Company Quick10K Filing
Quick10K
CSS Industries
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$6.27 9 $55
10-K 2019-03-31 Annual: 2019-03-31
10-Q 2018-12-31 Quarter: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-K 2018-03-31 Annual: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-K 2017-03-31 Annual: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-K 2016-03-31 Annual: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-K 2015-03-31 Annual: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-K 2014-03-31 Annual: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2019-07-03 Enter Agreement, Officers, Regulation FD, Exhibits
8-K 2019-06-27 Officers, Regulation FD, Exhibits
8-K 2019-05-30 Earnings, Exhibits
8-K 2019-05-23 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-05-08 Earnings, Exit Costs, Regulation FD, Exhibits
8-K 2019-03-13 Enter Agreement, Off-BS Arrangement, Officers, Regulation FD, Exhibits
8-K 2019-02-07 Earnings, Exhibits
8-K 2019-01-29 Officers
8-K 2018-11-02 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-11-01 Earnings, Exhibits
8-K 2018-08-31 Officers, Regulation FD, Exhibits
8-K 2018-08-06 Officers, Shareholder Vote, Exhibits
8-K 2018-08-01 Earnings, Exhibits
8-K 2018-07-12 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-06-04 Officers, Exhibits
8-K 2018-05-31 Earnings, Exhibits
8-K 2018-05-29 Officers, Exhibits
8-K 2018-03-28 Officers
8-K 2018-01-25 Officers, Exhibits
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MDLY Medley Management 89
CTEK CynergisTek 43
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CSS 2019-03-31
Part I
Item 1. Business.
Item 1A. Risk Factors.
Item 1B. Unresolved Staff Comments.
Item 2. Properties.
Item 3. Legal Proceedings.
Item 4. Mine Safety Disclosures.
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Item 6. Selected Financial Data.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 8. Financial Statements and Supplementary Data.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures.
Item 9B. Other Information.
Part III
Item 10. Directors, Executive Officers and Corporate Governance.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Item 14. Principal Accounting Fees and Services.
Part IV
Item 15. Exhibits and Financial Statement Schedules.
EX-4.1 exhibit41.htm
EX-10.3 exhibit103.htm
EX-21 fy201910-kxex21.htm
EX-23 fy201910-kxex23.htm
EX-31.1 fy201910-kxex311.htm
EX-31.2 fy201910-kxex312.htm
EX-32.1 fy201910-kxex321.htm
EX-32.2 fy201910-kxex322.htm

CSS Industries Earnings 2019-03-31

CSS 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 fy201910-k.htm 10-K Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
(Mark one)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2019
OR
 
¨
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
csscolorhigh1214.jpg
CSS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
 
 
 
 
Delaware
 
13-1920657
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
450 Plymouth Road, Suite 300, Plymouth Meeting, PA
 
19462
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (610) 729-3959
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
 
 
 
Title of each class 
 
Trading Symbol
 
Name of each exchange on which registered
Common Stock, $.10 par value
 
CSS
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
(Title of class) 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer
 
¨
  
Accelerated filer
 
ý
Non-accelerated filer
 
¨  
  
Smaller reporting company
 
ý
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The aggregate market value of the voting stock held by non-affiliates of the registrant is $121,676,333. Such aggregate market value was computed by reference to the closing price of the common stock of the registrant on the New York Stock Exchange on September 28, 2018, being the last trading day of the registrant’s most recently completed second fiscal quarter. Such calculation excludes the shares of common stock beneficially owned at such date by certain directors and officers of the registrant, as described under the section entitled “Ownership of CSS Common Stock” in the proxy statement to be filed by the registrant for its 2019 Annual Meeting of Stockholders. In making such calculation, registrant does not determine the affiliate or non-affiliate status of any holders of the shares of common stock for any other purpose.
At May 28, 2019, there were outstanding 8,837,238 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for its 2019 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.



CSS INDUSTRIES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 2019
INDEX
 
 
 
Page
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
 
Item 15.




PART I
Item 1. Business.
General
CSS Industries, Inc. (“CSS” or the “Company”) is a creative consumer products company, focused on the seasonal, gift and craft categories. For these design-driven categories, the Company engages in the creative development, manufacture, procurement, distribution and sale of our products with an omni-channel approach focused primarily on mass market retailers.
Seasonal The seasonal category includes holiday gift packaging items such as ribbon, bows, greeting cards, bags, tags and gift card holders, in addition to specific holiday-themed decorations, accessories, and activities, such as Easter egg dyes and novelties and Valentine's Day classroom exchange cards. These products are sold to mass market and online retailers, and production forecasts for these products are generally known well in advance of shipment.
Gift The gift category includes products designed to celebrate certain life events or special occasions, such as weddings, birthdays, anniversaries, graduations, or the birth of a child. Products include ribbons and bows, floral accessories, infant products, journals, gift card holders, all occasion boxed greeting cards, memory books, scrapbooks, stationery and other items that commemorate life's celebrations. Products in this category are primarily sold into mass, specialty and online retailers, floral and packaging wholesalers and distributors, and are generally ordered on a replenishment basis throughout the year.
Craft The craft category includes sewing patterns, ribbons and trims, buttons, knitting needles, needle arts and kids' crafts. These products are sold to mass market, specialty, and online retailers, and are generally ordered on a replenishment basis throughout the year.
CSS’ product breadth provides its retail customers the opportunity to use a single vendor for much of their seasonal, gift and craft product requirements. A substantial portion of CSS’ products are manufactured and packaged in the United States and warehoused and distributed from facilities in the United States, the United Kingdom and Australia, with the remainder sourced from foreign suppliers, primarily in Asia. The Company also has a manufacturing facility in India that produces certain craft products, including trims, braids and tassels, and also has a distribution facility in India. The Company’s products are sold to its customers by national and regional account sales managers, sales representatives, product specialists and by a network of independent manufacturers’ representatives. CSS maintains purchasing offices in Hong Kong and China to administer Asian sourcing opportunities.
The overall objective of the Company is to grow profitable sales and improve return on invested capital ("ROIC") through five strategic pillars. These strategic pillars include:
*Defend the base business - Design, product innovation, category leadership
*
Expand to adjacent categories with a focus on brands - Focus on fragmented markets, brands, omni-channel
*Build an omni-channel business model - Dedicated resources, leverage technology
*
Improve ROIC by maximizing margins while minimizing capital investment - Streamline and focus on economic value add and working capital
*Build a collaborative, One CSS culture - Communication, accountability, diversity
Principal Products CSS designs, manufactures, procures, distributes and sells a broad range of craft and gift consumer products. Craft and gift consumer products include ribbons and bows, trims, buttons, sewing patterns, knitting needles, needle arts, kids' crafts, floral accessories, infant products, journals, gift card holders, all occasion boxed greeting cards, memory books, scrapbooks, stationery, and other gift and craft items, sold to its mass market, craft, specialty and floral retail and wholesale distribution customers. CSS also designs, manufactures, procures, distributes and sells a broad range of seasonal consumer products primarily through the mass market distribution channel. Christmas products include packaging ribbons and bows, boxed greeting cards, gift bags, gift boxes, gift tags, gift card holders, tissue paper and decorations. CSS’ Valentine's Day product offerings include classroom exchange Valentine's Day cards and other related Valentine's Day products, while its Easter product offerings include Easter egg dyes and related Easter seasonal products. Its school products include teachers’ aids and other learning oriented products to the education market sold through mass market retailers, school supply distributors and teachers’ stores.

1


Key brands include Simplicity®, McCall’s®, Vogue Patterns®, Paper Magic®, Berwick®, Offray®, Butterick®, Kwik Sew®, Markings®, Stepping Stones®, Tapestry®, Seastone®, Dudley’s®, Eureka®, Stickerfitti®, Favorite Findings®, La Mode®, Wrights®, Boye®, Dimensions®, fitlosophy ®, X&O Paper Goods®, and Perler® .
CSS operates sixteen manufacturing and/or distribution facilities located in Pennsylvania, Maryland, New Hampshire, South Carolina, Alabama, Illinois, Kansas, the United Kingdom, Australia and India. A description of the Company’s product lines and related manufacturing and/or distribution facilities is as follows:
Ribbon and bows are primarily manufactured and warehoused in nine facilities located in Pennsylvania, Maryland, South Carolina and Alabama. The manufacturing process is vertically integrated. Non-woven ribbon and bow products are primarily made from polypropylene resin, a petroleum-based product, which is mixed with color pigment, melted and pressed through an extruder. Large rolls of extruded film go through various combinations of manufacturing processes before being made into bows or packaged on ribbon spools or reels as required by various markets and customers. Woven fabric ribbons are manufactured domestically or imported from Mexico and Asia. Imported woven products are either narrow woven or converted from bulk rolls of wide width textiles. Domestic woven products are narrow woven.
Journals, educational products, memory books, scrapbooks, stationery, infant products, and other gift items are imported from Asian manufacturers and warehoused and distributed primarily from two distribution facilities in Alabama.
Floral accessories, including pot covers, foil, waxed tissue, shred, aisle runners, corsage bags and other paper and film products, are manufactured in a facility located in New Hampshire or imported from Mexico. Manufacturing includes gravure and flexo printing, waxing and converting. Products are warehoused and distributed from a distribution facility in Pennsylvania.
Sewing patterns are purchased and distributed from a third party printer and are also manufactured and distributed from a facility located in Kansas. Sewing patterns are also warehoused and distributed from a distribution facility in the United Kingdom and a distribution facility in Australia.
Certain craft items, including trims, braids and tassels, are manufactured from two facilities in India and imported and distributed from a facility in Illinois.
Other products including, but not limited to, buttons, knitting needles, needle arts, kids crafts, boxed greeting cards, gift tags, gift card holders, gift bags, gift wrap, decorative tissue paper, classroom exchange Valentine's Day products, Easter products, and decorations are produced to the specifications of CSS and are imported primarily from Asian manufacturers and warehoused and distributed from facilities in Illinois, Alabama, and Pennsylvania.
The Company’s fiscal year ends on March 31. References to a particular year refer to the fiscal year ending in March of that year. For example, fiscal 2019 refers to the fiscal year ended March 31, 2019.
During our fiscal 2019, CSS experienced no material difficulties in obtaining raw materials or finished goods from suppliers.
Intellectual Property Rights CSS has a number of copyrights, patents, tradenames, trademarks and intellectual property licenses which are used in connection with its products. Substantially all of its designs and artwork are protected by copyright. Intellectual property license rights which CSS has obtained are viewed as especially important to the success of its classroom exchange Valentine's Day cards and stickers. It is CSS’ view that its operations are not dependent upon any individual patent, tradename, trademark, copyright or intellectual property license. The collective value of CSS’ intellectual property is viewed as substantial, and CSS seeks to protect its rights in all patents, copyrights, tradenames, trademarks and intellectual property licenses.
Sales and Marketing Most of CSS’ products are sold in the United States and Canada by national and regional account sales managers, sales representatives, product specialists and by a network of independent manufacturers’ representatives. CSS maintains permanent showrooms in Pennsylvania, Georgia, Arkansas, Ohio, Tennessee, Hong Kong and Australia where buyers for retail customers will typically visit for a presentation and review of new product lines. Products are also displayed and presented in showrooms maintained by various independent manufacturers’ representatives in major cities in the United States and Canada. Relationships are developed with key retail customers by CSS sales personnel and independent manufacturers’ representatives. Social stationery products are sold by sales representatives that specialize in the gift and specialty channel, as well as by key account representatives. Craft ribbon and bow products are also sold through sales representatives or independent manufacturers’ representatives to wholesale distributors and independent small retailers who serve the floral, craft and retail packaging trades. The Company also sells custom products to private label customers, to other

2


social expression companies, and to converters of the Company’s ribbon products. Custom products are sold by both independent manufacturers’ representatives and CSS sales managers.
Customers are generally mass market retailers, discount department stores, specialty chains, warehouse clubs, drug and food chains, dollar stores, office supply stores, online retailers, independent card, gift and floral shops and retail teachers’ stores. Sales to Walmart Stores, Inc. and its affiliates accounted for 24% of our sales during fiscal 2019 and sales to Jo-Ann Stores, LLC and its affiliates accounted for 13% of our sales during fiscal 2019. No other customer accounted for 10% or more of the Company’s sales in fiscal 2019. Our ten largest customers, which include mass market retailers, warehouse clubs, national craft chains and national drug store chains, accounted for 66% of our sales in our fiscal 2019. Approximately 70% of the Company’s net sales are attributable to gift and craft products with the remainder attributable to seasonal (Christmas, Valentine’s Day, Easter and back to-school) products. Approximately 22% of CSS’ net sales relate to the Christmas season. Seasonal products are generally designed and marketed beginning up to 18 to 20 months before the holiday event and manufactured during an eight to ten month production cycle. Due to these long lead time requirements, timely communication with third party factories, licensors, customers and independent manufacturers’ representatives is critical to the timely production of seasonal products. Sales terms for our seasonal products do not generally require payment until just before or just after the holiday, in accordance with industry practice. CSS products, with some customer specific exceptions, are not sold under guaranteed or return privilege terms. The Company has certain limited products, primarily sewing patterns, that are on consignment at mass market retailers and the Company recognizes the sale as products are sold to end consumers at point-of-sale terminals.
Competition among retailers in the sale of the Company’s products to end users is intense. CSS seeks to assist retailers in developing merchandising programs designed to enable the retailers to meet their revenue and profit objectives while appealing to their consumers’ tastes. These objectives are met through the development and manufacture of custom configured and designed products and merchandising programs. CSS’ years of experience in merchandising program development and product quality are key competitive advantages in helping retailers meet their objectives.
Competition CSS competes with various domestic and foreign companies in each of its seasonal, gift and craft categories. Some of our competitors are larger and have greater resources than the Company while many are smaller, private companies that we compete with across our product lines. CSS believes its products are competitively positioned in their primary markets. Since competition is based primarily on category knowledge, timely delivery, creative design, price and, with respect to seasonal products, the ability to serve major retail customers with single, combined product shipments for each holiday event, CSS believes that its focus on products, combined with consistent service levels, allows it to compete effectively in its core markets.
Backlog Production forecasts for products within our seasonal category are generally known well in advance of shipment. Orders for products within our gift and craft categories are generally ordered on a just-in-time replenishment basis by our customers and an order backlog does not typically exist, except when major program resets occur.
Employees
At May 28, 2019, approximately 2,000 persons were employed by CSS (increasing to approximately 2,400 as seasonal employees are added). The Company believes that relationships with its employees are good. Due to the seasonal nature of certain of its businesses, the number of production employees fluctuates during the year.
With the exception of the bargaining unit at the ribbon manufacturing facility in Hagerstown, Maryland, which totaled 86 employees as of May 28, 2019, CSS employees are not represented by labor unions. The collective bargaining agreement with the labor union representing the Hagerstown-based production and maintenance employees remains in effect until December 31, 2020. Historically, we have been successful in renegotiating expiring agreements without any disruption of operating activities.
Acquisitions
The Company endeavors to build on existing relationships with seasonal, gift and craft customers by expanding and diversifying its product lines to grow its presence in the largest retailers in North America. This includes both capitalizing on opportunities for organic growth in existing businesses as well as acquiring companies which fit into appropriate acquisition parameters. Though we are pausing on acquisitions in the near term, we will continue to actively meet with seasonal, gift and craft companies to review and assess potential acquisition targets. Historically, significant revenue growth at CSS has come through acquisitions. Over the long term, management anticipates that it will continue to consider acquisitions as a strategy to stimulate growth.

3


On June 1, 2018, a subsidiary of the Company completed the acquisition of substantially all of the business and net assets of Fitlosophy, Inc. ("Fitlosophy") for $2,500,000 in cash and transaction costs of $25,000, which are included in selling, general and administrative expenses in the consolidated statement of operations for fiscal 2019. In addition to the $2,500,000 paid at closing, the Company may pay up to an additional $10,500,000 of contingent earn-out consideration, in cash, if net sales of certain products meet or exceed five different thresholds during the period from the acquisition date through March 31, 2023. The contingent consideration payments will be paid, if at all, generally within 20 days after the end of each rolling twelve-month measurement period (quarterly through March 31, 2023). At the date of acquisition, the estimated fair value of the contingent earn-out consideration was $1,600,000. As of March 31, 2019, we updated our assessment of the fair value of the contingent consideration to be $1,366,000 which is included in accrued other liabilities in the consolidated balance sheet as of March 31, 2019. Fitlosophy is devoted to creating, marketing, and distributing innovative products that inspire people to develop healthy habits by focusing on effective goal-setting through journaling. Products include a complete line of fitness and wellness planning products all sold under the fitlosophyTM, live life fitTM and fitbookTM brands. The acquisition was accounted for using the acquisition method and the excess of cost over the fair market value of the net tangible and identifiable intangible assets acquired of $1,390,000 was recorded as goodwill. The Company determined that a triggering event occurred due to the fact that the Company’s total stockholders’ equity was in excess of the Company's market capitalization. Given this circumstance, the Company bypassed the option to assess qualitative factors to determine the existence of impairment and proceeded directly to the quantitative goodwill impairment test. Based on the results of its impairment test, the Company recorded an impairment charge of $1,390,000. As of March 31, 2019 and 2018, the Company had no goodwill.
On November 3, 2017, the Company completed the acquisition of substantially all of the net assets and business of Simplicity Creative Group ("Simplicity") from Wilton Brands LLC ("Wilton") for a total consideration of $69,617,000 and transaction costs of $3,411,000. Simplicity is a leading provider of home sewing patterns, decorative trims, knitting and crocheting tools, needle arts and kids' crafts products under the Simplicity®, Wrights®, Boye®, Dimensions®, and Perler® brand names. Simplicity's products are sold to mass-market retailers, specialty fabric and craft chains, wholesale distributors and online customers. The Company primarily financed the acquisition with borrowings of $60,000,000 under its credit facility. A portion of the purchase price is being held in escrow for certain indemnification obligations. The acquisition was accounted for using the acquisition method and the excess of cost over the fair market value of the net tangible and identifiable intangible assets acquired of $9,642,000 was recorded as goodwill. This goodwill was subsequently written off as a result of the Company’s annual impairment testing performed in the fourth quarter of fiscal 2018 as further described in Note 3 to the consolidated financial statements.
On December 13, 2016, the Company completed the acquisition of substantially all of the net assets and business of The McCall Pattern Company and certain affiliated subsidiaries ("McCall"), for $13,914,000 in cash, plus transaction costs of $1,484,000. McCall designs, manufactures, and sells home sewing patterns under the McCall’s®, Butterick®, Kwik Sew® and Vogue Patterns® brand names. McCall is a leading provider of home sewing patterns, selling to mass market retailers, specialty fabric and craft chains, and wholesale distributors. The acquisition was accounted for using the acquisition method and resulted in a bargain purchase due to the fair value of the net assets acquired of $33,528,000 exceeding the amount paid. In connection with this bargain purchase, the Company recorded a gain of $19,614,000 in the consolidated statements of operations in fiscal 2017.
On July 8, 2016, a subsidiary of the Company completed the acquisition of substantially all of the assets of Lawrence Schiff Silk Mills, Inc. ("Schiff") for $1,125,000 in cash. Schiff was a leading U.S. manufacturer and distributor of narrow woven ribbon prior to its April 2016 Chapter 11 bankruptcy filing. The acquisition was accounted for using the acquisition method and resulted in a bargain purchase due to the fair value of the net assets acquired of $1,501,000 exceeding the amount paid. In connection with this bargain purchase, the Company recorded a gain of $376,000 in the consolidated statements of operations in fiscal 2017.
SEC Filings
The Company’s Internet address is www.cssindustries.com. Through its website, the following filings are made available free of charge as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission: its annual report on Form 10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
Item 1A. Risk Factors.
You should carefully consider each of the risk factors we describe below, as well as other factors described in this annual report on Form 10-K and elsewhere in our SEC filings.

4


Our results of operations fluctuate on a seasonal basis, and quarter to quarter comparisons may not be a good indicator of our performance. Seasonal demand fluctuations may adversely affect our cash flow and our ability to sell our products.
Approximately 70% of the Company’s sales for fiscal 2019 were attributable to products within our gift and craft categories, with the remainder attributable to products in the seasonal category. Approximately 22% of our sales relate to the Christmas season. The seasonal nature of our business has historically resulted in lower sales levels and operating losses in our first and fourth quarters, and higher sales levels and operating profits in our second and third quarters. As a result, our quarterly results of operations fluctuate during our fiscal 2019, and a quarter to quarter comparison is not a good indication of our performance or how we will perform in the future. For example, our overall results of operations in the future may fluctuate substantially based on seasonal demand for our products. Such variations in demand could have a material adverse effect on the timing of cash flow and therefore our ability to meet our obligations with respect to our debt and other financial commitments. Seasonal fluctuations also affect our inventory levels. We must carry significant amounts of inventory, especially before the Christmas retail selling period. If we are not successful in selling the inventory during the relevant period, we may have to sell the inventory at significantly reduced prices, or we may not be able to sell the inventory at all.

We rely on a few mass market retailers, warehouse clubs and national drug store chains for a significant portion of our sales. The loss of sales, or a significant reduction of sales, to one or more of our large customers may adversely affect our business, results of operations and financial condition. Past and future consolidation within the retail sector also may lead to reduced profit margins, which may adversely affect our business, results of operations and financial condition.
A few of our customers are material to our business and operations. Our sales to Walmart Stores, Inc. and its affiliates accounted for 24% of our sales during our fiscal 2019 and sales to JoAnn- Stores, LLC and its affiliates accounted for 13% of our sales during fiscal 2019. No other single customer accounted for 10% or more of our sales in fiscal 2019. Our ten largest customers, which include mass market retailers, warehouse clubs and national drug store chains, accounted for 66% of our sales in our fiscal 2019. Our business depends, in part, on our ability to identify and define product and market trends, and to anticipate, understand and react to changing consumer demands in a timely manner. There can be no assurance that our large customers will continue to purchase our products in the same quantities that they have in the past. The loss of sales, or a significant reduction of sales, with one or more of our large customers, including without limitation a loss or significant reduction in sales resulting from our failure or inability to comply with one or more of any of our customers’ sourcing requirements, may adversely affect our business, results of operations and financial condition. Further, in recent years there has been consolidation among our retail customer base. As the retail sector consolidates, our customers become larger, and command increased leverage in negotiating prices and other terms of sale of our products, including credits, discounts, allowances and other incentive considerations to these customers. Past and future consolidation may lead to reduced profit margins, which may adversely affect our business, results of operations and financial condition.

A portion of our products, primarily sewing patterns, are sold on a consignment basis by third party consignment sellers, including certain mass market retailers. Because of the nature of the consignment arrangement, we may be adversely affected if third party consignment sellers, including mass market retailers, experience difficulties in recording sales of the products to end consumers, or in accounting for, or paying us for, the sales of such products. Additionally, while the consigned products are physically stored with third parties, including third party consignment sellers, we do not have custody or control of such products, and the consigned products are subject to damage or loss, including, but not limited to, theft. Any failure or inability by third parties, including third party consignment sellers, to appropriately manage the consignment arrangement may adversely affect our business, results of operations and financial condition.
A portion of our products, primarily sewing patterns, are sold on a consignment basis by third party consignment sellers, including certain mass market retailers. Under the consignment arrangement, the applicable products are physically stored at third party locations, including mass market retailer store locations, and we retain title to the consigned products until such products are purchased by an end consumer. We recognize the sale of such consigned products at the time that the products are sold to the end consumer, as recorded at the applicable seller’s point-of-sale terminals. Under this arrangement, we are subject to the ability of third party consignment sellers, including mass market retailers, to appropriately record the sales of our consigned products to end consumers, and to appropriately account for, and pay us for, such recorded sales. The failure or inability of third party consignment sellers, including mass market retailers, to record sales of our consigned products, and to appropriately account for, and pay us for, such recorded sales may adversely affect our business, results of operations and financial condition. Additionally, while our consigned products are physically stored with third parties, including third party consignment sellers, we do not have custody or control of such products, and the consigned products are subject to damage or loss, including, but not limited to, theft. There can be no assurance that third parties, including third party consignment sellers, will appropriately handle, monitor, secure or protect our consigned products, and any failure or inability to do so may adversely affect our business, results of operations and financial condition.


5


Increases in raw material and energy costs, resulting from general economic conditions, acts of nature, such as hurricanes, earthquakes or pandemics, acts of war, threats of war, terrorism, civil unrest, or other factors, may raise our cost of goods sold and adversely affect our business, results of operations and financial condition.
Paper and petroleum-based materials are essential in the manufacture of some of our products, such as our stationery and plastic decorative ribbons products, and the cost of such materials is significant to our cost of goods sold. Energy costs, especially fuel costs, also are significant expenses in the production and delivery of our products. Increased costs of raw materials or energy resulting from general economic conditions, acts of nature, such as hurricanes, earthquakes or pandemics, acts of war, threats of war, terrorism, civil unrest, or other factors, may result in declining margins and operating results if market conditions prevent us from passing these increased costs on to our customers through timely price increases on our products.
Risks associated with our use of foreign suppliers may adversely affect our business, results of operations and financial condition.
For a large portion of our product lines, with the exception of our decorative ribbon and bow product lines and sewing patterns, we use foreign suppliers to manufacture a significant portion of our products. Approximately 62% of our sales in fiscal 2019 were related to products sourced from foreign suppliers. Our use of foreign suppliers exposes us to risks inherent in doing business outside of the United States, including risks associated with foreign currency fluctuations, transportation costs and delays or disruptions, difficulties in maintaining and monitoring quality control (including without limitation risks associated with defective products), enforceability of agreed upon contract terms, compliance with existing and new United States and foreign laws and regulations, such as the United States Foreign Corrupt Practices Act and legislation and regulations relating to imported products, costs relating to the imposition or retrospective application of antidumping and countervailing duties or other trade-related sanctions on imported products, economic, civil or political instability, acts of war, threats of war, terrorism, civil unrest, labor-related issues, such as labor shortages or wage disputes or increases, international public health issues, and restrictions on the repatriation of profits and assets.

Increased overseas sourcing by our competitors and our customers may reduce our market share and profit margins, adversely affecting our business, results of operations and financial condition.
We have relatively high market share in many of our seasonal product categories. Most of our product markets have shown little or no growth, and some of our product markets have declined in recent years, and we continue to confront significant cost pressure as our competitors source certain products from overseas and certain customers increase direct sourcing from overseas factories. Increased overseas sourcing by our competitors and certain customers may result in a reduction of our market share and profit margins, adversely affecting our business, results of operations and financial condition.

Difficulties encountered by our key customers may cause them to reduce their purchases from us and/or increase our exposure to losses from bad debts, and adversely affect our business, results of operations and financial condition.
Many of our largest customers are national and regional retail chains. The retail channel in the United States has experienced significant shifts in market share among competitors in recent years, including as a result of the presence and continued growth of e-commerce retailers. Any current or future economic slowdown, slow economic recovery, or uncertain economic outlook could further adversely affect our key customers. Our business, results of operations and financial condition may be adversely affected if our customers file for bankruptcy protection and/or cease doing business, significantly reduce the number of stores they operate, significantly reduce their purchases from us, do not pay us for their purchases, or if their payments to us are delayed or reduced because of bankruptcy or other factors beyond our control.

Our inability to effectively develop, manufacture, procure, distribute and sell our products with an omni-channel approach may adversely affect our business, results of operations and financial condition.

The retail channel in the United States is rapidly evolving, and consumers are increasingly embracing online shopping, including through mobile commerce applications.  Many of our retail customers are experiencing a shift of their total consumer expenditures from sales at physical retail locations to sales on digital platforms.  Our retail customers expect us, as a product supplier, to assist them to deliver a seamless omni-channel shopping experience.   Additionally, our strategy includes a greater focus on our own direct-to-consumer online shopping opportunities.   We continue to invest in e-commerce technology, including the development of our digital platforms and mobile commerce applications.  Our business, results of operations and financial condition may be adversely affected if we are unable to effectively develop, manufacture, procure, distribute and sell our products with an omni-channel approach.     


6


Our business, results of operations and financial condition may be adversely affected by volatility in the demand for our products.
Our success depends on the sustained demand for our products. Many factors affect the level of consumer spending on our products, including, among other things, general business conditions, interest rates, the availability of consumer credit, taxation, the effects of war, terrorism or threats of war, civil unrest, fuel prices, consumer demand for our products based upon, among other things, consumer trends and the availability of alternative products, and consumer confidence in future economic conditions. A decline in economic activity in the United States or other regions of the world, a slow economic recovery, or an uncertain outlook, in addition to adversely affecting our customers, could adversely affect our business, results of operations and financial condition because of, among other things, reduced consumer spending on discretionary items, including our products. We also routinely utilize new artwork, designs or licensed intellectual property in connection with our products, and our inability to design, select, procure, maintain or sell consumer-desired artwork, designs or licensed intellectual property could adversely affect the demand for our products, which could adversely affect our business, results of operations and financial condition.

Our business, results of operations and financial condition may be adversely affected if we are unable to compete successfully against our competitors.
Our success depends in part on our ability to compete against our competitors in our highly competitive markets. Our competitors, including domestic businesses, foreign manufacturers who market directly to our customer base, and importers of products, may be able to offer similar products with more favorable pricing, servicing and/or terms of sale or may be able to provide products that more readily meet customer requirements or consumer preferences. Our inability to successfully compete against our competitors could adversely affect our business, results of operations and financial condition.

Our business, results of operations and financial condition may be adversely affected if we are unable to hire and retain sufficient qualified personnel.
Our success depends, to a substantial extent, on the ability, experience and performance of our senior management. In order to hire and retain qualified personnel, including our senior management team, we seek to provide competitive compensation programs. Our inability to retain our senior management team, or our inability to attract and retain qualified replacement personnel, may adversely affect us. We also regularly hire a large number of seasonal employees. Any difficulty we may encounter in hiring seasonal employees may result in significant increases in labor costs, which may have an adverse effect on our business, results of operations and financial condition.

Employee benefit costs may adversely affect our business, results of operations and financial condition.
We seek to provide competitive employee benefit programs to our employees. Employee benefit costs, such as healthcare costs for our eligible and participating employees, may increase significantly at a rate that is difficult to forecast, in part because of the current and/or future impact of federal healthcare legislation on our employer-sponsored medical plans. Higher employee benefit costs could have an adverse effect on our business, results of operations and financial condition.

Our acquisition strategy involves risks, and difficulties in integrating potential acquisitions may adversely affect our business, results of operations and financial condition.
We regularly evaluate potential acquisition opportunities to support, strengthen and grow our business. In fiscal 2019, we completed the acquisition of substantially all of the business and net assets of Fitlosophy. In fiscal 2018, we completed the acquisition of substantially all of the business and net assets of Simplicity. In fiscal 2017, we completed the acquisitions of substantially all of the businesses and net assets of McCall and Schiff. We cannot be sure that we will be able to locate suitable acquisition candidates, acquire possible acquisition candidates, acquire such candidates on commercially reasonable terms, or integrate acquired businesses successfully. Future acquisitions may require us to incur debt and contingent liabilities, which may adversely affect our business, results of operations and financial condition. The process of integrating acquired businesses into our existing operations may result in operating, contract and supply chain difficulties, such as the failure to retain customers or management personnel. Also, prior to our completion of any acquisition, we could fail to discover liabilities of the acquired business for which we may be responsible as a successor owner or operator in spite of any investigation we may make prior to the acquisition. Such difficulties may divert significant financial, operational and managerial resources from our existing operations, and make it more difficult to achieve our operating and strategic objectives. The diversion of management attention, particularly in a difficult operating environment, may adversely affect our business, results of operations and financial condition.


7


Our strategy to continuously review the efficiency, productivity and competitiveness of our business may result in our decision to divest or close selected operations.  Any divesture or closure involves risks, and decisions to divest or close selected operations may adversely affect our business, results of operations and financial condition.
We regularly evaluate the efficiency, productivity and competitiveness of our business, including our competitiveness within our product categories.  As part of such review, we also regularly evaluate the efficiency and productivity of our production and distribution facilities. If we decide to divest a portion of our business, we cannot be sure that we will be able to locate suitable buyers or that we will be able to complete such divestiture successfully, timely or on commercially reasonable terms. If we decide to close a portion of our business, we cannot be sure of the effect such closure would have on the productivity or effectiveness of the remaining portions of our business, including our ongoing relationships with suppliers and customers, or of the expected success, timing or costs relating to such closure. Activities associated with any divestiture or closure may divert significant financial, operational and managerial resources from our existing operations, and make it more difficult to achieve our operating and strategic objectives.  Accordingly, future decisions to divest or close any portion of our business may adversely affect our business, results of operations and financial condition.

Our inability to protect our intellectual property rights, or infringement claims asserted against us by others, may adversely affect our business, results of operations and financial condition.
We have a number of copyrights, patents, tradenames, trademarks and intellectual property licenses which are used in connection with our products. While our operations are not dependent upon any individual copyright, patent, tradename, trademark or intellectual property license, we believe that the collective value of our intellectual property is substantial. We rely upon copyright, patent, tradename and trademark laws in the United States and other jurisdictions and on confidentiality agreements with some of our employees and others to protect our proprietary rights. If our proprietary rights were infringed, our business could be adversely affected. In addition, our activities could infringe upon the proprietary rights of others, who could assert infringement claims against us. We could face costly litigation to defend these claims. If we are unsuccessful in defending such claims, our business, results of operations and financial condition could be adversely affected.
We seek to register certain of our copyrights, patents, tradenames and trademarks in the United States and elsewhere. These registrations could be challenged by others or invalidated through administrative process or litigation. In addition, our confidentiality agreements with some employees or others may not provide adequate protection in the event of unauthorized use or disclosure of our proprietary information, or if our proprietary information otherwise becomes known, or is independently developed by competitors.

We are subject to cyber security risks and may incur increasing costs in efforts to minimize those risks and to comply with regulatory standards.
We use information technologies to securely manage operations and various business functions. We rely on various technologies to process, store and report on our business and interact with customers, vendors and employees. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy. Despite our efforts, and those of our third party vendors, to develop and maintain security systems to protect this information, the security of our computer networks could be compromised through circumstances beyond our control, including systems failures, viruses, security breaches or cyber incidents such as intentional cyber attacks aimed at theft of sensitive data, or inadvertent cyber-security compromises. Such events could impact operations and confidential information could be misappropriated, which could lead to negative publicity, loss of sales and profits or cause us to incur significant costs to reimburse third-parties for damages which could adversely impact profits. As a result, our business, results of operations and financial condition could be adversely affected.

Various laws and governmental regulations applicable to a manufacturer or distributor of consumer products may adversely affect our business, results of operations and financial condition.
Our business is subject to numerous federal, state, provincial, local and foreign laws and regulations, including laws and regulations with respect to labor and employment, product safety, including regulations enforced by the United States Consumer Products Safety Commission, import and export activities, the Internet and e-commerce, antitrust issues, taxes, chemical usage, air emissions, wastewater and storm water discharges and the generation, handling, storage, transportation, treatment and disposal of waste materials, including hazardous materials. Although we believe that we are in substantial compliance with all applicable laws and regulations, because legal requirements frequently change and are subject to interpretation, we are unable to predict the ultimate cost of compliance or the consequences of non-compliance with these requirements, or the affect on our operations, any of which may be significant. If we fail to comply with applicable laws and regulations, we may be subject to criminal sanctions or civil remedies, including fines, injunctions, or prohibitions on importing or exporting. A failure to comply with applicable laws and regulations, or concerns about product safety, also may lead to a

8


recall or post-manufacture repair of selected products, resulting in the rejection of our products by our customers and consumers, lost sales, increased customer service and support costs, and costly litigation. There is risk that any claims or liabilities, including product liability claims, relating to such noncompliance may exceed, or fall outside the scope of, our insurance coverage. Further, a failure to comply with applicable laws and regulations with respect to the Internet and e-commerce activities (which cover issues relating to user privacy, data protection, copyrights and consumer protection), such as the European Union’s General Data Protection Regulation (GDPR), may subject us to significant liabilities. GDPR is a comprehensive European Union privacy and data protection reform effective in 2018. GDPR applies to companies that are organized in the European Union (or otherwise provide services to consumers who reside in the European Union), imposes strict standards regarding the sharing, storage, use, disclosure and protection of end user data and significant penalties (monetary and otherwise) for non-compliance. Any failure to comply with GDPR, or other regulatory standards, could subject us to legal and reputational risks. Misuse of or failure to secure personal information could also result in violation of data privacy laws and regulations, proceedings against the Company by governmental entities or others, damage to our reputation and credibility, and as a result, our business, results of operations and financial condition could be adversely affected. We cannot be certain that existing laws or regulations, as currently interpreted or reinterpreted in the future, or future laws or regulations, will not have an adverse effect on our business, results of operations and financial condition.

Unanticipated changes to our income tax liabilities may adversely affect our business, results of operations and financial condition.
As a corporation operating in various international jurisdictions, our business is subject to a wide variety of laws, regulations and policies, including, but not limited to, those of the United States, Canada, the United Kingdom, Australia, Hong Kong, China and India. There can be no assurance that laws, regulations and policies will not be changed in ways that will impact our income tax provision or our income tax assets and liabilities. We are also subject to income tax audits in the United States and foreign jurisdictions in which we operate. The tax laws to which we are subject are inherently complex and ambiguous, and we must interpret the applicable laws and make subjective judgments about both the expected outcome upon challenge by the applicable taxing authorities and our global provision for income taxes and other tax liabilities. Although we believe that our tax estimates are reasonable, there is risk that the final determination of tax audits or tax disputes will be different from what is reflected in our historical income tax provisions and accruals. Tax authorities in the various jurisdictions in which we have a presence and conduct business may disagree with our tax positions and assess additional taxes.

Additionally, our effective tax rate in the future could be adversely affected by changes to our operating structure, changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, and the discovery of new information in the course of our tax return preparation process. The carrying value of deferred tax assets, which are predominantly in the United States, is dependent on our ability to generate future taxable income in the United States. In fiscal 2019, the Company recorded a valuation allowance to fully offset its net deferred tax assets. Increases in our income tax liabilities could adversely affect our business, results of operations and financial condition.

Further, as a company based in the United States but doing business in international markets through subsidiaries, we are subject to intercompany pricing rules in the jurisdictions where we operate. Tax rates vary from country to country, and if regulators determine that our profits in one jurisdiction should be increased, we may not be able to fully offset the adjustment in the other jurisdictions, which would increase our effective tax rate. Additionally, the Organization for Economic Cooperation and Development (“OECD”) has adopted guidelines regarding base erosion and profit shifting. As a result of the adoption of these guidelines by the OECD, individual taxing jurisdictions have also adopted some form of these guidelines as well. As such, we may need to change our approach to intercompany transfer pricing in order to maintain compliance under the new rules. Our effective tax rate may increase or decrease depending on the current location of global operations at the time of the change. An increase in our effective tax rate may adversely affect our business, results of operations and financial condition.

Further, in December 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The Tax Act revised the U.S. corporate income tax by, among other things, lowering the corporate income tax rate from 35% to 21%, adopting a quasi-territorial income tax system and imposing a one-time transition tax on foreign unremitted earnings, and setting limitations on deductibility of certain costs (e.g., interest expense). An increase in our effective tax rate as a result of provisions in the Tax Act may adversely affect our business, results of operations, and financial condition.

Our business, results of operations and financial condition may be adversely affected by national or global changes in economic or political conditions.

9


Our business, results of operations and financial condition may be adversely affected by national or global changes in economic or political conditions, including foreign currency fluctuations and fluctuations in inflation and interest rates, trade disputes such as so-called "Section 301" tariffs imposed on certain goods imported from China into the United States, a national or international economic downturn, any future terrorist attacks, acts of war, threats of war, civil unrest, and the national and global military, diplomatic and financial exposure to such attacks or other threats.

We are subject to a number of restrictive covenants under our borrowing arrangement, including customary operating restrictions and customary financial covenants. Our business, results of operations and financial condition may be adversely affected if we are unable to maintain compliance with such covenants.
Our borrowing arrangement contains a number of restrictive covenants, including customary operating restrictions that limit our ability to engage in activities such as incurring additional debt, making investments, granting liens on our assets, making capital expenditures, paying dividends and making other distributions on our capital stock, and engaging in mergers, acquisitions, asset sales and repurchases of our capital stock. Under such arrangements, we are also subject to customary financial covenants, including covenants requiring us to maintain our fixed charge coverage ratio at or above a specified minimum level and to attain specified minimum EBITDA levels. Compliance with the financial covenants contained in our borrowing arrangements is based on financial measures derived from our operating results.
If our business, results of operations or financial condition is adversely affected by one or more of the risk factors described above, or other factors described in this annual report on Form 10-K or elsewhere in our filings with the SEC, we may be unable to maintain compliance with these covenants. If we fail to comply with such covenants, our lenders under our borrowing arrangements could stop advancing funds to us under these arrangements and/or demand immediate payment of amounts outstanding under such arrangements. Under such circumstances, we may need to seek alternate financing sources to fund our ongoing operations and to repay amounts outstanding and satisfy our other obligations under our existing borrowing arrangements. Such financing may not be available on favorable terms, if at all. Consequently, we may be restricted in how we fund ongoing operations and strategic initiatives and deploy capital, and in our ability to make acquisitions and to pay dividends. As a result, our business, results of operations and financial condition may be further adversely affected if we are unable to maintain compliance with the covenants under our borrowing arrangements.

The replacement of LIBOR with an alternative reference rate may adversely affect interest expense related to outstanding debt.
On July 27, 2017, the Financial Conduct Authority, or FCA, announced that it would phase out LIBOR as a benchmark by the end of 2021. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021. When LIBOR ceases to exist, we may need to amend the credit and loan agreements with our lenders that utilize LIBOR as a factor in determining the interest rate based on a new standard that is established, if any. The transition to an alternative rate will require careful and deliberate consideration and implementation so as to not disrupt the stability of financial markets. There is no guarantee that a transition from LIBOR to an alternative will not result in financial market disruptions, significant increases in benchmark rates, or borrowing costs to borrowers, any of which could have an adverse effect on our business, results of operations and financial condition.

Significant developments stemming from the U.K.’s referendum on membership in the EU could have a material adverse effect on us.
We have operations in the United Kingdom. On June 23, 2016, the U.K. held a referendum and voted in favor of leaving the European Union, or EU (commonly referred to as “Brexit”). The U.K.’s exit from the EU is expected to occur by the end of October 2019, but the U.K. government has thus far not passed a withdrawal agreement through Parliament, and has experienced difficulty in its efforts to do so. If an agreement is passed and the U.K. exits the EU prior to the end of October 2019, there will be a transition period (currently expected to last through December 2020) to allow for businesses and individuals to adjust to its changes. Otherwise, the U.K. is expected to be required to leave the EU without an agreement or transition period in place. Brexit has created political and economic uncertainty, particularly in the U.K. and the EU. Our business could be affected during this period of uncertainty, and perhaps longer, by the impact of the U.K. referendum. In addition, our business could be negatively affected by new trade agreements between the U.K. and other countries, including the U.S., and by the possible imposition of trade or other regulatory barriers in the U.K. These possible negative impacts, and others resulting from the U.K.’s actual or threatened withdrawal from the EU, may adversely affect our business, results of operations and financial condition.

We may experience economic harm as a result of the effects of climate change.
We cannot predict the future effects of climate change or how climate change may progress. However, the impact of climate change could have a material adverse effect on our properties, operating results and financial condition. Potential

10


impacts of climate change could include changes in weather patterns affecting the frequency and intensity of storms and rising sea levels. Our properties or the regions in which they are located may become adversely affected by these conditions. Climate change may also have indirect effects on our business by increasing the cost of, or decreasing the availability of, property insurance on terms we find acceptable, by increasing the cost of energy, or by impacting our operating activities. We may not be able to mitigate effectively any such effects, which may adversely affect our business, results of operations and financial condition.

Engaging in proxy contests can be costly and time-consuming and may thus have an adverse effect on our business, results of operations and financial condition.
Stockholders of the Company may from time to time engage in proxy solicitations, advance stockholder proposals or otherwise attempt to effect changes or acquire control over the Company. Campaigns by stockholders to effect changes at publicly-traded companies are sometimes led by investors seeking to increase short-term stockholder value by advocating corporate actions such as financial restructuring, increased borrowing, special dividends, stock repurchases or even sales of assets or the entire company.
On April 25, 2019, we received a letter from Varana Capital Focused, LP (“Varana”), the beneficial holder of approximately four percent of our outstanding shares of common stock, that indicates Varana’s intention to nominate ten director candidates to replace our eight-member Board of Directors and cause a change of control of the Company at our 2019 Annual Meeting of Stockholders. If a proxy contest involving Varana ensues, or if we become engaged in a proxy contest with another activist stockholder in the future, our business could be adversely affected because:
responding to proxy contests and other actions by activist stockholders can disrupt our operations, be costly and time-consuming, and divert the attention of our Board and senior management from the pursuit of business strategies, which could adversely affect our business, results of operations and financial condition;
perceived uncertainties as to our future direction as a result of changes to composition of our Board may lead to the perception of a change in the direction of the business, instability or lack of continuity which may be exploited by our competitors, cause concern to our current or potential customers, or result in the loss of potential business opportunities and make it more difficult to attract and retain qualified personnel and business partners; and
if individuals are elected to our Board with a specific agenda, it may adversely affect our ability to effectively implement our business strategy and create additional value for our stockholders.

If our business, results of operations or financial condition is adversely affected as a result of any of the risk factors described above or elsewhere in this annual report on Form 10-K or our other SEC filings, we may be required to incur financial statement charges, such as asset or goodwill impairment charges, which may, in turn, have a further adverse effect on our results of operations and financial condition.
In fiscal 2019, the Company recorded a non-cash impairment charge of $15,309,000 due to a full impairment of goodwill from a fiscal 2019 acquisition of $1,390,000, full impairment of certain customer relationship intangibles of $4,620,000, and partial and full impairment of certain tradename intangibles of $9,299,000. Also, in connection with a restructuring plan, the Company recorded an impairment of property, plant and equipment at one of the affected facilities in the United Kingdom of $1,398,000, which is included in restructuring expense on the consolidated statement of operations. If our business, results of operations or financial condition are adversely affected by one or more circumstances, such as any one or more of the risk factors above or other factors described in this annual report on Form 10-K and elsewhere in our SEC filings, we then may be required under applicable accounting rules to incur additional charges associated with reducing the carrying value on our financial statements of certain assets, such as goodwill, intangible assets or tangible assets.

Other indefinite lived intangible assets, such as our tradenames, are required to be tested annually for impairment. Authoritative guidance gives an entity the option to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. To perform a qualitative assessment, an entity must identify and evaluate changes in economic, industry and entity-specific events and circumstances that could affect the significant inputs used to determine the fair value of an indefinite-lived intangible asset. If the result of the qualitative analysis indicates it is more likely than not that an indefinite-lived intangible asset is impaired, a more detailed fair value calculation will need to be performed which is used to identify potential impairments and to measure the amount of impairment losses to be recognized, if any. We calculate the fair value of our tradenames using a “relief from royalty payments” methodology. We also review long-lived assets, except for goodwill and indefinite lived intangible assets, for impairment when circumstances indicate the carrying value of an asset may not be recoverable. If such assets are considered to be impaired, we will recognize, for impairment purposes, an amount by which the carrying amount of the assets exceeds the fair value of the assets.

11


If we are required to incur any of the foregoing financial charges, our results of operations and financial condition may be further adversely affected.
Item 1B. Unresolved Staff Comments.
None.

12


Item 2. Properties.
The following table sets forth the location and approximate square footage of the Company’s manufacturing and distribution facilities:
 
 
Use

Approximate Square Feet
 
 
Owned

Leased
U.S. Properties:
 
 
 
 
 
 
Florence, Alabama
 
Distribution



100,000

Florence, Alabama
 
Distribution



180,000

Shorewood, Illinois
 
Distribution
 

 
493,000

Manhattan, Kansas
 
Manufacturing and distribution
 
282,000

 

Hagerstown, Maryland
 
Manufacturing and distribution

284,000



Milford, New Hampshire
 
Manufacturing



58,000

Danville, Pennsylvania
 
Distribution

133,000



Berwick, Pennsylvania
 
Manufacturing and distribution

213,000



Berwick, Pennsylvania
 
Manufacturing and distribution

220,000



Berwick, Pennsylvania
 
Distribution

226,000



Berwick, Pennsylvania
 
Distribution



441,000

Batesburg, South Carolina
 
Manufacturing

229,000



Total U.S. Properties
 


1,587,000


1,272,000

 
 
 
 
 
 
 
International Properties:
 
 
 
 
 
 
Revesby, Australia
 
Distribution
 

 
27,000

Coimbatore, India
 
Manufacturing and distribution
 
100,000

 

Coimbatore, India
 
Manufacturing
 

 
31,000

Stockport, United Kingdom
 
Distribution
 

 
20,000

Total International Properties
 
 
 
100,000

 
78,000

Total Properties
 
 
 
1,687,000

 
1,350,000

In addition to the above facilities, the Company also utilizes owned and leased space aggregating approximately 254,000 square feet for various marketing and administrative purposes in the United States, and utilizes approximately 9,000 square feet as an office and showroom in Hong Kong. The headquarters and principal executive office of the Company are located in Plymouth Meeting, Pennsylvania.
Item 3. Legal Proceedings.
CSS and its subsidiaries are involved in ordinary, routine legal proceedings that are not considered by management to be material. In the opinion of Company counsel and management, the ultimate liabilities resulting from such legal proceedings will not materially affect the consolidated financial position of the Company or its results of operations or cash flows.
Item 4. Mine Safety Disclosures.
Not applicable.


13


PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The common stock of the Company is listed for trading on the New York Stock Exchange. The following table sets forth the high and low sales prices per share of that stock, and the dividends declared per share, for each of the quarters during fiscal 2019 and fiscal 2018.
 
Fiscal 2019
 

 

Dividends
Declared
 
High

Low

First Quarter
$
17.99


$
15.34


$
0.20

Second Quarter
17.63


13.72


0.20

Third Quarter
14.10


8.90


0.20

Fourth Quarter
11.21


5.99


0.20

 
 
 
 
 
 
Fiscal 2018
 

 

Dividends
Declared
 
High

Low

First Quarter
$
27.77


$
24.60


$
0.20

Second Quarter
28.97


26.02


0.20

Third Quarter
30.13


26.54


0.20

Fourth Quarter
28.20


17.50


0.20

At May 28, 2019, there were approximately 3,450 holders of the Company’s common stock and there were no shares of preferred stock outstanding.
Under the terms of the amended asset-based credit facility described in Note 15, the Company does not have the ability to pay cash dividends. 

14



Item 6. Selected Financial Data.
 
 
Years Ended March 31,
 
2019 (a)

2018 (b)

2017 (c)

2016

2015
 
(in thousands, except per share amounts)
Statement of Operations Data:









Net sales
$
382,263


$
361,896


$
322,431


$
317,017


$
313,044

Income (loss) from continuing operations before income taxes
(45,441
)

(46,059
)

29,687


26,641


26,641

Net income (loss)
(53,545
)

(36,520
)

28,504


17,236


16,954

 
 
 
 
 
 
 
 
 
 
Net income (loss) per common share:
 








Basic
$
(5.97
)

$
(4.01
)

$
3.14


$
1.88


$
1.82

Diluted
$
(5.97
)

$
(4.01
)

$
3.13


$
1.87


$
1.80

 
 
 
 
 
 
 
 
 
 
Balance Sheet Data:









Working capital
$
91,963


$
176,701


$
196,106


$
176,886


$
190,047

Total assets
285,595


365,188


339,194


309,926


309,473

Short term borrowings
26,139

 

 

 

 

Current portion of long-term debt
316

 
228

 
220

 

 

Long-term debt, net of current portion
13

 
40,228

 
456

 

 

Stockholders’ equity
189,931

 
253,695


294,154


271,490


270,255

 
 
 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.80


$
0.80


$
0.80


$
0.74


$
0.63

 
(a)
In fiscal 2019, the Company recorded a non-cash impairment charge of $15,309,000 due to a full impairment of goodwill from a fiscal 2019 acquisition of $1,390,000, full impairment of certain customer relationship intangibles of $4,620,000, and partial and full impairment of certain tradename intangibles of $9,299,000. Also, in connection with a restructuring plan, the Company recorded an impairment of property, plant and equipment at one of the affected facilities in the United Kingdom of $1,398,000, which is included in restructuring expense on the consolidated statement of operations.
(b)
In fiscal 2018, the Company recorded a non-cash pre-tax impairment charge of $33,358,000 due to a full impairment of goodwill and partial impairment of a tradename. The foregoing impairment charge was partially offset by a $6,233,000 tax benefit.
(c)
In fiscal 2017, the Company recorded a non-taxable bargain purchase gain of $19,990,000 related to the acquisition of substantially all of the net assets and business of McCall on December 13, 2016 and the acquisition of all of the assets of Schiff on July 8, 2016. These acquisitions were accounted for using the acquisition method and resulted in a bargain purchase due to the fair value of the net assets acquired of $35,029,000 exceeding the amount paid of $15,039,000.

15


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
The overall objective of the Company is to grow profitable sales and improve return on invested capital ("ROIC") through five strategic pillars. These strategic pillars include:
*Defend the base business - Design, product innovation, category leadership
*
Expand to adjacent categories with a focus on brands - Focus on fragmented markets, brands, omni-channel
*Build an omni-channel business model - Dedicated resources, leverage technology
*
Improve ROIC by maximizing margins while minimizing capital investment - Streamline and focus on economic value add and working capital
*Build a collaborative, One CSS culture - Communication, accountability, diversity
Approximately 70% of the Company’s net sales for fiscal 2019 are attributable to products within our gift and craft categories, with the remainder attributable to products in the seasonal category. The seasonal product category is defined as products designed, produced and sold to mass market and online retailers for holidays and seasonal events, including Christmas, Valentine’s Day, Easter and back-to-school. Production forecasts for these products are known well in advance of shipment. The gift product category is defined as products primarily designed to celebrate certain life events or special occasions such as weddings, birthdays, anniversaries, graduations, or the birth of a child. Gift products are primarily sold into mass, specialty, and online retailers, floral and packaging wholesalers and distributors, and are generally ordered on a replenishment basis throughout the year. The craft product category reflects products used for craft activities and includes ribbons, trims, buttons, sewing patterns, knitting needles, needle arts and kids crafts. Craft products are sold to mass market, specialty, and online retailers and are generally ordered on a replenishment basis throughout the year.
The Company has relatively high market share in many products across its categories. Most of these markets have declined in recent years. The Company continues to confront significant price pressure as its competitors source certain products from overseas and its customers increase direct sourcing from overseas factories. Increasing customer concentration has augmented customers' bargaining power, which has also contributed to price pressure. In recent fiscal years, the Company has experienced lower sales in certain Christmas product lines, craft ribbon product lines, gift stationery, infant product line, and in our non-retail packaging and floral product lines due to factors such as continued price pressure, inventory destocking, as well as a decline in brick and mortar retail traffic.
The Company has taken several measures to respond to sales volume, cost and price pressures. The Company believes it continues to have strong core product offerings which have allowed it to compete effectively in this competitive market. In addition, the Company is pursuing new product initiatives related to seasonal, gift and craft products, including new licensed and non-licensed product offerings, as well as increased investment in omni-channel offerings.
CSS continually invests in product and packaging design and product knowledge to assure that it can continue to provide unique added value to its customers. In addition, CSS maintains purchasing offices in Hong Kong and China to be able to provide foreign-sourced products at competitive prices. CSS continually evaluates the efficiency and productivity of its production and distribution facilities and of its back office operations to maintain its competitiveness.
CSS' domestically-manufactured plastic decorative ribbon product lines have experienced price pressure and reduced sales volume because of competition from low-priced imports from China. In December 2017, our Berwick Offray company filed trade remedy petitions with the U.S. International Trade Commission (“ITC”) and the U.S. Department of Commerce (“Commerce Department”) asserting that the competing Chinese products are being imported at less-than-fair value and that they benefit from unfair governmental subsidies.  In the petitions, Berwick Offray requested the imposition of trade remedies in the form of antidumping (“AD”) and countervailing (“CV”) duties on plastic decorative ribbon from China.  The ITC and the Commerce Department completed their respective investigations and issued their final determinations during the fourth quarter of fiscal 2019.  In February 2019, the ITC found that U.S. producers of plastic decorative ribbon have been materially injured by unfairly traded imports of plastic decorative ribbon from China.  In March 2019, the Commerce Department imposed trade remedies, in the form of AD and CV duties, on imports of plastic decorative ribbon from China at combined AD and CV duty rates ranging from 78.14% to 464.71%.  These rates are subject to possible adjustment through an annual administrative review process, and the AD and CV duty orders issued by the Commerce Department are subject to a sunset review once every five years.  The potential impact of these proceedings is not determinable at this time. 

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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.
The Company will continue to build on existing relationships with seasonal, gift and craft customers by expanding and diversifying its product lines and thereby growing its presence in the largest retailers in North America. This includes both capitalizing on opportunities for organic growth in existing businesses as well as acquiring companies which fit into appropriate acquisition parameters. Though we are pausing on acquisitions in the near term, we will continue to actively meet with seasonal, gift and craft companies to review and assess potential acquisition targets. Historically, significant revenue growth at CSS has come through acquisitions. Over the long term, management anticipates that it will continue to consider acquisitions as a strategy to stimulate growth.
On June 1, 2018, a subsidiary of the Company completed the acquisition of substantially all of the business and net assets of Fitlosophy, Inc. ("Fitlosophy") for $2,500,000 in cash and transaction costs of $25,000, which are included in selling, general and administrative expenses in the consolidated statement of operations. In addition to the $2,500,000 paid at closing, the Company may pay up to an additional $10,500,000 of contingent earn-out consideration, in cash, if net sales of certain products meet or exceed five different thresholds during the period from the acquisition date through March 31, 2023. The contingent consideration payments will be paid, if at all, generally within 20 days after the end of each rolling twelve-month measurement period (quarterly through March 31, 2023). At the date of acquisition, the estimated fair value of the contingent earn-out consideration was $1,600,000. As of March 31, 2019, we updated our assessment of the fair value of the contingent consideration to be $1,366,000 which is included in accrued other liabilities in the consolidated balance sheet as of March 31, 2019. Fitlosophy is devoted to creating, marketing, and distributing innovative products that inspire people to develop healthy habits by focusing on effective goal-setting through journaling. Products include a complete line of fitness and wellness planning products all sold under the fitlosophyTM, live life fitTM and fitbookTM brands. The acquisition was accounted for using the acquisition method and the excess of cost over the fair market value of the net tangible and identifiable intangible assets acquired of $1,390,000 was recorded as goodwill. The Company determined that a triggering event occurred due to the fact that the Company’s total stockholders’ equity was in excess of the Company's market capitalization. Given this circumstance, the Company bypassed the option to assess qualitative factors to determine the existence of impairment and proceeded directly to the quantitative goodwill impairment test. Based on the results of its impairment test, the Company recorded an impairment charge of $1,390,000. As of March 31, 2019 and 2018, the Company had no goodwill.
On November 3, 2017, the Company completed the acquisition of substantially all of the net assets and business of Simplicity Creative Group from Wilton for a total consideration of $69,617,000 and transaction costs of $3,411,000. Simplicity is a leading provider of home sewing patterns, decorative trims, knitting and crocheting tools, needle arts and kids' crafts products under the Simplicity®, Wrights®, Boye®, Dimensions®, and Perler® brand names. Simplicity's products are sold to mass-market retailers, specialty fabric and craft chains, wholesale distributors and online customers. The Company primarily financed the acquisition with borrowings of $60,000,000 under its credit facility. A portion of the purchase price is being held in escrow for certain indemnification obligations. The acquisition was accounted for using the acquisition method and the excess of cost over the fair market value of the net tangible and identifiable intangible assets acquired of $9,642,000 was recorded as goodwill. This goodwill was subsequently written off as a result of the Company’s annual impairment testing performed in the fourth quarter of fiscal 2018 as further described in Note 3 to the consolidated financial statements.
On December 13, 2016, the Company completed the acquisition of substantially all of the net assets and business of The McCall Pattern Company and certain subsidiaries for $13,914,000 in cash plus transaction costs of $1,484,000. McCall designs, manufactures, and sells home sewing patterns under the McCall’s®, Butterick®, Kwik Sew® and Vogue Patterns® brand names. McCall is a leading provider of home sewing patterns, selling to mass market retailers, specialty fabric and craft chains, and wholesale distributors. The acquisition was accounted for using the acquisition method and resulted in a bargain purchase due to the fair value of the net assets acquired of $33,528,000 exceeding the amount paid. In connection with this bargain purchase, the Company recorded a gain of $19,614,000 in the consolidated statement of operations in fiscal 2017.
On July 8, 2016, a subsidiary of the Company completed the acquisition of substantially all of the assets of Schiff for $1,125,000 in cash. Schiff was a leading U.S. manufacturer and distributor of narrow woven ribbon prior to its April 2016 Chapter 11 bankruptcy filing. The acquisition was accounted for using the acquisition method and resulted in a bargain purchase due to the fair value of the net assets acquired of $1,501,000 exceeding the amount paid. In connection with this bargain purchase, the Company recorded a gain of $376,000 in the consolidated statement of operations in fiscal 2017.
Litigation
CSS and its subsidiaries are involved in ordinary, routine legal proceedings that are not considered by management to be material. In the opinion of Company counsel and management, the ultimate liabilities resulting from such legal

17


proceedings will not materially affect the consolidated financial position of the Company or its results of operations or cash flows.
Results of Operations
Fiscal 2019 Compared to Fiscal 2018
Consolidated net sales for fiscal 2019 increased to $382,263,000 from $361,896,000 in fiscal 2018. The increase in net sales was due to incremental sales of $55,459,000 related to the acquisition of Simplicity on November 2, 2017. This increase was offset by a $14,418,000 decrease in gift sales consisting primarily of a decrease of $6,700,000 in infant products, $2,266,000 in journals, $1,710,000 in social gifts, $1,766,000 in all occasion cards, and $1,007,000 in packaging and floral. Craft sales had a decrease of $11,660,000 primarily driven by a decrease of $6,423,000 in ribbons and $1,865,000 in buttons. Seasonal sales experienced a decrease of $9,014,000 which was primarily driven by a decrease of $3,729,000 in Valentine products, $1,718,000 in Easter products, $1,780,000 in Christmas bows and ribbons, and $1,658,000 in Christmas tags.
Gross profit for fiscal 2019 decreased to $89,290,000 from $92,829,000 in fiscal 2018. The decrease in gross profit excluding Simplicity was primarily driven by a decrease in gross sales of $16,268,000 due to lower sales volume and $10,416,000 due to changes in product mix, furthered by $1,375,000 higher customer claims and an increase in cost of sales of $1,771,000 as a result of the Company's initiative to streamline product offerings. This decrease in gross profit was partially offset by $8,354,000 of lower McCall’s inventory step-up amortization. The overall decrease in gross profit for the base business was partially offset by an increased gross profit of $18,260,000 from a full year of the Simplicity business results.
Selling, general and administrative (“SG&A”) expenses for fiscal 2019 increased to $113,349,000 from $105,201,000 in fiscal 2018 primarily driven by a full year results of the Simplicity business resulting in an incremental increase in SG&A expenses of $9,818,000. This increase was driven by increased selling and marketing costs of $8,006,000, and general and administration expenses of $1,628,000. This increase in cost was partially offset by lower SG&A expenses of $2,447,000 for McCall’s due to savings attributable to the integration of the Simplicity and McCall businesses. Further increases in SG&A were driven by higher consulting and technology costs related to systems implementations, offset by lower personnel related costs resulting in a net increase of $1,060,000. This was partially offset by lower commission and selling expenses of $234,000.
During fiscal 2019, the Company incurred $15,309,000 of impairment charges compared to $33,358,000 in fiscal 2018. Fiscal 2019 charges included impairment of goodwill from a fiscal 2019 acquisition, impairment of a customer list intangible, and a partial and full impairment of certain tradename intangibles. See further discussion in Note 3 to the consolidated financial statements.
Interest expense, net for fiscal 2019 increased to $3,184,000 from $681,000 in fiscal 2018. The increase in interest expense was primarily driven by the increase in average borrowings and higher borrowing rates under the Company's credit facilities throughout fiscal 2019. Further increase in interest expense was driven by the write-off of the deferred financing costs related to the early termination of the Prior Credit Facillity, and the recognition of the fair value of the interest rate swap agreement. See further discussion in Notes 8 and 10 to the consolidated financial statements.
Income taxes, as a percentage of income (loss) before income taxes, were (18)% in fiscal 2019 and 21% in fiscal 2018. The increase in income taxes was primarily attributable to the recording of a valuation allowance that fully offset the Company’s U.S. net deferred tax assets.
The net loss for the fiscal year ended March 31, 2019 was $53,545,000, or $5.97 per diluted share compared to a net loss of $36,520,000, or $4.01 per diluted share in fiscal 2018.
Fiscal 2018 Compared to Fiscal 2017
Consolidated net sales for fiscal 2018 increased to $361,896,000 from $322,431,000 in fiscal 2017. The increase in net sales was due to incremental sales of $35,581,000 related to the acquisition of Simplicity on November 3, 2017 and incremental sales of $20,174,000 related to the acquisition of McCall on December 13, 2016. There was a decline in seasonal sales of $11,558,000, consisting primarily of Christmas gift tags of $5,422,000, ribbons and bows of $2,186,000, school products of $1,458,000, seasonal gift card holders of $1,052,000 and Valentines of $915,000. In our gift category, we had a sales decline of $2,969,000 in packaging and wholesale products, $2,810,000 in infant products and $1,342,000 in journals, which was partially offset by higher sales of gift card holders of $1,714,000, everyday ribbons, bags and bows of $1,335,000, and all occasion cards of $1,256,000. The remaining sales decline was primarily associated with lower craft sales of $1,925,000.

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Cost of sales, as a percentage of net sales, increased to 74% in fiscal 2018 compared to 71% in fiscal 2017 due to the recognition of the incremental McCall and Simplicity inventory step-up through cost of sales of $13,337,000 and $4,544,000, respectively, in fiscal 2018 and $3,577,000 of incremental McCall inventory step-up through cost of sales in fiscal 2017, which relates to the portion of acquired inventory that was sold during the period. In connection with the acquisitions of McCall and Simplicity, the inventory acquired was marked up to estimated fair value and is being recognized through cost of sales as the inventory turns. Excluding the recognition of the McCall and Simplicity inventory step-up, cost of sales, as a percentage of net sales, was 69% in fiscal 2018 and 70% in fiscal 2017. The decrease in fiscal 2018 is attributable to higher margin mix of Simplicity and McCall products sold compared to the prior fiscal year.
SG&A expenses, as a percentage of net sales, increased to 29% in fiscal 2018 compared to 26% in fiscal 2017 primarily due to incremental costs related to the acquired Simplicity business of $13,409,000 (which includes transaction costs of $3,411,000), incremental costs related to the acquired McCall business of $6,735,000 and higher payroll and employee expenses of $4,115,000, partially offset by lower commissions of $819,000, selling and marketing expenses of $773,000, professional fees of $718,000, and travel expenses of $305,000.
An impairment of goodwill and intangible assets of $33,358,000 was recorded in fiscal 2018 as a result of the full impairment of goodwill and partial impairment of a tradename. The impairment of goodwill was due to the decline in the Company's trading price of its common stock during the fourth quarter of fiscal 2018 and related decrease in the Company's market capitalization. See further discussion in Note 3 to the consolidated financial statements. There was no such impairment recorded in fiscal 2017.
Gain on bargain purchases of $19,990,000 in fiscal 2017 related to the acquisitions of McCall on December 13, 2016 and Schiff on July 8, 2016. These acquisitions were accounted for using the acquisition method and resulted in a bargain purchase due to the fair value of the net assets acquired of $35,029,000 exceeding the amount paid of $15,039,000. There was no such gain recorded in fiscal 2018.

Interest expense, net for fiscal 2018 increased to $681,000 from $29,000 in fiscal 2017. The increase in interest expense was primarily due to the Company's borrowings under its revolving credit facility due to its acquisition of Simplicity on November 3, 2017, as well as lower average balances of funds invested in short-term investments compared to the prior year. The Company had no borrowings outstanding under its revolving credit facility during fiscal 2017.
Other income, net for fiscal 2018 increased to $352,000 from $12,000 in fiscal 2017 primarily due to incremental rental income associated with McCall properties acquired on December 13, 2016.
Income taxes, as a percentage of income (loss) before income taxes, were 21% in fiscal 2018 and 4% in 2017. The increase in income taxes, as a percentage of income (loss) before taxes, was primarily attributable to the non-taxable bargain purchase gain related to the McCall and Schiff acquisitions in the prior fiscal year, partially offset by the impact of the new U.S. tax legislation enacted on December 22, 2017, commonly referred to as the Tax Cuts and Jobs Act ("Tax Act").
Net loss for the fiscal year ended March 31, 2018 was $36,520,000, or $4.01 per diluted share compared to net income of $28,504,000, or $3.13 per diluted share in fiscal 2017.
Liquidity and Capital Resources
As of March 31, 2019 and 2018, the Company had working capital of $91,963,000 and $176,701,000, respectively, and stockholders’ equity of $189,931,000 and $253,695,000, respectively. Operating activities provided net cash of $1,000,000 in fiscal 2019 compared to $31,368,000 in fiscal 2018 and $14,871,000 in fiscal 2017. Net cash provided by operating activities in fiscal 2019 reflects our working capital requirements which resulted in a decrease in accounts receivable of $4,151,000 and accrued expenses and long-term obligations of $3,888,000, and an increase in accounts payable of $5,694,000, inventory of $4,358,000, and prepaid expenses and other assets of $3,382,000. Included in the fiscal 2019 net loss were non-cash charges for impairment of property, plant, and equipment of $1,408,000 that is within restructuring expense, impairment of $15,309,000 related to goodwill and intangible assets, amortization of inventory step-up of $10,681,000, depreciation and amortization of $13,967,000, deferred tax provision of $6,736,000, provision for accounts receivable allowances of $5,299,000 and share-based compensation of $2,044,000. Net cash provided by operating activities in fiscal 2018 reflects our working capital requirements which resulted in an increase in accounts receivable of $6,409,000, a decrease in inventory of $16,082,000 and an increase in accrued expenses and long-term obligations of $5,164,000. Included in the fiscal 2018 net loss were non-cash charges for impairment of $33,358,000 related to goodwill and an intangible asset, amortization of inventory step-up of $17,881,000, depreciation and amortization of $10,487,000, deferred tax benefit of $14,125,000, provision for accounts receivable allowances of $4,035,000 and share-based compensation of $1,938,000. Net cash provided by operating activities in fiscal 2017 reflects our working capital requirements which resulted in an increase in accounts receivable of $6,095,000, an increase in inventory of $3,607,000, a decrease in prepaid expenses and other assets of $2,506,000, a decrease in accounts

19


payable of $1,153,000 and a decrease in accrued expenses and long-term obligations of $2,473,000. Included in fiscal 2017 net income was a non-cash gain on bargain purchases of $19,990,000 related to the acquisitions of McCall and Schiff on December 13, 2016 and July 8, 2016, respectively, and non-cash charges for depreciation and amortization of $8,477,000, provision for accounts receivable allowances of $5,188,000, amortization of inventory step-up of $3,577,000, share-based compensation of $1,653,000 and a deferred tax benefit of $1,608,000.
Net cash used for our investing activities was $14,990,000 in fiscal 2019, consisting primarily of the purchase of a business of $2,500,000, final payment of a previously acquired business of $2,500,000, capital expenditures of $10,597,000 and the purchase of a company-owned life insurance policy of $750,000, partially offset by proceeds from sale of assets of $1,659,000. Net cash used for our investing activities was $53,233,000 in fiscal 2018, consisting primarily of the purchase of a business of $65,228,000, capital expenditures of $7,291,000 and the purchase of a company-owned life insurance policy of $750,000, partially offset by maturities of investment securities of $20,000,000. Net cash provided by our investing activities was $20,287,000 in fiscal 2017, consisting primarily of maturities of investment securities of $60,000,000, partially offset by the purchase of held-to-maturity investment securities of $19,928,000, purchase of businesses of $15,039,000 and capital expenditures of $4,957,000.
Net cash used for our financing activities was $27,512,000 in fiscal 2019, consisting primarily of net repayments under the credit facility of $13,861,000, payments of financing transaction costs of $1,964,000, payments of cash dividends of $7,179,000, and the purchase of treasury stock of $4,372,000. Net cash provided by our financing activities was $32,688,000 in fiscal 2018, consisting primarily of net borrowings under the credit facility of $40,000,000, partially offset by payments of cash dividends of $7,293,000. Net cash used for financing activities in fiscal 2017 consisted primarily of payments of cash dividends of $7,273,000.
The Company relies primarily on cash on hand, cash generated from its operations and seasonal borrowings under its credit facility to meet its liquidity requirements throughout the year. Historically, a significant portion of the Company’s revenues have been seasonal, primarily Christmas related, with 64% of sales recognized in the second and third quarters. As payment for sales of Christmas related products is usually not received until just before or just after the holiday selling season in accordance with general industry practice, working capital has historically increased in the second and third quarters, peaking prior to Christmas and dropping thereafter.
On March 7, 2019, the Company entered into a $125,000,000 asset based senior secured credit facility with three banks (the “ABL Credit Facility”). The Company used the proceeds from borrowings under the ABL Credit Facility to repay in full the Company’s prior credit facility with two banks (the “Prior Credit Facility”), under which the maximum credit available to the Company at any one time (the “Committed Amount”) was $50,000,000 at the time the Prior Credit Facility was repaid and terminated on March 7, 2019. For information concerning this ABL facility, see Note 8 to the consolidated financial statements. As of March 31, 2019, there was $26,139,000 outstanding under the Company’s ABL Credit Facility. The Company had $173,000 of other debt outstanding and $156,000 of capital leases outstanding as of March 31, 2019.
Based on its current operating plan, the Company believes its sources of available capital are adequate to meet its ongoing cash needs for at least the next 12 months.
As of March 31, 2019, the Company’s contractual obligations and commitments are as follows (in thousands):
 
Contractual Obligations
Less than 1 Year
 
1-3 Years
 
4-5 Years
 
After 5 Years
 
Total
Debt (1)
$
26,462

 
$
14

 
$

 
$

 
$
26,476

Capital lease obligations
145

 
13

 

 

 
158

Operating leases
10,520

 
17,806

 
13,564

 
21,818

 
63,708

Other long-term obligations (2)
273

 
456

 
604

 
4,147

 
5,480

Royalty obligations (3) 
947

 
1,970

 

 

 
2,917

 
$
38,347

 
$
20,259

 
$
14,168

 
$
25,965

 
$
98,739

 
(1) 
Debt includes the outstanding borrowings under the Company's credit facility as of March 31, 2019 as well as the principle and interest related to an equipment financing agreement at a rate of 5.72%.
(2) 
Other long-term obligations consist primarily of postretirement medical liabilities, deferred compensation arrangements, pension obligations, and deferred rent. Future timing of payments for other long-term obligations is estimated by management.

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(3) 
The Company is committed to pay guaranteed minimum royalties attributable to sales of certain intellectual property licensed products.

The above table excludes any potential uncertain income tax liabilities that may become payable upon examination of the Company’s income tax returns by taxing authorities. Such amounts and periods of payment cannot be reliably estimated. See Note 7 to the consolidated financial statements for further explanation of the Company’s uncertain tax positions.
As of March 31, 2019, the Company’s other commitments are as follows (in thousands):
 
 
Less than 1 Year
 
1-3 Years
 
4-5 Years
 
After 5 Years
 
Total
Letters of credit
$
2,182,000

 
$

 
$

 
$

 
$
2,182,000

The Company has a reimbursement obligation with respect to stand-by letters of credit that guarantee the funding of workers’ compensation claims and a lease security deposit. The Company has no financial guarantees or other similar arrangements with any third parties or related parties other than its subsidiaries.
In the ordinary course of business, the Company enters into arrangements with vendors to purchase merchandise in advance of expected delivery. These purchase orders do not contain any significant termination payments or other penalties if canceled.
Critical Accounting Policies
In preparing our consolidated financial statements, management is required to make estimates and assumptions that, among other things, affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are most significant where they involve levels of subjectivity and judgment necessary to account for highly uncertain matters or matters susceptible to change, and where they can have a material impact on our financial condition and operating performance. Below are the most significant estimates and related assumptions used in the preparation of our consolidated financial statements. If actual results were to differ materially from the estimates made, the reported results could be materially affected.
Revenue
Revenue from the sale of the Company's products is recognized when control of the promised goods is transferred to customers, in the amount that reflects the consideration the Company expects to be entitled to receive from its customers in exchange for those goods. The Company's revenue is recognized using the five-step model identified in Accounting Standards Codification 606, "Revenue from Contracts with Customers." These steps are: (i) identify the contract with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue as the performance obligations are satisfied.
The Company's contracts with customers generally include one performance obligation under the revenue recognition standard. For most product sales, the performance obligation is the delivery of a specified product, and is satisfied at the point in time when control of the product has transferred to the customer, which takes place when title and risk of loss transfer in accordance with the applicable shipping terms, typically either at shipping point or at delivery to a specified destination. The Company has certain limited products, primarily sewing patterns, which are sold on consignment at mass market retailers. The Company recognizes revenue on these products as they are sold to end consumers as recorded at point-of-sale terminals, which is the point in time when control of the product is transferred to the customer.
Revenue is recognized based on the consideration specified in a contract with the customer, and is measured as the amount of consideration to which the Company expects to be entitled to receive in exchange for transferring the goods. When applicable, the transaction price includes estimates of variable consideration to the extent it is probable that a significant reversal of revenue recognized will not occur. Variable consideration consists of revenues that are subject to reductions to the transaction price for customer programs, which may include special pricing arrangements for specific customers, volume incentives and other promotions. The Company has significant historical experience with customer programs and estimates the expected consideration based on historical trends. The related reserves are included in accrued customer programs in the consolidated balance sheets. The Company adjusts its estimate of variable consideration at least quarterly or when facts and circumstances used in the estimation process may change. In limited cases, the Company may provide the right to return product to certain customers. The Company also records estimated reductions to revenue, based primarily on known claims, for customer returns and chargebacks that may arise as a result of shipping errors, product damaged in transit or for other reasons that become known subsequent to recognizing the revenue. These provisions are recorded in the period that the related

21


sale is recognized and are reflected as a reduction from gross sales. The related reserves are included as a reduction of accounts receivable in the consolidated balance sheets. If the amount of actual customer returns and chargebacks were to increase or decrease from the estimated amount, revisions to the estimated reserve would be recorded.
The Company treats shipping and handling activities that occur after the customer has obtained control of a good as an activity to fulfill the promise to transfer the product. Costs related to shipping of product are recorded as incurred and classified in cost of sales in the consolidated statements of operations and comprehensive income (loss).
Payment terms with customers vary by customer, but generally range from 30 to 90 days. Certain seasonal revenues have extended payment terms in accordance with general industry practice. Since the term between invoicing and expected payment is less than one year, the Company does not adjust the transaction price for the effects of a financing component.
Sales commissions are earned and are recognized as expense as the related revenue is recognized at a point in time. These costs are recorded in selling, general and administrative expenses. Taxes collected from customers are excluded from revenue and credited directly to obligations to the appropriate governmental agencies.
Inventory Valuation
Inventories are valued at the lower of cost or net realizable value. Cost is primarily determined by the first-in, first-out method although certain inventories are valued based on the last-in, first-out method. The Company writes down its inventory for estimated obsolescence in an amount equal to the difference between the cost of the inventory and the estimated net realizable value based upon assumptions about future demand, market conditions, customer planograms and sales forecasts. Additional inventory write downs could result from unanticipated additional carryover of finished goods and raw materials, or from lower proceeds offered by parties in our traditional closeout channels. In connection with the acquisitions of McCall on December 13, 2016, Simplicity on November 3, 2017, and Fitlosophy on June 1, 2018, there was a step-up to fair value of the inventory acquired of $21,773,000, $10,214,000, and $312,000, respectively, recorded at the applicable dates of acquisition. This was a result of the inventory acquired being marked up to estimated net selling price in purchase accounting, and is recognized through cost of sales as the inventory turns. The amount of step-up to fair value of the acquired inventory remaining as of March 31, 2019 and 2018 was $284,000 and $10,683,000. The Company expects the acquired Simplicity inventory to be sold through the first quarter of fiscal 2020. See Note 2 to the consolidated financial statements for further discussion of these acquisitions.
Other Intangibles and Long-Lived Assets
Other indefinite lived intangible assets consist primarily of tradenames, which are required to be tested annually for impairment. An entity has the option to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. To perform a qualitative assessment, an entity must identify and evaluate changes in economic, industry and entity-specific events and circumstances that could affect the significant inputs used to determine the fair value of an indefinite-lived intangible asset. If the result of the qualitative analysis indicates it is more likely than not that an indefinite-lived intangible asset is impaired, a more detailed fair value calculation will need to be performed which is used to identify potential impairments and to measure the amount of impairment losses to be recognized, if any. The fair value of the Company’s tradenames is calculated using a “relief from royalty payments” methodology. This approach involves first estimating reasonable royalty rates for each trademark then applying these royalty rates to a net sales stream and discounting the resulting cash flows to determine the fair value. The royalty rate is estimated using both a market and income approach. The market approach relies on the existence of identifiable transactions in the marketplace involving the licensing of tradenames similar to those owned by the Company. The income approach uses a projected pretax profitability rate relevant to the licensed income stream. We believe the use of multiple valuation techniques results in a more accurate indicator of the fair value of each tradename. This fair value is then compared with the carrying value of each tradename.
Long-lived assets (including property, plant and equipment) and indefinite lived intangible assets, are reviewed for impairment when circumstances indicate the carrying value of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset group to future net cash flows estimated by the Company to be generated by such assets. If such asset group is considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. Assets to be disposed of are recorded at the lower of their carrying value or estimated net realizable value.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our actual current tax expense or benefit (state, federal and foreign), including the impact of permanent and temporary differences

22


resulting from differing bases and treatment of items for tax and accounting purposes, such as the carrying value of intangibles, deductibility of expenses, depreciation of property, plant and equipment, and valuation of inventories. Temporary differences and operating loss and credit carryforwards result in deferred tax assets and liabilities, which are included within the Company's consolidated balance sheets. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income. Actual results could differ from this assessment if sufficient taxable income is not generated in future periods. To the extent we determine the need to establish a valuation allowance or increase (decrease) such allowance in a period, the Company would record additional tax expense (benefit) in the accompanying consolidated statements of operations. The management of the Company periodically estimates the probable tax obligations of the Company using historical experience in tax jurisdictions and informed judgments. There are inherent uncertainties related to the interpretation of tax regulations. The judgments and estimates made at a point in time may change based on the outcome of tax audits, as well as changes to or further interpretations of regulations. If such changes take place, there is a risk that the tax rate may increase or decrease in any period.
New tax legislation in the U.S., commonly referred to as the Tax Act, was enacted on December 22, 2017. Accounting Standards Codification 740, "Accounting for Income Taxes," required companies to recognize the effect of tax law changes in the period of enactment even though the effective date for most provisions was for tax years beginning after December 31, 2017, or in the case of certain other provisions, January 1, 2018. Though certain key aspects of the new law were effective January 1, 2018 and had an immediate accounting effect, other significant provisions were not effective or did not result in accounting effects for the Company until April 1, 2018.
Given the significance of the legislation, the Securities and Exchange Commission staff issued Staff Accounting Bulletin 118, "Income Tax Accounting Implications of the Tax Cuts and Jobs Act" ("SAB 118"), which allowed registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. However, the measurement period was deemed to have ended earlier when the registrant obtained, prepared and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law were expected to be recorded at the time a reasonable estimate for all or a portion of the effects could be made, and provisional amounts recognized and adjusted as information became available, prepared or analyzed.
In fiscal 2018, the Company estimated the impact of the Tax Act incorporating assumptions based on our current interpretations of its provisions. We recognized the tax impacts related to deemed repatriated earnings and revaluation of our deferred tax assets and liabilities, and included those amounts in our consolidated financial statements for fiscal 2018. In fiscal 2019, the Company completed the accounting within the one-year measurement period allowed under SAB 118. After further refinement of our calculations, any changes in interpretations and assumptions we made, and review of additional guidance issued, the actual impact of the Tax Act did not materially differ from the amounts recorded in fiscal 2018. In addition, we adopted a policy to record any tax liability associated with the Global Intangible Low-Taxed Income (“GILTI”) provision of the Tax Act as a period cost.
Accounting Pronouncements
See Note 13 to the consolidated financial statements for information concerning recent accounting pronouncements and the impact of those standards.
Forward-Looking and Cautionary Statements
This report includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including, among others, statements related to: the Company’s future organic growth; new product initiatives; the Company's future ability to provide unique added value to its customers; the period of time over which inventory acquired as part of the Simplicity acquisition will be sold; the expected future impact of legal proceedings; the expected future impact of foreign currency exchange rate fluctuations; the timing and amount of future expense recognition for amortization expense and unrecognized compensation expense; the timing and amount of future lease payments, royalty obligations and other contractual obligations and commitments; the expected future sale of a distribution facility; the expected future timing for the receipt of funds from an escrow arrangement; the expected future effect of certain accounting pronouncements; and the Company’s belief that its sources of available capital are adequate to meet its future cash needs for at least the next 12 months. Forward-looking statements are based on the beliefs of the Company’s management as well as assumptions made by and information currently available to the Company’s management as to future events and financial performance with respect to the Company’s operations.
Forward-looking statements speak only as of the date made. The Company undertakes no obligation to update any forward-looking statements to reflect the events or circumstances arising after the date as of which they were made. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation: risks associated with the Company’s strategic plan and its five strategic pillars, including the risk

23


that the Company may not successfully implement its strategic plan, and the risk that implementation of the strategic plan may not yield favorable results; difficulties achieving organic growth; currency risks and other risks associated with international markets; general market and economic conditions; increased competition (including competition from foreign products which may be imported at less than fair value and from foreign products which may benefit from foreign governmental subsidies); information technology risks, such as cyber attacks and data breaches; the risk that customers may become insolvent, may delay payments or may impose deductions or penalties on amounts owed to the Company; costs of compliance with governmental regulations and government investigations; liability associated with noncompliance with governmental regulations, including regulations pertaining to the environment, Federal and state employment laws, and import and export controls, customs laws and consumer product safety regulations; uncertainties associated with projecting the impact on the Company of recently enacted and possible future tariffs on products imported from China; risks associated with completed acquisitions, including acquisition integration costs and the risk that the Company may not be able to integrate and derive expected benefits and synergies from completed acquisitions; risks associated with realization of intangible assets and recoverability of long-lived assets; increased operating costs, including labor-related and energy costs and costs relating to the imposition or retrospective application of duties on imported products; and other factors described more fully elsewhere in this annual report on Form 10-K and in the Company’s other filings with the U.S. Securities and Exchange Commission. As a result of these factors, readers are cautioned not to place undue reliance on any forward-looking statements included herein or that may be made elsewhere from time to time by, or on behalf of, the Company.


24



Item 8. Financial Statements and Supplementary Data.

CSS INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
 


25


Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
CSS Industries, Inc.:

Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of CSS Industries, Inc. and subsidiaries (the Company) as of March 31, 2019 and 2018, the related consolidated statements of operations and comprehensive income (loss), cash flows and stockholders’ equity for each of the years in the three‑year period ended March 31, 2019, and the related notes and financial statement schedule II - valuation and qualifying accounts (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three‑year period ended March 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of March 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated May 31, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ KPMG LLP


We have served as the Company’s auditor since 2002.

Philadelphia, Pennsylvania
May 31, 2019


26


CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
 
 
March 31,
 
2019
 
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
17,100

 
$
58,560

Accounts receivable, net of allowances of $2,198 and $1,576
53,835

 
63,083

Inventories
96,231

 
102,436

Asset held for sale
131

 

Prepaid expenses and other current assets
12,568

 
11,962

Total current assets
179,865

 
236,041

Net property, plant and equipment
50,920

 
52,126

Deferred income taxes

 
10,439

Intangible assets, net of accumulated amortization of $27,119 and $21,960
40,285

 
57,029

Other assets
14,525

 
9,553

Total assets
$
285,595

 
$
365,188

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term borrowings
$
26,139

 
$

Current portion of long-term debt
316

 
228

Accounts payable
27,916

 
20,581

Accrued payroll and other compensation
6,962

 
11,496

Accrued customer programs
12,101

 
12,284

Accrued other expenses
14,468

 
14,751

Total current liabilities
87,902

 
59,340

Long-term debt, net of current portion
13

 
40,228

Deferred income taxes
619

 
1,639

Other long-term obligations
7,130

 
10,286

Total liabilities
95,664

 
111,493

Commitments and contingencies (Notes 9 and 11)

 

Stockholders’ equity:
 
 
 
Preferred stock, Class 2, $.01 par, 1,000,000 shares authorized, no shares issued

 

Common stock, $.10 par, 25,000,000 shares authorized, 14,703,084 shares issued at March 31, 2018 and 2017
1,470

 
1,470

Additional paid-in capital
60,921

 
58,877

Retained earnings
277,613

 
339,088

Accumulated other comprehensive income (loss), net of tax
465

 
1,163

Common stock in treasury, 5,865,846 and 5,583,338 shares, at cost
(150,538
)
 
(146,903
)
Total stockholders’ equity
189,931

 
253,695

Total liabilities and stockholders’ equity
$
285,595

 
$
365,188

See accompanying notes to consolidated financial statements.


27


CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share amounts)
 
 
For the Years Ended March 31,
 
2019
 
2018
 
2017
Net sales
$
382,263

 
$
361,896

 
$
322,431

Cost of sales
292,973

 
269,067

 
229,342

Gross profit
89,290

 
92,829

 
93,089

Selling, general and administrative expenses
113,349

 
105,201

 
83,375

Restructuring expenses
3,103

 

 

Impairment of goodwill and intangible assets
15,309

 
33,358

 

Operating income (loss)
(42,471
)
 
(45,730
)
 
9,714

Gain on bargain purchases

 

 
(19,990
)
Interest expense (income), net
3,184

 
681

 
29

Other expense (income), net
(214
)
 
(352
)
 
(12
)
Income (loss) before income taxes
(45,441
)
 
(46,059
)
 
29,687

Income tax expense (benefit)
8,104

 
(9,539
)
 
1,183

Net income (loss)
$
(53,545
)
 
$
(36,520
)
 
$
28,504

 
 
 
 
 
 
Net income (loss) per common share:
 
 
 
 
 
Basic
$
(5.97
)
 
$
(4.01
)
 
$
3.14

Diluted
$
(5.97
)
 
$
(4.01
)
 
$
3.13

 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
Basic
8,964

 
9,108

 
9,074

Diluted
8,964

 
9,108

 
9,115

 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
$
(53,545
)
 
$
(36,520
)
 
$
28,504

Other comprehensive income (loss), net:


 


 


Currency translation adjustments:
(976
)
 
943

 
45

Total currency translation gain (loss)
(976
)
 
943

 
45

Pension and postretirement benefits:


 


 


Net income (loss) arising from pension and postretirement benefits, net of tax expense of $50 in 2019, tax expense of $101 in 2018 and tax benefit of $12 in 2017
194

 
367

 
(46
)
Total effects of pension and postretirement benefits
194

 
367

 
(46
)
Interest rate swap agreement:


 


 


Termination of interest rate swap agreement
84

 

 

Fair value adjustment, net of tax of $26 in 2018


 
(84
)
 

Total effects of interest rate swap agreement
84

 
(84
)
 

Other comprehensive income (loss), net
(698
)
 
1,226

 
(1
)
Comprehensive income (loss)
$
(54,243
)
 
$
(35,294
)
 
$
28,503


See accompanying notes to consolidated financial statements.

28


CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
For the Years Ended March 31,
 
2019
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 
 
Net income (loss)
$
(53,545
)
 
$
(36,520
)
 
$
28,504

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
13,967

 
10,487

 
8,477

Amortization of inventory step-up
10,681

 
17,881

 
3,577

Accretion of asset retirement obligation
129

 
51

 

Accretion of contingent consideration
64

 

 

Accretion of investment discount

 
(69
)
 
(196
)
Change in valuation of contingent consideration
(298
)
 

 

Impairment of goodwill and intangible assets
15,309

 
33,358

 

Impairment of property, plant, and equipment
1,408

 

 

Provision for accounts receivable allowances
5,299

 
4,035

 
5,188

Deferred tax provision (benefit)
6,736

 
(14,125
)
 
(1,608
)
Share-based compensation expense
2,044

 
1,938

 
1,653

Gain on bargain purchases

 

 
(19,990
)
(Gain) loss on sale or disposal of assets
409

 
(12
)
 
88

(Gain) loss on interest rate swap
580

 

 

Changes in assets and liabilities, net of effects of purchase of businesses:
 
 
 
 
 
Accounts receivable
4,151

 
(6,409
)
 
(6,095
)
Inventories
(4,358
)
 
16,082

 
(3,607
)
Prepaid expenses and other assets
(3,382
)
 
(273
)
 
2,506

Accounts payable
5,694

 
(220
)
 
(1,153
)
Accrued expenses and long-term obligations
(3,888
)
 
5,164

 
(2,473
)
Net cash provided by operating activities
1,000

 
31,368

 
14,871

Cash flows from investing activities:
 
 
 
 
 
Maturities of investment securities

 
20,000

 
60,000

Purchase of held-to-maturity investment securities

 

 
(19,928
)
Purchase of businesses
(2,500
)
 
(65,228
)
 
(15,039
)
Final payment of purchase price for a business previously acquired
(2,500
)
 

 

Purchase of property, plant and equipment
(10,597
)
 
(7,291
)
 
(4,957
)
Purchase of company owned life insurance policy
(750
)
 
(750
)
 

Purchase of intangibles
(302
)
 

 
(100
)
Proceeds from sale of assets
1,659

 
36

 
311

Net cash (used for) provided by investing activities
(14,990
)
 
(53,233
)
 
20,287

Cash flows from financing activities:
 
 
 
 
 
Borrowings on credit facility
41,714

 
87,476

 

Repayments on credit facility
(55,575
)
 
(47,476
)
 

Payment of financing transaction costs
(1,964
)
 

 

Payments on long-term debt
(127
)
 
(220
)
 
(65
)
Dividends paid
(7,179
)
 
(7,293
)
 
(7,273
)
Purchase of treasury stock
(4,372
)
 

 

Proceeds from exercise of stock options

 
201

 
123

Payments for tax withholding on net restricted stock settlements
(9
)
 

 
(527
)
Tax effect of stock awards

 

 
286

Net cash provided by (used for) financing activities
(27,512
)
 
32,688

 
(7,456
)
Effect of exchange rate changes on cash
42

 
44

 
64

Net increase (decrease) in cash and cash equivalents
(41,460
)
 
10,867

 
27,766

Cash and cash equivalents at beginning of year
58,560

 
47,693

 
19,927

Cash and cash equivalents at end of year
$
17,100

 
$
58,560

 
$
47,693

See accompanying notes to consolidated financial statements.

29


CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share and per share amounts)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
Other
 
Common Stock
 
 
 
Preferred Stock
 
Common Stock
 
Paid-in
 
Retained
 
Comprehensive
 
in Treasury
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Earnings
 
Income (Loss)
 
Shares
 
Amount
 
Total
Balance, March 31, 2016

 
$

 
14,703,084

 
$
1,470

 
$
56,157

 
$
364,030

 
$
(62
)
 
(5,670,819
)
 
$
(150,105
)
 
$
271,490

Share-based compensation expense

 

 

 

 
1,653

 

 

 

 

 
1,653

Issuance of common stock upon exercise of stock options

 

 

 

 

 
(373
)
 

 
14,177

 
496

 
123

Issuance of common stock under equity plan

 

 

 

 

 
(2,079
)
 

 
40,323

 
1,552

 
(527
)
Purchase of treasury shares

 

 

 

 

 

 

 

 

 

Tax effect of stock awards

 

 

 

 
286

 

 

 

 

 
286

Reduction of deferred tax assets due to expired stock options

 

 

 

 
(99
)
 

 

 

 

 
(99
)
Cash dividends ($.80 per common share)

 

 

 

 

 
(7,275
)
 

 

 

 
(7,275
)
Other comprehensive loss

 

 

 

 

 

 
(1
)
 

 

 
(1
)
Net income

 

 

 

 

 
28,504

 

 

 

 
28,504

Balance, March 31, 2017

 

 
14,703,084

 
1,470

 
57,997

 
382,807

 
(63
)
 
(5,616,319
)
 
(148,057
)
 
294,154

Cumulative effective change in accounting principle

 

 

 

 
(1,059
)
 
1,059

 

 

 

 

Share-based compensation expense

 

 

 

 
1,939

 

 

 

 

 
1,939

Issuance of common stock upon exercise of stock options

 

 

 

 

 
(346
)
 

 
15,629

 
547

 
201

Issuance of common stock under equity plan

 

 

 

 

 
(607
)
 

 
17,352

 
607

 

Cash dividends ($.80 per common share)

 

 

 

 

 
(7,305
)
 

 

 

 
(7,305
)
Other comprehensive income

 

 

 

 

 

 
1,226

 

 

 
1,226

Net income

 

 

 

 

 
(36,520
)
 

 

 

 
(36,520
)
Balance, March 31, 2018

 

 
14,703,084

 
1,470

 
58,877

 
339,088

 
1,163

 
(5,583,338
)
 
(146,903
)
 
253,695

Share-based compensation expense

 

 

 

 
2,044

 

 

 

 

 
2,044

Issuance of common stock under equity plan

 

 

 

 

 
(746
)
 

 
20,658

 
737

 
(9
)
Purchase of treasury shares

 

 

 

 

 

 

 
(303,166
)
 
(4,372
)
 
(4,372
)
Cash dividends ($.80 per common share)

 

 

 

 

 
(7,184
)
 

 

 

 
(7,184
)
Other comprehensive loss

 

 

 

 

 

 
(698
)
 

 

 
(698
)
Net loss

 

 

 

 

 
(53,545
)
 

 

 

 
(53,545
)
Balance, March 31, 2019

 
$

 
14,703,084

 
$
1,470

 
$
60,921

 
$
277,613

 
$
465


(5,865,846
)
 
$
(150,538
)
 
$
189,931

See accompanying notes to consolidated financial statements.

30


CSS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(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’s fiscal year ends on March 31. References to a particular year refer to the fiscal year ending in March of that year. For example, fiscal 2019 refers to the fiscal year ended March 31, 2019.
Principles of Consolidation
The consolidated financial statements include the accounts of CSS Industries, Inc. and all of its subsidiaries. All intercompany transactions and accounts have been eliminated in consolidation.
Nature of Business
CSS is a creative consumer products company, focused on the seasonal, gift and craft categories. For these design-driven categories, the Company engages in the creative development, manufacture, procurement, distribution and sale of our products with an omni-channel approach focused primarily on mass market retailers.
Seasonal The seasonal category includes holiday gift packaging items such as ribbon, bows, greeting cards, bags, tags and gift card holders, in addition to specific holiday-themed decorations, accessories, and activities, such as Easter egg dyes and novelties and Valentine's Day classroom exchange cards. These products are sold to mass market retailers, and production forecasts for these products are generally known well in advance of shipment.
Gift The gift category includes products designed to celebrate certain life events or special occasions, such as weddings, birthdays, anniversaries, graduations, or the birth of a child. Products include ribbons and bows, floral accessories, infant products, journals, gift card holders, all occasion boxed greeting cards, memory books, scrapbooks, stationery, and other items that commemorate life's celebrations. Products in this category are primarily sold into mass, specialty, and online retailers, floral and packaging wholesalers and distributors, and are generally ordered on a replenishment basis throughout the year.
Craft The craft category includes sewing patterns, ribbons and trims, buttons, sewing patterns, knitting needles, needle arts and kids crafts. These products are sold to mass market, specialty, and online retailers, and are generally ordered on a replenishment basis throughout the year.
CSS’ product breadth provides its retail customers the opportunity to use a single vendor for much of their seasonal, gift and craft product requirements. A substantial portion of CSS’ products are manufactured and packaged in the United States and warehoused and distributed from facilities in the United States, the United Kingdom and Australia, with the remainder sourced from foreign suppliers, primarily in Asia. The Company also has a manufacturing facility in India that produces certain craft products, including trims, braids and tassels, and also has a distribution facility in India. The Company’s products are sold to its customers by national and regional account sales managers, sales representatives, product specialists and by a network of independent manufacturers’ representatives. CSS maintains purchasing offices in Hong Kong and China to administer Asian sourcing opportunities.
Foreign Currency Translation and Transactions
The Company's foreign subsidiaries generally use the local currency as the functional currency. The Company translates all assets and liabilities at year-end exchange rates and all income and expense accounts at average rates during the year. Translation adjustments are recorded in accumulated other comprehensive income (loss) in stockholders’ equity. Gains and losses on foreign currency transactions (denominated in currencies other than the local currency) are not material and are included in other expense (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

31


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 revenue recognition, the valuation of inventory and accounts receivable, the assessment of the recoverability of other intangible and long-lived assets, income tax accounting and resolution of litigation and other proceedings. Actual results could differ from these estimates.
Accounts Receivable
The Company offers seasonal dating programs related to certain seasonal product offerings pursuant to which customers that qualify for such programs are offered extended payment terms. With some exceptions, customers do not have the right to return product except for reasons the Company believes are typical of our industry, including damaged goods, shipping errors or similar occurrences. The Company generally is not required to repurchase products from its customers, nor does the Company have any regular practice of doing so. In addition, the Company mitigates its exposure to bad debts by evaluating the creditworthiness of its major customers, utilizing established credit limits, and purchasing credit insurance when appropriate and available on terms satisfactory to the Company. Bad debt and returns and allowances reserves are recorded as an offset to accounts receivable while reserves for customer programs are recorded as accrued liabilities. The Company evaluates accounts receivable related reserves and accruals monthly by specifically reviewing customers’ creditworthiness, historical recovery percentages and outstanding customer deductions and program arrangements. Customer account balances are charged off against the allowance reserve after reasonable means of collection have been exhausted and the potential for recovery is considered unlikely.

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 net realizable value. The remaining portion of the inventory is valued at the lower of last-in, first-out (LIFO) cost or net realizable value, which was $162,000 and $98,000 at March 31, 2019 and 2018, respectively. Had all inventories been valued at the lower of FIFO cost or market, inventories would have been greater by $576,000 and $524,000 at March 31, 2019 and 2018, respectively. During fiscal 2019, the Company recognized a charge of $1,771,000 as a result of the Company's initiative to streamline product offerings. Inventories consisted of the following (in thousands):
 
 
March 31,
 
2019
 
2018
Raw material
$
14,246

 
$
11,602

Work-in-process
16,816

 
17,809

Finished goods
65,169

 
73,025

 
$
96,231

 
$
102,436


Finished goods inventory includes $11,598,000 and $19,555,000 of inventory on consignment as of March 31, 2019 and 2018, respectively. In connection with the acquisition of McCall on December 13, 2016, Simplicity on November 3, 2017, and Fitlosophy on June 1, 2018, the Company recorded a step-up to fair value of the inventory acquired of $21,773,000, $10,214,000, and $312,000, respectively, recorded at the date of such acquisition. This was a result of the inventory acquired being marked up to estimated fair value in purchase accounting and is recognized through cost of sales as the inventory turns. The amount of step-up to fair value of the acquired inventory remaining as of March 31, 2019 and 2018 was $284,000 and $10,683,000, respectively. The Company expects the acquired Simplicity inventory to be sold through the first quarter of fiscal 2020. See Note 2 to the consolidated financial statements for further discussion of the McCall, Simplicity, and Fitlosophy acquisitions.

Asset Held for Sale
Asset held for sale of $131,000 as of March 31, 2019 represents a distribution facility in Danville, Pennsylvania which the Company is in the process of selling. The Company expects to sell this facility within the next 12 months and at the end of fiscal 2019, the Company ceased depreciating this facility at the time it was classified as held for sale. There were no such assets classified as held for sale as of March 31, 2018.
On March 29, 2019, the Company sold a distribution facility in Havant, England for $2,366,000 that was previously classified as asset held for sale for $2,570,000. The Company received cash proceeds of $1,778,000 with the remaining balance placed in escrow. The purpose of the escrow is to ensure that current licensees of the building exit the building as their licenses expire. As each license agreement expires and the applicable licensee vacates its unit, the funds held

32


in escrow related to such unit will be released to the Company. It is expected that the funds held in escrow as of March 31, 2019 will be released within six months. The Company incurred $118,000 of costs to sell the facility and recognized a loss of $322,000 on the sale that is included in other expense (income), net in the consolidated statement of operations.

Property, Plant and Equipment
Property, plant and equipment are stated at cost and include the following (in thousands):
 
 
March 31,
 
2019

2018
Land
$
5,738


$
7,100

Buildings, leasehold interests and improvements
40,893


45,164

Machinery, equipment and other
113,946


104,497


160,577


156,761

Less – Accumulated depreciation and amortization
(109,657
)

(104,635
)
Net property, plant and equipment
$
50,920


$
52,126

Depreciation is provided generally on the straight-line method and is based on estimated useful lives or terms of leases as follows:
 
Buildings, leasehold interests and improvements
  
Lease term to 45 years
Machinery, equipment and other
  
3 to 15 years
When property is retired or otherwise disposed of, the related cost and accumulated depreciation and amortization are eliminated from the consolidated balance sheet. Any gain or loss from the disposition of property, plant and equipment is included in other expense (income), net. Maintenance and repairs are expensed as incurred while improvements are capitalized and depreciated over their estimated useful lives.
For property, plant, and equipment, depreciation and amortization expense was $8,807,000, $6,455,000 and $5,173,000 for the years ended March 31, 2019, 2018 and 2017, respectively.
The Company maintains various operating leases and records rent expense on a straight-line basis over the lease term. See Note 9 for further discussion.

Impairment of Long-Lived Assets including Other Intangible Assets and Property, Plant and Equipment
Other indefinite lived intangible assets consist of tradenames which are required to be tested annually for impairment. An entity has the option to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. To perform a qualitative assessment, an entity must identify and evaluate changes in economic, industry and entity-specific events and circumstances that could affect the significant inputs used to determine the fair value of an indefinite-lived intangible asset. If the result of the qualitative analysis indicates it is more likely than not that an indefinite-lived intangible asset is impaired, a more detailed fair value calculation will need to be performed which is used to identify potential impairments and to measure the amount of impairment losses to be recognized, if any. The fair value of the Company’s tradenames is calculated using a “relief from royalty payments” methodology. This approach involves first estimating reasonable royalty rates for each trademark then applying these royalty rates to a net sales stream and discounting the resulting cash flows to determine the fair value. The royalty rate is estimated using both a market and income approach. The market approach relies on the existence of identifiable transactions in the marketplace involving the licensing of tradenames similar to those owned by the Company. The income approach uses a projected pretax profitability rate relevant to the licensed income stream. We believe the use of multiple valuation techniques results in a more accurate indicator of the fair value of each tradename. This fair value is then compared with the carrying value of each tradename.
Long-lived assets (including property, plant and equipment), except for goodwill and indefinite lived intangible assets, are reviewed for impairment when events or circumstances indicate the carrying value of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset group to future net cash flows estimated by the Company to be generated by such assets. If such asset group is considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. Assets to be disposed of are recorded at the lower of their carrying value or estimated net realizable value.

33


Derivative Financial Instruments
The Company uses certain derivative financial instruments as part of its risk management strategy to reduce interest rate and foreign currency risk. Derivatives are not used for trading or speculative activities.
The Company recognizes all derivatives on the consolidated balance sheet at fair value. On the date the derivative instrument is entered into, the Company generally designates the derivative as either (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), or (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”). Changes in the fair value of a derivative that is designated as, and meets all the required criteria for, a fair value hedge, along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings. Changes in the fair value of a derivative that is designated as, and meets all the required criteria for, a cash flow hedge are recorded in accumulated other comprehensive income (loss) and reclassified into earnings as the underlying hedged item affects earnings. The portion of the change in fair value of a derivative associated with hedge ineffectiveness or the component of a derivative instrument excluded from the assessment of hedge effectiveness is recorded currently in earnings. Also, changes in the entire fair value of a derivative that is not designated as a hedge are recorded immediately in earnings. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes relating all derivatives that are designated as fair value or cash flow hedges to specific assets and liabilities on the consolidated balance sheet or to specific firm commitments or forecasted transactions.
The Company also formally assesses, both at the inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in fair values or cash flows of the hedged item. If it is determined that a derivative is not highly effective as a hedge or if a derivative ceases to be a highly effective hedge, the Company will discontinue hedge accounting prospectively.
The Company enters into foreign currency forward contracts in order to reduce the impact of certain foreign currency fluctuations. Firmly committed transactions and the related receivables and payables may be hedged with forward exchange contracts. Gains and losses arising from foreign currency forward contracts are recorded in other expense (income), net as offsets of gains and losses resulting from the underlying hedged transactions. A realized gain of $3,000 and $56,000 was recorded in the years ended March 31, 2019 and 2017, respectively, and a realized loss of $108,000 was recorded in the year ended March 31, 2018. There were no open foreign currency forward exchange contracts as of March 31, 2019 and 2018.
On February 1, 2018, the Company entered into an interest rate swap agreement with a term of five years to manage its exposure to interest rate movements by effectively converting a portion of its anticipated working capital debt from variable to fixed rates. The notional amount of the interest rate swap contract subject to fixed rates was $40,000,000 in fiscal 2019 and 2018. Fixed interest rate payments were at a weighted average rate of 2.575% in fiscal 2018. Interest rate differentials paid under this agreement were recognized as adjustments to interest expense and were $147,000 and $60,000 for the years ended March 31, 2019 and 2018, respectively. This interest rate swap effectively converted $40,000,000 of the Company's variable-rate debt into fixed-rate debt with an effective interest rate of 3.525% (2.575% fixed + .95% spread) through March 2019. On March 7, 2019, the Company terminated its Prior Credit Facility and entered into an asset-based senior secured revolving credit facility (see Note 8). As of March 31, 2019, the Company updated its assessment of the swap and determined it was no longer probable the original forecasted transaction would occur. Accordingly, the Company reclassified into earnings a realized loss of $580,000 for the March 31, 2019 fair value of the interest rate swap agreement as a result of the discontinuance of the hedge. The related loss is included in interest expense (income) in the consolidated statements of operations. The interest rate swap agreement tied to the $40,000,000 debt was terminated on April 1, 2019. There were no interest rate swap agreements in fiscal 2017.
 Interest Expense (Income)
Interest expense was $3,459,000, $904,000 and $298,000 in the years ended March 31, 2019, 2018 and 2017, respectively. Interest income was $275,000, $223,000 and $269,000 in the years ended March 31, 2019, 2018 and 2017, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. An assessment is made to determine the likelihood that

34


our deferred tax assets will be recovered from future taxable income, and whether a valuation allowance is required to offset all or a portion of those deferred tax assets. To the extent the Company increases or decreases a valuation allowance, additional tax expense (benefit) is recorded in the consolidated statement of operations. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company recognizes the impact of an uncertain tax position, if it is more likely than not that such position will be sustained on audit, based solely on the technical merits of the position. See Note 7 for further discussion.
Revenue Recognition
Revenue from the sale of the Company's products is recognized when control of the promised goods is transferred to customers, in the amount that reflects the consideration the Company expects to be entitled to receive from its customers in exchange for those goods. The Company's revenue is recognized using the five-step model identified in Accounting Standards Codification 606, "Revenue from Contracts with Customers." These steps are: (i) identify the contract with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue as the performance obligations are satisfied.
The Company's contracts with customers generally include one performance obligation under the revenue recognition standard. For most product sales, the performance obligation is the delivery of a specified product, and is satisfied at the point in time when control of the product has transferred to the customer, which takes place when title and risk of loss transfer in accordance with the applicable shipping terms, typically either at shipping point or at delivery to a specified destination. The Company has certain limited products, primarily sewing patterns, that are sold on consignment at mass market retailers. The Company recognizes revenue on these products as they are sold to end consumers as recorded at point-of-sale terminals, which is the point in time when control of the product is transferred to the customer.
Revenue is recognized based on the consideration specified in a contract with the customer, and is measured as the amount of consideration to which the Company expects to be entitled to receive in exchange for transferring the goods. When applicable, the transaction price includes estimates of variable consideration to the extent it is probable that a significant reversal of revenue recognized will not occur. Variable consideration consists of revenues that are subject to reductions to the transaction price for customer programs, which may include special pricing arrangements for specific customers, volume incentives and other promotions. The Company has significant historical experience with customer programs and estimates the expected consideration considering historical trends. The related reserves are included in accrued customer programs in the consolidated balance sheets. The Company adjusts its estimate of variable consideration at least quarterly or when facts and circumstances used in the estimation process may change. In limited cases, the Company may provide the right to return product to certain customers. The Company also records estimated reductions to revenue, based primarily on known claims, for customer returns and chargebacks that may arise as a result of shipping errors, product damaged in transit or for other reasons that become known subsequent to recognizing the revenue. These provisions are recorded in the period that the related sale is recognized and are reflected as a reduction from gross sales. The related reserves are included as a reduction of accounts receivable in the consolidated balance sheets. If the amount of actual customer returns and chargebacks were to increase or decrease from the estimated amount, revisions to the estimated reserve would be recorded.
The Company treats shipping and handling activities that occur after the customer has obtained control of a good as an activity to fulfill the promise to transfer the product. Costs related to shipping of product are recorded as incurred and classified in cost of sales in the consolidated statements of operations and comprehensive income (loss).
Payment terms with customers vary by customer, but generally range from 30 to 90 days. Certain seasonal revenues have extended payment terms in accordance with general industry practice. Since the term between invoicing and expected payment is less than one year, the Company does not adjust the transaction price for the effects of a financing component.
Sales commissions are earned and are recognized as expense as the related revenue is recognized at a point in time. These costs are recorded in selling, general and administrative expenses. Taxes collected from customers are excluded from revenue and credited directly to obligations to the appropriate governmental agencies.
Product Development Costs
Product development costs consist of purchases of outside artwork, printing plates, cylinders, catalogs and samples. For seasonal products, the Company typically begins to incur product development costs 18 to 20 months before the applicable holiday event. These costs are amortized monthly over the selling season, which is generally within two to four months of the holiday event. Development costs related to gift and craft products are incurred within a period beginning six to nine months prior to the applicable sales period. These costs generally are amortized over a six to twelve month selling period. The

35


expense of certain product development costs that are related to the manufacturing process are recorded in cost of sales while the portion that relates to creative and selling efforts are recorded in selling, general and administrative expenses.
Product development costs capitalized as of March 31, 2019 were $2,495,000, of which $2,323,000 was recorded in other current assets and $172,000 was recorded in other long-term assets in the consolidated balance sheets. Product development costs capitalized as of March 31, 2018 were $3,835,000, of which $3,350,000 was recorded in prepaid expenses and other current assets and $485,000 was recorded in other long-term assets in the consolidated balance sheets. Product development expense of $8,051,000, $8,296,000 and $8,268,000 was recognized in the years ended March 31, 2019, 2018 and 2017, respectively.
Shipping and Handling Costs
Shipping and handling costs are reported in cost of sales in the consolidated statements of operations.
Share-Based Compensation
Share-based compensation cost is estimated at the grant date based on a fair-value model. Calculating the fair value of share-based awards at the grant date requires judgment, including estimating stock price volatility and expected option life.
The Company uses the Black-Scholes option valuation model to value service-based stock options and uses Monte Carlo simulation to value performance-based stock options and restricted stock units. The fair value of each service-based restricted stock unit is estimated on the day of grant based on the closing price of the Company's common stock reduced by the present value of the expected dividend stream during the vesting period using the risk-free interest rate. The Company estimates stock price volatility based on historical volatility of its common stock. Estimated option life assumptions are also derived from historical data. The Company recognizes compensation cost over the stated vesting period consistent with the terms of the arrangement (i.e. either on a straight-line or graded-vesting basis).
Net Income (Loss) Per Common Share
The following table sets forth the computation of basic net income (loss) per common share and diluted net income (loss) per common share for the years ended March 31, 2019, 2018 and 2017:
 
 
For the Years Ended March 31,
 
2019
 
2018
 
2017
 
(in thousands, except per share amounts)
Numerator:
 
 
 
 
 
Net income (loss)
$
(53,545
)
 
$
(36,520
)
 
$
28,504

 
 
 
 
 
 
Denominator:
 
 
 
 
 
Weighted average shares outstanding for basic income (loss) per common share
8,964

 
9,108

 
9,074

Effect of dilutive stock options

 

 
41

Adjusted weighted average shares outstanding for diluted income (loss) per common share
8,964

 
9,108

 
9,115

 
 
 
 
 
 
Basic net income (loss) per common share
$
(5.97
)
 
$
(4.01
)
 
$
3.14

Diluted net income (loss) per common share
$
(5.97
)
 
$
(4.01
)
 
$
3.13

The Company has excluded 512,000 shares, 495,000 shares, and 505,175 shares, consisting of outstanding stock options and unearned restricted stock units, in computing diluted net income (loss) per common share for the years ended March 31, 2019, 2018 and 2017, respectively, because their effects were antidilutive.
Statements of Cash Flows
For purposes of the consolidated statements of cash flows, the Company considers all holdings of highly liquid investments with a maturity at time of purchase of three months or less to be cash equivalents.

36


Supplemental Schedule of Cash Flow Information
 
 
For the Years Ended March 31,
 
2019
 
2018
 
2017
 
(in thousands)
Cash paid during the year for:
 
 
 
 
 
Interest
$
2,303

 
$
511

 
$
264

Income taxes
$
1,467

 
$
1,484

 
$
2,270

 
 
 
 
 
 
Details of acquisitions:
 
 
 
 
 
Fair value of assets acquired
$
4,268

 
$
92,666

 
$
50,445

Liabilities assumed
168

 
23,049

 
15,416

Net assets acquired
4,100

 
69,617

 
35,029

Amount due seller

 
2,500

 

Total consideration
4,100

 
67,117

 
35,029

Less cash acquired

 
1,889

 

Less contingent consideration
1,600

 

 

Less gain on bargain purchases

 

 
19,990

Net cash paid for acquisitions
$
2,500

 
$
65,228

 
$
15,039


Components of Accumulated Other Comprehensive Income (Loss), Net
 
For the Years Ended March 31,
 
2019
 
2018
 
2017
 
(in thousands)
Accumulated effect of currency translation adjustment:

  

  

Balance at beginning of year
$
988

  
$
45

  
$

Currency translation adjustment during period
(976
)
 
943

 
45

Balance at end of year
$
12

  
$
988