##### 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, 2007
 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
  o þ o
 o þ




---



##### 



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 six months ended September 30, 2007 and 2006
    
    
    3Condensed Consolidated Balance Sheets  September 30, 2007 and
March 31, 2007
    
    
    4Consolidated Statements of Cash Flows  Six months ended September
30, 2007 and 2006
    
    
    5Notes to Consolidated Financial Statements
    
    
    6-12Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    13-17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Item 4. Controls and Procedures
    
    
    17PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    18Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    18Item 4. Submission of Matters to a Vote of Security Holders
    
    
    19Item 6. Exhibits
    
    
    20Signatures
    
    
    21By-laws of the CompanyCertif. of CEO pursuant to Section 302Certif. of CFO pursuant to Section 302Certif. of CEO pursuant to Section 906Certif. of CFO pursuant to Section 906
  2




---



##### Table of Contents



CSS INDUSTRIES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
  
 Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006SALES
    
    $
    172,882
    
    
    $
    173,830
    
    
    $
    219,684
    
    
    $
    221,363COSTS AND EXPENSESCost of sales
    
    
    126,683
    
    
    
    129,003
    
    
    
    160,202
    
    
    
    163,066Selling, general and administrative expenses
    
    
    25,158
    
    
    
    25,289
    
    
    
    45,841
    
    
    
    47,493Interest expense (income), net
    
    
    284
    
    
    
    1,083
    
    
    
    (90
    )
    
    
    1,217Other income, net
    
    
    (159
    )
    
    
    (66
    )
    
    
    (401
    )
    
    
    (228
    )151,966
    
    
    
    155,309
    
    
    
    205,552
    
    
    
    211,548INCOME BEFORE INCOME TAXES
    
    
    20,916
    
    
    
    18,521
    
    
    
    14,132
    
    
    
    9,815INCOME TAX EXPENSE
    
    
    7,381
    
    
    
    6,818
    
    
    
    5,024
    
    
    
    3,619NET INCOME
    
    $
    13,535
    
    
    $
    11,703
    
    
    $
    9,108
    
    
    $
    6,196NET INCOME PER COMMON SHAREBasic
    
    $
    1.25
    
    
    $
    1.11
    
    
    $
    .84
    
    
    $
    .59Diluted
    
    $
    1.22
    
    
    $
    1.08
    
    
    $
    .82
    
    
    $
    .57WEIGHTED AVERAGE SHARES OUTSTANDINGBasic
    
    
    10,857
    
    
    
    10,559
    
    
    
    10,869
    
    
    
    10,528Diluted
    
    
    11,129
    
    
    
    10,838
    
    
    
    11,161
    
    
    
    10,831CASH DIVIDENDS PER SHARE OF COMMON
STOCK
    
    $
    .14
    
    
    $
    .12
    
    
    $
    .28
    
    
    $
    .24COMPREHENSIVE INCOMENet income
    
    $
    13,535
    
    
    $
    11,703
    
    
    $
    9,108
    
    
    $
    6,196Foreign currency translation adjustment
    
    
    1
    
    
    
    3
    
    
    
    1
    
    
    
    3Comprehensive income
    
    $
    13,536
    
    
    $
    11,706
    
    
    $
    9,109
    
    
    $
    6,199
  3




---



##### Table of Contents



CSS INDUSTRIES, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
   September 30,
    
    
    March 31,2007
    
    
    2007ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    6,004
    
    
    $
    100,091Accounts receivable, net
    
    
    147,482
    
    
    
    37,169Inventories
    
    
    140,014
    
    
    
    82,138Deferred income taxes
    
    
    8,130
    
    
    
    8,645Assets held for sale
    
    
    2,564
    
    
    
    2,564Other current assets
    
    
    14,103
    
    
    
    13,665Total current assets
    
    
    318,297
    
    
    
    244,272PROPERTY, PLANT AND EQUIPMENT, NET
    
    
    54,753
    
    
    
    58,897OTHER ASSETSGoodwill
    
    
    30,952
    
    
    
    30,952Intangible assets, net
    
    
    4,298
    
    
    
    4,328Other
    
    
    3,685
    
    
    
    4,621Total other assets
    
    
    38,935
    
    
    
    39,901Total assets
    
    $
    411,985
    
    
    $
    343,070LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESNotes payable
    
    $
    20,100
    
    
    $
    Current portion of long-term debt
    
    
    10,210
    
    
    
    10,195Accrued customer programs
    
    
    11,749
    
    
    
    10,290Other current liabilities
    
    
    76,304
    
    
    
    35,478Total current liabilities
    
    
    118,363
    
    
    
    55,963LONG-TERM DEBT, NET OF CURRENT PORTION
    
    
    20,276
    
    
    
    20,392LONG-TERM OBLIGATIONS
    
    
    6,308
    
    
    
    3,221DEFERRED INCOME TAXES
    
    
    1,147
    
    
    
    2,384STOCKHOLDERS EQUITY
    
    
    265,891
    
    
    
    261,110Total liabilities and stockholders equity
    
    $
    411,985
    
    
    $
    343,070
  4




---



##### Table of Contents



CSS INDUSTRIES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  Six Months EndedSeptember 30,2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    9,108
    
    
    $
    6,196Adjustments to reconcile net income to net cash used for
operating activities:Depreciation and amortization
    
    
    6,594
    
    
    
    7,096Provision for doubtful accounts
    
    
    243
    
    
    
    (134
    )Deferred tax (benefit) provision
    
    
    (722
    )
    
    
    610Gain on sale of assets
    
    
    
    
    
    
    (16
    )Share-based compensation expense
    
    
    1,399
    
    
    
    1,412Changes in assets and liabilities:Increase in accounts receivable
    
    
    (110,556
    )
    
    
    (104,734
    )Increase in inventory
    
    
    (57,876
    )
    
    
    (63,929
    )Decrease in other assets
    
    
    428
    
    
    
    2,126Increase in other liabilities
    
    
    38,187
    
    
    
    37,075Increase (decrease) in accrued taxes
    
    
    7,185
    
    
    
    (2,355
    )Total adjustments
    
    
    (115,118
    )
    
    
    (122,849
    )Net cash used for operating activities
    
    
    (106,010
    )
    
    
    (116,653
    )Cash flows from investing activities:Purchase of property, plant and equipment
    
    
    (2,350
    )
    
    
    (2,971
    )Proceeds from sale of assets
    
    
    
    
    
    
    16Net cash used for investing activities
    
    
    (2,350
    )
    
    
    (2,955
    )Cash flows from financing activities:Payments on long-term debt
    
    
    (101
    )
    
    
    (47
    )Borrowings on notes payable
    
    
    36,400
    
    
    
    128,710Repayments on notes payable
    
    
    (16,300
    )
    
    
    (55,200
    )Dividends paid
    
    
    (3,035
    )
    
    
    (2,526
    )Purchase of treasury stock
    
    
    (5,676
    )
    
    
    Proceeds from exercise of stock options
    
    
    2,639
    
    
    
    1,454Tax benefit realized for stock options exercised
    
    
    345
    
    
    
    740Net cash provided by financing activities
    
    
    14,272
    
    
    
    73,131Effect of exchange rate changes on cash
    
    
    1
    
    
    
    3Net decrease in cash and cash equivalents
    
    
    (94,087
    )
    
    
    (46,474
    )Cash and cash equivalents at beginning of period
    
    
    100,091
    
    
    
    57,656Cash and cash equivalents at end of period
    
    $
    6,004
    
    
    $
    11,182
  5




---



##### Table of Contents



CSS INDUSTRIES, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 September 30, 2007
 (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. The Company has condensed or omitted certain
information and footnote disclosures normally included in consolidated financial statements
prepared in accordance with accounting principles generally accepted in the United States
pursuant to such rules and regulations. In the opinion of management, the statements include
all adjustments (which include normal recurring adjustments) required for a fair presentation of
financial position, results of operations and cash flows for the interim periods presented.
These consolidated financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Companys Annual Report on Form 10-K for
the fiscal year ended March 31, 2007. The results of operations for the interim periods are not
necessarily indicative of the results for the full year.Principles of Consolidation -The consolidated financial statements include the accounts of the Company and all of its
subsidiaries. All significant intercompany transactions and accounts have been eliminated in
consolidation.Nature of Business -CSS is a consumer products company primarily engaged in the design, manufacture, procurement,
distribution and sale of seasonal and all occasion products, principally to mass market
retailers. These products include gift wrap, gift bags, gift boxes, boxed greeting cards, gift
tags, decorative tissue paper, decorations, classroom exchange Valentines, decorative ribbons
and bows, Halloween masks, costumes, make-up and novelties, Easter egg dyes and novelties, and
craft and educational products. 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.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, net in the consolidated statements of operations.Use of Estimates -The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Judgments and assessments of uncertainties are required
in applying the Companys accounting policies in many areas. Such estimates pertain to the
valuation of inventory and accounts receivable, the assessment of the recoverability of goodwill
and other intangible assets, income tax accounting, the valuation of share-based awards and
resolution of litigation and other proceedings. Actual results could differ from these
estimates.
 6




---



##### Table of Contents



Inventories -The Company records inventory at the date of taking title, which occurs upon receipt or prior to
receipt dependent on supplier shipping terms. The Company adjusts unsaleable and slow-moving
inventory to its estimated net realizable value. Substantially all of the Companys inventories
are stated at the lower of first-in, first-out (FIFO) cost or market. The remaining portion of
the inventory is valued at the lower of last-in, first-out (LIFO) cost or market. Inventories
consisted of the following (in thousands):
 September 30,
    
    
    March 31,2007
    
    
    2007Raw material
    
    $
    24,867
    
    
    $
    14,442Work-in-process
    
    
    19,043
    
    
    
    31,283Finished goods
    
    
    96,104
    
    
    
    36,413$
    140,014
    
    
    $
    82,138
 Assets Held for Sale
  Revenue Recognition
  Net Income Per Common Share
  Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Numerator:Net income
    
    $
    13,535
    
    
    $
    11,703
    
    
    $
    9,108
    
    
    $
    6,196Denominator:Weighted average shares outstanding for basic
income per common share
    
    
    10,857
    
    
    
    10,559
    
    
    
    10,869
    
    
    
    10,528Effect of dilutive stock options
    
    
    272
    
    
    
    279
    
    
    
    292
    
    
    
    303Adjusted weighted average shares outstanding for
diluted income per common share
    
    
    11,129
    
    
    
    10,838
    
    
    
    11,161
    
    
    
    10,831Basic net income per common share
    
    $
    1.25
    
    
    $
    1.11
    
    
    $
    .84
    
    
    $
    .59Diluted net income per common share
    
    $
    1.22
    
    
    $
    1.08
    
    
    $
    .82
    
    
    $
    .57
 7




---



##### Table of Contents



Statements of Cash Flows -For purposes of the consolidated statements of cash flows, the Company considers all holdings of
highly liquid debt instruments with a maturity at time of purchase of three months or less to be
cash equivalents.(2)
    
    SHARE-BASED COMPENSATION:Under the terms of the 2004 Equity Compensation Plan (2004 Plan), the Human Resources
Committee (Committee) of the Board of Directors may grant incentive stock options,
non-qualified stock options, restricted stock grants, stock appreciation rights, stock bonuses
and other awards to officers and other employees. Grants 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. All options outstanding as of
September 30, 2007 become exercisable at the rate of 25% per year commencing one year after the
date of grant. At September 30, 2007, options to acquire 1,219,750 shares were available for
grant under the 2004 Plan.Under the terms of the CSS Industries, Inc. 2006 Stock Option Plan for Non-Employee Directors
(2006 Plan), non-qualified stock options to purchase up to 200,000 shares of common stock are
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 2006 Plan, options to
purchase 4,000 shares of the Companys common stock will be granted automatically to each
non-employee director on the last day that the Companys common stock is traded in each November
until 2010. Each option will expire five years after the date the option is granted and
commencing one year after the date of grant, options begin vesting and are exercisable at the
rate of 25% per year. At September 30, 2007, options to acquire 180,000 shares were available
for grant under the 2006 Plan.Compensation cost related to stock options recognized in operating results (included in selling,
general and administrative expenses) was $718,000 and $668,000 in the quarter ended September
30, 2007 and 2006, respectively, and was $1,399,000 and $1,412,000 in the six months ended
September 30, 2007 and 2006, respectively.The fair value of each stock option granted was estimated on the date of grant using the
Black-Scholes option pricing model with the following average assumptions:
 For the Six MonthsEnded September 30,2007
    
    2006Expected dividend yield at time of grant
    
    
    1.59
    %
    
    
    1.61
    %Expected stock price volatility
    
    
    29
    %
    
    
    24
    %Risk-free interest rate
    
    
    4.80
    %
    
    
    4.96
    %Expected life of option (in years)
    
    
    4.2
    
    
    
    4.7
  8




---



##### Table of Contents



Transactions from April 1, 2007 through September 30, 2007 under the above plans (and their
predecessor plans) were as follows:
 AggregateWeighted
    
    
    Weighted
    
    
    IntrinsicNumberof Shares
    
    
    Option Priceper Share
    
    
    AveragePrice
    
    
    Average LifeRemaining
    
    
    Value(in thousands)Options outstanding at April 1, 2007
    
    
    1,508,110
    
    
    $
    12.71  36.60
    
    
    $
    26.94
    
    
    3.9 years
    
    $
    15,901Granted
    
    
    155,000
    
    
    
    35.23  37.33
    
    
    
    35.28Exercised
    
    
    (104,593
    )
    
    
    13.21  35.98
    
    
    
    25.80Canceled
    
    
    (30,675
    )
    
    
    23.58  34.12
    
    
    
    31.18Options outstanding at September 30, 2007
    
    
    1,527,842
    
    
    $
    12.71  37.33
    
    
    $
    27.77
    
    
    3.5 years
    
    $
    14,782Options exercisable at September 30, 2007
    
    
    867,317
    
    
    $
    12.71  36.60
    
    
    $
    24.19
    
    
    3.3 years
    
    $
    11,501
 The weighted average fair value of options granted during the six months ended September 30,
2007 and 2006 was $9.44 and $7.64, respectively.As of September 30, 2007, there was $5,413,000 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 1.3 years.(3)
    
    DERIVATIVE FINANCIAL INSTRUMENTS: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. As of September 30,
2007, the notional amount of open foreign currency forward contracts was $14,462,000 and the
related unrealized loss was $1,219,000. Gains and losses arising from foreign currency forward
contracts are recognized in income or expense as offsets of gains and losses resulting from the
underlying hedged transactions. As of March 31, 2007, the notional amount of open foreign
currency forward contracts was $294,000 and the related unrealized gain was immaterial.(4)
    
    BUSINESS RESTRUCTURING:On November 27, 2006, the Board of Directors of the Company approved a restructuring plan to
combine the operations of its Cleo Inc (Cleo) and Berwick Offray LLC (Berwick Offray)
subsidiaries, to close Cleos Maysville, Kentucky production facility and to exit a
non-material, non-core business. This restructuring was undertaken in order to improve
profitability and efficiency through the elimination of redundant back office functions, certain
senior management positions and excess manufacturing capacity. The Company expects to complete
the restructuring plan by December 31, 2007. As part of the restructuring plan, the Company
recorded a restructuring reserve of $1,323,000, including severance related to 29 employees.
Also, in connection with the restructuring plan, the Company recorded an impairment of property,
plant and equipment at the affected facilities of $422,000. Additionally, during fiscal 2007,
there was an increase in the restructuring reserve in the amount of $582,000 primarily related
to the ratable recognition of retention bonuses for employees providing service until their
termination date. In the first six months of fiscal 2008, there was a reduction in the
restructuring accrual of $155,000 primarily for costs related to severance that were less than
originally estimated. During the quarter and six months ended September 30, 2007, the Company
made payments of $454,000 and $807,000, respectively, primarily related to severance. As of
September 30, 2007, the remaining liability of $494,000 was classified as a current liability in
the accompanying condensed consolidated balance sheet and will be paid during the remainder of
fiscal 2008. Restructuring expenses were classified in selling, general and administrative
expenses. The Company expects to incur additional charges related to restructuring costs of
approximately $427,000 during the remainder of fiscal 2008.
 9




---



##### Table of Contents



Selected information relating to the aforementioned restructuring follows (in thousands):
 Termination
    
    
    OtherCosts
    
    
    Costs
    
    
    TotalRestructuring reserve as of March 31, 2007
    
    $
    1,353
    
    
    $
    103
    
    
    $
    1,456Cash paid  fiscal 2008
    
    
    (770
    )
    
    
    (37
    )
    
    
    (807
    )Non cash reduction  fiscal 2008
    
    
    (102
    )
    
    
    (53
    )
    
    
    (155
    )Restructuring reserve as of September 30, 2007
    
    $
    481
    
    
    $
    13
    
    
    $
    494
 (5)
    
    GOODWILL AND INTANGIBLES:The Company performs the required annual impairment test of the carrying amount of goodwill and
indefinite-lived intangible assets in the fourth quarter of its fiscal year.Included in intangible assets, net in the accompanying condensed consolidated balance sheets are
the following acquired intangible assets (in thousands):
 September 30,
    
    
    March 31,2007
    
    
    2007Tradenames
    
    $
    4,290
    
    
    $
    4,290Non-compete and other, net
    
    
    8
    
    
    
    38$
    4,298
    
    
    $
    4,328
 Amortization expense related to intangible assets was $15,000 and $24,000 for the quarters ended
September 30, 2007 and 2006, respectively, and was $30,000 and $47,000 for the six months ended
September 30, 2007 and 2006, respectively. The aggregate estimated amortization expense for
intangible assets remaining as of September 30, 2007 is $8,000 in fiscal 2008.(6)
    
    COMMITMENTS AND CONTINGENCIES:On September 10, 2007, the United States Court of Appeals for the Federal Circuit (Court of
Appeals) denied the appeal of the Companys Cleo subsidiary challenging the imposition of
antidumping duties on certain tissue paper products imported from China. As described in Item 3
of the Companys Annual Report on Form 10-K for the fiscal year ended March 31, 2007, in the
proceedings before the Court of Appeals, Cleo was seeking reversal of the March 2005 final
determination of the United States International Trade Commission (ITC) that, in part,
resulted in the imposition of such duties. In the fiscal year ended March 31, 2005, the Company
recognized an expense of approximately $2,300,000 for these duties, which reflected the maximum
liability of Cleo for duties related to tissue paper products imported from China during the
2005 fiscal year based on deposit rates that had been established by the United States
Department of Commerce (DOC). These duties were paid in
full prior to fiscal 2008.On October 10, 2007, the DOC issued its final determination of the duty rates applicable to
tissue paper products imported from China during the period September 21, 2004 through February
28, 2006. As a result of this final determination, Cleos actual liability for duties relating
to its importation of Chinese tissue paper during the fiscal year ended March 31, 2005 was fixed
at approximately $2,000,000, which is approximately $300,000 less than the amount previously
recognized as an expense for these duties in the Companys 2005 fiscal year. Given that the
actual duties are less than the amount previously expensed, the Company will recognize a gain of
approximately $294,000 in the third quarter of its 2008 fiscal year.CSS and its subsidiaries are also 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 lawsuits and claims will not materially affect the
consolidated financial position of the Company or its results of operations or cash flows.
 10




---



##### Table of Contents



(7)
    
    ACCOUNTING PRONOUNCEMENTS:In March 2007, the Financial Accounting Standards Board (FASB) ratified Emerging Issues Task
Force Issue No. 06-10 Accounting for Collateral Assignment Split-Dollar Life Insurance
Agreements (EITF 06-10). EITF 06-10 provides guidance for determining a liability for the
postretirement benefit obligation as well as recognition and measurement of the associated asset
on the basis of the terms of the collateral assignment agreement. EITF 06-10 is effective for
fiscal years beginning after December 15, 2007. The Company does not believe that the adoption
of EITF 06-10 will have a significant effect on its financial position or results of operations.In February 2007, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits
companies to choose to measure many financial instruments and certain other items at fair value.
The objective is to improve financial reporting by providing companies with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting provisions. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007. Companies are not allowed to
adopt SFAS No. 159 on a retrospective basis unless they choose early adoption. The Company
intends to adopt SFAS No. 159 at the beginning of fiscal 2009 and does not believe that the
adoption of SFAS No. 159 will have a significant effect on its consolidated financial position
or results of operations.In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157
establishes a framework for measuring fair value in accordance with accounting principles
generally accepted in the United States, and expands disclosure about such fair value
measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007
(fiscal 2009 for the Company). The Company does not believe that the adoption of SFAS No. 157
will have a significant effect on its financial position or results of operations.(8)
    
    INCOME TAXES:In June 2006, the FASB issued FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in
Income Taxes, which clarifies the accounting for uncertainty in income taxes. FIN 48
prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return.
The interpretation requires that the Company recognize in the financial statements the impact of
a tax position, if that position is more likely than not of being sustained on audit, based
solely on the technical merits of the position. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods and disclosure. The
Company adopted the provisions of FIN 48 on April 1, 2007. The implementation of FIN 48 did not
result in an adjustment to the Companys April 1, 2007 balance of retained earnings. The
implementation resulted in a reclassification to increase both deferred tax assets and long term
obligations in the amount of approximately $700,000. The total amount of unrecognized tax
benefits as of the date of adoption was $2,900,000. In addition, the Company reclassified
$2,100,000 from other current liabilities to long term obligations related to unrecognized tax
benefits which are not expected to be settled within 12 months of April 1, 2007.Included in the balance of unrecognized tax benefits at April 1, 2007 were $2,000,000 of tax
benefits that, if recognized, would affect the effective tax rate. Also included in the balance
of unrecognized tax benefits at April 1, 2007 were $900,000 of tax benefits that, if recognized,
would result in an adjustment to deferred taxes.Consistent with the Companys historical financial reporting, the Company recognizes potential
accrued interest and/or penalties related to unrecognized tax benefits in income tax expense in
the consolidated statements of operations. The Company had accrued $700,000 for the estimated
payment of interest and penalties at March 31, 2007. The implementation of FIN 48 did not
result in an adjustment to its accrual for interest and penalties which is included as a
component of the unrecognized tax benefits noted above. During the six months ended September
30, 2007, the Company accrued an additional $66,000 in potential interest and penalties
associated with uncertain tax positions.
 11




---



##### Table of Contents



The Company is subject to U.S. federal income tax as well as income tax in multiple state and
foreign jurisdictions. The Companys March 31, 2005 federal tax return is currently under
examination by the Internal Revenue Service. The Company finalized an examination of its March
31, 2004 federal tax return with the Internal Revenue Service in May of 2006. Although the
statute of limitations for the 2004 federal tax return has not yet expired, the Company
considers the year to be effectively settled as discussed in FASB Staff Position FIN 48-1. The
Company and its subsidiaries are currently not undergoing audits in any state jurisdiction. A
subsidiary of the Company is currently under examination by Hong Kong Inland Revenue for the
March 31, 2006 period.The Company anticipates that total unrecognized tax benefits will decrease by approximately
$200,000 over the next 12 months due to the expiration of certain state statute of limitations.
The Company has classified this amount as short term income taxes payable on its balance sheet
as of September 30, 2007.
 12




---



##### Table of Contents



CSS INDUSTRIES, INC. AND SUBSIDIARIES
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
 CONDITION AND RESULTS OF OPERATIONS
 STRATEGIC OVERVIEW
     LITIGATION
   13




---



##### Table of Contents



CRITICAL ACCOUNTING POLICIES
   RESULTS OF OPERATIONS
 Seasonality
  Six Months Ended September 30, 2007 Compared to Six Months Ended September 30, 2006
     14




---



##### Table of Contents



Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006
       LIQUIDITY AND CAPITAL RESOURCES
   15




---



##### Table of Contents



Less than 1
    
    1-3
    
    4-5
    
    After 5Year
    
    Years
    
    Years
    
    Years
    
    TotalLetters of credit
    
    $
    5,583
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    5,583
   LABOR RELATIONS
  ACCOUNTING PRONOUNCEMENTS
  FORWARD-LOOKING STATEMENTS
  16




---



##### Table of Contents



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 second quarter of fiscal
year 2008 that has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.
 17




---



##### Table of Contents



CSS INDUSTRIES, INC. AND SUBSIDIARIES
 
 PART II  OTHER INFORMATION
 
 Legal Proceedings
    
 Unregistered Sales of Equity Securities and Use of Proceeds
 Unregistered Sales of Equity Securities
   18




---



##### Table of Contents



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, 2007
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    247,424August 1 through August 31, 2007
    
    
    160,200
    
    
    
    35.63
    
    
    
    160,200
    
    
    
    87,224September 1 through September
30, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87,224Total Second Quarter
    
    
    160,200
    
    
    $
    35.63
    
    
    
    160,200
    
    
    
    87,224
 
 (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)
    
    The Companys Board of Directors authorized on February 18, 1998 the repurchase of up
to 1,000,000 shares of the Companys common stock (the Repurchase Program). Thereafter,
the Companys Board of Directors increased the number of shares authorized to be
repurchased by the Company pursuant to the Repurchase Program as follows: November 9, 1998
(500,000 additional shares); May 4, 1999 (500,000 additional shares); September 28, 1999
(500,000 additional shares); September 26, 2000 (500,000 additional shares); and February
27, 2003 (400,000 additional shares). As a result of the Companys three-for-two stock
split distributed on July 10, 2003, the number of shares authorized for repurchase pursuant
to the Repurchase Program was automatically increased to 5,100,000 shares. The aggregate
number of shares repurchased by the Company pursuant to the Repurchase Program as of
September 30, 2007 was 5,012,776 on a split-adjusted basis. An expiration date has not
been established for the Repurchase Program. 
 Submission of Matters to a Vote of Security Holders
 (a)
    
    The annual meeting of stockholders of the Company was held on August 2, 2007.
The only matter voted upon at the annual meeting was the election of directors.(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
    
    
    10,434,705
    
    
    
    60,703James H. Bromley
    
    
    10,379,964
    
    
    
    115,444Jack Farber
    
    
    10,406,352
    
    
    
    89,056Leonard E. Grossman
    
    
    10,225,671
    
    
    
    269,737James E. Ksansnak
    
    
    10,382,640
    
    
    
    112,768Rebecca C. Matthias
    
    
    10,434,362
    
    
    
    61,046Christopher J. Munyan
    
    
    10,406,665
    
    
    
    88,743
 19




---



##### Table of Contents



Exhibits
      20




---



##### Table of Contents



SIGNATURES
  CSS INDUSTRIES, INC.
(Registrant)Date:  October 25, 2007
    By:

/s/ Christopher J. MunyanChristopher J. MunyanPresident and Chief
Executive Officer
(principal executive officer) Date:  October 25, 2007
    By:

/s/ Clifford E. PietrafittaClifford E. PietrafittaVice President  Finance and
Chief Financial Officer
(principal financial and accounting officer) 21