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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 June 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 months ended June
30, 2008 and 2007
    
    
    3Condensed Consolidated Balance Sheets  June 30, 2008 and March
31, 2008
    
    
    4Consolidated Statements of Cash Flows  Three months ended June
30, 2008 and 2007
    
    
    5Notes to Consolidated Financial Statements
    
    
    6-13Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    14-17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    18Item 4. Controls and Procedures
    
    
    18PART II  OTHER INFORMATIONItem 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19Item 6. Exhibits
    
    
    19Signatures
    
    
    20Exhibit 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
 Three Months EndedJune 30,(In thousands, except per share data)
    
    2008
    
    
    2007SALES
    
    $
    54,647
    
    
    $
    46,802COSTS AND EXPENSESCost of sales
    
    
    37,713
    
    
    
    33,519Selling, general and administrative expenses
    
    
    23,550
    
    
    
    20,683Interest expense (income), net
    
    
    284
    
    
    
    (374
    )Other income, net
    
    
    (66
    )
    
    
    (242
    )61,481
    
    
    
    53,586LOSS BEFORE INCOME TAXES
    
    
    (6,834
    )
    
    
    (6,784
    )INCOME TAX BENEFIT
    
    
    (2,338
    )
    
    
    (2,357
    )NET LOSS
    
    $
    (4,496
    )
    
    $
    (4,427
    )BASIC AND DILUTED NET LOSS PER COMMON SHARE
    
    $
    (.44
    )
    
    $
    (.41
    )WEIGHTED AVERAGE BASIC AND DILUTED SHARES
OUTSTANDING
    
    
    10,255
    
    
    
    10,882CASH DIVIDENDS PER SHARE OF COMMON
STOCK
    
    $
    .15
    
    
    $
    .14COMPREHENSIVE INCOMENet loss
    
    $
    (4,496
    )
    
    $
    (4,427
    )Foreign currency translation adjustment
    
    
    2
    
    
    
    Comprehensive income
    
    $
    (4,494
    )
    
    $
    (4,427
    )
   3




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CSS INDUSTRIES, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    March 31,(In thousands)
    
    2008
    
    
    2008ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    7,213
    
    
    $
    28,109Accounts receivable, net
    
    
    43,700
    
    
    
    39,144Inventories
    
    
    143,387
    
    
    
    105,532Deferred income taxes
    
    
    6,519
    
    
    
    7,276Assets held for sale
    
    
    3,461
    
    
    
    3,590Other current assets
    
    
    15,003
    
    
    
    16,242Total current assets
    
    
    219,283
    
    
    
    199,893PROPERTY, PLANT AND EQUIPMENT, NET
    
    
    51,695
    
    
    
    50,632OTHER ASSETSGoodwill
    
    
    48,361
    
    
    
    48,361Intangible assets, net
    
    
    42,401
    
    
    
    42,454Other
    
    
    3,128
    
    
    
    3,701Total other assets
    
    
    93,890
    
    
    
    94,516Total assets
    
    $
    364,868
    
    
    $
    345,041LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESNotes payable
    
    $
    29,700
    
    
    $
    Current portion of long-term debt
    
    
    10,249
    
    
    
    10,246Accrued customer programs
    
    
    7,762
    
    
    
    9,438Other current liabilities
    
    
    44,815
    
    
    
    44,209Total current liabilities
    
    
    92,526
    
    
    
    63,893LONG-TERM DEBT, NET OF CURRENT PORTION
    
    
    10,129
    
    
    
    10,192LONG-TERM OBLIGATIONS
    
    
    6,235
    
    
    
    6,121DEFERRED INCOME TAXES
    
    
    2,108
    
    
    
    2,482STOCKHOLDERS EQUITY
    
    
    253,870
    
    
    
    262,353Total liabilities and stockholders equity
    
    $
    364,868
    
    
    $
    345,041
   4




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CSS INDUSTRIES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months EndedJune 30,(In thousands)
    
    2008
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (4,496
    )
    
    $
    (4,427
    )Adjustments to reconcile net loss to net cash used for
operating activities:Depreciation and amortization
    
    
    3,418
    
    
    
    3,296Provision for doubtful accounts
    
    
    52
    
    
    
    240Deferred tax provision (benefit)
    
    
    383
    
    
    
    (474
    )Gain on sale of assets
    
    
    (35
    )
    
    
    Compensation expense related to stock options
    
    
    665
    
    
    
    681Changes in assets and liabilities, net of effects from purchase
of a business:Increase in accounts receivable
    
    
    (4,580
    )
    
    
    (962
    )Increase in inventory
    
    
    (37,731
    )
    
    
    (42,874
    )Decrease (increase) in other assets
    
    
    1,216
    
    
    
    (893
    )Increase in other liabilities
    
    
    5,925
    
    
    
    1,550Decrease in accrued taxes
    
    
    (4,313
    )
    
    
    (2,230
    )Total adjustments
    
    
    (35,000
    )
    
    
    (41,666
    )Net cash used for operating activities
    
    
    (39,496
    )
    
    
    (46,093
    )Cash flows from investing activities:Purchase of a business
    
    
    (300
    )
    
    
    Final payment of purchase price for a business previously acquired
    
    
    (2,700
    )
    
    
    Purchase of property, plant and equipment
    
    
    (4,049
    )
    
    
    (1,108
    )Proceeds from sale of assets
    
    
    102
    
    
    
    Net cash used for investing activities
    
    
    (6,947
    )
    
    
    (1,108
    )Cash flows from financing activities:Payments on long-term obligations
    
    
    (60
    )
    
    
    (50
    )Borrowings on notes payable
    
    
    44,600
    
    
    
    Repayments on notes payable
    
    
    (14,900
    )
    
    
    Dividends paid
    
    
    (1,541
    )
    
    
    (1,525
    )Purchase of treasury stock
    
    
    (2,637
    )
    
    
    Proceeds from exercise of stock options
    
    
    79
    
    
    
    1,739Tax benefit realized for stock options exercised
    
    
    4
    
    
    
    249Net cash provided by financing activities
    
    
    25,545
    
    
    
    413Effect of exchange rate changes on cash
    
    
    2
    
    
    
    Net decrease in cash and cash equivalents
    
    
    (20,896
    )
    
    
    (46,788
    )Cash and cash equivalents at beginning of period
    
    
    28,109
    
    
    
    100,091Cash and cash equivalents at end of period
    
    $
    7,213
    
    
    $
    53,303
   5




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CSS INDUSTRIES, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 June 30, 2008
 (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, 2008. 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, craft
products, educational products, memory books, stationery, journals, notecards, infant and
wedding photo albums and scrapbooks, and other gift items that commemorate lifes celebrations.
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




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Inventories The Company records inventory when title is transferred, which occurs upon receipt or prior to
receipt dependent on supplier shipping terms. The Company adjusts unsaleable and slow-moving
inventory to its estimated net realizable value. Substantially all of the Companys inventories
are stated at the lower 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):
 June 30,
    
    
    March 31,2008
    
    
    2008Raw material
    
    $
    25,584
    
    
    $
    22,836Work-in-process
    
    
    29,370
    
    
    
    29,827Finished goods
    
    
    88,433
    
    
    
    52,869$
    143,387
    
    
    $
    105,532
 Assets Held for Sale Assets held for sale in the amount of $3,461,000 represents two former manufacturing facilities
and a distribution facility which the Company is in the process of selling. The Company expects
to sell these facilities within the next 12 months for an amount greater than the current
carrying value. The Company ceased depreciating these facilities at the time they were
classified as held for sale.Revenue Recognition The Company recognizes revenue from product sales when the goods are shipped, title and risk of
loss have been transferred to the customer and collection is reasonably assured. Provisions for
returns, allowances, rebates to customers and other adjustments are provided in the same period
that the related sales are recorded.Net Loss Per Common Share The following table sets forth the computation of basic and diluted net loss per common share
for the three months ended June 30, 2008 and 2007 (in thousands, except per share data):
 Three Months EndedJune 30,2008
    
    
    2007Numerator:Net loss
    
    $
    (4,496
    )
    
    $
    (4,427
    )Denominator:Weighted average shares outstanding for basic
loss per common share
    
    
    10,255
    
    
    
    10,882Effect of dilutive stock options
    
    
    
    
    
    
    Adjusted weighted average shares outstanding for
diluted loss per common share
    
    
    10,255
    
    
    
    10,882Basic and diluted net loss per common share
    
    $
    (.44
    )
    
    $
    (.41
    )
 The effect of dilutive stock options is not reflected as they are anti-dilutive.
  7




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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)
    
    STOCK-BASED COMPENSATION:2004 Equity Compensation PlanUnder 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
June 30, 2008 become exercisable at the rate of 25% per year commencing one year after the date
of grant. The Company granted 54,000 stock options under the 2004 Plan during the first quarter
of fiscal 2009.During the first quarter of fiscal 2009, the Company granted 27,600 performance-vested
restricted stock units (RSUs) which vest on the third anniversary of the date on which the
award was granted, providing that certain performance metrics have been met during the
performance period. During the first quarter of fiscal 2009, the Company also granted 26,550
time-vested RSUs which vest at a rate of 50% on each of the third and fourth anniversaries of
the date on which the award was granted.At June 30, 2008, there were 1,063,850 shares available for grant under the 2004 Plan.2006 Stock Option Plan for Non-Employee DirectorsUnder 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 tonon-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 June 30, 2008, there were 156,000 shares available for grant under the
2006 Plan.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 Three Months EndedJune 30,2008
    
    
    2007Expected dividend yield at time of grant
    
    
    2.18
    %
    
    
    1.59
    %Expected stock price volatility
    
    
    36
    %
    
    
    29
    %Risk-free interest rate
    
    
    3.50
    %
    
    
    4.80
    %Expected life of option (in years)
    
    
    4.2
    
    
    
    4.2
 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.
  8




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




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(5)
    
    BUSINESS RESTRUCTURING:
   Termination
    
    
    OtherCosts
    
    
    Costs
    
    
    TotalRestructuring reserve as of March 31, 2008
    
    $
    309
    
    
    $
    10
    
    
    $
    319Cash paid  fiscal 2009
    
    
    (238
    )
    
    
    
    
    
    
    (238
    )Charges to expense  fiscal 2009
    
    
    101
    
    
    
    
    
    
    
    101Restructuring reserve as of June 30, 2008
    
    $
    172
    
    
    $
    10
    
    
    $
    182
 (6)
    
    GOODWILL AND INTANGIBLES:
    June 30,
    
    
    March 31,2008
    
    
    2008Tradenames
    
    $
    23,790
    
    
    $
    23,790Customer relationships, net
    
    
    18,165
    
    
    
    18,480Trademarks
    
    
    275
    
    
    
    Non-compete, net
    
    
    171
    
    
    
    184$
    42,401
    
    
    $
    42,454
  Fiscal 2009
    
    $
    982Fiscal 2010
    
    
    1,310Fiscal 2011
    
    
    1,310Fiscal 2012
    
    
    1,293Fiscal 2013
    
    
    1,260Total
    
    $
    6,155
 (7)
    
    COMMITMENTS AND CONTINGENCIES:
   10




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(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
    
    
    UnobservableJune 30,
    
    
    Assets
    
    
    Inputs
    
    
    Inputs(in thousands)
    
    2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)AssetsMarketable securities
    
    $
    1,016
    
    
    $
    1,016
    
    
    $
    
    
    
    $
    Cash
surrender value of life insurance policies
    
    
    816
    
    
    
    
    
    
    
    816
    
    
    
    Foreign exchange contracts
    
    
    170
    
    
    
    
    
    
    
    170
    
    
    
    Total assets
    
    $
    2,002
    
    
    $
    1,016
    
    
    $
    986
    
    
    $
    LiabilitiesDeferred compensation plans
    
    $
    1,016
    
    
    $
    1,016
    
    
    $
    
    
    
    $
    Total liabilities
    
    $
    1,016
    
    
    $
    1,016
    
    
    $
    
    
    
    $
    
 (10)
    
    SUBSEQUENT EVENTS:
     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
  Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007
    15




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LIQUIDITY AND CAPITAL RESOURCES
    16




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Less than 1
    
    
    1-3
    
    
    4-5
    
    
    After 5Year
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    TotalLetters of credit
    
    $
    5,902
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    5,902
   LABOR RELATIONS
  ACCOUNTING PRONOUNCEMENTS
  FORWARD-LOOKING STATEMENTS
 Forward-looking
  17




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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 first quarter of fiscal
year 2009 that has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.
  18




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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)April 1 through April 30, 2008
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    May 1 through May 31, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500,000June 1 through June 30, 2008
    
    
    101,200
    
    
    
    25.99
    
    
    
    101,200
    
    
    
    398,800Total First Quarter
    
    
    101,200
    
    
    $
    25.99
    
    
    
    101,200
    
    
    
    398,800
 (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 May 29, 2008 the repurchase of up to
500,000 shares of the Companys common stock (the Repurchase Program). As of June 30,
2008, the Company repurchased an aggregate of 101,200 shares pursuant to the Repurchase
Program. An expiration date has not been established for the Repurchase Program. 
 Exhibits
           19




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SIGNATURES
  CSS INDUSTRIES, INC.
(Registrant)Date:  August 5, 2008
    By:

/s/ Christopher J. MunyanChristopher J. MunyanPresident and Chief
Executive Officer
(principal executive officer)Date:  August 5, 2008
    By:

/s/ Clifford E. PietrafittaClifford E. PietrafittaVice President  Finance and
Chief Financial Officer
(principal financial and accounting officer)  20




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21