##### 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 December 31, 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
    
    (I.R.S. Employerincorporation or organization)
    
    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 and Comprehensive Income  Three and nine months ended December 31, 2008 and 2007
    
    
    3Condensed Consolidated Balance Sheets  December 31, 2008 and March 31, 2008
    
    
    4Consolidated Statements of Cash Flows  Nine months ended December 31, 2008 and 2007
    
    
    5Notes to Consolidated Financial Statements
    
    
    6-14Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    15-19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    19Item 4. Controls and Procedures
    
    
    19PART II  OTHER INFORMATIONItem 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    20Item6. Exhibits
    
    
    21Signatures
    
    
    22Exhibit 10.2Exhibit 10.3Exhibit 10.4Exhibit 10.5Exhibit 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
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,(In thousands, except per share data)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007SALES
    
    $
    197,122
    
    
    $
    222,170
    
    
    $
    425,930
    
    
    $
    441,854COSTS AND EXPENSESCost of sales
    
    
    147,967
    
    
    
    160,788
    
    
    
    315,134
    
    
    
    320,990Selling, general and administrative expenses
    
    
    23,104
    
    
    
    25,545
    
    
    
    74,218
    
    
    
    71,493Restructuring (income) expense, net
    
    
    (574
    )
    
    
    105
    
    
    
    (275
    )
    
    
    (2
    )Interest expense, net
    
    
    1,093
    
    
    
    810
    
    
    
    2,293
    
    
    
    720Other expense (income), net
    
    
    225
    
    
    
    (51
    )
    
    
    195
    
    
    
    (452
    )171,815
    
    
    
    187,197
    
    
    
    391,565
    
    
    
    392,749INCOME BEFORE INCOME TAXES
    
    
    25,307
    
    
    
    34,973
    
    
    
    34,365
    
    
    
    49,105INCOME TAX EXPENSE
    
    
    8,895
    
    
    
    12,119
    
    
    
    11,945
    
    
    
    17,143NET INCOME
    
    $
    16,412
    
    
    $
    22,854
    
    
    $
    22,420
    
    
    $
    31,962NET INCOME PER COMMON SHAREBasic
    
    $
    1.69
    
    
    $
    2.12
    
    
    $
    2.24
    
    
    $
    2.95Diluted
    
    $
    1.68
    
    
    $
    2.07
    
    
    $
    2.22
    
    
    $
    2.88WEIGHTED AVERAGE SHARES OUTSTANDINGBasic
    
    
    9,734
    
    
    
    10,759
    
    
    
    10,010
    
    
    
    10,833Diluted
    
    
    9,796
    
    
    
    11,036
    
    
    
    10,120
    
    
    
    11,115CASH DIVIDENDS PER SHARE OF COMMON STOCK
    
    $
    .15
    
    
    $
    .14
    
    
    $
    .45
    
    
    $
    .42COMPREHENSIVE INCOMENet income
    
    $
    16,412
    
    
    $
    22,854
    
    
    $
    22,420
    
    
    $
    31,962Foreign currency translation adjustment
    
    
    
    
    
    
    1
    
    
    
    2
    
    
    
    2Comprehensive income
    
    $
    16,412
    
    
    $
    22,855
    
    
    $
    22,422
    
    
    $
    31,964
   3




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CSS INDUSTRIES, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 December 31,
    
    
    March 31,(In thousands)
    
    2008
    
    
    2008ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    5,492
    
    
    $
    28,109Accounts receivable, net
    
    
    145,513
    
    
    
    39,144Inventories
    
    
    96,303
    
    
    
    105,532Deferred income taxes
    
    
    5,457
    
    
    
    7,276Assets held for sale
    
    
    1,363
    
    
    
    3,590Other current assets
    
    
    12,732
    
    
    
    16,242Total current assets
    
    
    266,860
    
    
    
    199,893PROPERTY, PLANT AND EQUIPMENT, NET
    
    
    53,557
    
    
    
    50,632OTHER ASSETSGoodwill
    
    
    49,258
    
    
    
    48,361Intangible assets, net
    
    
    45,011
    
    
    
    42,454Other
    
    
    4,023
    
    
    
    3,701Total other assets
    
    
    98,292
    
    
    
    94,516Total assets
    
    $
    418,709
    
    
    $
    345,041LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESNotes payable
    
    $
    67,400
    
    
    $
    Current portion of long-term debt
    
    
    10,417
    
    
    
    10,246Accrued customer programs
    
    
    13,061
    
    
    
    9,438Other current liabilities
    
    
    54,060
    
    
    
    44,209Total current liabilities
    
    
    144,938
    
    
    
    63,893LONG-TERM DEBT, NET OF CURRENT PORTION
    
    
    
    
    
    
    10,192LONG-TERM OBLIGATIONS
    
    
    4,974
    
    
    
    6,121DEFERRED INCOME TAXES
    
    
    3,304
    
    
    
    2,482STOCKHOLDERS EQUITY
    
    
    265,493
    
    
    
    262,353Total liabilities and stockholders equity
    
    $
    418,709
    
    
    $
    345,041
   4




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CSS INDUSTRIES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Months EndedDecember 31,(In thousands)
    
    2008
    
    
    2007Cash flows from operating activities:Net income
    
    $
    22,420
    
    
    $
    31,962Adjustments to reconcile net income to net cash used for
operating activities:Depreciation and amortization
    
    
    10,101
    
    
    
    9,855Provision for doubtful accounts
    
    
    206
    
    
    
    20Deferred tax provision
    
    
    2,641
    
    
    
    1,389Gain on sale of assets
    
    
    (771
    )
    
    
    (22
    )Compensation expense related to stock options
    
    
    2,006
    
    
    
    2,110Changes in assets and liabilities, net of effects from purchase
of a business:Increase in accounts receivable
    
    
    (105,465
    )
    
    
    (114,239
    )Decrease in inventory
    
    
    12,751
    
    
    
    3,449Decrease in other assets
    
    
    3,794
    
    
    
    1,707Increase in other liabilities
    
    
    14,832
    
    
    
    33,770Total adjustments
    
    
    (59,905
    )
    
    
    (61,961
    )Net cash used for operating activities
    
    
    (37,485
    )
    
    
    (29,999
    )Cash flows from investing activities:Purchase of a business
    
    
    (10,599
    )
    
    
    (68,000
    )Final payment of purchase price for a business previously acquired
    
    
    (2,700
    )
    
    
    Purchase of property, plant and equipment
    
    
    (10,731
    )
    
    
    (4,039
    )Proceeds from sale of assets
    
    
    3,062
    
    
    
    80Net cash used for investing activities
    
    
    (20,968
    )
    
    
    (71,959
    )Cash flows from financing activities:Payments on long-term obligations
    
    
    (10,198
    )
    
    
    (10,088
    )Borrowings on notes payable
    
    
    489,290
    
    
    
    178,400Repayments on notes payable
    
    
    (421,890
    )
    
    
    (128,400
    )Payment of financing transaction costs
    
    
    (621
    )
    
    
    (103
    )Dividends paid
    
    
    (4,498
    )
    
    
    (4,537
    )Purchase of treasury stock
    
    
    (16,687
    )
    
    
    (10,762
    )Proceeds from exercise of stock options
    
    
    433
    
    
    
    3,589Tax benefit realized for stock options exercised
    
    
    5
    
    
    
    658Net cash provided by financing activities
    
    
    35,834
    
    
    
    28,757Effect of exchange rate changes on cash
    
    
    2
    
    
    
    2Net decrease in cash and cash equivalents
    
    
    (22,617
    )
    
    
    (73,199
    )Cash and cash equivalents at beginning of period
    
    
    28,109
    
    
    
    100,091Cash and cash equivalents at end of period
    
    $
    5,492
    
    
    $
    26,892
   5




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CSS INDUSTRIES, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 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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Goodwill
  Inventories
  December 31,
    
    
    March 31,2008
    
    
    2008Raw material
    
    $
    14,550
    
    
    $
    22,836Work-in-process
    
    
    20,457
    
    
    
    29,827Finished goods
    
    
    61,296
    
    
    
    52,869$
    96,303
    
    
    $
    105,532
 Assets Held for Sale
  Revenue Recognition
   7




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Net Income Per Common Share
  Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Numerator:Net income
    
    $
    16,412
    
    
    $
    22,854
    
    
    $
    22,420
    
    
    $
    31,962Denominator:Weighted average shares outstanding for basic
income per common share
    
    
    9,734
    
    
    
    10,759
    
    
    
    10,010
    
    
    
    10,833Effect of dilutive stock options
    
    
    62
    
    
    
    277
    
    
    
    110
    
    
    
    282Adjusted weighted average shares outstanding for
diluted income per common share
    
    
    9,796
    
    
    
    11,036
    
    
    
    10,120
    
    
    
    11,115Basic net income per common share
    
    $
    1.69
    
    
    $
    2.12
    
    
    $
    2.24
    
    
    $
    2.95Diluted net income per common share
    
    $
    1.68
    
    
    $
    2.07
    
    
    $
    2.22
    
    
    $
    2.88
 Statements of Cash Flows
  (2)
    
    STOCK-BASED COMPENSATION:
 2004 Equity Compensation Plan
  2006 Stock Option Plan for Non-Employee Directors
   8




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For the Nine MonthsEnded December 31,2008
    
    
    2007Expected dividend yield at time of grant
    
    
    2.47
    %
    
    
    1.56
    %Expected stock price volatility
    
    
    37
    %
    
    
    29
    %Risk-free interest rate
    
    
    3.04
    %
    
    
    4.61
    %Expected life of option (in years)
    
    
    4.4
    
    
    
    4.3
     (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
    
    
    (654
    )
    
    
    
    
    
    
    (654
    )Charges to expense  fiscal 2009
    
    
    395
    
    
    
    (10
    )
    
    
    385Restructuring reserve as of December 31, 2008
    
    $
    50
    
    
    $
    
    
    
    $
    50
 (6)
    
    GOODWILL AND INTANGIBLES:
   10




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Balance as of March 31, 2008
    
    $
    48,361Acquisition of Hampshire Paper
    
    
    897Balance as of December 31, 2008
    
    $
    49,258
   December 31,
    
    
    March 31,2008
    
    
    2008Tradenames
    
    $
    23,790
    
    
    $
    23,790Trademarks, net
    
    
    1,057
    
    
    
    Customer relationships, net
    
    
    19,961
    
    
    
    18,480Non-compete, net
    
    
    146
    
    
    
    184Patent, net
    
    
    57
    
    
    
    $
    45,011
    
    
    $
    42,454
  Fiscal 2009
    
    $
    381Fiscal 2010
    
    
    1,525Fiscal 2011
    
    
    1,525Fiscal 2012
    
    
    1,508Fiscal 2013
    
    
    1,475Total
    
    $
    6,414
 (7)
    
    SHORT TERM CREDIT FACILITIES:
   11




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(8)
    
    COMMITMENTS AND CONTINGENCIES:
  (9)
    
    ACCOUNTING PRONOUNCEMENTS:
      12




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(10)
    
    FAIR VALUE MEASUREMENTS:
    13




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Quoted PricesIn Active
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableDecember 31,
    
    
    Assets
    
    
    Inputs
    
    
    Inputs(in thousands)
    
    2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)AssetsMarketable securities
    
    $
    691
    
    
    $
    691
    
    
    $
    
    
    
    $
    Cash surrender value of
life insurance policies
    
    
    839
    
    
    
    
    
    
    
    839
    
    
    
    Foreign exchange contracts
    
    
    20
    
    
    
    
    
    
    
    20
    
    
    
    Total assets
    
    $
    1,550
    
    
    $
    691
    
    
    $
    859
    
    
    $
    LiabilitiesDeferred compensation plans
    
    $
    691
    
    
    $
    691
    
    
    $
    
    
    
    $
    Total liabilities
    
    $
    691
    
    
    $
    691
    
    
    $
    
    
    
    $
    
  14




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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
       15




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LITIGATION
  CRITICAL ACCOUNTING POLICIES
   RESULTS OF OPERATIONS
 Seasonality
  Nine Months Ended December 31, 2008 Compared to Nine Months Ended December 31, 2007
     16




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Three Months Ended December 31, 2008 Compared to Three Months Ended December 31, 2007
         17




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LIQUIDITY AND CAPITAL RESOURCES
    Less than 1
    
    
    1-3
    
    
    4-5
    
    
    After 5Year
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    TotalLetters of credit
    
    $
    4,523
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,523
    LABOR RELATIONS
   18




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ACCOUNTING PRONOUNCEMENTS
  FORWARD-LOOKING STATEMENTS
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 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 third 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
 Unregistered Sales of Equity Securities
    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)October 1 through October 31, 2008
    
    
    152,000
    
    
    $
    22.85
    
    
    
    152,000
    
    
    
    482,400November 1 through November 30, 2008
    
    
    77,400
    
    
    
    21.90
    
    
    
    77,400
    
    
    
    405,000December 1 through December 31, 2008
    
    
    92,000
    
    
    
    21.53
    
    
    
    92,000
    
    
    
    313,000Total Third Quarter
    
    
    321,400
    
    
    $
    22.52
    
    
    
    321,400
    
    
    
    313,000
 (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 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. As of December 31, 2008, the Company repurchased an aggregate
of 687,000 shares pursuant to these Repurchase Programs. An expiration date has not been
established for the Repurchase Program.  20




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Exhibits
 Exhibit 10.1
    
    Second Amended and Restated Loan Agreement dated November 21, 2008 among CSS
Industries, Inc., the lenders party thereto and PNC Bank, National Association, as
Administrative agent for the lenders party thereto (incorporated by reference to Exhibit
10.1 to the Registrants Current Report on Form 8-K dated November 21, 2008).Exhibit 10.2
    
    Sixth Amendment to Receivables Purchase Agreement dated November 21, 2008.Exhibit 10.3
    
    Amendment dated December 26, 2008 to Employment Agreement between CSS Industries, Inc.
and Christopher J. Munyan.Exhibit 10.4
    
    CSS Industries, Inc. Severance Pay Plan for Senior Management and Summary Plan
Description (Amended and Restated as of December 29, 2008).Exhibit 10.5
    
    Nonqualified Supplemental Executive Retirement Plan Covering Officer-Employees of CSS
Industries, Inc. and its Subsidiaries (Amended and Restated, Effective as of January 1, 2009).Exhibit 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.Exhibit 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.Exhibit 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.Exhibit 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.
  21




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##### Table of Contents



SIGNATURES
  CSS INDUSTRIES, INC.
(Registrant)Date: February 5, 2009
    By:
    /s/ Christopher J. MunyanChristopher J. MunyanPresident and Chief
Executive Officer
(principal executive officer)Date:  February 5, 2009
    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
    
    DescriptionExhibit 10.2
    
    Sixth Amendment to Receivables Purchase Agreement dated November 21, 2008.Exhibit 10.3
    
    Amendment dated December 26, 2008 to Employment Agreement between CSS Industries, Inc.
and Christopher J. Munyan.Exhibit 10.4
    
    CSS Industries, Inc. Severance Pay Plan for Senior Management and Summary Plan
Description (Amended and Restated as of December 29, 2008).Exhibit 10.5
    
    Nonqualified Supplemental Executive Retirement Plan Covering Officer-Employees of CSS
Industries, Inc. and its Subsidiaries (Amended and Restated, Effective as of January 1, 2009).Exhibit 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.Exhibit 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.Exhibit 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.Exhibit 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.
  23