CSS Industries Reports Fiscal 2019 Third Quarter Results
PLYMOUTH MEETING, Pa.--(BUSINESS WIRE)--Feb 7, 2019--CSS Industries, Inc. (NYSE: CSS), a leading consumer products company serving the craft, gift and seasonal markets, today announced results for the quarter ended December 31, 2018, representing the third quarter of the Company’s fiscal 2019.
Net sales in the third quarter of fiscal 2019 were $133.2 million, compared to $130.6 million in the third quarter of fiscal 2018, driven by the November 2017 acquisition of the Simplicity Creative Group business (“Simplicity”), which contributed net sales of $22.0 million in the current year quarter, compared to $14.9 million in the prior fiscal year quarter. Excluding Simplicity, net sales in the third quarter of fiscal 2019 were $111.3 million, compared to $115.7 million in the prior year quarter. The decline in base business sales was driven primarily by lower replenishment sales of craft and gift products, partially offset by higher seasonal product sales.
Gross profit was $33.5 million in the quarter, compared to $37.5 million in the prior year quarter, and gross margin was 25.1 percent compared to 28.7 percent in the prior year quarter. The decline in gross profit was driven by the mix impact of lower base business volume, as well as higher manufacturing costs, freight, duties and customer fines related to the reshoring of plastic decorative ribbons from China into our U.S. manufacturing facilities. Adjusted gross profit was $37.6 million for the quarter compared to $42.7 million in the prior year quarter. Adjusted gross margin was 28.1 percent in the quarter compared to 32.7 percent in the prior year quarter. The decline in adjusted gross margin percent for the quarter was driven primarily by the mix of lower volume in our base business replenishment craft and gift products, higher manufacturing costs primarily related to medical expenses and higher freight and distribution expenses not offset by selling price.
Selling, general and administrative (“SG&A”) expenses were $28.7 million in the quarter, compared to $29.1 million in the prior year quarter. The decline was primarily attributable to cost synergies related to the Simplicity acquisition, partially offset by higher integration spending, mainly related to systems and higher expenses due to three months of Simplicity expenses in the current year quarter, versus two months in the prior year quarter, as a result of the timing of the acquisition in the prior year. Excluding Simplicity, SG&A expenses were essentially flat.
Restructuring expenses were $1.1 million in the quarter, primarily attributable to severance expenses resulting from the Company’s ongoing review of its operating structure, as well as higher severance costs associated with our Australia consolidation. The Company had no restructuring expenses in the prior year quarter.
Operating income for the quarter was $3.7 million compared to operating income in the prior year quarter of $8.3 million. Adjusted operating income was $11.2 million compared to $16.7 million in the prior year quarter. Net loss was $6.8 million in the quarter compared to net income of $6.0 million in the prior year quarter. Adjusted net income was $6.5 million, compared to adjusted net income of $11.3 million in the prior year quarter. The diluted net loss per share was $0.77 per share compared to diluted net income per share of $0.65 in the prior year quarter. Adjusted EBITDA was $14.7 million for the current quarter compared to $19.5 million in the prior year quarter.
Strategic Initiatives Update
The Company’s overall strategy is to grow profitable sales and improve return on invested capital (ROIC) through five strategic pillars: defend the base, identify adjacent product categories with a focus on brands, build an omni-channel business model, improve ROIC and build a collaborative “One CSS” culture. Third quarter highlights related to these objectives included:
Debt & Liquidity
Cost Savings Initiatives
Building Omni-Channel Capabilities
“Our business did not perform as expected in our third fiscal quarter and we are disappointed with our results,” commented Christopher J. Munyan, President and Chief Executive Officer. “Though seasonal sales were in-line with expectations, our replenishment craft and gift businesses did not achieve expectations. The impact of those lower replenishment volumes along with higher manufacturing costs, resulted in an overall decline in adjusted EBITDA. Despite that, we continue to see integration synergies from our previously announced initiatives related to the combination of the Simplicity and McCall businesses, and we are encouraged that our ongoing management projects will drive enhanced profitability as we move ahead.”
The following is a summary of net sales by product category (not adjusted) (dollars in thousands):
Our core products within the craft category include sewing patterns, ribbons, trims, buttons, and kids crafts. These products are sold to mass market and specialty retailers on a replenishment basis.
Craft net sales increased 9.2 percent in the quarter compared to the prior year fiscal quarter, driven by the contribution of the Simplicity acquisition. Excluding sales from the Simplicity business, net sales decreased $3.7 million or -17.2 percent in the quarter, driven by lower button sales as the result of a customer not repeating a program reset, which occurred in the prior year quarter, as well as lower replenishment sales of ribbon as compared to the prior year quarter at a major mass retailer and also a leading craft chain.
The Company defines the gift product category as products which are designed to celebrate certain life events or special occasions, with a focus on packaging items, such as ribbons, bows, bags and wrap, as well as stationery, baby gift items, and party and entertaining products. Products in this category are generally ordered on a replenishment basis throughout the year.
Gift net sales decreased 13.1 percent versus the prior year quarter, due to lower replenishment sales of social giftable products, journals, and, as a result of a program loss with a major retailer, infant goods. The lower sales of these goods were driven mainly by sales declines in the mass and specialty channels.
The Company defines the seasonal product category as products sold to mass-market retailers for holidays and seasonal events, including Christmas, Valentine’s Day and Easter. Sales and production forecasts for these products are known well in advance of shipment. The seasonal nature of this business has historically resulted in lower sales levels in the first and fourth quarters, and higher sales levels in the second and third quarters.
Seasonal net sales increased 6.2 percent versus the prior year quarter, driven primarily by the later timing of Christmas ribbon and bow shipments and higher sales of school products, driven by new placement at a major retailer, partially offset by lower sales of Valentine’s Day products. The later timing of Christmas ribbon and bow sales relates directly to the re-shoring of production of certain ribbon and bow products as a result of our currently pending trade remedy petitions relating to plastic decorative ribbon imported from China. The lower sales of Valentine’s Day products are driven by retailer buydowns.
Balance Sheet and Cash Flow
The Company ended the quarter with $18.9 million of cash and cash equivalents compared to $30.3 million at the end of the prior year quarter. The lower balance was primarily due to higher spending related to acquisition integration efforts and lower levels of income within our base business. Inventory decreased to $94.9 million from $110.8 million at the end of the prior year quarter, primarily related to lower fair value step-up adjustments related to McCall and Simplicity inventories. Excluding the effect of the lower stepped-up inventory, inventory levels are essentially flat. Accounts receivable was in-line to prior year, decreasing $1.0 million to $119.6 million from $120.6 million in the prior year quarter. Assets held for sale increased $2.5 million versus the prior year quarter and represents a facility located in Havant, England. This asset was placed for sale as a result of the previously announced Simplicity and McCall UK office consolidation. Accounts payable increased to $36.7 million compared to $27.6 million in the prior year quarter, driven by improved working capital management. The Company ended the quarter with $59.0 million in total debt, of which $40.0 million relates to borrowings associated with the acquisition of Simplicity, $0.3 million related to McCall capital leases and $18.7 million relates to borrowings associated with funding our seasonal working capital build.
Cash used for operating activities was $34.5 million for the nine months compared to $10.4 million in the first nine months of the prior fiscal year. Cash from operating activities included $6.4 million of pre-tax cash acquisition and integration related costs compared to $4.0 million in the prior year. Cash used for investing activities included $2.5 million for our June 2018 acquisition of the assets of Fitlosophy, Inc. and $2.5 million relating to the final payment for our Simplicity acquisition. Capital expenditures for the nine months were $7.8 million, compared to $4.0 million in the first nine months of the prior fiscal year. The increased investment is driven by capital spending related to system enhancements to further streamline and improve our information technology environment.
The Company is adjusting its outlook for fiscal 2019 full year net sales, net income and adjusted EBITDA to reflect ongoing erosion within its replenishment craft and gift businesses.
The Company now expects net sales for its fiscal 2019 to be in the range of $390 million to $400 million, resulting in year over year growth of 8 percent to 11 percent. The driver of the growth will be the full year impact of the Simplicity acquisition, partially offset by a decline in the Company’s base business.
For the full year, we expect an adjusted tax rate of approximately -40.0 percent, reflective of the effect of our pretax net loss and the valuation allowance recorded in the third quarter.
Net loss outlook is revised and is now expected to be in the range of $29.0 million to $31.4 million compared to a net loss of $36.5 million in fiscal 2018. The increase from our previously provided guidance of a net loss of $10.2 million to $12.5 million is driven mainly by the mix of lower sales volume, higher manufacturing costs, additional restructuring expenses and the non-cash tax valuation allowance.
Adjusted EBITDA for fiscal 2019 is now expected to be in the range of $21 million to $23 million compared to $24.3 million in fiscal 2018. Our previous fiscal 2019 adjusted EBITDA guidance was in the range of $26 million to $29 million. The expected decline in adjusted EBITDA reflects continued erosion in base business sales and the resulting impact to earnings, partially offset by the full year contribution of Simplicity sales, acquisition integration synergies and operating expense reductions within the base business.
“Our core businesses continue to be adversely affected by the changing dynamic of retail, especially within brick and mortar retail stores,” commented Mr. Munyan. “To offset this, we will continue with additional phases of our management project to identify operational efficiencies and maximize savings potentials across our core business, while finalizing the integration efforts around the Simplicity acquisition. These, coupled with continued investment within our omni-channel initiatives, will help to stem the likely continued erosion of our base brick and mortar sales. The actions identified will drive enhanced profitability in our fiscal fourth quarter, while also laying the groundwork for success in fiscal 2020. In the near term, we will focus on cost cutting efforts, working capital improvements and aggressive debt paydown, which will strengthen our balance sheet, drive enhanced profitability and improve free cash flow looking ahead.”
The Company will hold a conference call for investors on February 8, 2019 at 8:30 a.m. ET. The call can be accessed in the following ways:
About CSS Industries, Inc.
CSS is a creative consumer products company, focused on the craft, gift and seasonal categories. For these design-driven categories, we engage in the creative development, manufacture, procurement, distribution and sale of our products with an omni-channel approach focused primarily on mass market retailers. Our core products within the craft category include sewing patterns, ribbons, trims, buttons, and kids crafts. For the gift category, our core products are designed to celebrate certain life events or special occasions, with a focus on packaging items, such as ribbons, bows, bags and wrap, as well as stationery, baby gift items, and party and entertaining products. For the seasonal category, we focus on holiday gift packaging items including ribbons, bows, bags, tags and gift card holders, in addition to specific holiday-themed decorations and activities, including Easter egg dyes and Valentine’s Day classroom exchange cards. In keeping with our corporate mission, all of our products are designed to help make life memorable.
This press release 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: overall strategy and its five strategic pillars; expectations regarding the New ABL Facility; expectation to continue paying down debt; expected future savings and enhanced profitability from the recently completed and planned future management projects; future investment in omni-channel and other initiatives and the benefits expected to be derived therefrom, including an expanded direct-to-consumer presence and a stemming of expected continued erosion of base sales to brick and mortar customers; expected future continuation of integration synergies from the combination of the Simplicity and McCall businesses; the amount of net sales, net loss and adjusted EBITDA expected to be generated in fiscal 2019; expected adjusted tax rate for fiscal 2019; expected enhanced profitability in the Company’s fiscal fourth quarter; expectations for future cost cutting, working capital improvements and debt repayment; and expectations regarding future balance sheet strength, future enhanced profitability, and future improved free cash flow.
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 overall strategy and its five strategic pillars, including the risk that the Company may not successfully execute on its strategy and the risk that execution of the strategy will not yield favorable results; risks associated with the New ABL Facility, including the risk that the Company may not close on such facility within the currently expected timeframe, or at all; risks associated with management projects, including the risk that anticipated future savings may not be realized in the amounts currently expected, or at all; risks associated with omni-channel and other initiatives, including the risk that expected the benefits from such initiatives may not be realized; risks associated with restructuring and integration initiatives, including the risk that expected future savings and/or synergies will not be realized in the amounts currently expected, or at all; inherent uncertainties associated with forecasting future net sales, net loss, adjusted EBITDA, and adjusted tax rate; execution risks that may impact the Company’s ability to achieve the levels of net sales, net loss, adjusted EBITDA currently forecasted for fiscal 2019; risks associated with the Company’s previously announced plan to exit a product line and restructure the specialty gift product line; risks associated with the recent consolidation of certain operations in the United Kingdom and Australia; risks associated with the base business, including the risk that currently forecasted base business sales may not be achieved; 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; increased operating costs, including labor-related and energy costs and costs relating to the imposition or retrospective application of duties on imported products; currency risks and other risks associated with international markets; risks associated with acquisitions, including difficulties identifying and evaluating suitable acquisition opportunities, acquisition integration costs and the risk that the Company may not be able to integrate and derive the expected benefits and synergies from acquisitions; 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 and customs laws; uncertainties associated with projecting the impact on the Company of new tariffs on products imported from China; and other factors described more fully in the Company’s annual report on Form 10-K and elsewhere in the Company’s filings with the 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.
CSS’ consolidated results of operations for the three- and nine months ended December 31, 2018 and 2017, condensed consolidated balance sheets as of December 31, 2018, March 31, 2018 and December 31, 2017, and condensed consolidated statements of cash flows for the nine months ended December 31, 2018 and 2017 follow:
CSS Industries, Inc. Reconciliation of Certain Non-GAAP Measures (Unaudited) (in thousands, except per share amounts)
In addition to the results reported in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) in this release, the Company has provided certain non-GAAP financial information, specifically adjusted diluted income (loss) per share, adjusted EBITDA, adjusted net sales, adjusted gross profit, adjusted gross margin %, adjusted operating income (loss), adjusted operating income (loss) % and adjusted net income (loss). These measures are non-GAAP metrics that exclude various items that are detailed in the accompanying financial tables reconciling U.S. GAAP results to non-GAAP results that are included in this release. We also present free cash flow, which we define as net cash provided by operating activities minus purchases of property, plant and equipment as shown in the consolidated statement of cash flows. Management believes that the presentation of these non-GAAP financial measures provides useful information to investors because the information may allow investors to better evaluate ongoing business performance and certain components of the Company’s results. In addition, the Company believes that the presentation of these financial measures enhances an investor’s ability to make period to period comparisons of the Company’s operating results. The presentation of our non-GAAP measures is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with U.S. GAAP. The Company has reconciled the non-GAAP information included in this release to the nearest U.S. GAAP measures, as required under the rules of the Securities and Exchange Commission regarding the use of non-GAAP financial measures.
The following provides a listing of approved adjustments related to non-GAAP measures, as defined by the CSS Board of Directors:
(1) The Company’s results include non-recurring costs related to the filing of trade remedy petitions with the U.S. International Trade Commission and the U.S. Department of Commerce and the strategic decision to reshore plastic decorative ribbon manufacturing to the U.S. from China in fiscal 2019. These costs include customer fines and penalties, which are reflected as a reduction to our net sales; increased freight costs, direct and indirect labor variances, and duties which are reflected as cost of goods sold; and professional fees for legal and economist support in connection with our petitions, which are reflected as selling, general and administrative expenses.
(2) Tax impact determined using combined federal and state statutory rates of 24% and 36% for the three- and nine month periods ended December 31, 2018 and three- and nine month periods ended December 31, 2017, respectively.
(3) Tax impact of recognizing a full valuation allowance for U.S. net deferred tax assets in the three month period ended December 31, 2018.
The following table sets forth a reconciliation of free cash flow, a non-GAAP financial measure, to net cash used for operating activities, which we believe to be the most directly comparable GAAP financial measure.
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CONTACT: KEITH PFEIL - CHIEF FINANCIAL OFFICER
KEYWORD: UNITED STATES NORTH AMERICA PENNSYLVANIA
INDUSTRY KEYWORD: DISCOUNT/VARIETY OFFICE PRODUCTS NATURAL RESOURCES FOREST PRODUCTS RETAIL SPECIALTY
SOURCE: CSS Industries
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PUB: 02/07/2019 04:15 PM/DISC: 02/07/2019 04:15 PM