Company announces the suspension of its quarterly dividend
Full Year Highlights
- Net sales of $382.3 million, an increase of 5.6 percent over the prior
year, driven by the full year contribution of the Simplicity
acquisition - Net loss of $53.5 million included $15.3 million of non-cash goodwill
and intangible asset impairment charges, $8.4 million of acquisition,
integration and other costs, $7.6 million of non-cash tax expense to
write-off deferred tax assets and $3.1 million of restructuring
expenses - Adjusted EBITDA of $15.0 million, down $9.3 million from the prior
year, driven mainly by volume declines within legacy business - Operating cash flow of $1.0 million compared to $31.4 million in the
prior year; free cash flow of ($9.6) million compared to $24.1 million
in the prior year - Net debt of $9.4 million as of year end, compared to net cash of $18.1
million at prior year end
Fourth Quarter Highlights
- Net sales of $72.0 million decreased 11.7 percent over the prior year
quarter, driven primarily by lower craft, gift and seasonal volume in
legacy business - Net loss of $23.4 million included $13.9 million of non-cash
intangible asset impairment charges and $2.5 million of acquisition,
integration and other costs - Adjusted EBITDA was ($0.9) million compared to ($2.1) million in the
prior year quarter
PLYMOUTH MEETING, Pa.–(BUSINESS WIRE)–CSS Industries, Inc. (NYSE: CSS), a leading consumer products company
serving the craft, gift and seasonal markets, today announced results
for its fiscal fourth quarter and full fiscal year ended March 31, 2019.
Net sales in the fourth quarter of fiscal 2019 were $72.0 million
compared to $81.5 million in the fourth quarter of fiscal 2018, driven
primarily by lower replenishment sales within our legacy craft, gift and
seasonal businesses.
Gross profit was $19.5 million in the quarter compared to $16.9 million
in the prior year quarter and gross margin was 27.1 percent compared to
20.7 percent in the prior year quarter. Adjusted gross profit was $20.9
million for the quarter compared to $22.5 million in the prior year
quarter. Adjusted gross margin was 29.0 percent in the quarter compared
to 27.6 percent in the prior year quarter, driven primarily by the mix
of sales within craft, as well as not repeating a manufacturing variance
write-off, which occurred in the prior year.
Selling, general & administrative (“SG&A”) expenses were $27.4 million
in the quarter compared to $32.1 million in the prior year quarter. The
decrease was attributable to lower spending as a result of management
cost reduction initiatives (primarily workforce reductions), within the
legacy business, as well as integration savings from the combination of
the Simplicity and McCall acquisitions.
The Company recorded pre-tax charges of $13.9 million for the impairment
of intangible assets in the quarter, primarily related to the non-cash
write-off of its C.R. Gibson tradename and customer list, of $8.0
million and $4.6 million, respectively. In addition, the Company
recorded an additional $1.3 million in non-cash impairment charges
related to tradenames within its legacy business. All impairment charges
were driven by lower sales within these product categories.
Operating loss for the quarter was $21.7 million compared to $48.6
million in the prior year quarter. Adjusted operating loss was $4.6
million compared to $5.4 million in the prior year quarter. Net loss was
$23.4 million compared to $38.4 million in the prior year quarter.
Adjusted net loss was $10.4 million compared to $5.0 million in the
prior year quarter. Net loss per share was $2.65 compared to $4.21 in
the prior year quarter and the adjusted net loss per share was $1.18
compared to an adjusted net loss of $0.55 in the prior year quarter.
Adjusted EBITDA was ($0.9) million compared to ($2.1) million in the
prior year quarter.
Full year net sales were $382.3 million compared to $361.9 million in
the prior fiscal year, representing a $20.4 million increase or 5.6%
increase. Sales attributable to Simplicity were $91.0 million compared
to $35.6 million in fiscal 2018. Excluding the impact of the Simplicity
acquisition in both periods, sales declined 10.8 percent. The decline
within the legacy business was driven primarily by lower replenishment
sales within our craft and gift categories and lower sales within our
Seasonal category, as a result of buy-downs and market share losses.
Full year gross profit was $89.3 million compared to $92.8 million in
the prior year and gross margin was 23.4 percent compared to 25.7
percent in the prior year. Adjusted gross profit was $106.4 million for
the year compared to $110.7 million in the prior year. Adjusted gross
margin was 27.8 percent compared to 30.6 percent in the prior year,
driven primarily by the customer and product mix of sales declines
within our craft and gift categories, the impact of lower seasonal
sales, higher manufacturing variances related to the production of
plastic decorative ribbons and higher freight costs.
Full year SG&A expenses were $113.3 million compared to $105.2 million
in the prior year. The increase was attributable to the full year of
Simplicity operations, partially offset by integration savings and cost
savings initiatives within the legacy business.
The Company recorded $3.1 million of restructuring charges in fiscal
2019, while there were no such charges in fiscal 2018. Of these charges,
$1.9 million of restructuring expenses relate to integration efforts of
the Simplicity and McCall business, primarily driven by the previously
announced U.K. office consolidation. The remaining $1.2 million relates
primarily to employee separation costs as a result of the first phase of
the previously announced initiative focused on addressing the legacy
business cost structure.
For the full year, the Company recorded $15.3 million of pre-tax charges
related to the impairment of goodwill and intangible assets. Of these
charges, $13.9 million related to the impairment of intangible assets
booked during the fiscal fourth quarter, driven primarily by the
impairment of the C.R. Gibson tradename and customer list, as a result
of continued sales declines. The remaining $1.4 million related to the
impairment of goodwill on the Fitlosophy acquisition, which was recorded
in the first quarter of fiscal 2019. This Fitlosophy goodwill write down
was related to the continued discrepancy between the Company’s book
value and its market capitalization. In the prior year, the Company
recorded $33.4 million related to the impairment of goodwill and
intangibles, driven by the discrepancy between its book value and its
market capitalization.
Operating loss for fiscal 2019 was $42.5 million compared to $45.7
million in the prior year. Adjusted operating income was $1.1 million
compared to $13.8 million in the prior year.
Net loss for fiscal 2019 was $53.5 million compared to $36.5 million in
the prior year. The net loss in the current year was impacted by the
goodwill and intangible asset impairment charges of $15.3 million, $10.7
million of inventory step-up amortization, $8.4 million of acquisition,
integration and other costs, $7.6 million tax expense to write-off
deferred tax assets, $3.9 million of costs associated with the impact of
trade remedy petitions, $3.1 million of restructuring expenses and $2.1
million of inventory and licensing write-down costs related to a product
line exit. Net loss in the prior year was $36.5 million and included a
$33.4 million goodwill and intangible asset impairment charge, $17.9
million of inventory step-up amortization, and $7.7 million of
acquisition, integration and other costs. Adjusted net loss in fiscal
2019 was $12.9 million compared to adjusted net income of $10.0 million
in the prior year. Loss per share in fiscal 2019 was $5.97 compared to
$4.01 in the prior year. Adjusted net loss per share in fiscal 2019 was
$1.43 compared to adjusted earnings per share of $1.10 in the prior
year. Adjusted EBITDA for fiscal 2019 was $15.0 million compared to
$24.3 million in the prior year.
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 omnichannel business model, improve ROIC and build a
collaborative “One CSS” culture. Highlights related to these objectives
included:
Debt & Liquidity
The Company remains focused on aggressive debt paydown, as it finished
fiscal 2019 with $9.4 million of net debt, which represents a $30.7
million reduction from its net debt at the end of its fiscal third
quarter of 2019. This reduction of debt reflects the complete payoff of
working capital debt related to seasonal production, as well as the
partial payoff of debt associated with the Simplicity acquisition. The
Company remains committed to reducing debt levels to further strengthen
its balance sheet. The Company is announcing the suspension of its
quarterly dividend as it focuses on its near-term priorities of
liquidity and debt management.
To align with the Company’s fiscal 2020 sales projections, the Company
recently has completed an amendment to its $125 million asset-asset
based senior secured facility. The amendment, among other things,
reduces the aggregate principal amount of the facility to $100 million,
enabling the Company to reduce the level of costs associated with unused
facility fees. The Company believes that this amended facility will
provide ample liquidity throughout the Company’s business cycle. The
bank syndicate of JPMorgan Chase Bank, N.A., acting as the
administrative agent, Bank of America, N.A., and KeyBank National
Association, as well as the March 2024 facility expiration date, remain
unchanged.
Cost Savings Initiatives
As previously announced, the Company began implementation of its
restructuring plan to drive significant cost reductions within its cost
base to streamline the organization and to improve business performance,
profitability and cash flow generation. It is expected that this plan
will generate ongoing run-rate spending reductions of approximately $22
million by the end of fiscal 2020, representing a 10 percent reduction
in total spending. Half of these savings are expected to be generated
through workforce reductions, while the remainder will be driven by
aggressive cost savings initiatives across the business, primarily
focused on the Company’s legacy product categories. In connection with
this plan, the Company expects to record a restructuring charge of
approximately $2 million in its first quarter of fiscal 2020, mainly
attributable to severance costs.
New initiatives being undertaken related to Active SKU Management (ASM)
and New Item Creation (NIC) processes are designed to drive enhancements
to existing processes around product life-cycle management and new
product development. A key outcome for these initiatives is greater
focus on total return through the adoption of economic value add (EVA)
concepts and overall simplification of product lines through extensive
SKU rationalization. The Company has identified approximately 7,000
SKUs, or 14 percent of our total SKUs, to be eliminated, reducing
run-rate spending related to the development process.
We expect to realize approximately $10 million in lower sales during
fiscal 2020 as a result of these initiatives, as well as the previously
announced exit of our sports-licensed back-to-school product line. We do
not expect an impact to profit associated with such lower sales, as the
sales volume reductions will be offset by cost savings initiatives.
These changes should lead to enhanced free cash flow, driven by lower
inventories. Overall, the changes being implemented are supported by our
strategic pillars, better positioning the Company for the future.
“Fiscal 2019 was an extremely disappointing year,” commented Christopher
J. Munyan, President and Chief Executive Officer. “While our Simplicity
business performed in line with expectations, our legacy business
continued to experience significant volume pressures across craft, gift
and seasonal, while also experiencing execution issues related to the
reshoring of plastic decorative ribbons from China into our U.S.
manufacturing facilities. Given the results of this year and the overall
continued decline of our legacy categories, the Company has taken steps
to address these issues over the longer term, through previously
announced initiatives, including our most recent announcement related to
our restructuring plan.”
The following is a summary of net sales by product
category (dollars in thousands):
| Quarter Ended March 31, | Year Ended March 31, | ||||||||||||||||||||
| 2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||
| Craft | $ | 40,581 | $ | 39,151 | 3.7 | % | $ | 158,105 | $ | 114,306 | 38.3 | % | |||||||||
| Gift | 26,784 | 34,578 | (22.5 | )% | 110,981 | 125,399 | (11.5 | )% | |||||||||||||
| Seasonal | 4,639 | 7,804 | (40.6 | )% | 113,177 | 122,191 | (7.4 | )% | |||||||||||||
| Total | $ | 72,004 | $ | 81,533 | (11.7 | )% | $ | 382,263 | $ | 361,896 | 5.6 | % | |||||||||
Craft
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 sales increased 3.7 percent in our fourth quarter compared to the
prior year quarter, driven by higher sales related to Simplicity.
Excluding sales from Simplicity in both quarters, craft sales decreased
30.5 percent versus the prior year quarter, driven primarily by lower
replenishment sales of ribbon and buttons to our two largest customers,
including a non-repeating button reset which occurred in the fourth
quarter of the prior year.
For the full year, craft sales increased 38.3 percent, all driven by the
Simplicity acquisition. Excluding sales from Simplicity in both years,
craft sales decreased 14.8 percent, driven by declines in ribbon,
buttons, and lower revenue related to McCall patterns. The decreases in
ribbons and buttons were the result of lower replenishment sales, as
well as price erosion within ribbon, driven by a product mix change with
a large customer. The decreases in McCall pattern sales were
attributable to system go-live issues and are not expected to repeat in
the future.
Gift
The Company defines the gift 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 sales declined 22.5 percent in our fourth quarter compared to the
prior year, driven primarily by lower replenishment sales within social
stationery, which includes journals, infant memory books, paper
tableware and all occasion greeting cards. These declines were partially
offset by higher sales of gift card holders.
For the full year, gift sales decreased 11.5%, driven primarily by
erosion within social stationery, as well as packaging and floral
ribbon. These decreases were partially offset by higher sales of
everyday ribbon, gift bags and gift boxes. The declines in social
stationery were primarily the result of market share loss with a major
retailer related to infant products, lower replenishment sales of
journals within the mass and drug channel and market share losses of
social stationery within discount and specialty retail. The growth in
everyday ribbon, gift bags and gift boxes represented market share
growth within the mass market and discount retail channels.
Seasonal
The Company defines the seasonal 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 sales declined 40.6% in our fourth quarter compared to the
prior year, driven primarily by lower sales of Easter dye kits as the
result of buy downs within mass market retail.
For the full year, seasonal sales declined 7.4% driven primarily by
lower sales of Valentine’s Day and Easter products, lower Christmas gift
card holder sales and lower sales of Christmas ribbons and bows. These
declines were partially offset by growth within our School stationery
business. The declines within Valentine’s Day and Easter were driven by
a combination of retail buydowns within mass market and discount, as
well as market share loss of Valentine products at a major retailer, due
to changes in product mix not offered by the Company. The lower sales of
gift card holders were driven by a combination of buydowns and price
erosion, as a result of product mix changes. The decline in Christmas
ribbon and bow sales were driven primarily by price erosion driven by
product mix and competitive pressures, as well as changes in customer
mix.
Income Tax
The Company’s effective tax rate for the quarter was 1.0% percent
compared to 21.2% for the prior year quarter. The decrease in the
effective tax rate was primarily attributable to the recording of a
valuation allowance that fully offset the Company’s U.S. net deferred
tax assets, resulting in no tax benefit recorded against U.S. pretax
losses in the quarter. The effective tax rate in the prior year quarter
was not impacted by a valuation allowance.
The Company’s effective tax rate for the year was (17.8) percent
compared to 20.7 percent in the prior year. The decrease in the
effective tax rate was primarily attributable to the recording of a
valuation allowance that fully offset the Company’s U.S. net deferred
tax assets, and no tax benefit was recorded against U.S. pretax losses
for the year. The effective tax rate in the prior year was not impacted
by a valuation allowance.
Balance Sheet and Cash Flow
The Company ended the year with $17.1 million of cash and cash
equivalents compared to $58.6 million in the prior year. Inventory
decreased to $96.2 million from $102.4 million in the prior year.
Excluding the inventory step-ups in both periods and inventory acquired
in the current year, inventory levels increased $4.1 million compared to
the prior year. The growth in inventory was driven by higher levels of
raw materials related to the domestic manufacturing of plastic
decorative ribbons for our Christmas and all occasion businesses. In
addition, inventory levels grew within our craft ribbon business driven
by lower replenishment sales. This growth was partially offset by lower
levels of gift inventory related to our stationery product lines, as a
result of SKU reductions. Accounts receivable decreased to $53.8 million
compared to $63.1 million in the prior year, driven primarily by lower
fourth quarter sales volume. Accounts payable increased to $27.9 million
from $20.6 million, driven by earlier buys of raw material related to
the domestic production of plastic decorative ribbons for our Christmas
and all occasion businesses. The Company ended the year with $26.5
million in total debt compared to $40.5 million in the prior year. The
lower level of debt was driven by debt paydown associated with the
borrowings incurred in connection with the acquisition of Simplicity in
November 2017.
Cash provided by operating activities was $1.0 million for the year
compared to $31.4 million in the prior year. Cash from operating
activities for the year included $10.7 million of inventory step-up
amortization, $8.4 million of acquisition, integration and other costs,
$7.6 million tax expense to write-off deferred tax assets, $3.9 million
of costs associated with the impact of trade remedy petitions, $3.1
million of restructuring expenses and $2.1 million of inventory and
licensing write-down costs related to a product line exit. Cash from
operating activities for the prior year included $17.9 million of
inventory step-up amortization, $7.7 million of acquisition, integration
and other costs and $0.7 million of cost associated with trade remedy
petitions in the prior year. Full year capital expenditures totaled
$10.6 million, compared to $7.3 million in the prior year. The increased
level of capital spending related to Simplicity and McCall integration
efforts was primarily related to information technology spending. Free
cash flow was ($9.6) million compared to $24.1 million in the prior
year. The decline in free cash flow versus the prior year is reflective
of not repeating the large inventory reduction experienced in fiscal
2018, higher capital spending as a result of integration efforts and
lower levels of cash generated from the legacy business, as a result of
volume and price pressures.
Fiscal 2020 Outlook
“We expect fiscal 2020 to be a year of stabilization and focus for the
business,” said Mr. Munyan. “We are pausing on acquisitions completely,
as we turn our attention to improving our legacy business. Our plan for
the new year assumes we continue to see sales erosion across our legacy
business and incorporates the expected sales losses from our process
changes around Active SKU Management (ASM) and New Item Creation (NIC).
Our cost savings initiatives are fully underway and will help us further
transform our legacy business. We remain focused on cash and debt
levels, while managing our portfolio and further addressing areas of
underperformance.”
“Looking ahead,” continued Mr. Munyan, “the Company will continue to
focus on stabilizing the business and transforming the business into a
leaner, focused organization. As part of this, we will continue our
review of underperforming product lines and assess the go-forward
strategy in a manner that drives enhanced returns on invested capital.”
The Company expects to generate net sales of $355 million to $365
million in its fiscal year ending March 31, 2020, resulting in
year-over-year erosion of (4) percent to (7) percent, all driven by
declines within our legacy business, partially offset by flat to
moderate sales growth in our Simplicity and McCall businesses.
Net loss is expected to be in the range of $0 million to $2 million
compared to a net loss of $53.5 million in fiscal 2019. Adjusted EBITDA
for fiscal 2020 is expected to be in the range of $21 million to $24
million, compared to $15.0 million in fiscal 2019. The expected growth
in adjusted EBITDA primarily reflects the anticipated realization of
cost savings initiatives, partially offset by anticipated lower sales
volumes within our legacy businesses, commodity and freight inflation
and expected higher manufacturing costs.
Free cash flow, defined as operating cash flow minus capital
expenditures, for fiscal 2020 is expected to be in the range of $14
million to $18 million, compared to fiscal 2019 free cash flow of ($9.6)
million. The anticipated improvement is driven by cost savings
initiatives, improvements in working capital, primarily lower
inventories, and reduced capital expenditures.
The Company will hold a conference call for investors on May 31, 2019 at
8:30 a.m. ET. The call can be accessed in the following ways:
- By telephone: For both “listen-only” participants and those
participants who wish to take part in the question-and-answer portion
of the call, the dial-in number in the United States is (844) 458-
8735, and for international callers, the dial-in number is (647)
253-8639. The conference ID for all callers is 5557899. - By webcast: http://www.cssindustries.com/investor-relations.
The webcast will be archived for those unable to participate live.
About CSS Industries, Inc.
CSS is a creative consumer products company, focused on the craft, gift
and seasonal categories.
Contacts
KEITH PFEIL – CHIEF FINANCIAL OFFICER
610-729-3947
Keith.Pfeil@cssindustries.com
