Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
________________________________________
FORM 10-Q
________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
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
________________________________________
CSSLOGOA05.JPG
CSS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
________________________________________
Delaware
 
13-1920657
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
450 Plymouth Road, Suite 300, Plymouth Meeting, PA
 
19462
(Address of principal executive offices)
 
(Zip Code)
(610) 729-3959
(Registrant’s telephone number, including area code)
________________________________________
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.     x   Yes     ¨   No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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).   x   Yes     ¨   No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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
x
Non-accelerated filer
¨
Smaller reporting company
¨
 
 
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     x   No
As of July 28, 2017 , there were 9,094,394 shares of common stock outstanding which excludes shares which may still be issued upon exercise of stock options or upon vesting of restricted stock unit grants.
 

Table of Contents

CSS INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
 
 
PAGE NO.
 
 
 


2
Table of Contents



CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands, except per share data)
 
Three Months Ended June 30,
 
2017
 
2016
 
 
 
 
Net sales
$
48,324

 
$
45,318

Cost of sales
36,512

 
33,021

Gross profit
11,812

 
12,297

Selling, general and administrative expenses
20,696

 
17,574

Operating income (loss)
(8,884
)
 
(5,277
)
Interest expense (income), net
(54
)
 
(89
)
Other expense (income), net
(159
)
 
(91
)
Income (loss) before income taxes
(8,671
)
 
(5,097
)
Income tax expense (benefit)
(1,607
)
 
(1,811
)
Net income (loss)
$
(7,064
)
 
$
(3,286
)
 
 
 
 
Weighted average basic and diluted shares outstanding
9,089

 
9,053

 
 
 
 
Basic and diluted net income (loss) per common share
$
(0.78
)
 
$
(0.36
)
 
 
 
 
Cash dividends per share of common stock
$
0.20

 
$
0.20

 
 
 
 
Comprehensive income (loss):
 
 
 
Net income (loss)
$
(7,064
)
 
$
(3,286
)
Currency translation adjustment
308

 
—

Comprehensive income (loss)
$
(6,756
)
 
$
(3,286
)
See notes to consolidated financial statements.

3
Table of Contents

CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
June 30,
2017
 
March 31,
2017
 
June 30,
2016
Assets
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents
$
49,695

 
$
47,693

 
$
10,111

Short-term investments
—

 
19,931

 
44,926

Accounts receivable, net of allowances of $1,124, $1,283 and $1,245
42,753

 
48,814

 
42,395

Inventories
115,348

 
105,258

 
91,109

Prepaid expenses and other current assets
14,099

 
10,793

 
16,105

Total current assets
221,895

 
232,489

 
204,646

Property, plant and equipment, net
35,474

 
35,764

 
27,089

Deferred income taxes
—

 
—

 
2,680

Other assets
 
 
 
 
 
Goodwill
19,916

 
19,916

 
19,974

Intangible assets, net
43,038

 
43,879

 
41,380

Other
8,172

 
7,146

 
7,160

Total other assets
71,126

 
70,941

 
68,514

Total assets
$
328,495

 
$
339,194

 
$
302,929

Liabilities and Stockholders’ Equity
 
 
 
 
 
Current liabilities
 
 
 
 
 
Current portion of long-term debt
$
223

 
$
220

 
$
—

Accounts payable
14,076

 
14,223

 
16,556

Accrued payroll and other compensation
7,107

 
7,884

 
4,907

Accrued customer programs
4,934

 
5,030

 
3,045

Other current liabilities
7,638

 
9,026

 
7,212

Total current liabilities
33,978

 
36,383

 
31,720

Long-term debt, net of current portion
399

 
456

 
—

Deferred income taxes
4,413

 
4,430

 
—

Other long-term obligations
3,809

 
3,771

 
4,650

Stockholders’ equity
 
 
 
 
 
Preferred stock
—

 
—

 
—

Common stock, $.10 par, 25,000,000 shares authorized, 14,703,084 shares issued at June 30, 2017, March 31, 2017 and June 30, 2016
1,470

 
1,470

 
1,470

Additional paid-in capital
57,221

 
57,997

 
56,845

Retained earnings
374,750

 
382,807

 
356,798

Accumulated other comprehensive income (loss)
245

 
(63
)
 
(62
)
Common stock in treasury
(147,790
)
 
(148,057
)
 
(148,492
)
Total stockholders' equity
285,896

 
294,154

 
266,559

Total liabilities and stockholders’ equity
$
328,495

 
$
339,194

 
$
302,929

See notes to consolidated financial statements.


4
Table of Contents

CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
 
Three Months Ended June 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(7,064
)
 
$
(3,286
)
Adjustments to reconcile net income (loss) to net cash used for operating activities:
 
 
 
Depreciation and amortization
2,126

 
2,160

Amortization of inventory step-up
3,185

 
—

Accretion of investment discount
(69
)
 
(120
)
Provision for accounts receivable allowances
526

 
590

Deferred tax (benefit) provision
(56
)
 
790

Share-based compensation expense
283

 
410

Changes in assets and liabilities:
 
 
 
Accounts receivable
5,562

 
2,158

Inventory
(13,156
)
 
(18,087
)
Prepaid expenses and other assets
(4,323
)
 
(3,917
)
Accounts payable
(99
)
 
2,667

Other accrued liabilities and long-term obligations
(2,239
)
 
(4,159
)
Total adjustments
(8,260
)
 
(17,508
)
Net cash used for operating activities
(15,324
)
 
(20,794
)
Cash flows from investing activities:
 
 
 
Maturities of investment securities
20,000

 
15,000

Purchase of property, plant and equipment
(901
)
 
(1,967
)
Net cash provided by investing activities
19,099

 
13,033

Cash flows from financing activities:
 
 
 
Payments on long-term debt
(54
)
 
—

Dividends paid
(1,819
)
 
(1,815
)
Exercise of stock options, net of tax withholdings
37

 
9

Payments for tax withholding on net restricted stock settlements
—

 
(526
)
Tax effect on stock awards
—

 
277

Net cash used for financing activities
(1,836
)
 
(2,055
)
Effect of exchange rate changes on cash
63

 
—

Net increase (decrease) in cash and cash equivalents
2,002

 
(9,816
)
Cash and cash equivalents at beginning of period
47,693

 
19,927

Cash and cash equivalents at end of period
$
49,695

 
$
10,111

See notes to consolidated financial statements.

5
Table of Contents

CSS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
(1)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
CSS Industries, Inc. (collectively with its subsidiaries, “CSS” or the “Company”) has prepared the consolidated financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission. The Company has condensed or omitted certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States pursuant to such rules and regulations. In the opinion of management, the statements include all adjustments (which include normal recurring adjustments) required for a fair presentation of financial position, results of operations and cash flows for the interim periods presented. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2017 . The results of operations for the interim periods are not necessarily indicative of the results for the full year.
The Company’s fiscal year ends on March 31. References to a particular fiscal year refer to the fiscal year ending in March of that year. For example, “fiscal 2018 ” refers to the fiscal year ending March 31, 2018 .
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All intercompany transactions and accounts have been eliminated in consolidation.
Nature of Business
CSS is a consumer products company within the seasonal, celebrations and craft markets that is primarily engaged in the design, manufacture, procurement, distribution and sale of seasonal, celebrations and craft social expression products, principally to mass market retailers.
Seasonal The seasonal product category is defined as products designed, produced and sold to mass market retailers for holidays and seasonal events, including Christmas, Valentine's Day, Easter and back-to-school. Products include Christmas packaging ribbons and bows, boxed greeting cards, gift tags, gift card holders, gift bags, gift wrap, tissue paper, classroom exchange Valentine cards, Easter egg dyes and novelties, and educational products. Production forecasts for these products are generally known well in advance of shipment.
Celebrations The celebrations product category is defined as products primarily designed to celebrate certain life events or special occasions such as weddings, birthdays, anniversaries, graduations, and the birth of a child. These products are primarily sold into mass and specialty retailers, floral and packaging wholesalers and distributors. Products include ribbons and bows, floral accessories, infant products, journals, gift card holders, all occasion boxed greeting cards, memory books, scrapbooks, stationery, stickers and other items that commemorate life's celebrations. Products in this category are generally ordered on a replenishment basis throughout the year.
Craft The craft product category is defined as products used for craft activities and includes ribbons, buttons, sewing patterns and accessories. These products are sold to mass market and specialty retailers and are generally ordered on a replenishment basis throughout the year.
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's principal operating subsidiaries include Berwick Offray LLC ("Berwick Offray"), Paper Magic Group, Inc. ("Paper Magic"), C.R. Gibson, LLC ("C.R. Gibson") and The McCall Pattern Company, Inc. ("McCall"), and their respective subsidiaries.

6

Reclassification
Certain prior period amounts have been classified to conform with the current year presentation.
Foreign Currency Translation and Transactions
The Company's foreign subsidiaries use the local currency as the functional currency. The Company translates all assets and liabilities at period end exchange rates and all income and expense accounts at average rates during the period. 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 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 goodwill and other intangible and long-lived assets, income tax accounting, the valuation of share-based awards and resolution of litigation and other proceedings. Actual results could differ from these estimates.
Short-Term Investments
The Company categorized and accounted for its short-term investment holdings as held-to-maturity securities. This categorization was based upon the Company's positive intent and ability to hold these securities until maturity. There were no short-term investments at June 30, 2017 . Short-term investments at March 31, 2017 consisted of commercial paper with an amortized cost of $19,931,000 and matured in the first quarter of fiscal 2018 . Short-term investments at June 30, 2016 consisted of commercial paper with an amortized cost of $44,926,000 and matured in the second quarter of fiscal 2017 . Held-to-maturity securities are recorded at amortized cost which approximated fair value at March 31, 2017 and June 30, 2016 .
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 and net realizable value. The remaining portion of the inventory is valued at the lower of last-in, first-out (LIFO) cost and net realizable value. Inventories consisted of the following (in thousands):
 
June 30, 2017
 
March 31, 2017
 
June 30, 2016
Raw material
$
12,129

 
$
11,210

 
$
12,509

Work-in-process
19,198

 
18,316

 
17,835

Finished goods
84,021

 
75,732

 
60,765

 
$
115,348

 
$
105,258

 
$
91,109

In connection with the acquisition of McCall on December 13, 2016, there was a step-up to fair value of the inventory acquired in the amount of $ 21,773,000 recorded at the date of acquisition. This was a result of the inventory acquired being marked up to an estimated net selling price in purchase accounting and is recognized through cost of sales as the inventory is sold. The amount of step-up to fair value of the acquired inventory remaining as of June 30, 2017 and March 31, 2017 was $ 15,071,000 and $ 18,187,000 , respectively. The Company expects the acquired inventory to be sold through the first quarter of fiscal 2019.

7

Property, Plant and Equipment
Property, plant and equipment are stated at cost and include the following (in thousands):
 
June 30, 2017
 
March 31, 2017
 
June 30, 2016
Land
$
5,882

 
$
5,838

 
$
2,508

Buildings, leasehold interests and improvements
40,798

 
40,661

 
34,610

Machinery, equipment and other
90,713

 
89,917

 
88,667

 
137,393

 
136,416

 
125,785

Less - Accumulated depreciation and amortization
(101,919
)
 
(100,652
)
 
(98,696
)
Net property, plant and equipment
$
35,474

 
$
35,764

 
$
27,089

Depreciation expense was $1,285,000 and $1,357,000 for the quarters ended June 30, 2017 and 2016 , respectively.
Long-Lived Assets including Goodwill and Other Intangible Assets
The Company performs an annual impairment test of the carrying amount of goodwill and indefinite-lived intangible assets in the fourth quarter of its fiscal year. Additionally, the Company would perform its impairment testing at an interim date if events or circumstances indicate that goodwill or intangibles might be impaired. During the three months ended June 30, 2017 , there were no such events or circumstances.
The Company uses a dual approach to determine the fair value of its reporting units, including both a market approach and an income approach. The Company believes the use of multiple valuation techniques results in a more accurate indicator of the fair value of each reporting unit. The test compares the fair value of a reporting unit to its carrying amount, including goodwill, as of the date of the test. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss would be reported.
Other indefinite-lived intangible assets consist primarily of tradenames, which are also required to be tested annually for impairment. The fair value of the Company’s tradenames is calculated using a “relief from royalty payments” methodology. 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. 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. During the three months ended June 30, 2017 , there were no such events or circumstances. See Note 4 for further information on other intangible assets.
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. 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 records a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized.
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.
Revenue Recognition
The Company recognizes the majority of its revenue from product sales when the goods are shipped, title and risk of loss have been transferred to the customer and collection is reasonably assured. The Company has certain 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 as recorded at point-of-sale terminals. Provisions for returns, allowances, rebates to customers and other adjustments are provided in the same period that the related sales are recorded.

8

Net Income (Loss) Per Common Share
Due to the Company's net losses in the first quarter, potentially dilutive securities of 561,000 shares and 570,000 shares as of June 30, 2017 and 2016, respectively, consisting of outstanding stock options and unearned restricted stock units, were excluded from the diluted net income (loss) per common share calculation due to their antidilutive effect.
(2)
SHARE-BASED COMPENSATION
2013 Equity Compensation Plan
Under the terms of the Company’s 2013 Equity Compensation Plan (“ 2013 Plan ”), the Company may grant incentive stock options, non-qualified stock options, stock units, restricted stock grants, stock appreciation rights, stock bonus awards and dividend equivalents to officers and other employees and non-employee directors. Grants under the 2013 Plan may be made through July 29, 2023. The term of each grant is at the discretion of the Company, but in no event greater than ten years from the date of grant, and at the date of grant the Company has discretion to determine the date or dates on which granted options become exercisable. Under the 2013 Plan, a committee of the Company's Board of Directors (the "Board") approves grants to officers and other employees, and the Board approves grants to non-employee directors. Service-based stock options outstanding as of June 30, 2017 become exercisable at the rate of 25% per year commencing one year after the date of grant. Market-based stock options outstanding as of June 30, 2017 become exercisable only if certain market conditions and service requirements are satisfied, and the date(s) on which they become exercisable will depend on the period in which such market conditions and service requirements are met, if at all, except that vesting and exercisability are accelerated upon a change of control. Outstanding service-based restricted stock units ("RSUs") granted to employees vest at the rate of 50% of the shares underlying the grant at each of the third and fourth anniversaries of the date on which the award was granted. Service-based RSUs granted to directors and outstanding as of June 30, 2017 vested on July 31, 2017. Market-based RSUs outstanding at June 30, 2017 will vest only if certain market conditions and service requirements have been met, and the date(s) on which they vest will depend on the period in which such market conditions and service requirements are met, if at all, except that vesting and redemption are accelerated upon a change of control. At June 30, 2017 , there were 536,788 shares available for grant under the 2013 Plan.
The fair value of each stock option granted under the above plan was estimated on the date of grant using a Black-Scholes option pricing model with the following average assumptions:
 
Three Months Ended June 30,
 
2017
 
2016
Risk-free interest rate
2.21
%
 
1.66
%
Volatility
34.45
%
 
35.12
%
Dividend yield
2.90
%
 
2.91
%
Expected life of option (in years)
6.25

 
4.75

The fair value of each market-based RSU granted under the above plan during the first quarter of fiscal 2017 was estimated on the date of grant using a Monte Carlo simulation model with assumptions of a risk-free interest rate of 1.20% , volatility of 33.08% and dividend yield of 2.99% . There were no market-based RSUs granted during the first quarter of fiscal 2018 . The fair value of each service-based RSU granted to employees was 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 fair value of each service-based RSU granted to directors, for which dividend equivalents are paid upon vesting of the underlying awards, was estimated on the day of grant based on the closing price of the Company's common stock.
During the three months ended June 30, 2017 and 2016 , the Company granted 119,000 and 151,350 stock options, respectively, with a weighted average fair value of $7.42 and $6.25 , respectively. During the three months ended June 30, 2017 and 2016 , the Company granted 54,360 and 47,250 RSUs, respectively, with a weighted average fair value of $25.21 and $19.50 , respectively. As of June 30, 2017 , there were 616,100 and 199,237 outstanding stock options and RSUs, respectively.
As of June 30, 2017 , there was $1,964,000 of total unrecognized compensation cost related to non-vested stock option awards granted under the Company’s equity incentive plans which is expected to be recognized over a weighted average period of 3.1 years . As of June 30, 2017 , there was $2,502,000 of total unrecognized compensation cost related to non-vested RSUs granted under the Company’s equity incentive plans which is expected to be recognized over a weighted average period of 2.8 years .

9

On August 11, 2015, the Company granted 10,000 RSUs to the Chair of the Company's Board of Directors. The RSUs will become vested and convertible into a lump sum cash payment equal to the then fair market value of corresponding shares of common stock of the Company if, and only to the extent that, certain service-based vesting conditions and other terms and conditions are satisfied by August 15, 2017, or upon occurrence of a change of control. The RSUs are classified as liability awards because they will be paid in cash upon vesting. The RSU award liability is measured at its fair market value at the end of each reporting period and, therefore, will fluctuate based on the performance of the Company's stock. The total amount accrued related to this grant as of June 30, 2017 was $245,000 and is included in accrued payroll and other compensation in the consolidated balance sheet. The total amount accrued related to this grant as of June 30, 2016 was $ 117,000 and is included in other long-term obligations in the consolidated balance sheet. During each of the three months ended June 30, 2017 and 2016 , dividend equivalents of $2,000 were paid in cash related to this liability classified award and were charged to selling, general and administrative expenses.
Compensation cost related to stock options and RSUs (inclusive of the liability classified awards described above) recognized in operating results (included in selling, general and administrative expenses) was $319,000 and $442,000 in the quarters ended June 30, 2017 and 2016 , respectively.
(3)
DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into foreign currency forward contracts in order to reduce the impact of certain foreign currency fluctuations on sales denominated in a foreign currency. Derivatives are not used for trading or speculative activities. Firmly committed transactions and the related receivables 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 loss of $19,000 was recorded in the three months ended June 30, 2017 and a realized gain of $2,000 was recorded in the three months ended June 30, 2016 . As of June 30, 2017 and 2016 , the notional amount of open foreign currency forward contracts was $1,636,000 and $1,464,000 , respectively. The related unrealized loss was $35,000 at June 30, 2017 and the related unrealized gain was $8,000 at June 30, 2016 . The Company believes it does not have significant counterparty credit risks as of June 30, 2017 .
The following table shows the fair value of the foreign currency forward contracts designated as hedging instruments and included in the Company’s consolidated balance sheet (in thousands):
 
 
 
Fair Value of Derivative Instruments
 
 
 
Fair Value
 
Balance Sheet Location
 
June 30, 2017
 
June 30, 2016
Foreign currency forward contracts
Other current liabilities
 
$
35

 
$
—

Foreign currency forward contracts
Other current assets
 
$
—

 
$
8

(4)
INTANGIBLE ASSETS
The gross carrying amount and accumulated amortization of other intangible assets is as follows (in thousands):
 
June 30, 2017
 
March 31, 2017
 
June 30, 2016
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Tradenames and trademarks
$
19,953

 
$
—

 
$
19,953

 
$
—

 
$
15,553

 
$
—

Customer relationships
39,757

 
17,273

 
39,757

 
16,495

 
39,157

 
14,184

Patents
1,164

 
855

 
1,164

 
825

 
1,164

 
738

Trademarks
403

 
370

 
403

 
363

 
403

 
340

Non-compete
530

 
271

 
530

 
245

 
530

 
165

 
$
61,807

 
$
18,769

 
$
61,807

 
$
17,928

 
$
56,807

 
$
15,427


10

Amortization expense related to intangible assets was $841,000 and $803,000 for the quarters ended June 30, 2017 and 2016 , respectively. Based on the current composition of intangibles, amortization expense for the remainder of fiscal 2018 and each of the succeeding four years is projected to be as follows (in thousands):
Remainder of fiscal 2018
$
2,521

Fiscal 2019
3,305

Fiscal 2020
3,244

Fiscal 2021
3,056

Fiscal 2022
2,960

(5)
LONG-TERM DEBT
The Company leases certain equipment under capital leases, of which $76,000 and $75,000 is classified in current portion of long-term debt and $175,000 and $194,000 is classified in long-term debt, net of current portion in the accompanying consolidated balance sheets as of June 30, 2017 and March 31, 2017 , respectively.
The Company also finances certain equipment, of which $147,000 and $145,000 is classified in current portion of long-term debt and $224,000 and $262,000 is classified in long-term debt, net of current portion in the accompanying consolidated balance sheets as of June 30, 2017 and March 31, 2017 , respectively.
There was no long-term debt as of June 30, 2016 .
(6)
COMMITMENTS AND CONTINGENCIES
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.
(7)
FAIR VALUE MEASUREMENTS
Recurring Fair Value Measurements
The Company uses certain derivative financial instruments as part of its risk management strategy to reduce foreign currency risk. The Company recorded all derivatives on the consolidated balance sheet at fair value based on quotes obtained from financial institutions as of June 30, 2017 .
The Company maintains a Nonqualified Supplemental Executive Retirement Plan ("SERP") for qualified employees and invests assets to mirror the obligations under this Plan. The invested funds are maintained at a third party financial institution in the name of CSS and are invested in publicly traded mutual funds. There have been no contributions provided under the SERP since fiscal 2007 and there are four employees who maintain account balances as of June 30, 2017 . The Company maintains separate accounts for each participant to reflect deferred contribution amounts and the related gains or losses on such deferred amounts. The investments are included in other current assets and the related liability is recorded as deferred compensation and included in other long-term obligations in the consolidated balance sheet. The fair value of the investments is based on the market price of the mutual funds as of June 30, 2017 .
The Company maintains a nonqualified Deferred Compensation Plan ("Deferred Comp Plan") for qualified employees. The Deferred Comp Plan provides eligible key employees with the opportunity to elect to defer up to 50% of their eligible compensation under the Deferred Comp Plan. The Company may make matching or discretionary contributions, at the discretion of the Board. All compensation deferred under the Deferred Comp Plan is held by the Company. The Company maintains separate accounts for each participant to reflect deferred contribution amounts and the related gains or losses on such deferred amounts. A participant’s account is notionally invested in one or more investment funds and the value of the account is determined with respect to such investment allocations. The related liability is recorded as deferred compensation and included in other long-term obligations in the consolidated balance sheet as of June 30, 2017 .
The Company maintains two life insurance policies in connection with deferred compensation arrangements with two former executives. The cash surrender value of the policies is recorded in other long-term assets in the consolidated balance sheets and is based on quotes obtained from the insurance company as of June 30, 2017 .
To increase consistency and comparability in fair value measurements, the Financial Accounting Standards Board ("FASB") established a fair value hierarchy that prioritizes the inputs to valuation techniques into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial

11

assets and liabilities fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
The Company’s recurring assets and liabilities recorded on the consolidated balance sheet are categorized based on the inputs to the valuation techniques as follows:
Level 1 – Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access.
Level 2 – Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Examples of Level 2 inputs include quoted prices for identical or similar assets or liabilities in non-active markets and pricing models whose inputs are observable for substantially the full term of the asset or liability.
Level 3 – Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.
The following table presents the Company’s fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis in its consolidated balance sheet as of June 30, 2017 and March 31, 2017 (in thousands):
 
 
 
Fair Value Measurements at June 30, 2017 Using
 
June 30, 2017
 
Quoted Prices In
Active Markets
for Identical
Assets (Level 1)
 
Significant Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)
Assets
 
 
 
 
 
 
 
Marketable securities
$
329

 
$
329

 
$
—

 
$
—

Cash surrender value of life insurance policies
1,194

 
—

 
1,194

 
—

Total assets
$
1,523

 
$
329

 
$
1,194

 
$
—

Liabilities
 
 
 
 
 
 
 
Deferred compensation plans
$
472

 
$
472

 
$
—

 
$
—

Foreign exchange contracts
35

 
—

 
35

 
—

Total liabilities
$
507

 
$
472

 
$
35

 
$
—

 
 
 
Fair Value Measurements at March 31, 2017 Using
 
March 31, 2017
 
Quoted Prices In
Active Markets
for Identical
Assets (Level 1)
 
Significant Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)
Assets
 
 
 
 
 
 
 
Marketable securities
$
319

 
$
319

 
$
—

 
$
—

Cash surrender value of life insurance policies
1,187

 
—

 
1,187

 
—

Total assets
$
1,506

 
$
319

 
$
1,187

 
$
—

Liabilities
 
 
 
 
 
 
 
Deferred compensation plans
$
364

 
$
364

 
$
—

 
$
—

Total liabilities
$
364

 
$
364

 
$
—

 
$
—

Cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are reflected at carrying value in the consolidated balance sheets as such amounts are a reasonable estimate of their fair values due to the short-term nature of these instruments. Short-term investments as of March 31, 2017 and June 30, 2016 included held-to-maturity securities that were recorded at amortized cost, which approximates fair value (Level 2), because their short-term maturity results in the interest rates on these securities approximating current market interest rates. As of June 30, 2017 and March 31, 2017, the outstanding balance of the Company’s debt approximated its fair value based on current rates available to the Company for debt of the same maturity and represents Level 2 financial instruments.
Nonrecurring Fair Value Measurements
The Company’s nonfinancial assets which are measured at fair value on a nonrecurring basis include property, plant and equipment, goodwill, intangible assets and certain other assets. These assets are not measured at fair value on a

12

recurring basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence that an impairment may exist. In making the assessment of impairment, 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.
Goodwill and indefinite-lived intangibles are subject to impairment testing on an annual basis, or sooner if events or circumstances indicate a condition of impairment may exist. Impairment testing is conducted through valuation methods that are based on assumptions for matters such as interest and discount rates, growth projections and other future business conditions (Level 3). These valuation methods require a significant degree of management judgment concerning the use of internal and external data. In the event these methods indicate that fair value is less than the carrying value, the asset is recorded at fair value as determined by the valuation models. As of June 30, 2017 , the Company believes that no impairments exist.
(8)
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-09, “Compensation–Stock Compensation (Topic 718): Scope of Modification Accounting,” clarifying when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The new guidance is effective for the Company on a prospective basis beginning on April 1, 2018, with early adoption permitted. This new guidance is not expected to have an impact on the Company’s consolidated financial statements as it is not the Company’s practice to change either the terms or conditions of share-based payment awards once they are granted.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"). Under the amendments in ASU 2017-04, Step 2 of the goodwill impairment test is eliminated. An entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. Also eliminated is the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. This standard is effective for the Company for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. As the amendments within ASU 2017-04 are meant to reduce the cost and complexity of evaluating goodwill for impairment, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements. Effective April 1, 2017, the Company elected to early adopt ASU 2017-04 and the amendments described therein will be applied prospectively to all future goodwill impairment tests performed on an interim or annual basis.
In January 2017, the FASB issued ASU 2017-01, "Clarifying the Definition of a Business" ("ASU 2017-01"). This new guidance clarifies the definition of a business in order to assist with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted for transactions not reported in financial statements that have been issued or made available for issuance. The new guidance must be applied prospectively on or after the effective date, and no disclosures for a change in accounting principle are required at transition. The Company elected to early adopt ASU 2017-01 effective April 1, 2017 and the new guidance did not have an impact on the Company's consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory" ("ASU 2016-16") which amends the accounting for income taxes. ASU 2016-16 requires the recognition of the income tax consequences of an intra-entity asset transfer, other than transfers of inventory, when the transaction occurs. For intra-entity transfers of inventory, the income tax effects will continue to be deferred until the inventory has been sold to a third party. The standard is effective in annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The new guidance is required to be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the

13

beginning of the period of adoption. The Company intends to adopt the guidance when it becomes effective in the first quarter of fiscal 2019 and does not anticipate that this guidance will have a material impact on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). ASU 2016-09 simplifies several aspects of accounting for share-based payment award transactions, including income tax consequences, classification of awards as either liability or equity, and classification on the statement of cash flows. The standard is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. The Company adopted the guidance effective April 1, 2017 and recorded a $1,059,000 cumulative-effect adjustment to retained earnings to recognize deferred taxes attributable to excess tax benefits. The Company also elected to adopt the cash flow presentation of the excess tax benefits prospectively commencing in the first quarter of fiscal 2018.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" ("ASU 2016-02"). ASU 2016-02 requires lessees to record a right-of-use asset and lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The standard also requires certain quantitative and qualitative disclosures. While we are continuing to assess all potential aspects of ASU 2016-02, including taking an inventory of outstanding leases, the Company currently believes the most significant impact relates to our accounting for manufacturing, distribution, warehouse and office space operating leases. The Company expects this standard to have a material impact on its consolidated balance sheet, but does not believe that it will have a material impact on its consolidated statements of operations.
In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory" ("ASU 2015-11"). ASU 2015-11 amends the guidelines for the measurement of inventory from lower of cost or market to the lower of cost and net realizable value ("NRV"). NRV is defined as the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. Under existing standards, inventory is measured at lower of cost or market, which requires the consideration of replacement cost, NRV and NRV less an amount that approximates a normal profit margin. This ASU eliminates the requirement to determine and consider replacement cost or NRV less a normal profit margin for inventory measurement. The new standard is effective prospectively for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company adopted ASU 2015-11 effective April 1, 2017 and it had no impact on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"). ASU 2014-09 provides a single model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The new standard also requires expanded disclosures regarding the qualitative and quantitative information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted for fiscal years beginning after December 15, 2016. The standard permits the use of either a full retrospective or a modified retrospective approach.
The Company intends to adopt the new guidance effective April 1, 2018, with a cumulative-effect adjustment, if any, to opening retained earnings under the modified retrospective approach. The Company’s implementation of this ASU includes the evaluation of its customer agreements to identify terms or conditions that could be considered a performance obligation such that, if material to the terms of the contract, consideration would be allocated to the performance obligation and could accelerate or defer the timing of recognizing revenue. The Company’s evaluation of the new guidance is not yet complete; however, based on the nature of the Company’s primary revenue sources and current policies, excluding McCall, the Company does not expect a significant change in the timing and presentation of recognizing its revenue, but does expect there to be a material impact on disclosures. The Company is currently evaluating the impact of adoption of ASU 2014-09 will have on its consolidated financial statements in respect to revenue related to its recent McCall acquisition.

14

CSS INDUSTRIES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
STRATEGIC OVERVIEW
The strategy of CSS is to build on existing relationships with seasonal, celebrations 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. We actively meet with seasonal, celebrations and craft companies to review and assess potential acquisition targets.
Approximately 59% of the Company’s sales are attributable to products within our celebrations 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 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 celebrations 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. These products are primarily sold into mass and specialty retailers, floral and packaging wholesalers and distributors. Products in this category are generally ordered on a replenishment basis throughout the year. The craft product category reflects products used for craft activities and includes ribbons, buttons, sewing patterns and accessories. These products are sold to mass market and specialty 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 shown little growth and in some cases 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 and in our non-retail packaging and floral product lines due to a decline in usage by consumers.
The Company has taken several measures to respond to sales volume, cost and price pressures. The Company believes it continues to have strong core Christmas product offerings which has allowed it to compete effectively in this competitive market. In addition, the Company is pursuing new product initiatives related to seasonal, celebrations and craft products, including new licensed and non-licensed product 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 a purchasing office in Hong Kong to be able to provide foreign-sourced products at competitive prices. CSS continually evaluates the efficiency and productivity of its North American production and distribution facilities and of its back office operations to maintain its competitiveness.
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 companies ("McCall"), through newly-formed subsidiaries, for approximately $13,914,000 in cash plus transaction costs of approximately $1,484,000 . McCall designs, manufactures, and sells 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. A portion of the purchase price is being held in escrow for certain post closing adjustments and indemnification obligations. 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 approximately $33,528,000 exceeding the amount paid. In connection with this bargain purchase, the Company recorded a gain of approximately $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 approximately $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 approximately $ 1,501,000 exceeding the amount paid. In connection with this bargain purchase, the Company recorded a gain of approximately $376,000 in the consolidated statements of operations in the second quarter of fiscal 2017.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the

15
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reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The significant accounting policies of the Company are described in the notes to the consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended March 31, 2017 . Judgments and estimates of uncertainties are required in applying the Company’s accounting policies in many areas. Following are some of the areas requiring significant judgments and estimates: revenue; the assessment of the recoverability of goodwill and other intangible and long-lived assets; the valuation of inventory and accounts receivable; income tax accounting; the valuation of share-based awards and resolution of litigation and other proceedings. There have been no material changes to the critical accounting policies affecting the application of those accounting policies as noted in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2017 .
RESULTS OF OPERATIONS
Seasonality
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.
Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016
Net sales for the three months ended June 30, 2017 increased 7% to $48,324,000 from $45,318,000 in the three months ended June 30, 2016 due to incremental sales of sewing patterns of $7,119,000 related to the acquisition of McCall on December 13, 2016, partially offset by lower sales of craft products of $2,453,000, seasonal products of $842,000, and celebration products of $818,000.
Cost of sales, as a percentage of net sales, increased to 76% in the three months ended June 30, 2017 from 73% in the three months ended June 30, 2016 due to the recognition of the McCall inventory step-up through cost of sales in the amount of $3,185,000, which relates to the portion of acquired inventory that was sold during the period. In connection with the acquisition of McCall, the inventory acquired was marked up to estimated fair value and is being recognized through cost of sales as the inventory is sold. Excluding the recognition of the McCall inventory step-up in the first quarter of fiscal 2018, costs of sales, as a percentage of sales, was 69% . The decline was a result of higher margins achieved on sales of sewing patterns, which is a new product line for the Company with its acquisition of McCall, compared to the same quarter in the prior year.
Selling, general and administrative expenses of $ 20,696,000 in the three months ended June 30, 2017 increased from $ 17,574,000 in the three months ended June 30, 2016 due to incremental costs related to the acquired McCall business of $3,808,000, partially offset by lower legal fees of $391,000 and product development costs of $314,000.
Interest income, net of $ 54,000 in the three months ended June 30, 2017 decreased from $ 89,000 in the three months ended June 30, 2016 primarily due to lower average balances of funds invested in short-term investments compared to the prior year.
Other income, net of $159,000 in the three months ended June 30, 2017 increased from $ 91,000 in the three months ended June 30, 2016 primarily due to incremental rental income related to the McCall acquisition.
The income tax benefit, as a percentage of income (loss) before income taxes, was 19% and 36% in the three months ended June 30, 2017 and 2016 , respectively. The decrease in the income tax benefit, as a percentage of income (loss) before income taxes, was primarily attributable to the permanent reinvestment of current year foreign earnings at lower income tax rates. Additionally, the Company’s first quarter of fiscal 2018 effective tax rate includes tax expense of $235,000 associated with the Company’s adoption of an accounting standard update regarding the tax impact of certain stock-based compensation. This discrete tax expense reduced the income tax benefit recorded during the first quarter of fiscal 2018, further lowering the rate. There was no permanent reinvestment of foreign earnings tax benefit or stock-based compensation tax expense during the first quarter of fiscal 2017.  The Company expects to continue to experience volatility in its effective tax rate due to the timing and amount of certain stock-based compensation income tax effects.
The net loss for the three months ended June 30, 2017 was $7,064,000 , or $0.78 per diluted share compared to $3,286,000 , or $0.36 per diluted share for the comparable period in 2016 .
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2017 , the Company had working capital of $ 187,917,000 and stockholders’ equity of $ 285,896,000 . Operating activities used net cash of $15,324,000 during the three months ended June 30, 2017 compared to $20,794,000 in the three months ended June 30, 2016 . Net cash used for operating activities during the three months ended June 30, 2017 reflected our

16
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working capital requirements which resulted in an increase in inventory of $ 13,156,000 due to the normal seasonal inventory build necessary for the fiscal 2018 shipping season, a decrease in accounts receivable of $ 5,562,000 , an increase in prepaid expenses and other assets of $4,323,000 and a decrease in other accrued liabilities of $2,239,000 . Included in net income (loss) for the three months ended June 30, 2017 were non-cash charges for amortization of inventory step-up of $3,185,000 , depreciation and amortization of $2,126,000 , provision for accounts receivable allowances of $526,000 and share-based compensation of $ 283,000 . Net cash used for operating activities during the three months ended June 30, 2016 reflected our working capital requirements which resulted in an increase in inventory of $18,087,000 due to the normal seasonal inventory build necessary for the fiscal 2017 shipping season, a decrease in other accrued liabilities of $4,159,000 , an increase in prepaid expenses and other assets of $3,917,000 , an increase in accounts payable of $2,667,000 and a decrease in accounts receivable of $2,158,000 . Included in net income (loss) for the three months ended June 30, 2016 were non-cash charges for depreciation and amortization of $2,160,000 , deferred tax provision of $790,000 , provision for accounts receivable allowances of $590,000 and share-based compensation of $ 410,000 .
Our investing activities provided net cash of $19,099,000 in the three months ended June 30, 2017 , consisting primarily of the proceeds from held-to-maturity securities of $20,000,000 , partially offset by capital expenditures of $901,000 . In the three months ended June 30, 2016 , our investing activities provided net cash of $13,033,000 , consisting primarily of the proceeds from held-to-maturity securities of $ 15,000,000 , partially offset by capital expenditures of $1,967,000 .
Our financing activities used net cash of $1,836,000 in the three months ended June 30, 2017 , consisting primarily of payments of cash dividends of $1,819,000 . In the three months ended June 30, 2016 , financing activities used net cash of $2,055,000 , consisting primarily of payments of cash dividends of $1,815,000 .
The Company relies primarily on cash on hand, cash generated from its operations and, if needed, seasonal borrowings under its revolving credit facility to meet its liquidity requirements throughout the year. The Company has not borrowed under its revolving credit facility since fiscal 2012. Historically, a significant portion of the Company’s revenues have been seasonal, primarily Christmas related, with approximately 68% 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. Seasonal financing requirements are available under a revolving credit facility with two banks. Reflecting the seasonality of the Company’s business, the maximum credit available at any one time under the credit facility (“Commitment Level”) adjusts to $50,000,000 from February to June (“Low Commitment Period”), $100,000,000 from July to October (“Medium Commitment Period”) and $150,000,000 from November to January (“High Commitment Period”) in each respective year over the term of the facility. The Company has the option to increase the Commitment Level during part of any Low Commitment Period from $50,000,000 to an amount not less than $62,500,000 and not in excess of $125,000,000; provided, however, that the Commitment Level must remain at $50,000,000 for at least three consecutive months during each Low Commitment Period. The Company has the option to increase the Commitment Level during all or part of any Medium Commitment Period from $100,000,000 to an amount not in excess $125,000,000. Fifteen days prior written notice is required for the Company to exercise an option to increase the Commitment Level with respect to a particular Low Commitment Period or Medium Commitment Period. The Company may exercise an option to increase the Commitment Level no more than three times each calendar year. This financing facility is available to fund the Company's seasonal borrowing needs and to provide the Company with sources of capital for general corporate purposes, including acquisitions as permitted under the revolving credit facility. This facility is due to expire on March 16, 2020. At June 30, 2017 , there were no borrowings outstanding under the Company’s revolving credit facility, and the Company did not borrow any amount under the facility during the three months ended June 30, 2017 . The Company had approximately $371,000 of other debt outstanding and approximately $251,000 of capital leases outstanding at June 30, 2017 . The Company is in compliance with all financial debt covenants as of June 30, 2017 . Based on its current operating plan, the Company believes its sources of available capital are adequate to meet its future cash needs for at least the next 12 months.
As of June 30, 2017 , the Company’s letter of credit commitments are as follows (in thousands):
 
Less than 1
Year

1-3
Years

4-5
Years

After 5
Years

Total
Letters of credit
$
1,338


—


—


—


$
1,338

The Company has a reimbursement obligation with respect to stand-by letters of credit that guarantee the funding of workers compensation claims. The Company has no financial guarantees with any third parties or related parties other than with respect to certain obligations of its subsidiaries.
As of June 30, 2017 , the Company is committed to pay guaranteed minimum royalties attributable to sales of certain licensed products. Reference is made to contractual obligations included in the Company’s annual report on Form 10-K for the fiscal year ended March 31, 2017 . There have been no significant changes to such contractual obligations.

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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 cancelled.
LABOR RELATIONS
With the exception of the bargaining unit at the ribbon manufacturing facility in Hagerstown, Maryland, which totaled 91 employees as of June 30, 2017 , CSS employees are not represented by labor unions. Because of the seasonal nature of certain of its businesses, the number of production employees fluctuates during the year. The collective bargaining agreement with the labor union representing the Hagerstown-based production and maintenance employees remains in effect until December 31, 2017 .
ACCOUNTING PRONOUNCEMENTS
See Note 8 to the consolidated financial statements for information concerning recent accounting pronouncements and the impact of those standards.
FORWARD-LOOKING STATEMENTS
This report includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding: the Company’s strategy to grow its presence in the largest retailers in North America by expanding and diversifying the Company’s product lines, including through acquisitions; pursuing new product initiatives within certain identified product categories; the expected future impact of legal proceedings; the period of time over which inventory acquired as part of the McCall acquisition will be sold; the expected amount and timing of future amortization expense and future compensation expense relating to non-vested outstanding stock options and RSUs; 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: 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, realization of intangible assets and recoverability of long-lived assets, acquisition integration costs, and the risk that the Company may not be able to integrate and derive the expected benefits from acquisitions; risks associated with the combination of the facilities and/or operations of the Company’s operating businesses; 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 non-compliance 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; and other factors described more fully in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2017 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s activities expose it to a variety of market risks, including the effects of changes in interest rates and foreign currency exchange rates. The Company actively monitors these exposures and, where considered appropriate, manages these risks. The Company manages its exposure to foreign currency fluctuations by entering into foreign currency forward contracts to hedge the majority of firmly committed transactions and related receivables that are denominated in a foreign currency. The Company does not enter into contracts for trading purposes and does not use leveraged instruments. The market risks associated with debt obligations and other significant instruments as of June 30, 2017 have not materially changed from March 31, 2017 (see Item 7A of the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2017 ).

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Table of Contents

ITEM 4. CONTROLS AND PROCEDURES
 
(a)
Evaluation of Disclosure Controls and Procedures . As of the end of the period covered by this report, the Company’s management, with the participation of the Company’s President and Chief Executive Officer and Executive Vice President – Finance and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures in accordance with Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President – Finance and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed by the Company in reports that it files under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including the President and Chief Executive Officer and Executive Vice President – Finance and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.
 
(b)
Changes in Internal Controls . There was no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) as promulgated by the Securities and Exchange Commission under the Exchange Act) during the first quarter of fiscal year 2018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Table of Contents

CSS INDUSTRIES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits
*Exhibit 10.1
Form of Grant Instrument for Service-Based Non-Qualified Stock Options issued under the 2013 Equity Compensation Plan.
*Exhibit 10.2
Form of Grant Instrument for Service-Based Restricted Stock Units issued under the 2013 Equity Compensation Plan.
*Exhibit 31.1
Certification of the Chief Executive Officer of CSS Industries, Inc. required by Rule 13a-14(a) under the Securities Exchange Act of 1934.
*Exhibit 31.2
Certification of the Chief Financial Officer of CSS Industries, Inc. required by Rule 13a-14(a) under the Securities Exchange Act of 1934.
*Exhibit 32.1
Certification of the Chief Executive Officer of CSS Industries, Inc. required by Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U. S. C. Section 1350.
*Exhibit 32.2
Certification of the Chief Financial Officer of CSS Industries, Inc. required by Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U. S. C. Section 1350.
*101.INS
XBRL Instance Document.
*101.SCH
XBRL Schema Document.
*101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
*101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
*101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
*101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.

*     Filed with this Quarterly Report on Form 10-Q.


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Table of Contents

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
CSS INDUSTRIES, INC.
 
(Registrant)
 
 
 
Date: August 1, 2017
By:
 
/s/ Christopher J. Munyan
 
 
 
Christopher J. Munyan
 
 
 
President and Chief Executive Officer
 
 
 
(principal executive officer)
 
 
 
Date: August 1, 2017
By:
 
/s/ John M. Roselli
 
 
 
John M. Roselli
 
 
 
Executive Vice President – Finance and Chief Financial Officer
 
 
 
(principal financial and accounting officer)


21
Exhibit 10.1

Service-Based Form

CSS INDUSTRIES, INC.

2013 EQUITY COMPENSATION PLAN

NONQUALIFIED STOCK OPTION GRANT

This NONQUALIFIED STOCK OPTION GRANT, dated as of                  (the “ Date of Grant ”), is delivered by CSS Industries, Inc. (the “ Company ”) to                                  (the “ Grantee ”).
RECITALS
WHEREAS, the Human Resources Committee of the Board of Directors of the Company (the “ Committee ”) has determined to grant the Grantee a nonqualified stock option to purchase shares of the common stock of the Company, par value $0.10 per share, (the “ Company Stock ”); and
WHEREAS, the Committee has determined that the nonqualified stock option granted to the Grantee shall be issued under the CSS Industries, Inc. 2013 Equity Compensation Plan (the “ Plan ”) and the terms and conditions of such nonqualified stock option shall be memorialized in this Nonqualified Stock Option Grant (the “ Grant ”).
NOW, THEREFORE, the parties to this Grant, intending to be legally bound hereby, agree as follows:
1. Grant of Option . Subject to the terms and conditions set forth in this Grant and in the Plan, the Company hereby grants to the Grantee a nonqualified stock option (the “ Option ”) to purchase          shares of Company Stock at an exercise price of $         per share. The Option shall become exercisable according to Paragraph 2 below.
2.      Exercisability of the Option .
(a)      Except as provided in subparagraph (b) below, the Option shall become exercisable on the following dates, if the Grantee is Employed by the Employer (as defined in the Plan) on the applicable vesting date (each a "Vesting Date"):
Vesting Date
 
Shares for Which the Option is
Exercisable on the Vesting Date
[_________________________]
 
[__]%
[_________________________]
 
[__]%
[_________________________]
 
[__]%
[_________________________]
 
[__]%





The exercisability of the Option is cumulative, but shall not exceed 100% of the shares of Company Stock subject to the Option. If the foregoing schedule would produce fractional shares, the number of shares for which the Option becomes exercisable shall be rounded up to the nearest whole Share. The Committee may accelerate the period over which the Option becomes exercisable based upon the Grantee’s individual performance.

(b)    Notwithstanding subparagraph (a) above, unless the Committee determines to not accelerate the exercisability of the Options prior to the occurrence of a Change of Control (as defined in the Plan), if a Change of Control occurs while the Grantee is Employed by the Employer, then any Options which have not become exercisable as a result of subparagraph (a) above, shall become exercisable on the date of such Change of Control.

3.      Term of Option .
(a)      The Option shall have a term of          years from the Date of Grant and shall terminate at the expiration of that period, unless it is terminated at an earlier date pursuant to the provisions of this Grant or the Plan.
(b)      The Option shall automatically terminate upon the happening of the first of the following events:
(i)      The expiration of the 90‑day period after the Grantee ceases to be Employed by the Employer, if the termination is for any reason other than death, termination for Cause (as defined in the Plan), or the Grantee’s sole determination to terminate his or her employment (other than by reason of retirement approved by the Committee).
(ii)      The expiration of the 180-day period after the Grantee ceases to be Employed by the Employer, if the Grantee dies while Employed by the Employer or retires from such employment with the consent of the Committee.
(iii)      The date on which the Grantee ceases to be Employed by the Employer on account of a termination for Cause by the Employer (as defined in the Plan) or the Grantee’s voluntary termination (other than by reason of retirement approved by the Committee). In addition, notwithstanding the prior provisions of this Paragraph 3, if the Grantee engages in conduct that constitutes Cause after the Grantee’s employment or service terminates, the Option shall immediately terminate.
Notwithstanding the foregoing, in no event may the Option be exercised after the date that is immediately before the          anniversary of the Date of Grant. Any portion of the Option that is not exercisable at the time the Grantee ceases to be Employed by the Employer shall immediately terminate.

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4.      Exercise Procedures .
(a)      Subject to the provisions of Paragraphs 2 and 3 above, the Grantee may exercise part or all of the exercisable portion of the Option by giving the Company written notice of intent to exercise in the manner provided in this Grant, specifying the number of shares of Company Stock as to which the Option is to be exercised and the method of payment. Payment of the exercise price shall be made in accordance with procedures established by the Committee from time to time based on type of payment being made but, in any event, prior to issuance of the shares of Company Stock. The Grantee shall pay the exercise price (i) in cash, (ii) by delivering shares of Company Stock owned by the Grantee and having a Fair Market Value (as defined in the Plan) on the date of exercise at least equal to the exercise price or by attestation (on a form prescribed by the Committee) to ownership of shares of Company Stock having a Fair Market Value on the date of exercise at least equal to the exercise price, (iii) by payment through a broker in accordance with procedures permitted by Regulation T of the Federal Reserve Board, (iv) by "net exercise", which is the surrender of shares of Company Stock for which the Option is exercisable to the Company in exchange for a distribution of shares of Company Stock equal to the amount by which the then Fair Market Value of the shares of Company Stock subject to the exercised Option exceeds the applicable exercise price per share, (v) any combination of clauses (i), (ii), (iii) or (iv); or (vi) by such other method as the Committee may approve, to the extent permitted by applicable law. The Committee may impose from time to time such limitations as it deems appropriate on the use of shares of Company Stock to exercise the Option.
(b)      The obligation of the Company to deliver shares of Company Stock upon exercise of the Option shall be subject to all applicable laws, rules, and regulations and such approvals by governmental agencies as may be deemed appropriate by the Committee, including such actions as Company counsel shall deem necessary or appropriate to comply with relevant securities laws and regulations.
(c)      All obligations of the Company under this Grant shall be subject to the rights of the Employer as set forth in the Plan to withhold amounts required to be withheld for any taxes, if applicable. Unless the Committee determines otherwise, the Grantee may elect to satisfy any tax withholding obligation of the Employer with respect to the Option by having shares of Company Stock withheld up to an amount that does not exceed the minimum applicable withholding tax rate for federal (including FICA), state and local tax liabilities.
5.      Change of Control . The provisions of the Plan applicable to a Change of Control shall apply to the Option, and, in the event of a Change of Control, in addition to Paragraph 2(b) above, the Committee may take such actions as it deems appropriate pursuant to the Plan.
6.      Restrictions on Exercise . Except as the Committee may otherwise permit pursuant to the Plan, only the Grantee may exercise the Option during the Grantee’s lifetime and, after the

3



Grantee’s death, the Option shall be exercisable (subject to the limitations specified in the Plan) solely by the legal representatives of the Grantee, or by the person who acquires the right to exercise the Option by will or by the laws of descent and distribution, to the extent that the Option is exercisable pursuant to this Grant.
7.      Acknowledgement By Grantee . By accepting this Grant, the Grantee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by the terms of the Plan and this Grant. The Grantee further agrees to be bound by the determinations and decisions of the Committee with respect to this Grant and the Plan and the Grantee’s rights to benefits under this Grant and the Plan, and agrees that all such determinations and decisions of the Committee shall be binding on the Grantee, his or her beneficiaries and any other person having or claiming an interest under this Grant and the Plan on behalf of the Grantee. The Grantee further hereby acknowledges and agrees that the Grantee will indemnify the Employer and hold the Employer free and harmless of, from and against any and all losses, damage, obligation or liability, and all costs and expenses (including reasonable attorneys’ fees) incurred in connection therewith, which may be suffered or incurred on account or by reason of any act or omission of the Grantee or the Grantee’s heirs, executors, administrators, personal representatives, successors and assigns in breach or violation of the provisions of the Plan or the agreements of the Grantee set forth herein.
8.      Grant Subject to Plan Provisions . This Grant is made pursuant to the Plan, the terms of which are incorporated herein by reference, and in all respects shall be interpreted in accordance with the Plan. The grant and exercise of the Option are subject to interpretations, regulations and determinations concerning the Plan established from time to time by the Committee in accordance with the provisions of the Plan, including, but not limited to, provisions pertaining to (a) rights and obligations with respect to withholding taxes, (b) the registration, qualification or listing of the shares of Company Stock, (c) changes in capitalization of the Company and (d) other requirements of applicable law. The Committee shall have the authority to interpret and construe the Option pursuant to the terms of the Plan, and its decisions shall be conclusive as to any questions arising hereunder.
9.      No Employment or Other Rights . The grant of the Option shall not confer upon the Grantee any right to be retained by or in the employ or service of the Employer and shall not interfere in any way with the right of the Employer to terminate the Grantee’s employment or service at any time. The right of the Employer to terminate the Grantee’s employment or service at any time for any reason is specifically reserved.
10.      No Stockholder Rights . Neither the Grantee, nor any person entitled to exercise the Grantee’s rights in the event of the Grantee’s death, shall have any of the rights and privileges of

4



a stockholder with respect to the shares of Company Stock subject to the Option, until certificates for shares of Company Stock have been issued upon the exercise of the Option.
11.      Assignment and Transfers . Except as the Committee may otherwise permit pursuant to the Plan, the rights and interests of the Grantee under this Grant may not be sold, assigned, encumbered or otherwise transferred except, in the event of the death of the Grantee, by will or by the laws of descent and distribution. In the event of any attempt by the Grantee to alienate, assign, pledge, hypothecate, or otherwise dispose of the Option or any right hereunder, except as provided for in this Grant, or in the event of the levy or any attachment, execution or similar process upon the rights or interests hereby conferred, the Company may terminate the Option by notice to the Grantee, and the Option and all rights hereunder shall thereupon become null and void. The rights and protections of the Company hereunder shall extend to any successors or assigns of the Company and to the Company’s parents, subsidiaries, and affiliates. This Grant may be assigned by the Company without the Grantee’s consent.
12.      Applicable Law; Entire Agreement . The validity, construction, interpretation and effect of this instrument shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, without giving effect to the conflicts of laws provisions thereof. This Grant, together with the Non-Disclosure and Non-Competition Agreement (or, if applicable, the Non-Disclosure Agreement) provided to the Grantee herewith, the provisions of which are incorporated herein by reference, sets forth the entire agreement of the parties with respect to the subject matter hereof and may not be changed or terminated except by a writing signed by the Grantee and the Company. This Grant and any undertakings and indemnities delivered hereunder shall be binding upon and shall inure to the benefit of the Grantee and the Grantee’s heirs, distributees and personal representatives and to the Company, its successors and assigns.
13.      Notice . Any notice to the Company provided for in this instrument shall be addressed to the Company in care of the Secretary at the corporate headquarters of the Company, and any notice to the Grantee shall be addressed to such Grantee at the current address shown on the payroll of the Employer, or to such other address as the Grantee may designate to the Employer in writing. Any notice shall be delivered by hand, sent by telecopy or enclosed in a properly sealed envelope addressed as stated above, registered and deposited, postage prepaid, in a post office regularly maintained by the United States Postal Service.
[ SIGNATURE PAGE FOLLOWS ]

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IN WITNESS WHEREOF, the Company has caused its duly authorized officers to execute and attest this Grant, and the Grantee has executed this Grant, effective as of the Date of Grant.
ATTEST
 
CSS INDUSTRIES, INC.
 
 
 
(Corporate Seal)
 
 
 
 
 
________________________
 
By:____________________________________
                            
I hereby accept the Option described in this Grant, and I agree to be bound by the terms of the Plan and this Grant. I hereby further agree that all the decisions and determinations of the Committee shall be final and binding.

                            
 
ACCEPTED:
 
 
 
 
 
______________________________________________
 
________________________________(Grantee)


6

Exhibit 10.2

Time-Based Form

CSS INDUSTRIES, INC.

2013 EQUITY COMPENSATION PLAN

RESTRICTED STOCK UNIT GRANT

This RESTRICTED STOCK UNIT GRANT, dated as of              (the “ Date of Grant ”), is delivered by CSS Industries, Inc. (the “ Company ”) to                      (the “ Grantee ”).

RECITALS

WHEREAS, the Human Resources Committee of the Board of Directors of the Company (the “ Committee ”) has determined to grant the Grantee stock units that will be converted to shares of common stock of the Company, par value $0.10 per share, (the “ Company Stock ”); and
WHEREAS, the Committee has determined that the stock units granted to the Grantee shall be issued under the CSS Industries, Inc. 2013 Equity Compensation Plan (the “ Plan ”) and the terms and conditions of such stock units shall be memorialized in this Stock Unit Grant (the “ Grant ”).
NOW, THEREFORE, the parties to this Grant, intending to be legally bound hereby, agree as follows:
1. Grant of Stock Units . Subject to the terms and conditions set forth in this Grant and the Plan, the Company hereby grants to the Grantee              stock units (collectively, the “ Restricted Stock Units ”). Each Restricted Stock Unit (a “ Unit ”) shall be a phantom right and shall be equivalent to one share of Company Stock on the applicable Redemption Date (as defined below).
2.      Restricted Stock Unit Account . The Company shall establish and maintain a Restricted Stock Unit account as a bookkeeping account on its records (the “ Restricted Stock Unit Account ”) for the Grantee and shall record in such Restricted Stock Unit Account the number of Restricted Stock Units granted to the Grantee. The Grantee shall not have any interest in any fund or specific assets of the Company by reason of this grant or the Restricted Stock Unit Account established for the Grantee.
3.      Vesting .
(a)                   percent (___%) of the Restricted Stock Units shall become vested on the              anniversary of the Date of Grant (the “ First Service Date ”), provided the Grantee continues to be Employed by the Employer (as defined in the Plan) from the Date of Grant through the First Service Date.




(b)      The remaining          percent (___%) of the Restricted Stock Units shall become vested on the              anniversary of the Date of Grant (the “ Second Service Date ”), provided the Grantee continues to be Employed by the Employer from the Date of Grant through the Second Service Date.
(c)      Notwithstanding subparagraphs (a) and (b) above, unless the Committee determines to not accelerate the vesting of the Restricted Stock Units prior to the occurrence of a Change of Control (as defined in the Plan), if a Change of Control occurs while the Grantee is Employed by the Employer, then any Restricted Stock Units which have not become vested as a result of subparagraphs (a) and (b) above, shall become vested on the date of such Change of Control.
(d)      If at any time prior to the date on which the Restricted Stock Units become vested as provided in this Paragraph 3, the Grantee ceases to be Employed by the Employer for any reason or no reason, all of the Restricted Stock Units subject to this Grant that have not vested will be immediately forfeited and the Grantee shall have no rights with respect to the redemption of any portion of such forfeited Restricted Stock Units.
(e)      The applicable date, if any, on which the Restricted Stock Units become vested as provided in this Paragraph 3 shall hereinafter be referred to as the “ Vesting Date ”.
4.      Redemption . The Restricted Stock Units that become vested pursuant to Paragraph 3 above shall be redeemed by the Company on the applicable Vesting Date, or as soon as administratively practicable thereafter, but not later than thirty (30) days following the applicable Vesting Date, if the Grantee continues to be Employed by the Employer, from the Date of Grant to the applicable Vesting Date (each such date, the “ Redemption Date ”). On the respective Redemption Date, all Restricted Stock Units that have become vested pursuant to Paragraph 3 will be redeemed and converted to an equivalent number of shares of Company Stock, and the Grantee shall receive a single sum distribution of such shares of Company Stock, which shall be issued under the Plan.
5.      Change of Control . The provisions set forth in the Plan applicable to a Change of Control shall apply to the Restricted Stock Units, and, in the event of a Change of Control, in addition to Paragraph 3(c) above, the Committee may take such actions as it deems appropriate pursuant to the Plan and is consistent with the requirements of section 409A of the Internal Revenue Code of 1986, as amended (the “ Code ”), if applicable.
6.      Acknowledgment by Grantee . By accepting this Grant, the Grantee acknowledges that with respect to any right to redemption pursuant to this Grant, the Grantee is and shall be an unsecured general creditor of the Company without any preference as against other unsecured general creditors of the Company, and the Grantee hereby covenants for himself or herself, and

2



anyone at any time claiming through or under the Grantee not to claim any such preference, and hereby disclaims and waives any such preference which may at any time be at issue, to the fullest extent permitted by applicable law. The Grantee also hereby acknowledges and agrees that the Grantee will indemnify the Employer (as defined in the Plan) and hold the Employer free and harmless of, from and against any and all losses, damage, obligation or liability, and all costs and expenses (including reasonable attorneys’ fees) incurred in connection therewith, which may be suffered or incurred on account or by reason of any act or omission of the Grantee or the Grantee’s heirs, executors, administrators, personal representatives, successors and assigns in breach or violation of the provisions of the Plan or the agreements of the Grantee set forth herein. The Grantee also acknowledges receipt of a copy of the Plan and agrees to be bound by the terms of the Plan and this Grant. The Grantee further agrees to be bound by the determinations and decisions of the Committee with respect to this Grant and the Plan and the Grantee’s rights to benefits under this Grant and the Plan, and agrees that all such determinations and decisions of the Committee shall be binding on the Grantee, his or her beneficiaries and any other person having or claiming an interest under this Grant and the Plan on behalf of the Grantee.
7.      Restrictions on Issuance or Transfer of Shares of Company Stock .
(a)      The obligation of the Company to deliver shares of Company Stock upon the redemption of the Restricted Stock Units shall be subject to the condition that if at any time the Committee shall determine in its discretion that the listing, registration or qualification of the shares of Company Stock upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the issuance of shares of Company Stock, the shares of Company Stock may not be issued in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. The issuance of shares of Company Stock pursuant to this Grant is subject to any applicable taxes and other laws or regulations of the United States or of any state having jurisdiction thereof.
(b)      As a condition to receive any shares of Company Stock on the Redemption Date, the Grantee agrees to be bound by the Company’s policies regarding the transfer of the shares of Company Stock and understands that there may be certain times during the year in which the Grantee will be prohibited from selling, transferring, pledging, donating, assigning, mortgaging, hypothecating or otherwise encumbering the shares of Company Stock.
(c)      As soon as administratively practicable following the Redemption Date, a certificate representing the shares of Company Stock that are redeemed shall be issued to the Grantee.

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8.      Grant Subject to Plan Provisions . This Grant is made pursuant to the Plan, the terms of which are incorporated herein by reference, and in all respects shall be interpreted in accordance with the Plan. In the event of any contradiction, distinction or difference between this Grant and the terms of the Plan, the terms of the Plan will control. Except as otherwise defined in this Grant, capitalized terms used in this Grant shall have the meanings set forth in the Plan. This Grant is subject to the interpretations, regulations and determinations concerning the Plan established from time to time by the Committee in accordance with the provisions of the Plan, including, but not limited to, provisions pertaining to (a) rights and obligations with respect to withholding taxes, (b) the registration, qualification or listing of the shares of Company Stock, (c) changes in capitalization of the Company, and (d) other requirements of applicable law. The Committee shall have the authority to interpret and construe this Grant pursuant to the terms of the Plan, its decisions shall be conclusive as to any questions arising hereunder and the Grantee’s acceptance of this Grant is the Grantee’s agreement to be bound by the interpretations and decisions of the Committee with respect to this Grant and the Plan.
9.      No Rights as Stockholder . The Grantee shall not have any rights as a stockholder of the Company, including the right to any cash dividends, or the right to vote, with respect to any Restricted Stock Units.
10.      No Rights to Continued Employment or Service . This Grant shall not confer upon the Grantee any right to be retained in the employment or service of the Employer and shall not interfere in any way with the right of the Employer to terminate the Grantee’s employment or service at any time. The right of the Employer to terminate at will the Grantee’s employment or service at any time for any reason is specifically reserved.
11.      Assignment and Transfers . No Restricted Stock Units awarded to the Grantee under this Grant may be transferred, assigned, pledged, or encumbered by the Grantee and a Restricted Stock Unit shall be redeemed during the lifetime of the Grantee only for the benefit of the Grantee. Any attempt to transfer, assign, pledge, or encumber the Restricted Stock Unit by the Grantee shall be null, void and without effect. The rights and protections of the Company hereunder shall extend to any successors or assigns of the Company. This Grant may be assigned by the Company without the Grantee’s consent.
12.      Withholding . The Grantee shall be required to pay to the Employer, or make other arrangements satisfactory to the Employer to provide for the payment of, any federal, state, local or other taxes that the Employer is required to withhold with respect to the grant, vesting and redemption of the Restricted Stock Units. Any tax withholding obligation of the Employer with respect to the redemption of the Restricted Stock Units shall be satisfied by having shares of Company Stock withheld up to an amount that does not exceed the minimum applicable withholding tax rate for federal (including FICA), state, local and other tax liabilities.

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13.      Effect on Other Benefits . The value of shares of Company Stock distributed with respect to the Restricted Stock Units shall not be considered eligible earnings for purposes of any other plans maintained by the Company or the Employer. Neither shall such value be considered part of the Grantee’s compensation for purposes of determining or calculating other benefits that are based on compensation, such as life insurance.
14.      Applicable Law; Entire Agreement . The validity, construction, interpretation and effect of this Grant shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, without giving effect to the conflicts of laws provisions thereof. This Grant, together with the Company’s Non-Disclosure and/or Non-Competition Agreement (or, if applicable, the Non-Disclosure Agreement) provided to the Grantee herewith, the provisions of which are incorporated herein by reference, sets forth the entire agreement of the parties with respect to the subject matter hereof and may not be changed or terminated except by a writing signed by the Grantee and the Company. This Grant and any undertakings and indemnities delivered hereunder shall be binding upon and shall inure to the benefit of the Grantee and the Grantee’s heirs, distributees and personal representatives and to the Company, its successors and assigns.
15.      Notice . Any notice to the Company provided for in this instrument shall be addressed to the Company in care of the Secretary at the Company’s corporate headquarters, and any notice to the Grantee shall be addressed to such Grantee at the current address shown on the payroll records of the Employer, or to such other address as the Grantee may designate to the Employer in writing. Any notice shall be delivered by hand, sent by telecopy or enclosed in a properly sealed envelope addressed as stated above, registered and deposited, postage prepaid, in a post office regularly maintained by the United States Postal Service.
16.      Section 409A of the Code . This Grant is not intended to constitute or result in deferred compensation subject to the requirements of section 409A of the Code. However, to the extent any amount payable under this Grant is subsequently determined to constitute deferred compensation subject to the requirements of section 409A of the Code, this Grant shall be administered in accordance with the requirements of section 409A of the Code. In such case, distributions made under this Grant may only be made in a manner and upon an event permitted by section 409A of the Code. To the extent that any provision of this Grant would cause a conflict with the requirements of section 409A of the Code, or would cause the administration of this Grant to fail to satisfy the requirements of section 409A of the Code, such provision shall be deemed null and void to the extent permitted by applicable law. In no event shall the Grantee, directly or indirectly, designate the calendar year of distribution. This Grant may be amended without the consent of the Grantee in any respect deemed by the Committee to be necessary in order to preserve compliance with Section 409A of the Code. All redemptions pursuant to this Grant shall be deemed as a separate payment.

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IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Grant effective as of the Date of Grant.
ATTEST
 
CSS INDUSTRIES, INC.
 
 
 
(Corporate Seal)
 
 
 
 
 
____________________________
 
By: __________________________________


I hereby accept the grant of Restricted Stock Units described in this Restricted Stock Unit Grant. I have read the terms of the Plan and this Restricted Stock Unit Grant, and agree to be bound by the terms of the Plan and this Restricted Stock Unit Grant and the interpretations of the Committee with respect thereto.

 
ACCEPTED:
 
 
 
 
 
_______________________________________
 
______________________________ (Grantee)
                        


6



Exhibit 31.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Christopher J. Munyan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CSS Industries, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date:  August 1, 2017
 
/s/ Christopher J. Munyan
Christopher J. Munyan,
President and Chief Executive Officer
(principal executive officer)




Exhibit 31.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John M. Roselli, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CSS Industries, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date:  August 1, 2017
 
/s/ John M. Roselli
John M. Roselli
Executive Vice President – Finance and Chief Financial Officer
(principal financial officer)




Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CSS Industries, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Christopher J. Munyan, President and Chief Executive Officer, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
/s/ Christopher J. Munyan
Christopher J. Munyan
President and Chief Executive Officer
(principal executive officer)
August 1, 2017




Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CSS Industries, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John M. Roselli, Executive Vice President – Finance and Chief Financial Officer, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
/s/ John M. Roselli
John M. Roselli
Executive Vice President – Finance and Chief Financial Officer
(principal financial officer)
August 1, 2017