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.
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.
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.
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.
7
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
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.
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.
In the fourth quarter of fiscal 2011, we recorded a non-cash pre-tax impairment charge of $11,051,000 primarily due to a full impairment of the tangible assets in our Cleo manufacturing facility located in Memphis, Tennessee. In the fourth quarter of fiscal 2010, we recorded a non-cash pre-tax impairment charge of $44,315,000 due to a full impairment of goodwill in our BOC Design Group and C.R. Gibson reporting units, and partial impairments of trademarks used by such entities. If our business, results of operations or financial condition are adversely affected by one or more circumstances, such as any one or more of the risk factors above or other factors described in this annual report onForm 10-K and elsewhere in our SEC filings, we then may be required under applicable accounting rules to incur additional charges associated with reducing the carrying value on our financial statements of certain assets, such as goodwill, intangible assets or tangible assets.
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.
9
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. | Item 1B.Unresolved Staff Comments. |
None.
| |
Item 2. |
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 | |
| | | | | | | | | | |
| | |
(1) | | 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. |
|
| | | | | | | |
| 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.Item 3.Legal Proceedings. | 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.
| |
Item 4. | (Removed and Reserved). |
10
Item 4.Mine Safety Disclosures.
Not applicable.
PART II
Item 5.
| |
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.
11
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.
12
| |
Item 6. |
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 the tangible assets in its former Cleo manufacturing facility that was located in Memphis, Tennessee.Tennessee (of which $10,738,000 is recorded in discontinued operations and $313,000 is recorded in continuing operations). The foregoing impairment charge was partially offset by a $3,965,000 tax benefit.benefit (of which $3,853,000 is recorded in discontinued operations and $112,000 is recorded in continuing operations). |
| |
|
(b) | (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. |
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Item 7. |
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.
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.
On May 27, 2009, a subsidiary of the Company completed the acquisition of substantially all of the business and assets of 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 and there was no goodwill recorded in this transaction.
On February 20, 2009, a subsidiary of the Company completed the acquisition of substantially all of the business and assets of 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 increase in patents in the amount of $1,087,000 and $161,000, respectively, related to the Seastone royalty 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.
On August 5, 2008, a subsidiary of the Company completed the acquisition of substantially all of the business and assets of Hampshire Paper for approximately $9,725,000 in cash, including transaction costs of approximately $49,000. Hampshire Paper is a manufacturer and supplier of pot covers, waxed tissue, paper and foil to the wholesale floral and horticultural industries. The acquisition was accounted for as a purchase and was included in the BOC Design Group reporting unit. The excess of cost over fair market value of the net tangible and identifiable intangible assets acquired of $897,000 was recorded as goodwill as of March 31, 2009. This goodwill was subsequently written off as a result of the Company’s annual impairment testing performed in fiscal 2010 as further described in Note 3 to the consolidated financial statements.
On May 16, 2008, a subsidiary of the Company completed the acquisition of substantially all of the business and assets of iota for approximately $300,000 in cash and a note payable to the seller in the amount of $100,000. The purchase price is subject to adjustment, based on future sales volume through fiscal 2014, up to a maximum of $2,000,000. The amount recorded through March 31, 2011 was immaterial. In addition, the seller retains a 50% interest in royalty income associated with the sale by third parties of licensed iota products through the fifth
14
anniversary of the closing date. iota is a designer and marketer of stationery products such as notecards, journals, and stationery kits. The acquisition was accounted for as a purchase and there was no goodwill recorded in this transaction.
On May 24, 2011, the Company, as part of a continuing review of its Cleo gift wrap business, approved a plan to close its 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. During our fiscal year ending March 31, 2012, we expect to incur pre-tax expenses of up to $10,300,000 associated with the approved plan, which costs primarily relate to cash expenditures for facility and staff costs (approximately $7,100,000) and non-cash asset write-downs (approximately $3,200,000). Approximately half of these charges are expected to be recognized in the first quarter of fiscal year 2012. Additionally, the Company expects to incur $1,300,000 in cash spending during fiscal 2012 which was expensed previously. The Company expects to complete the restructuring plan by the end of fiscal 2012.
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.
An impairment of tangible assets of $11,051,000 was recorded in fiscal 2011 related to the full impairment of the tangible assets relating to our Cleo manufacturing facility located in Memphis, Tennessee. See further discussion in Note 1 to the consolidated financial statements. There was no impairment of tangible assets in fiscal 2010.
An impairment of goodwill and intangible assets of $44,315,000 was recorded in fiscal 2010 as a result of the full impairment of goodwill in two of the Company’s reporting units, C.R. Gibson and BOC Design Group, and partial impairments of tradenames used by such entities. See further discussion in Note 3 to the consolidated financial statements. There was no impairment of goodwill and intangible assets in fiscal 2011.
Restructuring expenses were $164,000 in fiscal 2011 and $207,000 in fiscal 2010.
Interest expense, net decreased to $1,348,000 in fiscal 2011 from $1,885,000 in fiscal 2010. The decrease in interest expense, net was primarily due to lower average borrowing levels as a result of cash generated from operations in fiscal 2011 compared to the prior year.
Income before income taxes was $8,751,000, or 2% of net sales, in fiscal 2011 compared to loss before income taxes of $30,987,000, or 7% of net sales, in fiscal 2010. Excluding the charge related to the impairment of tangible assets in fiscal 2011 and the charge related to the impairment of goodwill and intangible assets in fiscal 2010, income before income taxes increased 49% to $19,802,000 in fiscal 2011 from $13,328,000 in fiscal 2010.
Income taxes, as a percentage of income before taxes, were 36% in fiscal 2011. The income tax benefit, as a percentage of loss before income taxes, was 23% in fiscal 2010. The increase in income taxes in fiscal 2011 was
15
primarily attributable to a portion of the goodwill impairment recorded in fiscal 2010 being non-deductible for tax purposes which was non-recurring in fiscal 2011.
Net income for the year ended March 31, 2011 was $5,611,000 compared to a net loss of $23,739,000 in fiscal 2010. Excluding the charge related to the impairment of tangible assets in fiscal 2011 and the charge related to the impairment of goodwill and intangible assets in fiscal 2010, net income increased 43% to $12,696,000 in fiscal 2011 from $8,884,000 in fiscal 2010 and diluted earnings per share increased 42% to $1.31 in fiscal 2011 compared to prior year diluted earnings per share of $0.92. The increase in net income was primarily due to lower payroll and stock compensation expenses and interest expense, as well as the impact of higher sales volume, compared to the prior year.
Fiscal 2010 Compared to Fiscal 2009
Consolidated net sales for fiscal 2010 decreased 7% to $448,450,000 from $482,424,000 in fiscal 2009. The decrease in net sales was primarily due to reduced customer purchases following weak retail sales in the preceding Christmas selling season. Sales of all occasion products in the current fiscal year have also been negatively impacted by the current economic downturn as retailers replenishment rates were lower than expected. Partially offsetting these declines were sales of businesses acquired since the beginning of last fiscal year and growth in our baby memory products business. Excluding sales of businesses acquired since the beginning of last fiscal year, sales declined 9%.
Cost of sales, as a percentage of net sales, was 75%23% in fiscal 2010 compared to 74%2014 and 22% in fiscal 2009. The increase in cost2013.
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.
SG&A expenses decreased to $95,667,000 is fiscal 2010 from $96,723,000 in fiscal 2009. The decrease in SG&A expenses is primarily due to lower compensation expense and incentives in fiscal 2010 compared to the prior year.
An impairment of goodwill and intangible assets of $44,315,000 was$5,798,000 recorded in fiscal 2010 as a result2013 primarily relates to costs associated with the sale of the full impairmentHalloween 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 twothe aforementioned professional fees, yielding net proceeds of $1,758,000. A portion of the Company’sgoodwill associated with the Paper Magic reporting units, C.R. Gibson and BOC Design Group, and partial impairments of tradenames used by such entities. See further discussion in Note 3unit was allocated to the consolidated financial statements. Therebusiness being sold. Such allocation was no impairmentmade on the basis of goodwill and intangiblethe fair value of the assets in fiscal 2009.
Restructuring expenses were $207,000 in fiscal 2010 and $1,138,000 in fiscal 2009. The decrease in restructuring expenses was duebeing sold relative to the absenceoverall fair value of costs in the current year related to a reduction in workforce that was announced in the prior year.Paper Magic reporting unit. See Note 4 to the consolidated financial statements for further discussion.
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
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 income tax benefit, as a percentage of loss before taxes, was 23% in fiscal 2010. Income taxes, as a percentage of income from continuing operations before income taxes, were 34%31% in fiscal 2009.2013 and 36% in 2012. The decrease in income taxes in fiscal 20102013 was primarily attributable to the release of valuation allowances related to state net operating loss carryforwards and lower federal and state income taxes, partially offset by a portion of the goodwill impairmentreduction being non-deductible for tax purposes.
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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income was primarily attributable to lower Christmas sales volume and lower margins due to competitive pricing pressures and Christmas product manufacturing inefficiencies combined with difficulties encountered from the implementation of a phase of our enterprise resource planning systems standardization project. Partially offsetting these negative factors were reduced SG&A expenses, lower restructuring expenses, reduced interest expense and an increase in other income.
Reconciliation of Certain Non-GAAP Measures
Management believes that presentation of results of operations adjusted$361,000 for the effects of non-recurring charges related to the impairment of tangible assets in fiscal 2011 and the impairment of goodwill and intangible assets in fiscal 2010 provides useful information to investors because it enhances comparability between the reporting periods.
| | | | | | | | | | | | |
| | 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 | |
| | | | | | | | | | | | |
Diluted earnings per share for the year ended March 31, 2010 does not add due2013 reflects pre-tax income of $89,000 related to rounding.the Christmas gift wrap business which was sold on September 9, 2011 offset by income tax expense of $450,000. The loss from discontinued operations, net of tax, of $559,000 for the fiscal year ended March 31, 2012 includes: a pre-tax operating loss of the Christmas gift wrap business of $903,000, which includes a non-cash write-down of inventory to net realizable value; a pre-tax gain of $5,849,000 related to the sale of the Christmas gift wrap business and certain of Cleo’s assets to Impact; pre-tax proceeds of $825,000 related to the sale of the remaining equipment located in Cleo’s former Memphis, Tennessee manufacturing facility to a third party; and pre-tax exit costs of $6,572,000 consisting primarily of facility and staff termination costs. See further discussion in Notes 1 and 2 to the consolidated financial statements.
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
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
17
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.
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 an asset retirement obligation and Seastone royalty earn out.earn-out. Future timing of payments for other long-term obligations is estimated by management. |
| |
(2) | | The Company is committed to purchase approximately $674,000 of electric power from a vendor over a one year term. The Company believes the minimum commodity purchases under this agreement are well within the Company’s annual commodity requirements. |
|
(3) | | The Company is committed to pay a guaranteed minimum royaltyroyalties attributable to sales of certain licensed products. |
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 | |
|
| | | | | | | | | | | | | | | | | | | |
| 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.
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.
19
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
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
20
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.
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.
| |
Item 7A. |
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.
22
| |
Item 8. |
Item 8.Financial Statements and Supplementary Data. |
CSS INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
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| 24 | |
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| 25 | |
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| 26 | |
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| 27 | |
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| 28 | |
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| 29-51 | |
Financial Statement Schedule: | | | | |
| | | | |
23
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.
As discussed in note 14 to the consolidated financial statements, effective April 1, 2008, CSS Industries, Inc. adoptedEITF 06-10,Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements(incorporated into Accounting Standards Codification (ASC) Topic 715, “Compensation — Retirement Benefits”).
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.
May 26, 201128, 2014
Philadelphia, PA
24
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.
25
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
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
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.
28
CSS INDUSTRIES, INC. AND SUBSIDIARIES
MARCH 31, 20112014
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
| |
(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
$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
29
Property, plant and equipment are stated at cost and include the following (in thousands):
During fiscal 2011, the Company identified and wrote off certain property, plant and equipment that was fully depreciated and no longer in use. The net effect was to decrease gross cost and accumulated depreciation by $23,951,000. There was no effect on net property, plant and equipment.
|
| | | | | | | |
| 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 | |
In conjunction with negotiating certain lease extensions during the first quarter of fiscal 2011, the Company identified a previously unrecognized asset retirement obligation at one of its leased facilities. The Company believes that this obligation existed since the adoption of Financial Accounting Standards Board (“FASB”) No. 143, “Asset Retirement Obligations,” which was later codified asASC 420-20, which became effective for the Company beginning in fiscal 2004. The Company calculated the historical impact as if it had appropriately adopted the standard in fiscal 2004, and the impact was not material to any individual period from fiscal 2004 through fiscal 2010. The impact of recording the asset retirement obligation resulted in an asset and a liability, each in the amount of $1,704,000, as of April 1, 2003. Additionally, on April 1, 2010, a reduction in income of $1,326,000 was recorded related to depreciation and accretion from fiscal 2004 through fiscal 2010 in the amount of $712,000 and $614,000, respectively. In December 2010, the Company entered into a lease amendment which resulted in a reduction in the asset retirement obligation of $1,049,000 and a reduction of depreciation expense of $134,000 during the third quarter of fiscal 2011. During the year ended March 31, 2011, the impact of the asset retirement obligation included $76,000 of depreciation expense and $91,000 of accretion expense. Accretion expense was recorded as a component of depreciation expense and amortization. The asset retirement obligation of $110,000 and $1,082,000 is included in current and other long-term obligations, respectively, at March 31, 2011.
Additionally, during the first quarter of fiscal 2011, the Company determined that the useful lives used to amortize leasehold improvements at the same leased facility from fiscal 2006 to fiscal 2010 did not follow the guidance in the codification referenced above. Leasehold improvements were being amortized through the lease end date without consideration of lease renewal periods that were reasonably assured. The Company calculated the historical impact as if it had used the proper useful life of the assets, and such impact was not material to any individual period from fiscal 2006 to fiscal 2010. The impact of adjusting the leasehold improvement amortization periods resulted in additional net book value of $1,293,000 as of April 1, 2010 that was recorded as a reduction of depreciation expense in the first quarter of fiscal 2011.
The correction of these items did not have a material impact on the Company’s consolidated statement of cash flows. Management evaluated the quantitative and qualitative impact of the corrections on previously reported periods as well as the three months ended June 30, 2010 and the year ended March 31, 2011. Based upon this
31
CSS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
evaluation, management concluded that these adjustments were not material to the Company’s consolidated financial statements.
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
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
32
CSS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
On May 24, 2011, the Company, as part of a continuing review of its Cleo gift wrap business, approved a plan to close its 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. During our fiscal year ending March 31, 2012, we expect to incur pre-tax expenses of up to $10,300,000 associated with the approved plan, which costs primarily relate to cash expenditures for facility and staff costs (approximately $7,100,000) and non-cash asset write-downs (approximately $3,200,000). Approximately half of these charges are expected to be recognized in the first quarter of fiscal year 2012. Additionally, the Company expects to incur $1,300,000 in cash spending during fiscal 2012 which was expensed previously. The Company expects to complete the restructuring plan by the end of fiscal 2012.
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
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
CSS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
Uncertain tax positions are recognized and measured under provisions in ASC 740. These provisions require that theThe Company recognize in its consolidated financial statementsrecognizes the impact of aan uncertain tax position, if that positionit is more likely than not of beingthat such position will be sustained on audit, based solely on the technical merits of the position. See Note 89 for further discussion.
Revenue Recognition
The Company recognizes revenueRevenue is recognized from product sales when the goods are shipped, title and risk of loss have been transferred to the customer and collection is reasonably assured. ProvisionsThe Company records estimated reductions to revenue for returns, allowances, rebates tocustomer programs, which may include special pricing agreements for specific customers, volume incentives and other adjustmentspromotions. 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 providedrecorded in the same period that the related salessale is recognized and are recorded.
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.
34
CSS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
Effective April 1, 2006, the Company used the modified prospective transition method, and began accounting for its share-based compensation using a fair-value based recognition method. Share-based compensation cost is estimated at the grant date based on a fair-value model. Calculating the fair value of share-based awards at the grant date requires considerable judgment, including estimating stock price volatility and expected option life.
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 | |
| | | | | | | | | | | | |
Options |
| | | | | | | | | | | |
| 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.
35
CSS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 |
| | |
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 | ) |
| |
(2) (A) | BUSINESS ACQUISITIONSDuring the quarter ended June 30, 2011, the Company recorded a write down of inventory to net realizable value of $2,547,000, which was included in cost of sales of the discontinued operation. During the quarter ended September 30, 2011, the Company was able to sell certain of the inventory written down during the quarter ended June 30, 2011 for amounts greater than its adjusted carrying value resulting in higher gross profit of $563,000 of the discontinued operation for the quarter ended September 30, 2011. |
| |
(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. |
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):
|
| | | | | | | | | | | | | | | |
| 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.
On August 5, 2008, a subsidiary of the Company completed the acquisition of substantially all of the business and assets of Hampshire Paper Corp. (“Hampshire Paper”) for approximately $9,725,000 in cash, including transaction costs of approximately $49,000. Hampshire Paper is a manufacturer and supplier of pot covers, waxed tissue, paper and foil to the wholesale floral and horticultural industries. The acquisition was accounted for as a purchase and was included in the BOC Design Group reporting unit. The excess of cost over fair market value of the net tangible and identifiable intangible assets acquired of $897,000 was recorded as goodwill. This goodwill was subsequently written off as a result of the Company’s annual impairment testing performed in fiscal 2010 as further described in Note 3.
On May 16, 2008, a subsidiary of the Company completed the acquisition of substantially all of the business and assets of iotatm (“iota”) for approximately $300,000 in cash and a note payable to the seller in the amount of $100,000. The purchase price is subject to adjustment, based on future sales volume through fiscal 2014, up to a maximum of $2,000,000. The amount recorded through March 31, 2011 was immaterial. In addition, the seller retains a 50% interest in royalty income associated with the sale by third parties of licensed iota products through the fifth anniversary of the closing date. iota is a designer and marketer of stationery products such as notecards,
36
CSS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
journals, and stationery kits. The acquisition was accounted for as a purchase and there was no goodwill recorded in this transaction.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisitions in fiscal 2009 (in thousands):
| | | | |
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 | |
| | | | |
| |
(3) | GOODWILL, OTHER INTANGIBLE ASSETS AND LONG-LIVED ASSETS |
The following table shows changes in goodwill for the fiscal years ended March 31, 2010 and 2011 (in thousands):
| | | | |
Balance as of March 31, 2009 | | $ | 49,258 | |
Impairment charge | | | (32,025 | ) |
| | | | |
Balance as of March 31, 2010 and 2011 | | $ | 17,233 | |
| | | | |
The gross carrying amount and accumulated amortization of other intangible assets as of March 31, 2011 and 2010 is as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | 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 | |
| | | | | | | | | | | | | | | | |
During fiscal 2011, there was an increase in patents in the amount of $1,087,000 related to the Seastone royalty 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 outearn-out is determinable beyond a reasonable doubt.
The weighted-average amortization period of customer relationships, trademarks and patents are 712 years, 10 years and 10 years, respectively.
37
CSS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 | |
|
| | | |
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.
During the fourth quarter annual impairment test of indefinite-lived tradenames performed in fiscal 2010, the Company determined that the carrying value of the C.R. Gibson tradename exceeded its fair value. The decline in the fair value of the C.R. Gibson tradename was due to the same circumstances as those that caused the goodwill impairment for the C.R. Gibson reporting unit. The Company recorded a non-cash pre-tax tradename impairment charge of $8,000,000 related to the C.R. Gibson tradename.
Additionally, the Company determined that it would discontinue the use of the indefinite-lived tradename related to the Crystal branded bag and tissue products. The Company’s determination to discontinue the tradename is part of a strategic decision made by management to streamline the use of product branding within the Company’s portfolio of products. In the future, the bag and tissue products will use the Berwick tradename. As a result, the Company recorded a non-cash pre-tax charge of $4,290,000 related to the Crystal tradename.
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.
| |
(4) | BUSINESS RESTRUCTURING |
(6) TREASURY STOCK TRANSACTIONS
During fiscal 2009,On December 11, 2012, the Company reduced its workforce to improve efficiency and to a lesser extent as a result of the consolidation of various back office operations among its subsidiaries. Involuntary termination benefits offered to terminated employees werepurchased, under the Company’s pre-existing severance program.stock repurchase program, an aggregate 80,000 shares of its common stock from a trust established by a director of the Company. The Company recorded approximately $1,321,000 in employee severance charges during fiscal 2009. Duringterms of the year ended March 31, 2010,purchase were negotiated on behalf of the Company made paymentsby a Special Committee of $971,000 for costs related to severance. During fiscal 2010, therethe Board of Directors consisting of four independent, disinterested directors. The price of $20.00 per share was a reduction in the restructuring accrual of $44,000 for costs that were less than originally estimated.
38
CSS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On January 4, 2008, the Company announcedfair market value of a restructuring plan to closeshare of the Company’s Elysburg, Pennsylvania production facilities and its Troy, Pennsylvania distribution facility. This restructuring was undertaken ascommon stock on the Company shifted from domestically manufactured to foreign sourced boxed greeting cards and gift tags. As partdate of the restructuring plan,transaction. The Special Committee unanimously authorized the Company recorded a restructuring reserve of $628,000, including severance related to 75 employees. Under the restructuring plan, both facilities were closed as of March 31, 2008. Also, in connection with the restructuring plan, the Company recorded an impairment of property, plant and equipment at the affected facilities of $1,222,000, which was included in restructuring expenses in the fourth quarter of fiscal 2008. During the quarter ended December 31, 2008, the Company sold two facilities associated with this restructuring program and recognized a gain of $761,000 related to this sale of assets. During fiscal 2009, there was an increase in the restructuring reserve in thepurchase. The total amount of $578,000 primarily related to the ratable recognition of retention bonuses for employees providing service until their termination date. During fiscal 2011 and 2010, the Company recorded $164,000 and $251,000, respectively, related to the carrying costs of its Elysburg, Pennsylvania manufacturing facility thatthis transaction was closed and remains held for sale as of March 31, 2011.
| |
(5) | TREASURY STOCK TRANSACTIONS |
$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)
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.
The Board of the Company adopted the CSS Industries, Inc. 2011 Stock Option Plan for Non-Employee Directors (“2011 Plan”), subject to stockholder approval. If approved by the stockholders, non-qualified stock options to purchase up to 150,000 shares of common stock would be available for grant to non-employee directors at exercise prices of not less than fair market value of the underlying common stock on the date of grant. Under the 2011 Plan, options to purchase 4,000 shares of the Company’s common stock would beare granted automatically to each non-employee director on the last day that the Company’s common stock is traded in November of each year from 2011 to
39
CSS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
On May 24, 2011, in connection with the adoption of At March 31, 2014, 101,000 shares were available for grant under the 2011 Plan, our Board approved an amendment to our 2004 Plan to reduce the number of shares of our common stock authorized for issuance under the 2004 Plan by 500,000 shares. As a result of this reduction, our 2004 Plan now provides that 1,500,000 shares of our common stock may be issued as grants under the 2004 Plan. Prior to this amendment, our 2004 Plan provided that 2,000,000 shares of our common stock could be issued as grants under the 2004 Plan.
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 | |
| | | | | | | | | | | | | | | | |
40
CSS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
| | | | | | | | | | | | |
| 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.
41