | 1,727 | — | — | — | — | |||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | 1,783 | — | — | — | — | 1,783 | ||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | — | — | — | — | — | (193 | ) | — | 11,000 | 385 | 192 | |||||||||||||||||||||||||
| Issuance of common stock under equity plan | — | — | — | — | — | (1,487 | ) | — | 28,784 | 1,225 | (262 | ) | ||||||||||||||||||||||||
| Purchase of treasury shares | — | — | — | — | — | — | — | (251,180 | ) | (4,864 | ) | (4,864 | ) | |||||||||||||||||||||||
| Tax effect of stock awards | — | — | — | — | (6 | ) | — | — | — | — | (6 | ) | ||||||||||||||||||||||||
| Reduction of deferred tax assets due to expired stock options | — | — | — | — | (549 | ) | — | — | — | — | (549 | ) | ||||||||||||||||||||||||
| Cash dividends ($.60 per common share) | — | — | — | — | — | (5,731 | ) | — | — | — | (5,731 | ) | ||||||||||||||||||||||||
| Postretirement medical plan, net of tax | — | — | — | — | — | — | (15 | ) | — | — | (15 | ) | ||||||||||||||||||||||||
| Net income | — | — | — | — | — | 15,227 | — | — | — | 15,227 | ||||||||||||||||||||||||||
| BALANCE, March 31, 2013 | — | — | 14,703,084 | 1,470 | 49,884 | 338,464 | (40 | ) | (5,235,312 | ) | (140,800 | ) | 248,978 | |||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | 1,843 | — | — | — | — | 1,843 | ||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | — | — | — | — | — | (2,044 | ) | — | 59,793 | 2,093 | 49 | |||||||||||||||||||||||||
| Issuance of common stock under equity plan | — | — | — | — | — | (2,083 | ) | — | 39,928 | 1,520 | (563 | ) | ||||||||||||||||||||||||
| Purchase of treasury shares | — | — | — | — | — | — | — | (272,655 | ) | (6,634 | ) | (6,634 | ) | |||||||||||||||||||||||
| Tax effect of stock awards | — | — | — | — | 425 | — | — | — | — | 425 | ||||||||||||||||||||||||||
| Reduction of deferred tax assets due to expired stock options | — | — | — | — | (35 | ) | — | — | — | — | (35 | ) | ||||||||||||||||||||||||
| Cash dividends ($.60 per common share) | — | — | — | — | — | (5,637 | ) | — | — | — | (5,637 | ) | ||||||||||||||||||||||||
| Postretirement medical plan, net of tax | — | — | — | — | — | — | 21 | — | — | 21 | ||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 18,769 | — | — | — | 18,769 | ||||||||||||||||||||||||||
| BALANCE, March 31, 2014 | — | $ | — | 14,703,084 | $ | 1,470 | $ | 52,117 | $ | 347,469 | $ | (19 | ) | (5,408,246 | ) | $ | (143,821 | ) | $ | 257,216 | ||||||||||||||||
See accompanying notes to consolidated financial statements.
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27
CSS INDUSTRIES, INC. AND SUBSIDIARIES
MARCH 31, 20112014
(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.
On September 9, 2011, the Company and its Cleo Inc (“Cleo”) subsidiary sold the Christmas gift wrap portion of Cleo’s business and certain assets relating to such business, including certain equipment, contract rights, customer lists, intellectual property and other intangible assets to Impact Innovations, Inc. (“Impact”). Cleo’s remaining assets, including accounts receivable and inventory, were excluded from the sale. Various prior period amounts contained in these consolidated financial statements include assets, liabilities and cash flows related to the Christmas gift wrap business which are presented as current assets and liabilities of discontinued operations. The results of operations for the years ended March 31, 2014, 2013 and 2012 reflect the historical operations of the Christmas gift wrap business as discontinued operations. The discussions in this annual report are presented on the basis of continuing operations, unless otherwise noted.
The Company’s fiscal year ends on March 31. References to a particular year refer to the fiscal year ending in March of that year. For example fiscal 2014 refers to the fiscal year ended March 31, 2014.
Principles of Consolidation
The consolidated financial statements include the accounts of CSS Industries, Inc. (“CSS” or the “Company”) and all of its subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation.
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) expense, net in the consolidated statements of operations.
Nature of Business
CSS is a consumer products company primarily engaged in the design, manufacture, procurement, distribution and sale of seasonalall occasion and all occasionseasonal social expression products, principally to mass market retailers. These seasonalall occasion and all occasionseasonal products include decorative ribbons and bows, boxed greeting cards, gift tags, gift wrap, gift bags, gift boxes, gift card holders, decorative tissue paper, decorations, classroom exchange Valentines, decorative ribbons and bows, floral accessories, Halloween masks, costumes,make-up and novelties, Easter egg dyes and novelties, craft and educational products, stickers, memory books, stationery, journals, notecards, infant and wedding photo albums, scrapbooks, and other gift items that commemorate life’s celebrations. CSS’ product breadth provides its retail customers the opportunity to use a single vendor for much of their seasonal product requirements. A substantial portion of CSS’ products are manufactured, packagedand/or warehoused in eleventen facilities located in the United States, with the remainder purchased primarily from manufacturers in Asia and Mexico. The Company’s products are sold to its customers by national and regional account sales managers, sales representatives, product specialists and by a network of independent manufacturers’ representatives. CSS maintains a purchasing officeshowroom in Hong Kong as well as a purchasing office to administer Asian sourcing opportunities.
The Company’s principal operating subsidiaries include Berwick Offray LLC (“Berwick Offray”), Paper Magic Group, Inc. (“Paper Magic”), BOC Design Group (consisting of Berwick Offray LLC (“Berwick Offray”) and Cleo Inc (“Cleo”)) and C.R. Gibson, LLC (“C.R. Gibson”). In fiscal 2007,On December 3, 2013, the Company combined the operations of its Cleo andC.R. Gibson business with the operations of its Berwick Offray subsidiariesand Paper Magic businesses, which were previously combined on March 27, 2012. These businesses were combined in order to improve profitabilitydrive sales growth by providing stronger management oversight and efficiency throughby reallocating sourcing, sales and marketing resources in a more strategic manner.
On September 5, 2012, the eliminationCompany and its Paper Magic subsidiary sold the Halloween portion of redundant back office functionsPaper Magic’s business and certain management positions.Paper Magic assets relating to such business, including certain tangible and intangible assets associated with Paper Magic’s Halloween business, to Gemmy Industries (HK) Limited (“Gemmy”). Paper Magic’s remaining assets, including accounts receivable and inventory, were excluded from the sale. Paper Magic retained the right and obligation to fulfill all customer orders for Paper Magic Halloween products (such as Halloween masks, costumes, make-up and novelties) for the Halloween 2012 season. The sale price of $2,281,000 was paid to Paper Magic at closing. The Company consolidated its human resources, accounts receivable, accounts payable and payroll functions into a combined back office operation, which was substantially completed in the first quarterincurred
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$523,000 of fiscal 2010. Also completed in the first quarter of fiscal 2010 was the implementationtransaction costs (included within disposition of a phaseproduct line further discussed in Note 2 to the consolidated financial statements), yielding net proceeds of the Company’s enterprise resource planning systems standardization project.
$1,758,000.
Approximately 60095 of its 1,8301,200 employees (increasing to approximately 2,5501,500 as seasonal employees are added) are represented by a labor unions.union. The collective bargaining agreement with the labor union representing the production and maintenance employees in Hagerstown, Maryland remains in effect until December 31, 2011. The collective bargaining agreement with the labor union representing the production and maintenance employees2014. Historically, we have been successful in Memphis, Tennessee also remains in effect until December 31, 2011. The Company plans to close its Cleo manufacturing facility located in Memphis, Tennessee, with an exit to be completed by no later than December 31, 2011. As partrenegotiating expiring agreements without any disruption of such closing, the Company plans to transition the sourcing of all gift wrap products to foreign suppliers.operating activities.
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
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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 revenue recognition, the valuation of inventory and accounts receivable, the assessment of the recoverability of goodwill and other intangible and long-lived assets, income tax accounting, the valuation of share-based awards and resolution of litigation and other proceedings. Actual results could differ from these estimates.
Short-Term Investments
The Company categorizes and accounts for its short-term investment holdings as held-to-maturity securities. Held-to-maturity securities are recorded at amortized cost which approximates fair market value at March 31, 2014. This categorization is based upon the Company's positive intent and ability to hold these securities until maturity. Short-term investments at March 31, 2014 consist of commercial paper with an amortized cost of $29,862,000 and mature in fiscal 2015. There were no short-term investments at March 31, 2013.
Accounts Receivable
The Company offers seasonal dating programs related to certain seasonal product offerings pursuant to which customers that qualify for such programs are offered extended payment terms. With some exceptions, customers do not have the right to return product except for reasons the Company believes are typical of our industry, including damaged goods, shipping errors or similar occurrences. The Company generally is not required to repurchase products from its customers, nor does the Company have any regular practice of doing so. In addition, the Company mitigates its exposure to bad debts by evaluating the creditworthiness of its major customers, utilizing established credit limits, and purchasing credit insurance when appropriate and available on terms satisfactory to the Company. Bad debt and returns and allowances reserves are recorded as an offset to accounts receivable while reserves for customer programs are recorded as accrued liabilities. The Company evaluates accounts receivable related reserves and accruals monthly by specifically reviewing customers’ creditworthiness, historical recovery percentages and outstanding customer deductions and program arrangements. Customer account balances are charged off against the allowance reserve after reasonable means of collection have been exhausted and the potential for recovery is considered unlikely.
Inventories
The Company records inventory when title is transferred, which 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 offirst-in, first-out (FIFO) cost or market. The remaining portion of the inventory is valued at the lower oflast-in, first-out (LIFO) cost or market, which was $791,000$465,000 and $996,000$641,000 at March 31, 20112014 and 2010,2013, respectively. Had all inventories been valued at the lower of FIFO cost or market, inventories would have been greater by $863,000$820,000 and $854,000$851,000 at March 31, 20112014 and 2010,2013, respectively. Inventories consisted of the following (in thousands):
| March 31, | ||||||||
| 2011 | 2010 | |||||||
| Raw material | $ | 12,232 | $ | 12,696 | ||||
| Work-in-process | 20,127 | 20,881 | ||||||
| Finished goods | 48,408 | 45,274 | ||||||
| $ | 80,767 | $ | 78,851 | |||||
| March 31, | |||||||
| 2014 | 2013 | ||||||
| Raw material | $ | 9,366 | $ | 8,116 | |||
| Work-in-process | 14,418 | 14,687 | |||||
| Finished goods | 35,468 | 39,795 | |||||
| $ | 59,252 | $ | 62,598 | ||||
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Property, Plant and Equipment
Property, plant and equipment are stated at cost and include the following (in thousands):
| March 31, | ||||||||
| 2011 | 2010 | |||||||
| Land | $ | 2,508 | $ | 2,508 | ||||
| Buildings, leasehold interests and improvements | 44,127 | 45,165 | ||||||
| Machinery, equipment and other | 119,784 | 147,305 | ||||||
| 166,419 | 194,978 | |||||||
| Less — Accumulated depreciation | (134,074 | ) | (147,192 | ) | ||||
| Net property, plant and equipment | $ | 32,345 | $ | 47,786 | ||||
| March 31, | |||||||
| 2014 | 2013 | ||||||
| Land | $ | 2,508 | $ | 2,508 | |||
| Buildings, leasehold interests and improvements | 37,183 | 37,007 | |||||
| Machinery, equipment and other | 93,928 | 101,916 | |||||
| 133,619 | 141,431 | ||||||
| Less – Accumulated depreciation and amortization | (106,556 | ) | (113,475 | ) | |||
| Net property, plant and equipment | $ | 27,063 | $ | 27,956 | |||
Depreciation is provided generally on the straight-line method and is based on estimated useful lives or terms of leases as follows:
| Buildings, leasehold interests and improvements | Lease term to 45 years | |||
| Machinery, equipment and other | 3 to 15 years | |||
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When property is retired or otherwise disposed of, the related cost and accumulated depreciation and amortization are eliminated from the consolidated balance sheet. Any gain or loss from the disposition of property, plant and equipment is included in other (income) expense, net with the exception of a gain of $761,000 recorded in fiscal 2009 related to the sale of two facilities associated with a restructuring program.net. Maintenance and repairs are expensed as incurred while improvements are capitalized and depreciated over their estimated useful lives.
The Company leased $1,125,000 of computer equipment (which had total accumulated amortization of $963,000)maintained no assets under capital leases as of March 31, 2011. As of March 31, 2010, the Company leased $1,125,000 of computer equipment2014 and $184,000 of trucks (which had total accumulated amortization of $712,000) under capital leases as of March 31, 2010. The amortization of capitalized assets is included in depreciation expense.2013. Depreciation expense was $8,735,000, $10,967,000$5,917,000, $5,948,000 and $10,936,000$6,197,000 for the years ended March 31, 2011, 20102014, 2013 and 2009,2012, respectively.
The Company maintains various operating leases and records rent expense on a straight-line basis over the lease term. See Note 11 for further discussion.
Impairment of Long-Lived Assets including Goodwill, Other Intangible Assets and Property, Plant and Equipment
When a company is acquired, the difference between the fair value of its net assets, including intangibles, and the purchase price is recorded as goodwill. Goodwill is subject to an assessment for impairment using a two-step fair value-based test, the first step of which must be performed at least annually or more frequently if events or circumstances indicate that goodwill might be impaired. The Financial Accounting Standards Board (“FASB”) issued updated authoritative guidance in September 2011 to amend previous guidance on the annual and interim testing of goodwill for impairment. The guidance became effective for the Company performsat the beginning of its required annual assessment as2013 fiscal year. The guidance provides entities with the option of first assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is determined, on the basis of the fiscal year end.qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, the two step impairment test would still be required. The first step of the test compares the fair value of a reporting unit to its carrying amount, including goodwill, as of the date of the test. The Company uses a dual approach to determine the fair value of its reporting units including both a market approach and an income approach. The market approach computes fair value using a multiple of earnings before interest, income taxes, depreciation and amortization which was developed considering both the multiples of recent transactions as well as trading multiples of consumer products companies. The income approach is based on the present value of discounted cash flows and a terminal value projected for each reporting unit. The income approach requires significant judgments including the Company’s projected net cash flows, the weighted average cost of capital (“WACC”) used to discount the cash flows and terminal value assumptions. The projected net cash flows are derived using the most recent available estimate for each reporting unit. The WACC rate is based on an average of the capital structure, cost of capital and inherent business risk profiles of the Company and peer consumer products companies. We believe the use of multiple valuation techniques results in a more accurate indicator of the fair value of each reporting unit.
The Company then corroborates the reasonableness of the total fair value of the reporting units by reconciling the aggregate fair values of the reporting units to the Company’s total market capitalization adjusted to include an estimated control premium. The estimated control premium is derived from reviewing observable transactions involving the purchase of controlling interests in comparable companies. The market capitalization is calculated using the relevant shares outstanding and an average closing stock price which considers volatility around the test date. The exercise of reconciling the market capitalization to the computed fair value further supports the Company’s conclusion on the fair value. If the carrying amount of
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the reporting unit exceeds its fair value, the second step is performed. The second step compares the carrying amount of the goodwill to the implied fair value of the goodwill. If the implied fair value of the goodwill is less than the carrying amount of the goodwill, an impairment loss would be reported.
The adoption of this updated authoritative guidance had no impact on the Company’s Consolidated Financial Statements. The Company performs its required annual assessment as of the fiscal year end. Changes to our judgments regarding assumptions and estimates could result in a significantly different estimate of the fair market value of the reporting units, which could result in an impairment of goodwill.
Other indefinite lived intangible assets consist primarily of tradenames which are also required to be tested annually.annually for impairment. In July 2012, the FASB issued amended guidance that gives an entity the option to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. The amended guidance became effective for the Company at the beginning of its 2014 fiscal year. To perform a qualitative assessment, an entity must identify and evaluate changes in economic, industry and entity-specific events and circumstances that could affect the significant inputs used to determine the fair value of an indefinite-lived intangible asset. If the result of the qualitative analysis indicates it is more likely than not that an indefinite-lived intangible asset is impaired, a more detailed fair value calculation will need to be performed which is used to identify potential impairments and to measure the amount of impairment losses to be recognized, if any. The fair value of the Company’s tradenames is calculated using a “relief from royalty payments” methodology. This approach involves first estimating reasonable royalty rates for each trademark then applying these royalty rates to a net sales stream and discounting the resulting cash flows to determine the fair value. The royalty rate is estimated using both a market and income approach. The market approach relies on the existence of
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identifiable transactions in the marketplace involving the licensing of tradenames similar to those owned by the Company. The income approach uses a projected pretax profitability rate relevant to the licensed income stream. We believe the use of multiple valuation techniques results in a more accurate indicator of the fair value of each tradename. This fair value is then compared with the carrying value of each tradename.
Long-lived assets (including property, plant and equipment), except for goodwill and indefinite lived intangible assets, are reviewed for impairment when events or circumstances indicate the carrying value of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset group to future net cash flows estimated by the Company to be generated by such assets. If such asset group is considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. Assets to be disposed of are recorded at the lower of their carrying value or estimated net realizable value.
In the fourth quarter of fiscal 2011, 20102014, the Company elected to perform the qualitative assessment of its goodwill as permitted by the updated accounting literature. As a result of the qualitative assessment performed, it was determined that it was not more likely than not that goodwill was impaired. Consequently, the more detailed two step impairment test was not performed. In connection with the Company's review of the recoverability of other intangibles as it prepared its financial statements for the fiscal year ended March 31, 2014, the fair value of other intangible assets was in excess of the carrying value and 2009,no impairment was recorded. In each of fiscal 2013 and 2012, the Company performed the required annual impairment test of the carrying amount of goodwill and indefinite lived intangible assets. Refer to Note 3 for the results of the annual impairment testing performed in fiscal 2010. The Company determined that no impairment of intangible assets existed in fiscal 2011 and 2009.2013 or in fiscal 2012.
In connection with the Company’s review of the recoverability of its long-lived assets as it prepared its financial statements for the fiscal yearyears ended March 31, 2011,2014, 2013 and 2012, no circumstances were identified that indicated the Company evaluated the recoverabilitycarrying value of the long-lived asset group primarily relatedassets may not be recoverable. There was no impairment of assets recorded in fiscal 2014, 2013 or 2012.
In connection with the sale of the Halloween portion of Paper Magic’s business on September 5, 2012, a portion of the goodwill associated with the Paper Magic reporting unit was allocated to the Cleo gift wrap manufacturing and distribution facility. In accordance withbusiness being sold. Such allocation was made on the guidance in the codification on testing long-lived assets for impairment, the Company considered the indicators that led to this test which included projected future operating and cash flow losses as well as various options available to the Company. The Company uses a dual approach to determinebasis of the fair value of the Cleo asset group, including both a market approach and an income approach, using a weighted average of various scenarios. As a result of this analysis, it was determined thatassets being sold relative to the overall fair value of the Cleo asset group was less than the carrying value.Paper Magic reporting unit. This resulted in an impairment chargethe Company recording a reduction of $11,051,000, which was recordedgoodwill in the fourth quarteramount of fiscal 2011.$2,711,000 for the Paper Magic reporting unit. See Note 5 for further discussion.
Derivative Financial Instruments
The Company uses certain derivative financial instruments as part of its risk management strategy to reduce foreign currency risk. Derivatives are not used for trading or speculative activities.
The Company recognizes all derivatives on the consolidated balance sheet at fair value. On the date the derivative instrument is entered into, the Company generally designates the derivative as either (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), or (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”). Changes in the fair value of a derivative that is designated as, and meets all the required criteria for, a fair value
31
hedge, along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings. Changes in the fair value of a derivative that is designated as, and meets all the required criteria for, a cash flow hedge are recorded in accumulated other comprehensive (loss) income and reclassified into earnings as the underlying hedged item affects earnings. The portion of the change in
33
fair value of a derivative associated with hedge ineffectiveness or the component of a derivative instrument excluded from the assessment of hedge effectiveness is recorded currently in earnings. Also, changes in the entire fair value of a derivative that is not designated as a hedge are recorded immediately in earnings. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes relating all derivatives that are designated as fair value or cash flow hedges to specific assets and liabilities on the consolidated balance sheet or to specific firm commitments or forecasted transactions.
The Company also formally assesses, both at the inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in fair values or cash flows of the hedged item. If it is determined that a derivative is not highly effective as a hedge or if a derivative ceases to be a highly effective hedge, the Company will discontinue hedge accounting prospectively.
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 forward exchange contracts. Gains and losses arising from foreign currency forward contracts are recognizedrecorded in income orother expense, net as offsets of gains and losses resulting from the underlying hedged transactions. Realized gains of $123,000 were recorded in the fiscal year ended March 31, 2014 and realized losses of $40,000 were recorded in the fiscal year ended March 31, 2013. There were no open foreign currency forward exchange contracts as of March 31, 20112014. As of March 31, 2013, the notional amount of open foreign currency forward contracts was $187,000 and 2010.the related unrealized loss was $17,000.
The following table shows the fair value of the foreign currency forward contracts designated as hedging instruments and included in the Company’s consolidated balance sheet as of March 31, 2014 and 2013 (in thousands):
| Fair Value of Derivative Instruments | |||||||||
| Balance Sheet | Fair Value as of March 31, | ||||||||
| Location | 2014 | 2013 | |||||||
| Foreign currency forward contracts | Other current liabilities | $ | — | $ | 17 | ||||
Interest (Income) Expense
Interest income was $92,000, $342,000 and $223,000 in the years ended March 31, 2014, 2013 and 2012, respectively. Interest expense was $283,000, $291,000 and $418,000 in the years ended March 31, 2014, 2013 and 2012, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Revenue Recognition
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reflected as a reduction from gross sales. The related reserves are shown as a reduction of accounts receivable, except for reserves for customer programs which are shown as a current liability. If the amount of actual customer returns and chargebacks were to increase or decrease significantly from the estimated amount, revisions to the estimated allowance would be required.
Product Development Costs
Product development costs consist of purchases of outside artwork, printing plates, cylinders, catalogs and samples. For seasonal products, the Company typically begins to incur product development costs approximately 18 to 20 months before the applicable holiday event. Historically, these costs have been amortized monthly over the selling season, which is generally within two to four months of the holiday event. Development costs related to all occasion products are incurred within a period beginning six to nine months prior to the applicable sales period. Historically, these costs generally have been amortized over a six to twelve month selling period. During fiscal 2010, the Company revised the period to two years over which certain product development costs are amortized to better align with the period over which the Company expects to utilize these assets. The expense of certain product development costs that are related to the manufacturing process are recorded in cost of sales while the portion that relates to creative and selling efforts are recorded in selling, general and administrative expenses.
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Product development costs capitalized as of March 31, 20112014 and 20102013 were $7,165,000$3,778,000 and $6,747,000,$3,481,000, respectively, and are included in other current assets in the consolidated financial statements. Product development expense of $9,912,000, $10,009,000$5,716,000, $6,785,000 and $9,809,000$8,222,000 was recognized in the years ended March 31, 2011, 20102014, 2013 and 2009,2012, respectively.
Shipping and Handling Costs
Shipping and handling costs are reported in cost of sales in the consolidated statements of operations.
Share-Based Compensation
The Company uses the Black-Scholes option valuation model and Monte Carlo simulation to value employee stock options.options and restricted stock units. The Company estimates stock price volatility based on historical volatility of its common stock. Estimated option life assumptions are also derived from historical data. Had the Company used alternative valuation methodologies and assumptions, compensation cost for share-based payments could be significantly different. The Company recognizes compensation expense usingcost over the stated vesting period consistent with the terms of the arrangement (i.e. either on a straight-line amortization method for share-based compensation awards with graded vesting.or graded-vesting basis).
Net Income (Loss) Per Common Share
The following table sets forth the computation of basic net income (loss) per common share and diluted net income (loss) per common share for the years ended March 31, 2011, 20102014, 2013 and 2009.2012.
| For the Years Ended March 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In thousands, except per share amounts) | ||||||||||||
| Numerator: | ||||||||||||
| Net income (loss) | $ | 5,611 | $ | (23,739 | ) | $ | 16,986 | |||||
| Denominator: | ||||||||||||
| Weighted average shares outstanding for basic income (loss) per common share | 9,703 | 9,637 | 9,909 | |||||||||
| Effect of dilutive stock options | 12 | — | 81 | |||||||||
| Adjusted weighted average shares outstanding for diluted income (loss) per common share | 9,715 | 9,637 | 9,990 | |||||||||
| Basic net income (loss) per common share | $ | .58 | $ | (2.46 | ) | $ | 1.71 | |||||
| Diluted net income (loss) per common share | $ | .58 | $ | (2.46 | ) | $ | 1.70 | |||||
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| For the Years Ended March 31, | |||||||||||
| 2014 | 2013 | 2012 | |||||||||
| (in thousands, except per share amounts) | |||||||||||
| Numerator: | |||||||||||
| Income from continuing operations | $ | 18,564 | $ | 15,588 | $ | 16,229 | |||||
| Income (loss) from discontinued operations, net of tax | 205 | (361 | ) | (559 | ) | ||||||
| Net income | $ | 18,769 | $ | 15,227 | $ | 15,670 | |||||
| Denominator: | |||||||||||
| Weighted average shares outstanding for basic income per common share | 9,389 | 9,562 | 9,728 | ||||||||
| Effect of dilutive stock options | 47 | 6 | 4 | ||||||||
| Adjusted weighted average shares outstanding for diluted income per common share | 9,436 | 9,568 | 9,732 | ||||||||
| Basic: | |||||||||||
| Continuing operations | $ | 1.98 | $ | 1.63 | $ | 1.67 | |||||
| Discontinued operations | $ | 0.02 | $ | (0.04 | ) | $ | (0.06 | ) | |||
| Total | $ | 2.00 | $ | 1.59 | $ | 1.61 | |||||
| Diluted: | |||||||||||
| Continuing operations | $ | 1.97 | $ | 1.63 | $ | 1.67 | |||||
| Discontinued operations | $ | 0.02 | $ | (0.04 | ) | $ | (0.06 | ) | |||
| Total | $ | 1.99 | $ | 1.59 | $ | 1.61 | |||||
Stock options on 705,000151,000 shares, 942,000182,000 shares, and 1,434,000343,000 shares of common stock were not included in computing diluted net income (loss) per common share for the years ended March 31, 2011, 20102014, 2013 and 2009,2012, respectively, because their effects were antidilutive.
Statements of Cash Flows
For purposes of the consolidated statements of cash flows, the Company considers all holdings of highly liquid debt instrumentsinvestments with a maturity at time of purchase of three months or less to be cash equivalents.
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Supplemental Schedule of Cash Flow Information
| For the Years Ended March 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In thousands) | ||||||||||||
| Cash paid during the year for: | ||||||||||||
| Interest | $ | 1,058 | $ | 1,892 | $ | 2,896 | ||||||
| Income taxes | $ | 2,860 | $ | 3,036 | $ | 7,741 | ||||||
| Details of acquisitions: | ||||||||||||
| Fair value of assets acquired | $ | — | $ | 225 | $ | 11,560 | ||||||
| Liabilities assumed | — | — | 296 | |||||||||
| Net assets acquired | — | 225 | 11,264 | |||||||||
| Amount due seller | — | — | 100 | |||||||||
| Cash paid | — | 225 | 11,164 | |||||||||
| Less cash acquired | — | — | — | |||||||||
| Net cash paid for acquisitions | $ | — | $ | 225 | $ | 11,164 | ||||||
| For the Years Ended March 31, | |||||||||||
| 2014 | 2013 | 2012 | |||||||||
| (in thousands) | |||||||||||
| Cash paid during the year for: | |||||||||||
| Interest | $ | 289 | $ | 245 | $ | 383 | |||||
| Income taxes | $ | 9,112 | $ | 9,770 | $ | 2,665 | |||||
(2) DISCONTINUED OPERATIONS AND RELATED RESTRUCTURING CHARGES
On May 24, 2011, the Company approved a plan to close its Cleo manufacturing facility located in Memphis, Tennessee. The Company exited the Memphis facility in December 2011. During the fiscal year ended March 31, 2012, the Company incurred pre-tax expenses of $8,141,000 in connection with this plan, of which $7,435,000 was recorded in discontinued operations and $706,000 was recorded in continuing operations (see Note 3). The table below summarizes the major components of the charges incurred (in thousands):
| Amount | Cash/Noncash | ||||
| Facility and staff costs | $ | 6,572 | Cash | ||
| Asset write-downs | 1,688 | Noncash | |||
| Gain on sale of equipment | (825 | ) | Cash | ||
| Total | $ | 7,435 | |||
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In connection with this restructuring plan which was completed by March 31, 2012, the Company recorded restructuring charges of $6,749,000 during fiscal 2012 primarily related to severance of 433 employees as well as facility costs. Additionally, there was a non-cash reduction of $177,000 related to severance that was less than originally estimated, which was included in restructuring expenses in fiscal 2012. The Company paid $884,000 in cash during fiscal 2012 relating to this plan which was expensed in fiscal 2011. Payments of $735,000, primarily for severance, were made in the year ended March 31, 2013. These payments represent the final restructuring payments. Additionally, there was a reduction in the restructuring accrual of $95,000 during the year ended March 31, 2013 for costs that were less than originally estimated. In fiscal 2012, the Company sold most of the remaining equipment located in Cleo’s Memphis, Tennessee manufacturing facility to a third party for $825,000. The Company received these proceeds during fiscal 2012.
Selected information relating to the aforementioned restructuring follows (in thousands):
Employee Termination Costs | Facility and Other Costs | Total | |||||||||
| Restructuring reserve as of March 31, 2012 | 750 | 80 | 830 | ||||||||
| Cash paid – fiscal 2013 | (705 | ) | (30 | ) | (735 | ) | |||||
| Non-cash adjustments – fiscal 2013 | (45 | ) | (50 | ) | (95 | ) | |||||
| Restructuring reserve as of March 31, 2013 and 2014 | $ | — | $ | — | $ | — | |||||
On September 9, 2011, the Company sold the Cleo Christmas gift wrap business and certain of its assets to Impact. Impact acquired the Christmas gift wrap portion of Cleo’s business and certain of its assets relating to such business, including certain equipment, contract rights, customer lists, intellectual property and other intangible assets. Cleo’s remaining assets, including accounts receivable and inventory, were excluded from the sale. Cleo retained the right and obligation to fulfill all customer orders for Christmas gift wrap products for Christmas 2011. The purchase price was $7,500,000, of which $2,000,000 was paid in cash at closing. The remainder of the purchase price was paid through the issuance by Impact of an unsecured subordinated promissory note, which provided for quarterly payments of interest at 7% and principal payments as follows: $500,000 on March 1, 2012; $2,500,000 on March 1, 2013; and all remaining principal and interest on March 1, 2014. In the fourth quarter of fiscal 2013, the Company received a $2,000,000 principal payment in advance of the March 1, 2014 due date. All interest payments were paid timely and the final principal payment of $500,000 was received in March 2014. This transaction resulted in a pre-tax gain of $5,849,000 in fiscal 2012.
As a result of the sale of its Christmas gift wrap business, the Company has reported these operations, including the operating income of the business and all exit activities, as discontinued operations, as shown in the following table (in thousands):
| Years Ended March 31, | |||||||||||
| 2014 | 2013 | 2012 | |||||||||
| Operating loss (A) | $ | (11 | ) | $ | (6 | ) | $ | (903 | ) | ||
| Exit costs | 128 | 95 | (6,572 | ) | |||||||
| Exit costs – equipment sale | — | — | 825 | ||||||||
| Gain on sale of business to Impact | — | — | 5,849 | ||||||||
| Discontinued operations, before income taxes | 117 | 89 | (801 | ) | |||||||
| Income tax (benefit) expense (B) | (88 | ) | 450 | (242 | ) | ||||||
| Discontinued operations, net of tax | $ | 205 | $ | (361 | ) | $ | (559 | ) | |||
| (B) | Fiscal 2014 includes a $356,000 current income tax benefit offset by $268,000 deferred income tax provision. Fiscal 2013 includes a $1,496,000 current income tax provision offset by a $1,046,000 deferred income tax benefit. Fiscal 2012 includes a $5,787,000 current income tax benefit offset by a $5,545,000 deferred income tax provision. |
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The following table presents the carrying values of the major accounts of discontinued operations that are included in the March 31, 2014 and 2013 consolidated balance sheet (in thousands):
| March 31, | |||||||
| 2014 | 2013 | ||||||
| Accounts receivable, net | $ | 1 | $ | 2 | |||
| Total assets attributable to discontinued operations | $ | 1 | $ | 2 | |||
| Customer programs | $ | — | $ | 162 | |||
| Other current liabilities | 233 | 482 | |||||
| Total liabilities associated with discontinued operations | $ | 233 | $ | 644 | |||
(3) BUSINESS RESTRUCTURING
On MayMarch 27, 2009,2012, the Company combined the operations of its Berwick Offray and Paper Magic subsidiaries in order to drive sales growth by providing stronger management oversight and by reallocating sales and marketing resources in a more strategic manner. Involuntary termination benefits offered to terminated employees were under the Company’s pre-existing severance program. The Company recorded approximately $706,000 in employee severance charges during fiscal 2012 and made payments of $523,000 and $116,000 in the years ended March 31, 2013 and 2012, respectively. The final restructuring payment of $13,000 was paid in April 2013. During the fiscal year ended March 31, 2013, there was a reduction in the restructuring accrual of $54,000 related to severance costs that were less than originally estimated as certain employees under the plan did not receive the expected amount of severance. The charges associated with this restructuring plan are included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
(4) DISPOSITION OF PRODUCT LINE
On September 5, 2012, the Company and its Paper Magic subsidiary sold the Halloween portion of Paper Magic’s business and certain Paper Magic assets relating to such business, including certain tangible and intangible assets associated with the Halloween portion of Paper Magic’s business, to Gemmy. Paper Magic’s remaining Halloween assets, including accounts receivable and inventory, were excluded from the sale. Paper Magic retained the right and obligation to fulfill all customer orders for Paper Magic Halloween products (such as Halloween masks, costumes, make-up and novelties) for the Halloween 2012 season. The sale price of $2,281,000 was paid to Paper Magic at closing. In connection with the sale, the Company recorded charges of $5,368,000 during the second quarter of fiscal 2013, consisting of severance of 49 employees of $1,282,000, facility closure costs of $1,375,000, professional fees and other costs of $1,341,000 ($523,000 were costs of the Company completed the acquisitiontransaction) and a non-cash write-down of substantially allassets of $1,370,000. Additionally, a portion of the goodwill associated with the Paper Magic reporting unit was allocated to the business being sold. Such allocation was made on the basis of the fair value of the assets being sold relative to the overall fair value of the Paper Magic reporting unit. This resulted in the Company recording a reduction of goodwill in the amount of $2,711,000 for the Paper Magic reporting unit. There was also a non-cash charge of $1,266,000 related to the write-down of inventory to net realizable value which was recorded in cost of sales. Net sales of the Halloween business were $1,366,000, $30,914,000 and assets$31,156,000 for the years ended March 31, 2014, 2013 and 2012, respectively.
During fiscal 2013, the Company made payments related to the restructuring of Designer Dispatch Ribbon, Inc. (“Designer Dispatch Ribbon”) for $225,000 in cash. Designer Dispatch Ribbon was a manufacturer of stock and custom ribbon and bows and related products. The acquisition was accounted for as a purchase$1,901,000 and there was a reduction in the restructuring reserve of $210,000, primarily due to sub-lease income that was greater than originally estimated. During the year ended March 31, 2014, the Company made payments related to the restructuring of $1,251,000 and reduced the restructuring reserve by $412,000 related to costs that were less than originally estimated. As of March 31, 2014, $117,000 of the remaining liability was classified in current liabilities and $107,000 was classified in long-term obligations in the accompanying condensed consolidated balance sheet and will be paid through December 2015. The Company is satisfying the liabilities through December 2015.
Selected information relating to the aforementioned restructuring follows (in thousands):
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Employee Termination Costs | Facility Costs | Professional Fees and Other Costs | Total | ||||||||||||
| Initial restructuring reserve | $ | 1,282 | $ | 1,375 | $ | 1,341 | $ | 3,998 | |||||||
| Cash paid – fiscal 2013 | (734 | ) | (315 | ) | (852 | ) | (1,901 | ) | |||||||
| Non-cash adjustments – fiscal 2013 | 41 | (245 | ) | (6 | ) | (210 | ) | ||||||||
| Restructuring reserve as of March 31, 2013 | 589 | 815 | 483 | 1,887 | |||||||||||
| Cash paid – fiscal 2014 | (516 | ) | (621 | ) | (114 | ) | (1,251 | ) | |||||||
| Non-cash adjustments – fiscal 2014 | (73 | ) | (82 | ) | (257 | ) | (412 | ) | |||||||
| Restructuring reserve as of March 31, 2014 | $ | — | $ | 112 | $ | 112 | $ | 224 | |||||||
(5) GOODWILL, OTHER INTANGIBLE ASSETS AND LONG-LIVED ASSETS
In connection with the sale of the Halloween portion of Paper Magic’s business on September 5, 2012, a portion of the goodwill associated with the Paper Magic reporting unit was allocated to the business being sold. Such allocation was made on the basis of the fair value of the assets being sold relative to the overall fair value of the Paper Magic reporting unit. This resulted in the Company recording a reduction of goodwill in the amount of $2,711,000 for the Paper Magic reporting unit. As the sale of the Halloween portion of Paper Magic’s business was considered a triggering event, the Company performed an interim impairment test on the goodwill remaining in the Paper Magic reporting unit after the reduction in goodwill associated with the sale of the Halloween portion of Paper Magic’s business was recorded. The Company determined that no impairment existed for the remainder of the goodwill recordedof the Paper Magic reporting unit.
The following table shows changes in this transaction.goodwill for the fiscal year ended March 31, 2013. There were no changes to the goodwill balance during fiscal year 2014 (in thousands):
| Balance as of March 31, 2012 | $ | 17,233 | |
| Reduction in goodwill | (2,711 | ) | |
| Balance as of March 31, 2013 and 2014 | $ | 14,522 | |
The gross carrying amount and accumulated amortization of other intangible assets as of March 31, 2014 and 2013 is as follows (in thousands):
| March 31, 2014 | March 31, 2013 | ||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||||
| Tradenames and trademarks | $ | 12,793 | $ | — | $ | 12,793 | $ | — | |||||||
| Customer relationships | 22,057 | 9,359 | 22,057 | 7,859 | |||||||||||
| Trademarks | 403 | 273 | 403 | 243 | |||||||||||
| Patents | 1,193 | 505 | 1,262 | 409 | |||||||||||
| $ | 36,446 | $ | 10,137 | $ | 36,515 | $ | 8,511 | ||||||||
There was a subsidiary of the Company completed the acquisition of substantially all of the business and assets of Seastone L.C. (“Seastone”) for $1,139,000 in cash. The purchase price is subject to adjustment, equal to 5% of net sales of certain products sold, through fiscal 2014. During fiscal 2011 and 2010, there was an increasedecrease in patents in the amount of $1,087,000$69,000 and $161,000,$39,000 during fiscal 2014 and 2013, respectively, related to the Seastone royalty earn out,earn-out, equal to 5% of the estimated net sales of certain products through 2014. The Company believes that the obligation related to the earn out is determinable beyond a reasonable doubt. Seastone is a provider of specialty gift card holders. The acquisition was accounted for as a purchase and there was no goodwill recorded in this transaction.
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| Currents assets | $ | 5,418 | ||
| Property, plant and equipment | 593 | |||
| Intangible assets | 4,652 | |||
| Goodwill | 897 | |||
| Total assets acquired | 11,560 | |||
| Current liabilities | 205 | |||
| Other long-term obligations | 91 | |||
| Total liabilities assumed | 296 | |||
| Net assets acquired | $ | 11,264 | ||
| Balance as of March 31, 2009 | $ | 49,258 | ||
| Impairment charge | (32,025 | ) | ||
| Balance as of March 31, 2010 and 2011 | $ | 17,233 | ||
| March 31, 2011 | March 31, 2010 | |||||||||||||||
| Gross Carrying | Accumulated | Gross Carrying | Accumulated | |||||||||||||
| Amount | Amortization | Amount | Amortization | |||||||||||||
| Tradenames and trademarks | $ | 12,793 | $ | — | $ | 12,793 | $ | — | ||||||||
| Customer relationships | 22,057 | 4,858 | 22,057 | 3,358 | ||||||||||||
| Non-compete | 200 | 167 | 200 | 117 | ||||||||||||
| Trademarks | 403 | 183 | 403 | 153 | ||||||||||||
| Patents | 1,337 | 174 | 250 | 48 | ||||||||||||
| $ | 36,790 | $ | 5,382 | $ | 35,703 | $ | 3,676 | |||||||||
The weighted-average amortization period of customer relationships, trademarks and patents are 712 years, 10 years and 10 years, respectively.
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Amortization expense was $1,706,000$1,626,000 for fiscal 2011, $1,593,0002014, $1,646,000 for fiscal 20102013, and $1,458,000$1,683,000 for fiscal 2009.2012. The estimated amortization expense for the next five fiscal years is as follows (in thousands):
| Fiscal 2012 | $ | 1,694 | ||
| Fiscal 2013 | 1,661 | |||
| Fiscal 2014 | 1,661 | |||
| Fiscal 2015 | 1,642 | |||
| Fiscal 2016 | 1,641 |
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| Fiscal 2015 | $ | 1,628 | |
| Fiscal 2016 | 1,627 | ||
| Fiscal 2017 | 1,627 | ||
| Fiscal 2018 | 1,627 | ||
| Fiscal 2019 | 1,627 | ||
In the fourth quarter of fiscal 20112014, 2013 and 2009,2012, the Company performed the required annual impairment test of the carrying amount of goodwill and indefinite lived intangibles and determined that no impairment existed. Upon performing its annual impairment test in the fourth quarter of fiscal 2010, the Company determined that the C.R. Gibson reporting unit, as well as the BOC Design Group reporting unit, had a fair market value which was less than the carrying value and, therefore, failed step one of the test. The factors that led to failing step one of the test included a deterioration of the financial performance in these reporting units during the fourth quarter of fiscal 2010 as well as a decline in the outlook for future periods. The second step of the test resulted in the Company recording a non-cash pre-tax goodwill impairment charge of $17,409,000 for the C.R. Gibson reporting unit and $14,616,000 for the BOC Design Group reporting unit.
The Company assesses the impairment of long-lived assets, including identifiable intangible assets subject to amortization and property and plant and equipment, whenever events or changes in circumstances indicate the carrying value may not be recoverable. Factors the Company considers important that could trigger an impairment review include significant changes in the use of any assets, changes in historical trends in operating performance, changes in projected operating performance, stock price, loss of a major customer, failure to pass step one of the goodwill impairment test and significant negative economic trends. In connection with the Company’s review of the recoverability of its long-lived assets as it prepared its financial statements for the fiscal year ended March 31, 2011,2014, 2013 and 2012, the Company recorded a non-cash pre-tax impairment charge of $11,051,000 primarily due to a full impairment of the tangible assets relating to its Cleo manufacturing facility located in Memphis, Tennessee. See Note 1 for further discussion. Such test yieldeddetermined that no impairment existed in fiscal 20102014, 2013 and 2009.2012.
(6) TREASURY STOCK TRANSACTIONS
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$1,600,000.
Under a stock repurchase programsprogram authorized by the Company’s Board of Directors, the Company repurchased 687,000272,655 shares of the Company's common stock for $6,634,000 in fiscal 2014. The Company repurchased 251,180 shares (inclusive of the 80,000 shares described above) of the Company’s common stock for $4,864,000 (inclusive of the $1,600,000 described above) in fiscal 2013. The Company repurchased 88,210 shares of the Company’s common stock for $16,687,000$1,648,000 in fiscal 2009. There were no repurchases of the Company’s common stock by the Company during fiscal 2011 and 2010.2012. As of March 31, 2011,2014, the Company had 313,000200,955 shares remaining available for repurchase under the Board’s authorization.
(7) SHARE-BASED PLANS
2013 Equity Compensation Plan
On July 30, 2013, the Company's stockholders approved the CSS Industries, Inc. 2013 Equity Compensation Plan ("2013 Plan"). Under the terms of the Company's 2013 Plan, the Human Resources Committee of the Company's Board of Directors ("Board"), or other committee appointed by the Board (collectively with the Human Resources Committee, the "2013 Equity Plan Committee"), may grant incentive stock options, non-qualified stock options, stock units, restricted stock grants, stock appreciation rights, stock bonus awards and dividend equivalents to officers and other employees. Grants under the 2013 Plan may be made through July 29, 2023. The term of each grant is at the discretion of the 2013 Equity Plan Committee, but in no event greater than ten years from the date of grant. The 2013 Equity Plan Committee has discretion to determine the date or dates on which granted options become exercisable. At March 31, 2014, there were 1,132,950 shares available for grant and no awards outstanding under the 2013 Plan.
2004 Equity Compensation Plan
Under the terms of the 2004 Equity Compensation Plan (“2004 Plan”), the Human Resources Committee (“Committee”) of the Board of Directors (“Board”) maypreviously had the ability to grant incentive stock options, non-qualified stock options, restricted stock grants, stock appreciation rights, stock bonuses and other awards to officers and other employees. GrantsEffective upon approval of the 2013 Plan on July 30, 2013, no further grants will be made 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. AllPlan. Service-based options outstanding as of March 31, 20112014 become exercisable at the rate of 25% per year commencing one year after the date of grant. Outstanding time-vestedMarket-based options outstanding as of such date will become exercisable only if certain market conditions and service requirements are satisfied, and the date(s)
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on which they become exercisable will depend on the period in which such market conditions and service requirements are met, if at all, except that vesting and exercisability are accelerated upon a change of control. Market-based restricted stock units (“RSUs”) outstanding at March 31, 2014 will vest (subjectonly if certain market conditions and service requirements have been met, and the date(s) on which they vest will depend on the period in which such market conditions and service requirements are met, if at all, except that vesting and redemption are accelerated upon a change of control. Subject to limited exceptions)exceptions, service-based RSUs outstanding as of March 31, 2014 vest at the rate of 50% of the shares underlying the grant on each of the third and fourth anniversaries of the date on which the award was granted. At March 31, grant date.
2011 1,230,269 shares were availableStock Option Plan for grant under the 2004 Plan.
Non-Employee Directors
Under the terms of the CSS Industries, Inc. 20062011 Stock Option Plan for Non-Employee Directors (“20062011 Plan”), which expired on December 31, 2010, non-qualified stock options to purchase up to 200,000150,000 shares of common stock wereare available for grant to non-employee directors at exercise prices of not less than the 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 were granted automatically to each non-employee director on the last day that the Company’s common stock was traded in November from 2006 to 2010. Each option will expire five years after the date the option was granted, and options vest and become excisable at the rate of 25% per year on each of the first four anniversaries of the grant date. Given that the 2006 Stock Plan is now expired, no further grants may be made under such plan.
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2015. Each option will expire five years after the date the option is granted and options may be exercised at the rate of 25% per year commencing one year after the date of grant.
Compensation cost is recognized over the stated vesting period consistent with the terms of the arrangement (i.e. either on a straight-line basis over the vesting period during which employees perform related services.or graded-vesting basis).
Stock Options
Compensation cost related to stock options recognized in operating results (included in selling, general and administrative expenses) was $1,116,000, $1,797,000$1,008,000, $857,000, and $2,460,000$869,000 in the years ended March 31, 2011, 20102014, 2013 and 2009,2012, respectively, and the associated future income tax benefit recognized was $404,000, $653,000$375,000, $310,000, and $843,000$313,000 in the years ended March 31, 2011, 20102014, 2013 and 2009,2012, respectively.
During fiscal year 2013, the Company identified that it had overstated its share-based compensation expense since fiscal 2007. The Company’s share-based compensation cost is estimated at the grant date based on the fair value of the awards and is expensed ratably over the requisite service period of the awards, net of estimated forfeitures. Share-based compensation expense is required to be adjusted periodically based on actual awards forfeited. Since the adoption of ASC 718 in fiscal year 2007, the Company had not adjusted share-based compensation expense for actual forfeitures. Specifically, share-based compensation expense was overstated by $128,000 in fiscal 2012, $184,000 in fiscal 2011, $339,000 in fiscal 2010, $351,000 in fiscal 2009, $337,000 in fiscal 2008 and $388,000 in fiscal 2007.
Accordingly, share-based compensation expense and additional paid-in capital were overstated in fiscal years 2007 to 2012. The Company assessed the materiality of these items, using relevant quantitative and qualitative factors, and determined these items, both individually and in the aggregate, were not material to any previously reported period. As such, the consolidated statements of stockholders’ equity was revised to reflect the cumulative effect of these adjustments resulting in a decrease to additional paid-in capital and an increase to retained earnings of $1,727,000, which is reflected as an adjustment in the fiscal 2013 consolidated statement of stockholders’ equity.
The Company issues treasury shares for stock option exercises. 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) were presented as financing cash flows in the consolidated statements of cash flows.
Activity and related information pertaining to stock options for the years ended March 31, 2011, 20102014, 2013 and 20092012 was as follows:
| Weighted | Weighted | |||||||||||||||
| Average | Average | Aggregate | ||||||||||||||
| Number | Exercise | Remaining | Intrinsic | |||||||||||||
| of Options | Price | Contractual Life | Value | |||||||||||||
| Outstanding at March 31, 2008 | 1,523,090 | $ | 28.34 | |||||||||||||
| Granted | 98,000 | 24.00 | ||||||||||||||
| Exercised | (29,622 | ) | 18.27 | |||||||||||||
| Forfeited/cancelled | (145,270 | ) | 28.82 | |||||||||||||
| Outstanding at March 31, 2009 | 1,446,198 | 28.20 | ||||||||||||||
| Granted | 96,210 | 20.15 | ||||||||||||||
| Exercised | (123,783 | ) | 15.55 | |||||||||||||
| Forfeited/cancelled | (296,962 | ) | 31.77 | |||||||||||||
| Outstanding at March 31, 2010 | 1,121,663 | 27.96 | ||||||||||||||
| Granted | 121,500 | 18.96 | ||||||||||||||
| Exercised | (76,937 | ) | 14.89 | |||||||||||||
| Forfeited/cancelled | (350,296 | ) | 31.28 | |||||||||||||
| Outstanding at March 31, 2011 | 815,930 | $ | 26.43 | 2.4 years | $ | 175,555 | ||||||||||
| Exercisable at March 31, 2011 | 574,667 | $ | 28.30 | 1.4 years | $ | 118,580 | ||||||||||
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Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | |||||||||
| (in thousands) | ||||||||||||
| Outstanding at April 1, 2011 | 815,930 | $ | 26.43 | |||||||||
| Granted | 114,000 | 18.78 | ||||||||||
| Exercised | (42,577 | ) | 16.70 | |||||||||
| Forfeited/canceled | (290,031 | ) | 28.31 | |||||||||
| Outstanding at March 31, 2012 | 597,322 | 24.75 | ||||||||||
| Granted | 132,600 | 18.79 | ||||||||||
| Exercised | (11,000 | ) | 17.47 | |||||||||
| Forfeited/canceled | (208,381 | ) | 31.32 | |||||||||
| Outstanding at March 31, 2013 | 510,541 | 20.68 | ||||||||||
| Granted | 108,700 | 29.84 | ||||||||||
| Exercised | (182,378 | ) | 20.03 | |||||||||
| Forfeited/canceled | (48,800 | ) | 23.87 | |||||||||
| Outstanding at March 31, 2014 | 388,063 | $ | 23.14 | 4.0 years | $ | 1,737 | ||||||
| Exercisable at March 31, 2014 | 128,037 | $ | 23.17 | 2.2 years | $ | 592 | ||||||
The fair value of each stock option granted was estimated on the date of grant using either the Black-Scholes option pricing model (service-based awards) or a Monte Carlo simulation model (market-based awards) with the following average assumptions:
| For the Years Ended March 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| Expected dividend yield at time of grant | 3.17 | % | 2.98 | % | 2.64 | % | ||||||
| Expected stock price volatility | 55 | % | 54 | % | 38 | % | ||||||
| Risk-free interest rate | 2.39 | % | 2.92 | % | 2.96 | % | ||||||
| Expected life of option (in years) | 4.7 | 4.2 | 4.3 | |||||||||
| For the Years Ended March 31, | ||||||||
| 2014 | 2013 | 2012 | ||||||
| Expected dividend yield at time of grant | 2.02 | % | 2.92 | % | 3.21 | % | ||
| Expected stock price volatility | 52 | % | 54 | % | 54 | % | ||
| Risk-free interest rate | 0.94 | % | 0.61 | % | 2.14 | % | ||
| Expected life of option (in years) | 4.8 | 5.0 | 5.1 | |||||
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 weighted average fair value of stock options granted during fiscal 2011, 20102014, 2013 and 20092012 was $6.89, $7.40,$11.19, $7.30 and $6.77$6.87, per share, respectively. The total intrinsic value of options exercised during the years ended March 31, 2011, 20102014, 2013 and 20092012 was $343,000, $611,000,$1,606,000, $25,000 and $252,000,$174,000, respectively.
The total fair value of stock options vested during fiscal 2014, 2013 and 2012 was $667,000, $544,000 and $775,000.
As of March 31, 2011,2014, there was $1,476,000$1,215,000 of total unrecognized compensation cost related to non-vested stock option awards granted under the Company’s equity incentive plans which is expected to be recognized over a weighted average period of 2.42.2 years.
Restricted Stock Units
Compensation cost related to time-vested RSUs recognized in operating results (included in selling, general and administrative expenses) was $822,000, $526,000$835,000, $926,000 and $172,000$814,000 in the years ended March 31, 2011, 20102014, 2013 and 2009,2012, respectively, and the associated future income tax benefit recognized was $298,000, $191,000$311,000, $335,000 and $60,000$293,000 in the years ended March 31, 2011, 20102014, 2013 and 2009,2012, respectively. For the performance-based RSUs that were issued in the first quarter of fiscal 2009, there was no compensation cost recognized in the year ended March 31, 2009 as it was determined in the third quarter of fiscal 2009 that the performance measures associated with these RSUs were improbable of achievement. There were no issuances of performance-based RSUs prior to fiscal 2009 and none were issued in fiscal 2011 and 2010. All RSUs granted during fiscal 2011 and 2010 were subject solely to service-based vesting conditions.
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Activity and related information pertaining to RSUs for the years ended March 31, 2011, 20102014, 2013 and 20092012 was as follows:
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| Number | Weighted Average | Weighted Average | ||||||||||
| of RSUs | Fair Value | Contractual Life | ||||||||||
| Outstanding at April 1, 2008 | — | $ | — | |||||||||
| Granted | 58,150 | 25.70 | ||||||||||
| Exercised | — | — | ||||||||||
| Forfeited/cancelled | (9,800 | ) | 26.02 | |||||||||
| Outstanding at March 31, 2009 | 48,350 | 25.63 | ||||||||||
| Granted | 98,760 | 16.70 | ||||||||||
| Exercised | — | — | ||||||||||
| Forfeited/cancelled | (18,940 | ) | 20.41 | |||||||||
| Outstanding at March 31, 2010 | 128,170 | 19.52 | ||||||||||
| Granted | 85,350 | 16.75 | ||||||||||
| Exercised | — | — | ||||||||||
| Forfeited/cancelled | (27,520 | ) | 17.97 | |||||||||
| Outstanding at March 31, 2011 | 186,000 | $ | 17.80 | 4.7 years | ||||||||
Number of RSUs | Weighted Average Fair Value | Weighted Average Contractual Life | ||||||
| Outstanding at April 1, 2011 | 186,000 | $ | 17.80 | |||||
| Granted | 79,850 | 16.33 | ||||||
| Vested | (10,825 | ) | 25.29 | |||||
| Forfeited/canceled | (37,015 | ) | 17.27 | |||||
| Outstanding at March 31, 2012 | 218,010 | 16.98 | ||||||
| Granted | 70,800 | 14.78 | ||||||
| Vested | (42,479 | ) | 18.75 | |||||
| Forfeited/canceled | (16,889 | ) | 16.24 | |||||
| Outstanding at March 31, 2013 | 229,442 | 16.02 | ||||||
| Granted | 38,850 | 20.51 | ||||||
| Vested | (59,517 | ) | 16.64 | |||||
| Forfeited/canceled | (15,950 | ) | 15.83 | |||||
| Outstanding at March 31, 2014 | 192,825 | $ | 16.75 | 4.7 years | ||||
The fair value of each market-based RSU granted during fiscal 2014 and 2013 was estimated on the date of grant using a Monte Carlo simulation model with the following assumptions:
| For the Years Ended March 31, | ||||||
| 2014 | 2013 | |||||
| Expected dividend yield at time of grant | 2.04 | % | 3.15 | % | ||
| Expected stock price volatility | 40 | % | 58 | % | ||
| Risk-free interest rate | 0.66 | % | 0.58 | % | ||
The fair value of each RSU granted during fiscal 2012 was estimated on the daydate of grant based on the closing price of the Company’s common stock reduced by the present value of the expected dividend stream during the vesting period using the risk-free interest rate.
The total fair value of restricted stock units vested during fiscal 2014, 2013 and 2012 was $990,000, $797,000 and $298,000.
As of March 31, 2011,2014, there was $1,790,000$1,200,000 of total unrecognized compensation cost related to non-vested RSUs granted under the Company’s equity incentive plans which is expected to be recognized over a weighted average period of 2.32.0 years.
(8) RETIREMENT BENEFIT PLANS |
Profit Sharing Plans
The Company and its subsidiaries maintainmaintains a defined contribution profit sharing and 401(k) plansplan covering substantially all of theirthe employees of the Company and its subsidiaries as of March 31, 2011.2014. Annual contributions under the plansplan are determined by the Board of Directors of the Company or each subsidiary, as appropriate.Company. Consolidated expense related to the plans for the years ended March 31, 2011, 20102014, 2013 and 20092012 was $326,000, $112,000$689,000, $703,000 and $128,000,$412,000, respectively.
Postretirement Medical Plan
The Company’s CleoBerwick Offray subsidiary administers a postretirement medical plan covering certain persons who were employees or former employees of Crystal at the time of Cleo’s acquisition of Crystal in October 2002.a former subsidiary. The plan is unfunded and was frozen to new participants prior to Crystal’s acquisition by the Company.
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participants.
The following table provides a reconciliation of the benefit obligation for the postretirement medical plan (in thousands):
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| 2011 | 2010 | |||||||
| Benefit obligation at beginning of year | $ | 996 | $ | 1,022 | ||||
| Interest cost | 56 | 62 | ||||||
| Actuarial gain | (98 | ) | (8 | ) | ||||
| Benefits paid | (82 | ) | (80 | ) | ||||
| Benefit obligation at end of year | $ | 872 | $ | 996 | ||||
| For the Years Ended March 31, | |||||||
| 2014 | 2013 | ||||||
| Benefit obligation at beginning of year | $ | 871 | $ | 877 | |||
| Interest cost | 36 | 38 | |||||
| Actuarial (gain) loss | (30 | ) | 24 | ||||
| Benefits paid | (73 | ) | (68 | ) | |||
| Benefit obligation at end of year | $ | 804 | $ | 871 | |||
The benefit obligation of $872,000$804,000 and $996,000$871,000 as of March 31, 20112014 and 2010,2013, respectively, was recorded in other long-term obligations in the consolidated balance sheet.
The net loss recognized in accumulated other comprehensive loss at March 31, 20112014 was $12,000,$26,000, net of tax, and there is no actuarial gain or loss expected to be amortized from accumulated other comprehensive loss into net periodic benefit cost during fiscal 2012.
2015.
The assumptions used to develop the net periodic benefit cost and benefit obligation for the postretirement medical plan as of and for the years ended March 31, 2011, 20102014, 2013 and 20092012 were a discount rate of 5.75% (6%4.50% (4.25% for 20102013 and 6.25%4.50% for 2009)2012) and assumed health care cost trend rates of 12% (13%9% (10% for 20102013 and 14%11% for 2009)2012) trending down to an ultimate rate of 5% in 2022.
The discount rate is determined based on the average of the Citigroup Pension Liability Index, Moody's Long Term Corporate Bond Yield, and Corporate Bond Rate calculated by the Internal Revenue Service.
Net periodic pension and postretirement medical costs were $56,000, $62,000$36,000, $38,000 and $60,000$48,000 for the years ended March 31, 2011, 20102014, 2013 and 2009,2012, respectively.
(9) INCOME TAXES |
Income (loss) from continuing operations before income tax expense (benefit) was as follows (in thousands):
| For the Years Ended March 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| United States | $ | (443 | ) | $ | (41,157 | ) | $ | 18,478 | ||||
| Foreign | 9,194 | 10,170 | 7,412 | |||||||||
| $ | 8,751 | $ | (30,987 | ) | $ | 25,890 | ||||||
| For the Years Ended March 31, | |||||||||||
| 2014 | 2013 | 2012 | |||||||||
| United States | $ | 18,112 | $ | 13,468 | $ | 19,262 | |||||
| Foreign | 9,588 | 9,169 | 5,983 | ||||||||
| $ | 27,700 | $ | 22,637 | $ | 25,245 | ||||||
The following table summarizes the provision for U.S. federal, state and foreign taxes on income (loss)from continuing operations (in thousands):
| For the Years Ended March 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| Current: | ||||||||||||
| Federal | $ | 2,332 | $ | 1,099 | $ | 4,451 | ||||||
| State | 592 | 29 | (14 | ) | ||||||||
| Foreign | 1,517 | 1,678 | 1,223 | |||||||||
| 4,441 | 2,806 | 5,660 | ||||||||||
| Deferred: | ||||||||||||
| Federal | (1,261 | ) | (9,439 | ) | 2,994 | |||||||
| State | (40 | ) | (615 | ) | 250 | |||||||
| (1,301 | ) | (10,054 | ) | 3,244 | ||||||||
| $ | 3,140 | $ | (7,248 | ) | $ | 8,904 | ||||||
| For the Years Ended March 31, | |||||||||||
| 2014 | 2013 | 2012 | |||||||||
| Current: | |||||||||||
| Federal | $ | 4,830 | $ | 7,871 | $ | 7,296 | |||||
| State | 481 | 876 | 726 | ||||||||
| Foreign | 1,582 | 1,513 | 987 | ||||||||
| 6,893 | 10,260 | 9,009 | |||||||||
| Deferred: | |||||||||||
| Federal | 1,978 | (1,917 | ) | (63 | ) | ||||||
| State | 265 | (1,294 | ) | 70 | |||||||
| 2,243 | (3,211 | ) | 7 | ||||||||
| $ | 9,136 | $ | 7,049 | $ | 9,016 | ||||||
The differences between the statutory and effective federal income tax rates on income (loss)from continuing operations before income taxes were as follows:
| For the Years Ended March 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| U.S. federal statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
| State income taxes, less federal benefit | 4.3 | .4 | 1.3 | |||||||||
| Tax exempt interest income | — | — | (.1 | ) | ||||||||
| Changes in tax reserves and valuation allowance | (.2 | ) | .5 | (1.4 | ) | |||||||
| Nondeductible goodwill | — | (13.6 | ) | — | ||||||||
| Other, net | (3.2 | ) | 1.1 | (.4 | ) | |||||||
| 35.9 | % | 23.4 | % | 34.4 | % | |||||||
| For the Years Ended March 31, | ||||||||
| 2014 | 2013 | 2012 | ||||||
| U.S. federal statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | ||
| State income taxes, less federal benefit | 1.9 | 1.4 | 2.1 | |||||
| Changes in tax reserves and valuation allowance | 1.6 | (3.1 | ) | 0.1 | ||||
| Nondeductible goodwill | — | 2.5 | — | |||||
| Permanent book/tax differences (primarily §199 deduction) | (2.2 | ) | (1.6 | ) | (0.7 | ) | ||
| Other, net | (3.3 | ) | (3.1 | ) | (0.8 | ) | ||
| 33.0 | % | 31.1 | % | 35.7 | % | |||
The Company receives distributions from its foreign operations and, therefore, does not assume that the income from operations of its foreign subsidiaries will be permanently reinvested.
Income tax benefits related to the exercise of stock options and vesting of restricted stock units reduced current taxes payable by $1,175,000, $290,000 and increased additional paid-in capital by $78,000$99,000 in fiscal 2011, $159,000 in fiscal 20102014, 2013 and $31,000 in fiscal 2009.
2012, respectively.
Deferred taxes are recorded based upon differences between the financial statement and tax bases of assets and liabilities and available net operating loss and credit carryforwards. The following temporary differences gave rise to net deferred income tax assets (liabilities) as of March 31, 20112014 and 20102013 (in thousands):
| March 31, | ||||||||
| 2011 | 2010 | |||||||
| Deferred income tax assets: | ||||||||
| Accounts receivable | $ | 191 | $ | 229 | ||||
| Inventories | 3,074 | 4,155 | ||||||
| Accrued expenses | 2,275 | 3,316 | ||||||
| State net operating loss and credit carryforwards | 5,923 | 5,583 | ||||||
| Share-based compensation | 4,573 | 3,746 | ||||||
| Property, plant and equipment | 1,031 | — | ||||||
| Intangibles | 5,464 | 7,061 | ||||||
| 22,531 | 24,090 | |||||||
| Valuation allowance | (6,907 | ) | (6,325 | ) | ||||
| 15,624 | 17,765 | |||||||
| Deferred income tax liabilities: | ||||||||
| Property, plant and equipment | — | 3,257 | ||||||
| Unremitted earnings of foreign subsidiaries | 2,447 | 2,538 | ||||||
| Other | 272 | 366 | ||||||
| 2,719 | 6,161 | |||||||
| Net deferred income tax asset | $ | 12,905 | $ | 11,604 | ||||
| March 31, | |||||||
| 2014 | 2013 | ||||||
| Deferred income tax assets: | |||||||
| Accounts receivable | $ | 196 | $ | 332 | |||
| Inventories | 2,852 | 2,806 | |||||
| Accrued expenses | 3,093 | 3,016 | |||||
| State net operating loss and credit carryforwards | 6,031 | 5,992 | |||||
| Share-based compensation | 1,718 | 1,861 | |||||
| Intangibles | 2,110 | 3,031 | |||||
| 16,000 | 17,038 | ||||||
| Valuation allowance | (5,815 | ) | (5,467 | ) | |||
| 10,185 | 11,571 | ||||||
| Deferred income tax liabilities: | |||||||
| Property, plant and equipment | 1,248 | 1,823 | |||||
| Unremitted earnings of foreign subsidiaries | 2,308 | 986 | |||||
| Other | 250 | 268 | |||||
| 3,806 | 3,077 | ||||||
| Net deferred income tax asset | $ | 6,379 | $ | 8,494 | |||
At March 31, 20112014 and 2010,2013, the Company had potential state income tax benefits of $6,907,000$6,315,000 (net of federal tax of $3,719,000)$3,400,000) and $6,325,000$6,158,000 (net of federal tax of $3,406,000)$3,316,000), respectively, from state deferred tax assets and state net operating loss carryforwards that expire in various years through 2031. These benefits were fully offset by a
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