##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the quarterly period ended September 30, 2008
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the transition period from  to
 Commission file number 1-2661
 CSS INDUSTRIES, INC.
  Delaware
    
    13-1920657(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)1845 Walnut Street, Philadelphia, PA
    
    19103(Address of principal executive offices)
    
    (Zip Code)
 (Registrants telephone number, including area code)
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



CSS INDUSTRIES, INC. AND SUBSIDIARIES
 INDEX
 PAGE NO.PART I  FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Statements of Operations  Three and six months ended September 30, 2008 and 2007
    
    
    3Condensed Consolidated Balance Sheets  September 30, 2008 and March 31, 2008
    
    
    4Consolidated Statements of Cash Flows  Six months ended September 30, 2008 and 2007
    
    
    5Notes to Consolidated Financial Statements
    
    
    6-13Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    14-18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    18Item 4. Controls and Procedures
    
    
    19PART II  OTHER INFORMATIONItem 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    20Item 4. Submission of Matters to a Vote of Security Holders
    
    
    20Item 6. Exhibits
    
    
    21Signatures
    
    
    22Exhibit 10.1Exhibit 10.2Exhibit 10.3Exhibit 10.5Exhibit 10.6Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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CSS INDUSTRIES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
  Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,(In thousands, except per share data)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007SALES
    
    $
    174,161
    
    
    $
    172,882
    
    
    $
    228,808
    
    
    $
    219,684COSTS AND EXPENSESCost of sales
    
    
    129,454
    
    
    
    126,683
    
    
    
    167,167
    
    
    
    160,202Selling, general and administrative expenses
    
    
    27,863
    
    
    
    25,158
    
    
    
    51,413
    
    
    
    45,841Interest expense (income), net
    
    
    916
    
    
    
    284
    
    
    
    1,200
    
    
    
    (90
    )Other expense (income), net
    
    
    36
    
    
    
    (159
    )
    
    
    (30
    )
    
    
    (401
    )158,269
    
    
    
    151,966
    
    
    
    219,750
    
    
    
    205,552INCOME BEFORE INCOME TAXES
    
    
    15,892
    
    
    
    20,916
    
    
    
    9,058
    
    
    
    14,132INCOME TAX EXPENSE
    
    
    5,388
    
    
    
    7,381
    
    
    
    3,050
    
    
    
    5,024NET INCOME
    
    $
    10,504
    
    
    $
    13,535
    
    
    $
    6,008
    
    
    $
    9,108NET INCOME PER COMMON SHAREBasic
    
    $
    1.05
    
    
    $
    1.25
    
    
    $
    .59
    
    
    $
    .84Diluted
    
    $
    1.03
    
    
    $
    1.22
    
    
    $
    .58
    
    
    $
    .82WEIGHTED AVERAGE SHARES OUTSTANDINGBasic
    
    
    10,043
    
    
    
    10,857
    
    
    
    10,149
    
    
    
    10,869Diluted
    
    
    10,156
    
    
    
    11,129
    
    
    
    10,282
    
    
    
    11,161CASH DIVIDENDS PER SHARE OF COMMON STOCK
    
    $
    .15
    
    
    $
    .14
    
    
    $
    .30
    
    
    $
    .28COMPREHENSIVE INCOMENet income
    
    $
    10,504
    
    
    $
    13,535
    
    
    $
    6,008
    
    
    $
    9,108Foreign currency translation adjustment
    
    
    
    
    
    
    1
    
    
    
    2
    
    
    
    1Comprehensive income
    
    $
    10,504
    
    
    $
    13,536
    
    
    $
    6,010
    
    
    $
    9,109
   3




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CSS INDUSTRIES, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
  September 30,
    
    
    March 31,(In thousands)
    
    2008
    
    
    2008ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    5,783
    
    
    $
    28,109Accounts receivable, net
    
    
    139,372
    
    
    
    39,144Inventories
    
    
    156,359
    
    
    
    105,532Deferred income taxes
    
    
    6,737
    
    
    
    7,276Assets held for sale
    
    
    3,461
    
    
    
    3,590Other current assets
    
    
    13,353
    
    
    
    16,242Total current assets
    
    
    325,065
    
    
    
    199,893PROPERTY, PLANT AND EQUIPMENT, NET
    
    
    52,924
    
    
    
    50,632OTHER ASSETSGoodwill
    
    
    50,072
    
    
    
    48,361Intangible assets, net
    
    
    44,987
    
    
    
    42,454Other
    
    
    3,113
    
    
    
    3,701Total other assets
    
    
    98,172
    
    
    
    94,516Total assets
    
    $
    476,161
    
    
    $
    345,041LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESNotes payable
    
    $
    102,980
    
    
    $
    Current portion of long-term debt
    
    
    10,400
    
    
    
    10,246Accrued customer programs
    
    
    10,374
    
    
    
    9,438Other current liabilities
    
    
    77,782
    
    
    
    44,209Total current liabilities
    
    
    201,536
    
    
    
    63,893LONG-TERM DEBT, NET OF CURRENT PORTION
    
    
    10,065
    
    
    
    10,192LONG-TERM OBLIGATIONS
    
    
    5,439
    
    
    
    6,121DEFERRED INCOME TAXES
    
    
    2,298
    
    
    
    2,482STOCKHOLDERS EQUITY
    
    
    256,823
    
    
    
    262,353Total liabilities and stockholders equity
    
    $
    476,161
    
    
    $
    345,041
   4




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CSS INDUSTRIES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  Six Months EndedSeptember 30,(In thousands)
    
    2008
    
    
    2007Cash flows from operating activities:Net income
    
    $
    6,008
    
    
    $
    9,108Adjustments to reconcile net income to net cash used for
operating activities:Depreciation and amortization
    
    
    6,570
    
    
    
    6,594Provision for doubtful accounts
    
    
    183
    
    
    
    243Deferred tax provision (benefit)
    
    
    356
    
    
    
    (722
    )Gain on sale of assets
    
    
    (35
    )
    
    
    Compensation expense related to stock options
    
    
    1,390
    
    
    
    1,399Changes in assets and liabilities, net of effects from purchase
of a business:Increase in accounts receivable
    
    
    (99,313
    )
    
    
    (110,556
    )Increase in inventory
    
    
    (46,706
    )
    
    
    (57,876
    )Decrease in other assets
    
    
    2,974
    
    
    
    428Increase in other liabilities
    
    
    35,823
    
    
    
    38,187Increase in accrued taxes
    
    
    495
    
    
    
    7,185Total adjustments
    
    
    (98,263
    )
    
    
    (115,118
    )Net cash used for operating activities
    
    
    (92,255
    )
    
    
    (106,010
    )Cash flows from investing activities:Purchase of a business
    
    
    (10,614
    )
    
    
    Final payment of purchase price for a business previously acquired
    
    
    (2,700
    )
    
    
    Purchase of property, plant and equipment
    
    
    (7,338
    )
    
    
    (2,350
    )Proceeds from sale of assets
    
    
    102
    
    
    
    Net cash used for investing activities
    
    
    (20,550
    )
    
    
    (2,350
    )Cash flows from financing activities:Payments on long-term obligations
    
    
    (131
    )
    
    
    (101
    )Borrowings on notes payable
    
    
    247,280
    
    
    
    36,400Repayments on notes payable
    
    
    (144,300
    )
    
    
    (16,300
    )Dividends paid
    
    
    (3,044
    )
    
    
    (3,035
    )Purchase of treasury stock
    
    
    (9,431
    )
    
    
    (5,676
    )Proceeds from exercise of stock options
    
    
    99
    
    
    
    2,639Tax benefit realized for stock options exercised
    
    
    4
    
    
    
    345Net cash provided by financing activities
    
    
    90,477
    
    
    
    14,272Effect of exchange rate changes on cash
    
    
    2
    
    
    
    1Net decrease in cash and cash equivalents
    
    
    (22,326
    )
    
    
    (94,087
    )Cash and cash equivalents at beginning of period
    
    
    28,109
    
    
    
    100,091Cash and cash equivalents at end of period
    
    $
    5,783
    
    
    $
    6,004
   5




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CSS INDUSTRIES, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 September 30, 2008
  (1)
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 Basis of Presentation
  Principles of Consolidation
  Nature of Business
  Foreign Currency Translation and Transactions
  Use of Estimates
   6




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Inventories
  September 30,
    
    
    March 31,2008
    
    
    2008Raw material
    
    $
    25,285
    
    
    $
    22,836Work-in-process
    
    
    23,391
    
    
    
    29,827Finished goods
    
    
    107,683
    
    
    
    52,869$
    156,359
    
    
    $
    105,532
 Assets Held for Sale
  Revenue Recognition
  Net Income Per Common Share
  Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Numerator:Net income
    
    $
    10,504
    
    
    $
    13,535
    
    
    $
    6,008
    
    
    $
    9,108Denominator:Weighted average shares outstanding for basic
income per common share
    
    
    10,043
    
    
    
    10,857
    
    
    
    10,149
    
    
    
    10,869Effect of dilutive stock options
    
    
    113
    
    
    
    272
    
    
    
    133
    
    
    
    292Adjusted weighted average shares outstanding for
diluted income per common share
    
    
    10,156
    
    
    
    11,129
    
    
    
    10,282
    
    
    
    11,161Basic net income per common share
    
    $
    1.05
    
    
    $
    1.25
    
    
    $
    .59
    
    
    $
    .84Diluted net income per common share
    
    $
    1.03
    
    
    $
    1.22
    
    
    $
    .58
    
    
    $
    .82
  7




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Statements of Cash Flows
  STOCK-BASED COMPENSATION:
 2004 Equity Compensation Plan
  2006 Stock Option Plan for Non-Employee Directors
   For the Six MonthsEnded September 30,2008
    
    
    2007Expected dividend yield at time of grant
    
    
    2.18
    %
    
    
    1.59
    %Expected stock price volatility
    
    
    36
    %
    
    
    29
    %Risk-free interest rate
    
    
    3.5
    %
    
    
    4.8
    %Expected life of option (in years)
    
    
    4.2
    
    
    
    4.2
    8




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(3)
    
    DERIVATIVE FINANCIAL INSTRUMENTS:
  (4)
    
    BUSINESS ACQUISITIONS:
    9




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(5)
    
    BUSINESS RESTRUCTURING:
   Termination
    
    
    OtherCosts
    
    
    Costs
    
    
    TotalRestructuring reserve as of March 31, 2008
    
    $
    309
    
    
    $
    10
    
    
    $
    319Cash paid  fiscal 2009
    
    
    (306
    )
    
    
    
    
    
    
    (306
    )Charges to expense  fiscal 2009
    
    
    183
    
    
    
    
    
    
    
    183Restructuring reserve as of September 30, 2008
    
    $
    186
    
    
    $
    10
    
    
    $
    196
 (6)
    
    GOODWILL AND INTANGIBLES:
   Balance as of March 31, 2008
    
    $
    48,361Acquisition of Hampshire Paper
    
    
    1,711Balance as of September 30, 2008
    
    $
    50,072
   10




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September 30,
    
    
    March 31,2008
    
    
    2008Tradenames
    
    $
    25,265
    
    
    $
    23,790Customer relationships, net
    
    
    19,128
    
    
    
    18,480Non-compete, net
    
    
    400
    
    
    
    184Patent, net
    
    
    194
    
    
    
    $
    44,987
    
    
    $
    42,454
  Fiscal 2009
    
    $
    763Fiscal 2010
    
    
    1,526Fiscal 2011
    
    
    1,526Fiscal 2012
    
    
    1,509Fiscal 2013
    
    
    1,476Total
    
    $
    6,800
 (7)
    
    COMMITMENTS AND CONTINGENCIES:
  (8)
    
    ACCOUNTING PRONOUNCEMENTS:
    11




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(9)
    
    FAIR VALUE MEASUREMENTS:
   12




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Quoted PricesIn Active
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableSeptember 30,
    
    
    Assets
    
    
    Inputs
    
    
    Inputs(in thousands)
    
    2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)AssetsMarketable securities
    
    $
    853
    
    
    $
    853
    
    
    $
    
    
    
    $
    Cash surrender value of life insurance policies
    
    
    822
    
    
    
    
    
    
    
    822
    
    
    
    Foreign exchange contracts
    
    
    500
    
    
    
    
    
    
    
    500
    
    
    
    Total assets
    
    $
    2,175
    
    
    $
    853
    
    
    $
    1,322
    
    
    $
    LiabilitiesDeferred compensation plans
    
    $
    853
    
    
    $
    853
    
    
    $
    
    
    
    $
    Total liabilities
    
    $
    853
    
    
    $
    853
    
    
    $
    
    
    
    $
    
  13




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CSS INDUSTRIES, INC. AND SUBSIDIARIES
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 STRATEGIC OVERVIEW
       14




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LITIGATION
  CRITICAL ACCOUNTING POLICIES
   RESULTS OF OPERATIONS
 Seasonality
   15




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Six Months Ended September 30, 2008 Compared to Six Months Ended September 30, 2007
       Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
       16




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LIQUIDITY AND CAPITAL RESOURCES
    Less than 1
    
    
    1-3
    
    
    4-5
    
    
    After 5Year
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    TotalLetters of credit
    
    $
    5,925
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    5,925
   LABOR RELATIONS
   17




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ACCOUNTING PRONOUNCEMENTS
  FORWARD-LOOKING STATEMENTS
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   18




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ITEM 4. CONTROLS AND PROCEDURES
 (a)
    
    Evaluation of Disclosure Controls and Procedures.As of the end of the period covered by
this report, the Companys management, with the participation of the Companys President and
Chief Executive Officer and Vice President  Finance and Chief Financial Officer, evaluated
the effectiveness of the Companys disclosure controls and procedures in accordance with Rule
13a-15 of the Securities Exchange Act of 1934 (the Exchange Act). Based upon that
evaluation, the President and Chief Executive Officer and Vice President  Finance and Chief
Financial Officer concluded that the Companys disclosure controls and procedures are
effective in providing reasonable assurance that information required to be disclosed by the
Company in reports that it files under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commissions rules
and forms.
 (b)
    
    Changes in Internal Controls. There was no change in the Companys internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) as promulgated by the
Securities and Exchange Commission under the Exchange Act) during the second quarter of fiscal
year 2009 that has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.
  19




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CSS INDUSTRIES, INC. AND SUBSIDIARIES
 
 PART II  OTHER INFORMATION
 
 Unregistered Sales of Equity Securities and Use of Proceeds
 Share Repurchase Program
  MaximumTotal Number of
    
    
    Number of SharesTotal Number
    
    
    
    
    
    
    Shares Purchased as
    
    
    that May Yet Beof Shares
    
    
    Average Price
    
    
    Part of Publicly
    
    
    Purchased UnderPurchased (1)
    
    
    Paid Per Share
    
    
    Announced Program (2)
    
    
    the Program (2)July 1 through July 31, 2008
    
    
    98,800
    
    
    $
    24.93
    
    
    
    98,800
    
    
    
    300,000August 1 through August 31, 2008
    
    
    61,500
    
    
    
    26.46
    
    
    
    61,500
    
    
    
    238,500September 1
through September 30, 2008
    
    
    104,100
    
    
    
    26.06
    
    
    
    104,100
    
    
    
    134,400Total Second Quarter
    
    
    264,400
    
    
    $
    25.64
    
    
    
    264,400
    
    
    
    134,400
 (1)
    
    All share repurchases were effected in open-market transactions and in accordance with
the safe harbor provisions of Rule 10b-18 of the Exchange Act.(2)
    
    On May 29, 2008, the Company announced that its Board of Directors had authorized the
repurchase of up to 500,000 shares of the Companys common stock (the Repurchase
Program). As of September 30, 2008, the Company repurchased an aggregate of 365,600
shares pursuant to the Repurchase Program. An expiration date has not been established for
the Repurchase Program. As of October 23, 2008, the Company had repurchased the available
shares remaining under the Repurchase Program and on that date the Company announced that
its Board of Directors had authorized the repurchase of up to an additional 500,000 shares
of the Companys common stock. An expiration date has not been established for the
repurchase program announced on October 23, 2008. 
 Submission of Matters to a Vote of Security Holders
 (a)
    
    The annual meeting of stockholders of the Company was held on July 31, 2008.
The matters voted upon at the annual meeting were the election of directors, a proposal
to approve an Amendment to the Companys 2004 Equity Compensation Plan and a proposal
to approve the Companys Management Incentive Program.(b)
    
    The result of the vote of the stockholders for the election of directors was as
set forth in the table that follows. The individuals listed in the table below were
elected to serve as Directors of the Company until the next annual meeting and until
their successors shall be elected and qualify:
 SHARES OF VOTING STOCKFOR
    
    
    WITHHELDScott A. Beaumont
    
    
    9,450,890
    
    
    
    37,612James H. Bromley
    
    
    9,414,130
    
    
    
    74,372Jack Farber
    
    
    9,424,952
    
    
    
    63,550John J. Gavin
    
    
    9,450,440
    
    
    
    38,062Leonard E. Grossman
    
    
    9,305,008
    
    
    
    183,494James E. Ksansnak
    
    
    9,414,475
    
    
    
    74,027Rebecca C. Matthias
    
    
    9,450,403
    
    
    
    38,099Christopher J. Munyan
    
    
    9,425,694
    
    
    
    62,808
  20




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(c)
    
    The result of the vote of the stockholders on the proposal to approve the
Amendment to the 2004 Equity Compensation Plan was as follows:
 For
    
    
    8,729,659Against
    
    
    263,659Abstain
    
    
    3,060Broker non-votes
    
    
    492,124
 (d)
    
    The result of the vote of the stockholders on the proposal to approve the
Companys Management Incentive Program was as follows:
 For
    
    
    8,958,953Against
    
    
    34,223Abstain
    
    
    3,202Broker non-votes
    
    
    492,124
 
 Exhibits
            21




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SIGNATURES
  CSS INDUSTRIES, INC.
(Registrant)Date:  October 30, 2008
    By:

/s/ Christopher J. MunyanChristopher J. MunyanPresident and Chief
Executive Officer
(principal executive officer) Date:  October 30, 2008
    By:

/s/ Clifford E. PietrafittaClifford E. PietrafittaVice President  Finance and
Chief Financial Officer
(principal financial and accounting officer)  22




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EXHIBIT INDEX
 ExhibitNumber
    
    Description10.1
    
    

Amendment to the Amended and Restated Loan Agreement dated July 31, 2008.10.2
    
    
    Letter Agreement dated August 1, 2008 between CSS Industries, Inc. and PNC Bank, National Association regarding a $10 million Committed Line of Credit.10.3
    
    
    Asset Purchase Agreement dated August 1, 2008 among Granite Acquisition Corp., Lion Ribbon Company, Inc., Hampshire Paper Corp. and the Shareholders of Hampshire Paper Corp.10.5
    
    
    Employment Agreement dated as of July 25, 2008 between CSS Industries, Inc. and Paul Quick.10.6
    
    
    Amendment to Employment Agreement dated as of September 5, 2008 between CSS Industries, Inc. and Christopher J. Munyan.31.1
    
    
    Certification of the Chief Executive Officer of CSS Industries, Inc. required by Rule 13a- 14(a) under the Securities Exchange Act of 1934.31.2
    
    
    Certification of the Chief Financial Officer of CSS Industries, Inc. required by Rule 13a- 14(a) under the Securities Exchange Act of 1934.32.1
    
    
    Certification of the Chief Executive Officer of CSS Industries, Inc. required by Rule 13a- 14(b) under the Securities Exchange Act of 1934 and 18 U. S. C. Section 1350.32.2
    
    
    Certification of the Chief Financial Officer of CSS Industries, Inc. required by Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U. S. C. Section 1350.