CSS INDUSTRIES INC (Form: 10-Q, Received: 08/09/2006 17:28:33)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________________ to _____________________

Commission file number 1-2661

CSS INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)


	Delaware (State or other jurisdiction of incorporation or organization)		13-1920657 (I.R.S. Employer Identification No.)

1845 Walnut Street, Philadelphia, PA
(Address of principal executive offices)

19103
(Zip Code)

(215) 569-9900

(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.

Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

Accelerated filer

Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

Yes No

As of August 4, 2006, there were 10,553,315 shares of common stock outstanding which excludes shares which may still be issued upon exercise of stock options.

CSS INDUSTRIES, INC. AND SUBSIDIARIES

INDEX

		PAGE NO.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Consolidated Statements of Operations and Comprehensive Income – Three months ended June 30, 2006 and 2005		3

Condensed Consolidated Balance Sheets – June 30, 2006 and March 31, 2006		4

Consolidated Statements of Cash Flows – Three months ended June 30, 2006 and 2005		5

Notes to Consolidated Financial Statements		6-12

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13-16

Item 3. Quantitative and Qualitative Disclosures About Market Risk		17

Item 4. Controls and Procedures		17

PART II - OTHER INFORMATION

Item 6. Exhibits		18

Signatures		19

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CSS INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except

per share data)

	Three Months Ended June 30,

	2006			2005

SALES	$	47,533		$	57,494

COSTS AND EXPENSES
Cost of sales		34,063			42,765
Selling, general and administrative expenses		22,204			19,985
Interest expense, net		134			442
Other income, net		(162	)		(5	)

		56,239			63,187

LOSS BEFORE INCOME TAXES		(8,706	)		(5,693	)
INCOME TAX BENEFIT		(3,199	)		(2,038	)

NET LOSS	$	(5,507	)	$	(3,655	)

BASIC AND DILUTED NET LOSS PER COMMON SHARE	$	(.52	)	$	(.35	)

WEIGHTED AVERAGE BASIC AND DILUTED SHARES OUTSTANDING		10,496			10,415

CASH DIVIDENDS PER SHARE OF COMMON STOCK	$	.12		$	.12

COMPREHENSIVE LOSS
Net loss	$	(5,507	)	$	(3,655	)
Foreign currency translation adjustment		—			(3	)

Comprehensive loss	$	(5,507	)	$	(3,658	)

See notes to consolidated financial statements.

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CSS INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)

	June 30, 2006		March 31, 2006

ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	4,794	$	57,656
Accounts receivable, net		36,457		35,582
Inventories		149,165		103,770
Deferred income taxes		7,043		7,898
Asset held for sale		1,425		—
Other current assets		18,583		18,906

Total current assets		217,467		223,812

PROPERTY, PLANT AND EQUIPMENT, NET		67,747		70,868

OTHER ASSETS
Goodwill		30,952		30,952
Intangible assets, net		4,399		4,422
Other		3,964		4,095

Total other assets		39,315		39,469

Total assets	$	324,529	$	334,149

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Notes payable	$	—	$	—
Current portion of long-term debt		10,195		10,169
Accrued customer programs		9,264		10,791
Other current liabilities		38,519		41,370

Total current liabilities		57,978		62,330

LONG-TERM DEBT, NET OF CURRENT PORTION		30,551		30,518

LONG-TERM OBLIGATIONS		3,505		3,533

DEFERRED INCOME TAXES		5,198		5,258

STOCKHOLDERS’ EQUITY		227,297		232,510

Total liabilities and stockholders’ equity	$	324,529	$	334,149

See notes to consolidated financial statements.

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CSS INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)	Three Months Ended June 30,

	2006			2005

Cash flows from operating activities:
Net loss	$	(5,507	)	$	(3,655	)

Adjustments to reconcile net income to net cash used for operating activities:
Depreciation and amortization		3,651			3,467
Provision for doubtful accounts		(238	)		(166	)
Deferred tax provision		795			435
Loss on sale of assets		1			1
Share-based compensation expense		744			—
Changes in assets and liabilities:
Increase in accounts receivable		(637	)		(7,965	)
Increase in inventory		(45,395	)		(46,065	)
Decrease (increase) in other assets		416			(1,414	)
Increase in other liabilities		3,717			6,363
Decrease in accrued taxes		(8,122	)		(2,666	)


Total adjustments		(45,068	)		(48,010	)


Net cash used for operating activities		(50,575	)		(51,665	)


Cash flows from investing activities:
Purchase of property, plant and equipment		(1,758	)		(2,865	)
Proceeds from sale of assets		1			155


Net cash used for investing activities		(1,757	)		(2,710	)


Cash flows from financing activities:
Payments on long-term obligations		(82	)		(256	)
Borrowings on notes payable		—			10,335
Repayments on notes payable		—			(5,935	)
Dividends paid		(1,258	)		(1,255	)
Purchase of treasury stock		—			(2,452	)
Proceeds from exercise of stock options		673			1,524
Tax benefit realized for stock options exercised		137			—


Net cash (used for) provided by financing activities		(530	)		1,961


Effect of exchange rate changes on cash		—			(3	)

Net decrease in cash and cash equivalents		(52,862	)		(52,417	)

Cash and cash equivalents at beginning of period		57,656			57,333

Cash and cash equivalents at end of period	$	4,794		$	4,916

See notes to consolidated financial statements.

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CSS INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006

(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 financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006. The results of operations for the interim periods are not necessarily indicative of the results for the full year.

Principles of Consolidation -

The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation.

Nature of Business -

CSS is a consumer products company primarily engaged in the design, manufacture, procurement and sale of seasonal and social expression products, principally to mass market retailers. These products include gift wrap, gift bags, boxed greeting cards, gift tags, tissue paper, paper and vinyl decorations, classroom exchange Valentines, decorative ribbons and bows, Halloween masks, costumes, make-up and novelties, Easter egg dyes and novelties, and craft and educational products. The seasonal nature of CSS’ business has historically resulted in lower sales levels and operating losses in the first and fourth quarters and comparatively higher sales levels and operating profits in the second and third quarters of the Company’s fiscal year which ends March 31, thereby causing significant fluctuations in the quarterly results of operations of the Company.

Foreign Currency Translation and Transactions -

Translation adjustments are charged or credited to a separate component of stockholders’ equity. Gains and losses on foreign currency transactions are not material and are included in other income, net in the consolidated statements of operations.

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Use of Estimates -

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Judgments and assessments of uncertainties are required in applying the Company’s accounting policies in many areas. Such estimates pertain to the valuation of inventory and accounts receivable, the assessment of the recoverability of goodwill and other intangible assets, income tax accounting, the valuation of share-based awards and resolution of litigation and other proceedings. Actual results could differ from these estimates.

Inventories -

The Company records inventory at the date of taking title which generally occurs upon receipt or prior to receipt with regard to in-transit inventory. The Company adjusts unsaleable and slow-moving inventory to its estimated net realizable value. Substantially all of the Company’s inventories are stated at the lower of first-in, first-out (FIFO) cost or market. The remaining portion of the inventory is valued at the lower of last-in, first-out (LIFO) cost or market. Inventories consisted of the following (in thousands):

	June 30, 2006		March 31, 2006


Raw material	$	24,244	$	22,881
Work-in-process		36,159		35,741
Finished goods		88,762		45,148

	$	149,165	$	103,770

Asset Held for Sale -

Asset held for sale in the amount of $1,425,000 represents a former warehouse facility which the Company is in the process of selling. The Company expects to sell this facility within the next 12 months for an amount greater than its current carrying value. The Company ceased depreciating the facility at the time it was classified as held for sale.

Revenue Recognition -

The Company recognizes revenue from product sales when the goods are shipped and title and risk of loss passes to the customer. Provisions for returns, allowances, rebates to customers and other adjustments are provided in the same period that the related sales are recorded.

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Net Loss Per Common Share -

The following table sets forth the computation of basic and diluted net loss per common share for the three months ended June 30, 2006 and 2005 (in thousands, except per share data):

	Three Months Ended June 30,

	2006			2005

Numerator:
Net loss	$	(5,507	)	$	(3,655	)

Denominator:
Weighted average shares outstanding for basic loss per common share		10,496			10,415
Effect of dilutive stock options		—			—

Adjusted weighted average shares outstanding for diluted loss per common share		10,496			10,415

Basic and diluted net loss per common share	$	(.52	)	$	(.35	)

The effect of dilutive stock options is not reflected as they are anti-dilutive.

Statements of Cash Flows -

For purposes of the consolidated statements of cash flows, the Company considers all holdings of highly liquid debt instruments with a purchased maturity of less than three months to be cash equivalents.

(2)	SHARE-BASED COMPENSATION:

Under the terms of the 2004 Equity Compensation Plan (“2004 Plan”), the Human Resources Committee (“Committee”) of the Board of Directors may grant incentive stock options, non-qualified stock options, restricted stock grants, stock appreciation rights, stock bonuses and other awards to officers and other employees. Grants under the 2004 Plan may be made through February 2014. The term of the grant is at the discretion of the Committee, but in no event greater than ten years from the date of grant. Options may be exercised at the rate of 25% per year commencing one year after the date of grant. At June 30, 2006, options to acquire 1,321,550 shares were available for grant under the 2004 Plan.

Under the terms of the CSS Industries, Inc. 2006 Stock Option Plan for Non-Employee Directors (“2006 Plan”), which was approved by the stockholders of CSS on August 2, 2006, non-qualified stock options to purchase up to 200,000 shares of common stock are available for grant to non-employee directors at exercise prices of not less than fair market value of the underlying common stock on the date of grant. Under the 2006 Plan, options to purchase 4,000 shares of the Company’s common stock will be granted automatically to each non-employee director on the last day that the Company’s common stock is traded in November from 2006 to 2010. Each option will expire five years after the date the option is granted and commencing one year after the date of grant, options begin vesting and are exercisable at the rate of 25% per year.

Prior to April 1, 2006, the Company accounted for its equity incentive plans under the recognition and measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations, as permitted by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.” Effective April 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123R, “Share-Based Payment,” using the modified prospective transition method. Under that transition method, stock compensation cost recognized in fiscal 2007 includes: (a) compensation cost for all share-based payments granted prior to, but not vested as of April 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted subsequent to April 1, 2006, based on the grant

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date fair value estimated in accordance with the provisions of SFAS No. 123R. Compensation cost is recognized on a straight-line basis over the vesting period which employees perform related services. In accordance with the modified prospective transition method, the consolidated financial statements for fiscal 2006 have not been restated to reflect the impact of SFAS No. 123R.

Prior to the adoption of SFAS No. 123R, the Company presented all tax benefits of deductions resulting from share-based payment arrangements as operating cash flows in the Consolidated Statements of Cash Flows. SFAS No. 123R requires the cash flows resulting from the tax benefits from tax deductions in excess of the compensation cost recognized for those share awards (excess tax benefits) to be classified as financing cash flows. The $137,000 excess tax benefit classified as a financing cash inflow for the quarter ended June 30, 2006 would have been classified as an operating cash inflow if the Company had not adopted SFAS No. 123R.

As a result of adopting SFAS No. 123R on April 1, 2006, the Company’s loss before income taxes for the three months ended June 30, 2006 was $744,000 higher and the Company’s net loss for the same period was $576,000 higher than if it had continued to account for share-based compensation under APB Opinion No. 25. Basic and diluted loss per share for the three months ended June 30, 2006 was $.05 higher than if the Company had continued to account for share-based compensation under APB Opinion No. 25.

The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to options granted under the Company’s stock option plan for the three months ended June 30, 2005:

	Three Months Ended June 30, 2005

(in thousands, except per share amounts)
Net loss as reported	$	(3,655	)
Less: stock-based compensation expense determined using fair value method, net of tax		(671	)

Pro forma net loss	$	(4,326	)

Loss per share:
Basic and diluted – as reported	$	(.35	)

Basic and diluted – pro forma	$	(.42	)

Upon exercise of stock options, the Company issues shares from treasury stock. Expected volatilities are based on historical volatility of the Company’s common stock. The expected life of the option is estimated using historical data pertaining to option exercises and employee terminations. The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant.

The fair value of each stock option granted was estimated on the date of grant using the Black-Scholes option pricing model with the following average assumptions:

	For the Three Months Ended June 30,

	2006		2005

Expected dividend yield at time of grant	1.61	%	1.45	%
Expected stock price volatility	24	%	34	%
Risk-free interest rate	4.96	%	3.97	%
Expected life of option	4.7 years		4.6 years

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Transactions from April 1, 2006 through June 30, 2006 under the above plans were as follows:

	Number of Shares		Option Price per Share		Weighted Average Price		Weighted Average Life Remaining	Aggregate Intrinsic Value (in thousands)

Options outstanding at April 1, 2006	1,737,606		$	12.71 – 36.60	$	24.35
Granted	346,100			27.60 – 32.74		29.85
Exercised	(39,552	)		14.33 – 23.83		16.77
Canceled	(67,288	)		16.70 – 34.12		31.81

Options outstanding at June 30, 2006	1,976,866		$	12.71 – 36.60	$	25.25	4.2 years	$	10,600

Options exercisable at June 30, 2006	1,133,799		$	12.71 – 35.50	$	20.71	3.8 years	$	10,167

The weighted average fair value of options granted during the three months ended June 30, 2006 and 2005 was $9.53 and $10.25, respectively.

The total intrinsic value of options exercised during the three months ended June 30, 2006 was $414,000. As of June 30, 2006, there was $7,669,000 of total unrecognized compensation cost related to non-vested stock option awards granted under the Company’s equity incentive plan.

(3)	DERIVATIVE FINANCIAL INSTRUMENTS:

The Company enters into foreign currency forward contracts in order to reduce the impact of certain foreign currency fluctuations. Firmly committed transactions and the related receivables and payables may be hedged with foreign currency forward contracts. Gains and losses arising from foreign currency forward contracts are recognized in income or expense as offsets of gains and losses resulting from the underlying hedged transactions. As of June 30, 2006, the notional amount of open foreign currency forward contracts was $13,712,000 and the related unrealized gain was $24,000.

(4)	BUSINESS RESTRUCTURING:

On May 5, 2004, a subsidiary of the Company announced a restructuring of its business and established a restructuring reserve related to its administrative office located in Minneapolis, Minnesota. This restructuring was established in order to gain efficiencies within the business unit and was substantially completed by the first quarter of fiscal 2006. As part of this restructuring plan, the Company accrued $377,000 for termination costs and costs related to the restructuring of the administrative office. As of the end of fiscal 2005, the Company had communicated termination of employment to 33 employees. In fiscal 2005, the Company increased the restructuring reserve related to the ratable recognition of retention bonuses for employees providing service until their termination date in the amount of $255,000. Additionally, during fiscal 2005, there was an increase in the restructuring reserve related to unutilized office space in the amount of $177,000 and related to other restructuring expenses in the amount of $398,000. The Company increased the restructuring reserve by $37,000 during fiscal 2006 primarily related to the ratable recognition of retention bonuses for employees providing service until their termination. Final payments for termination costs of $4,000 were made in the quarter ended June 30, 2006.

Selected information relating to the Minneapolis restructuring reserve follows (in thousands):

Restructuring reserve as of March 31, 2006	$	4
Cash paid – fiscal 2007		(4	)

Restructuring reserve as of June 30, 2006	$	—

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(5)	GOODWILL AND INTANGIBLES:

The Company performs the required annual impairment test of the carrying amount of goodwill and indefinite-lived intangible assets in the fourth quarter of its fiscal year.

Included in intangible assets, net in the accompanying condensed consolidated balance sheets are the following acquired intangible assets (in thousands):

	June 30, 2006		March 31, 2006

Tradenames	$	4,290	$	4,290
Non-compete and other, net		109		132

	$	4,399	$	4,422

Amortization expense related to intangible assets was $23,000 for the quarters ended June 30, 2006 and 2005. The aggregate estimated amortization expense for intangible assets remaining as of June 30, 2006 is as follows (in thousands):

Fiscal 2007	$	71
Fiscal 2008		38

Total	$	109

(6)	COMMITMENTS AND CONTINGENCIES:

On May 25, 2005, the Company’s Cleo subsidiary filed a complaint in United States Court of International Trade appealing the U.S. International Trade Commission’s (“ITC”) final determination that, in part, resulted in the imposition of duties on certain tissue paper products imported from China on or after September 21, 2004. In the fiscal year ended March 31, 2005, the Company recognized an expense of approximately $2,300,000 for these duties, reflecting Cleo’s estimated liability for duties relating to subject tissue paper products that Cleo imported from China during the 2005 fiscal year, based on the applicable deposit rates established by the U.S. Commerce Department.

The amount of Cleo’s actual liability for duties pertaining to the fiscal year ended March 31, 2005, which liability is capped at the deposit rates in effect with respect to the period of time that the subject products were imported by Cleo, will be determined at the time of “liquidation” of the applicable entries by the United States Bureau of Customs & Border Protection. Liquidation of the applicable entries has been enjoined pending the decision of the United States Court of International Trade in Cleo’s appeal of the ITC’s final determination.

CSS and its subsidiaries are also 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 lawsuits and claims will not materially affect the consolidated financial position of the Company or its results of operations or cash flows.

(7)	ACCOUNTING PRONOUNCEMENTS:

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation requires that the Company recognize in the financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based solely on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. The provisions of FIN 48 will be effective for the Company beginning April 1, 2007 with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings.

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The Company is currently evaluating the impact of adopting FIN 48 on the financial statements.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” SFAS No. 154 requires retrospective application to prior periods’ financial statements for voluntary changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This statement also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in non-discretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. SFAS No. 154 also requires that a change in depreciation, amortization or depletion method for long-lived non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company’s financial position, results of operations or cash flows will only be impacted by SFAS No. 154 if it implements changes in accounting principles that are addressed by the standard or corrects accounting errors in future periods.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs,” which amends the guidance in Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and spoilage. SFAS No. 151 now requires that these costs be expensed as current period charges. In addition, this statement requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this statement were effective for the Company beginning April 1, 2006. The adoption of this statement did not have a material impact on the Company’s financial position or results of operations.

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CSS INDUSTRIES, INC. AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

STRATEGIC OVERVIEW

Approximately 75% of the Company’s sales are attributable to seasonal (Christmas, Valentine’s Day, Easter and Halloween) products, with the remainder being attributable to everyday products. Seasonal products are sold primarily to mass market retailers and the Company typically has relatively high market shares in many of these categories. Most of these markets have shown little or no growth in recent years, and we continue to confront significant cost pressure as our competitors source certain products from overseas and our customers increase direct sourcing from overseas factories. Increasing customer concentration has increased their bargaining power which has also contributed to price pressure.

The Company has taken several measures to respond to cost and price pressures. CSS has increased its investment in product and packaging design and product knowledge to assure it can continue to provide unique added value to its customers. In addition, CSS substantially expanded an office and showroom in Hong Kong to better meet customers’ buying needs and to be able to provide alternatively sourced products at competitive prices. CSS also increased its focus on efficiency and productivity in its North American production and distribution facilities to maintain its competitiveness domestically.

The Company’s everyday craft and floral product lines have higher inherent growth potential due to CSS’ relatively low current market share. The Company has established project teams to pursue top line sales growth in these and other areas.

The Company has experienced cost increases in certain key materials, supplies and logistics services. These increases will continue to impact fiscal 2007 and will require that management either obtain price increases from its customers or find other means of reducing product and delivery costs.

Historically, significant growth at CSS has come through carefully chosen and executed acquisitions. Management anticipates that it will continue to utilize acquisitions to stimulate further growth.

LITIGATION

On May 25, 2005, the Company’s Cleo subsidiary filed a complaint in United States Court of International Trade appealing the U.S. International Trade Commission’s (“ITC”) final determination that, in part, resulted in the imposition of duties on certain tissue paper products imported from China on or after September 21, 2004. (The proceedings that led to the imposition of these duties are further described in Item 3 of Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006.) In the fiscal year ended March 31, 2005, the Company recognized an expense of approximately $2,300,000 for these duties, reflecting Cleo’s estimated liability for duties relating to subject tissue paper products that Cleo imported from China during the 2005 fiscal year, based on the applicable deposit rates established by the U.S. Commerce Department.

The amount of Cleo’s actual liability for tissue duties pertaining to the fiscal year ended March 31, 2005, which liability is capped at the deposit rates in effect with respect to the period of time that the subject products were imported by Cleo, will be determined at the time of “liquidation” of the applicable entries by the United States Bureau of Customs & Border Protection. Liquidation of the applicable entries has been enjoined pending the decision of the United States Court of International Trade in Cleo’s appeal of the ITC’s final determination.

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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 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, 2006. 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; cash flow and valuation assumptions in performing asset impairment tests of long-lived assets and goodwill; valuation reserves for inventory and accounts receivable; income tax accounting and the valuation of share-based awards. There have been no material changes to our critical accounting policies affecting the application of those accounting policies since our Annual Report on Form 10-K for the fiscal year ended March 31, 2006, except for our accounting for share-based compensation as described below:

Share-Based Compensation

Effective April 1, 2006, the Company adopted SFAS No. 123R using the modified prospective transition method and began accounting for its share-based compensation using a fair-value based recognition method. Under the provisions of SFAS No. 123R, share-based compensation cost is estimated at the grant date based on the fair-value of the award and is expensed ratably over the requisite service period of the award. Determining the appropriate fair-value model and calculating the fair value of share-based awards at the grant date requires considerable judgment, including estimating stock price volatility, expected option life and forfeiture rates. The Company develops its estimates based on historical data and market information which can change significantly over time.

The Company uses the Black-Scholes option valuation model to value employee stock awards. The Company estimates stock price volatility based on historical volatility of its common stock. Estimated option life and forfeiture rate assumptions are also derived from historical data. The Company recognizes compensation expense using the straight-line amortization method for share-based compensation awards with graded vesting. Had the Company used alternative valuation methodologies, the amount it expensed for share-based payments could be significantly different.

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 shipment 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.

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Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005

Sales for the three months ended June 30, 2006 decreased 17% to $47,533,000 from $57,494,000 in 2005 primarily due to the later timing of seasonal direct import sales of Halloween and Christmas products. Net of these seasonal timing issues, lower sales of everyday ribbon and bow products were partially offset by increased sales of all occasion greeting cards and educational products.

Cost of sales, as a percentage of sales, was 72% in 2006 and 74% in 2005. The decrease in cost of sales is primarily due to improved margins achieved in the gift wrap, tissue and ribbon and bow product lines, partially offset by lower margins on Halloween products.

Selling, general and administrative (“SG&A”) expenses, as a percentage of sales, were 47% in 2006 and 35% in 2005. The increase in SG&A expenses, as a percentage of sales, is primarily due to lower sales in the quarter, share-based compensation expense related to the adoption of SFAS No. 123R, and budgeted increases in severance, compensation and consulting costs.

Interest expense, net was $134,000 in 2006 and $442,000 in 2005. The decrease in interest expense was primarily due to lower borrowing levels compared to the same quarter in prior year.

Income taxes, as a percentage of income before taxes, were 37% in 2006 and 36% in 2005. The increase in the effective tax rate is primarily due to the portion of stock option expense recorded as a result of the adoption of SFAS No. 123R which is not tax deductible.

The net loss for the three months ended June 30, 2006 was $5,507,000, or $.52 per diluted share compared to $3,655,000, or $.35 per diluted share in 2005. The increase in net loss is primarily attributable to the impact of lower sales volume and the expensing of stock options due to the first quarter adoption of SFAS No. 123R.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2006, the Company had working capital of $159,489,000 and stockholders’ equity of $227,297,000. The increase in inventories and the decrease in cash from March 31, 2006 reflected the normal seasonal inventory build necessary for the fiscal 2007 shipping season. The decrease in stockholders’ equity was primarily attributable to the first quarter net loss and payment of the quarterly dividend, partially offset by capital contributed upon exercise of employee stock options.

The Company relies primarily on cash generated from its operations and seasonal borrowings to meet its liquidity requirements. Historically, a significant portion of the Company’s revenues are seasonal with approximately 80% of sales recognized in the second and third quarters. As payment for sales of Christmas related products is usually not received until after the holiday selling season in accordance with general industry practice, short-term borrowing needs increase throughout the second and third quarters peaking prior to Christmas and dropping thereafter. Seasonal financing requirements are met under a $50,000,000 revolving credit facility with five banks and an accounts receivable securitization facility with an issuer of receivables-backed commercial paper. This facility has a funding limit of $100,000,000 during peak seasonal periods and $25,000,000 during off-peak seasonal periods. In addition, the Company has outstanding $40,000,000 of 4.48% senior notes due ratably in annual $10,000,000 installments through December 2009. These financing facilities are 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. At June 30, 2006, there was $40,000,000 of long-term borrowings outstanding related to the senior notes and no borrowings outstanding under the Company’s short-term credit facilities. Based on its current operating plan, the Company believes its sources of available capital are adequate to meet its ongoing cash needs for at least the next 12 months.

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As of June 30, 2006, 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	$	3,948	$	—	$	—	$	—	$	3,948

The Company has letters of credit that guarantee funding of workers compensation claims as well as obligations to certain vendors. The Company has no financial guarantees or other arrangements with any third parties or related parties other than its subsidiaries.

In the ordinary course of business, the Company enters into arrangements with vendors to purchase merchandise in advance of expected delivery. These purchase orders do not contain any significant termination payments or other penalties if cancelled.

LABOR RELATIONS

With the exception of the bargaining units at the gift wrap facilities in Memphis, Tennessee and the ribbon manufacturing facilities in Hagerstown, Maryland, which totaled approximately 790 employees as of June 30, 2006, 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 Cleo’s production and maintenance employees at the Cleo gift wrap plant and warehouses in Memphis, Tennessee remains in effect until December 31, 2007. The collective bargaining agreement with the labor union representing the Hagerstown-based employees remains in effect until December 31, 2006.

ACCOUNTING PRONOUNCEMENTS

See Note 7 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. 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 conditions, increased competition, increased operating costs, including labor-related and energy costs, currency risks and other risks associated with international markets, risks associated with acquisitions, including acquisition integration costs, the risk that customers may become insolvent, 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 and customs laws, and other factors described more fully in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006 and in the Company’s previous 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.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to the impact of interest rate changes and manages this exposure through the use of variable-rate and fixed-rate debt. 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, 2006 has not materially changed from March 31, 2006 (See Item 7A of the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006).

ITEM 4. CONTROLS AND PROCEDURES

(a)

Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, the Company’s management, with the participation of the Company’s President and Chief Executive Officer and Vice President – Finance and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures in accordance with Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the President and Chief Executive Officer and Vice President – Finance and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed by the Company in reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

(b)

Changes in Internal Controls . There was no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) as promulgated by the Securities Exchange Commission under the Exchange Act) during the first quarter of fiscal year 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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CSS INDUSTRIES, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 6.

Exhibits

Exhibit 10.1 Separation Agreement and Release of Claims dated as of April 3, 2006 between CSS Industries, Inc. and David J. M. Erskine.

Exhibit 10.2 Employment Agreement dated as of May 12, 2006 between CSS Industries, Inc. and Christopher J. Munyan.

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.

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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 9, 2006	By:	/s/ Christopher J. Munyan

		Christopher J. Munyan President and Chief Executive Officer (principal executive officer)


Date: August 9, 2006	By:	/s/ Clifford E. Pietrafitta

		Clifford E. Pietrafitta Vice President – Finance and Chief Financial Officer (principal financial and accounting officer)

Exhibit 10.1

Personal and Confidential
Mr. David J.M. Erskine
503 Hilaire Road
St. Davids, PA 19087

April 3, 2006

Re: Separation Agreement and Release of Claims

Dear David:

This letter agreement (the “Agreement”) confirms our discussions in which you indicated your desire to retire from employment with CSS Industries, Inc., and to resign your position as a director of CSS Industries, Inc., effective June 30, 2006 (the “Separation Date”), and the Company’s acceptance of your resignation on these terms. The Human Resources Committee of the Board of Directors of CSS Industries, Inc. has approved the terms of this Agreement. For purposes herein, the term “Company” shall mean CSS Industries, Inc., and its affiliates and subsidiaries.

In connection with your retirement and the termination of your employment, the Company is offering you severance payments (the “Severance Payments”), medical benefits (“Medical Benefits”) and a period of time after your Separation Date to exercise your outstanding stock options (“Stock Options”) that are exercisable as of your Separation Date, subject to the terms and conditions specified in this Agreement (the “Offer”). You should read this Agreement carefully and consult with an attorney prior to signing this Agreement or the General Release of Claims (“Release”) attached to this Agreement.

We have agreed as follows:

1. Effective on the Separation Date you will resign from each and every position you presently hold with the Company, including without limitation any position as an officer, director, trustee or otherwise. At the Company’s request, from time to time and to the extent the Company deems the same necessary, you will promptly execute and deliver separate forms of resignations from each of these positions. You agree that, until the Separation Date, you will use such efforts as are appropriate to carry out your current duties and responsibilities in a manner reasonably acceptable to the Board of Directors (the “Board”) of CSS Industries, Inc. In the event that the Board determines, in its reasonable discretion, that you have breached your current duties and responsibilities (and have not cured such breach within a reasonable period of time after notice thereof), you agree that the Board may elect to change the Separation Date to such earlier date as the Board may in its sole and absolute discretion determine, in which case you will receive prior written notice of such decision.

Mr. David J.M. Erskine

April 3, 2006

Page 2

2. If you abide by and satisfy the terms and conditions set forth in this Agreement, including without limitation executing and delivering the attached Release to the Company in accordance with Paragraph 4 (d) hereof, the Company will make Severance Payments, provide Medical Benefits and continue your Stock Options, subject to the provisions of this Agreement, as follows:

a) Severance Payments . The Company will make Severance Payments to you in the aggregate amount of Four Hundred Sixty-Eight Thousand Dollars ($468,000.00), which amount will be paid to you as follows: (i) Two Hundred Thirty-Four Thousand Dollars ($234,000.00) will be paid to you on the first payday for the Company’s senior management employees that occurs after the expiration of the six (6) month period following your Separation Date (or such earlier date as is permitted under Section 409A of the Internal Revenue Code of 1986, as amended) (the “Payment Date”), and (ii) the remaining Two Hundred Thirty-Four Thousand Dollars ($234,000.00) will be paid to you in equal installments over a six (6) month period commencing on the first payday for the Company’s senior management employees that occurs after the payment described in clause (i) above is made. The Severance Payment described in clause (ii) will be paid to you on the then-applicable paydays for the Company’s senior management employees. The lump sum payment and each installment payment will be subject to and reduced by any requisite tax withholdings and any other then-applicable payroll deductions. The foregoing Severance Payments shall be reduced by and to the extent of any earnings and other cash compensation received by you or accrued for your benefit for your services (whether as an employee or as an independent contractor) during the period commencing on the day following the Separation Date and ending twelve (12) months thereafter (but excluding any earnings and other cash compensation with respect to activities in which you are engaged as of the date of this Agreement). You, in turn, covenant and agree that you will promptly advise the Company in writing on a bi-weekly basis of any such earnings and other compensation, excluding unemployment compensation, and will repay any portion of the Severance Payment that would be reduced by earnings and other cash compensation received between the Payment Date and the end of the twelve (12) month period that falls within the preceding sentence.

b) Medical Benefits . If you avail yourself of your rights under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”), the Company will pay one hundred percent (100%) of the cost of your premiums for family coverage in Company-sponsored medical benefit plans (pursuant to COBRA) until the earlier of: (i) the date that you no longer qualify to continue your COBRA coverage, (ii) the date that you discontinue your COBRA coverage, or (iii) the date on which six (6) months of such premiums (in the aggregate for the period commencing on the day after the Separation Date) have been paid by the Company.

c) Stock Options . All of your outstanding Stock Options to purchase shares of the Company’s common stock under the Company’s 2004 Equity Compensation Plan and the Company’s Equity Compensation Plan that (i) are exercisable as of your Separation Date shall remain exercisable for the ninety (90) day period following your Separation Date (or such longer period as the Company’s 2004 Equity Compensation Plan provides on retirement for options granted thereunder, but not beyond the remaining term of the stock option, if shorter) and if not exercised within such period shall terminate, and (ii) are not exercisable as of your Separation Date shall immediately terminate as of your Separation Date.

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Mr. David J.M. Erskine

April 3, 2006

Page 3

3. The Severance Payments, Medical Benefits and Stock Option treatment described in this Agreement constitute the entire compensation that will be payable to you by the Company under this understanding and, except as described in this Agreement, there will be no additional period to exercise your outstanding Stock Options. Following the Separation Date, except as expressly provided herein or pursuant to the terms of any benefits plans of the Company (other than severance plans) that provide benefits or payments to former employees according to their terms, and except for full payment of the balance accrued for you under the Company’s Non-Qualified Supplemental Executive Retirement Plan Covering Officer-Employees of CSS Industries, Inc. through the Separation Date (which is not contingent upon execution of the Release), you will not be entitled or eligible to receive any form of compensation from or on behalf of Company, including by way of illustration, but not of limitation, salary, bonus, profit sharing contribution and accrued vacation (other than as provided below).

With a Separation Date of June 30, 2006, you and the Company agree that, under the Company’s vacation policy, you will be eligible for one (1) week and three (3) days of vacation time for this calendar year. You and the Company further agree that as of the date of this Agreement you already have used one (1) week of vacation time during this calendar year. In addition to vacation time available to you during this calendar year under the Company’s vacation policy, we have agreed that during the period commencing with the date of this Agreement through the Separation Date you will be permitted to take up to three (3) weeks additional vacation time, so long as you provide the undersigned with prior advance notice. Notwithstanding the foregoing, we have agreed that you will be paid as of the Separation Date (regardless of whether or not you accept this Agreement and sign and deliver the attached Release) only for unused vacation time provided to you under the Company’s vacation policy, which you and the Company agree will not exceed three (3) days of unused vacation time.

4. You and the Company agree as follows:

a) You agree that as of the Separation Date you will surrender possession to the Company of all Company keys, the Company automobile, all Company documents, all Company credit cards and all other Company property that at any time was in your possession and control.

b) You covenant that for a period of twelve (12) months from the Separation Date, you will not, unless with the prior written consent of the Human Resources Committee of the Board of Directors of CSS Industries, Inc., directly or indirectly, own, manage, operate, join, control, finance or participate in the ownership, management, operation, control or financing of, or be connected as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise with or use or permit your name to be used in connection with, any business or enterprise engaged in the design, development, manufacture, distribution or sale of any products which (A) the Company designed, developed, manufactured, distributed or sold during your employment or on the date of termination of your employment with the Company and (B) are intended for ultimate sale or distribution within any portion of the United States or Canada (whether or not such business or enterprise is physically located within the United States or Canada). You recognize that the business of the Company and your connection therewith is or was involved in activities both inside and outside the United States and Canada with respect to the design, development, manufacture, distribution or sale of products intended for ultimate sale and distribution in the United States and Canada and that more limited geographical limitations on this non-competition covenant (and the non-solicitation covenant set forth below) are therefore not appropriate.

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Mr. David J.M. Erskine

April 3, 2006

Page 4

You acknowledge that the foregoing restriction shall not be construed to prohibit the ownership by you of not more than five percent (5%) of any class of securities of any corporation which is engaged in any of the foregoing businesses having a class of securities registered pursuant to the Securities Exchange Act of 1934, provided that such ownership represents a passive investment and that neither you nor any group of persons including yourself in any way, either directly or indirectly, manage or exercise control of any such corporation, guarantee any of its financial obligations, otherwise take any part in its business, other than exercising your rights as a shareholder, or seek to do any of the foregoing.

You further covenant that, for a period of twelve (12) months from the Separation Date, you will not either directly or indirectly, (A) call on or solicit any person, firm, corporation or other entity who or which at the time of such termination was, or within two years prior thereto had been, a customer or supplier of the Company, with respect to the activities prohibited by the first paragraph of this Paragraph 4(b), or (B) solicit the employment of any person who was employed by the Company on a full or part-time basis at the effective date of your termination of employment with the Company, unless such person was involuntarily discharged by such entity after your termination of employment.

The covenants set forth in this Paragraph 4(b) are independent of and do not affect the efficacy of any covenants that you have made in favor of CSS Industries, Inc., including without limitation the Employment Agreement you executed on May 13, 1999, the Non-Disclosure Agreement you executed on June 10, 1999 and the various Non-Disclosure and Non-Competition Agreements you executed on February 1, 2000, February 27, 2001, February 15, 2002, May 16, 2003, May 6, 2004 and April 29, 2005 (which shall continue to apply in all respects, unless specifically inconsistent with the terms of this Agreement).

c) You recognize and acknowledge that by reason of your employment by and service to the Company you have had access to confidential information of the Company and its affiliates. This includes, without limitation, information and knowledge pertaining to products and services offered, inventions, innovations, designs, ideas, plans, trade secrets, proprietary information, manufacturing, packaging, advertising, distribution and sales methods and systems, sales and profit figures, customer and client lists, and relationships between the Company and its affiliates and dealers, distributors, wholesalers, customers, clients, suppliers and others who have business dealings with the Company and its affiliates (“Confidential Information”). You acknowledge that such Confidential Information is a valuable and unique asset. You must not at any time disclose any such Confidential Information to any person for any reason whatsoever without the prior written authorization of the undersigned, or the undersigned’s successor or designee, unless such information is in the public domain through no fault of your own, and except as may be required by law.

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Mr. David J.M. Erskine

April 3, 2006

Page 5

d) You agree to execute and deliver to the Company the attached Release on or after the Separation Date, but no later than twenty-two (22) days after the Separation Date.

e) Without your written consent, the Company agrees to treat the Offer and this Agreement as irrevocable and binding upon the Company upon your execution and delivery of this Agreement.

5. This Agreement shall be governed by and construed in accordance with the substantive laws of the Commonwealth of Pennsylvania, without giving effect to any conflict of laws provisions. If any portion of this Agreement is determined to be legally invalid and/or unenforceable, the remainder of this Agreement shall continue in full force and effect.

6. You are encouraged to consult with your attorney prior to your execution of this Agreement. Further, please be advised that you have twenty-one (21) days from the date this Agreement was first presented to you to consider executing this Agreement. Changes to the terms set forth in this Agreement, whether material or immaterial, will not restart the running of the twenty-one (21) day period. If you execute this Agreement within the twenty-one (21) day period, then you acknowledge that you were given at least twenty-one (21) days to consider executing it and that your decision to execute it was knowingly and voluntarily made. You further acknowledge that this Agreement has been individually negotiated and is not part of a group exit incentive or other separation package.

By signing and returning this Agreement, you acknowledge that you have read carefully and fully understand the terms of this Agreement, including the attached Release, you have had an opportunity to consult with an attorney prior to signing it and you are signing it knowingly and voluntarily and have not been coerced or threatened into signing it or promised anything else in exchange for signing it.

You also have the right for a period of eight (8) days following your execution of this Agreement (the “Revocation Period”), to revoke this Agreement. If you choose to revoke this Agreement, you must do so in writing and such revocation must be received by the undersigned within the eight (8) day Revocation Period.

Your receipt of any severance payments or post-employment benefits under this Agreement is contingent on (1) your execution of this Agreement, including the attached Release, and (2) the expiration of the Revocation Period without this Agreement being revoked by you. This Agreement shall take effect on the first business day following the expiration of the Revocation Period, provided this Agreement has not been revoked by you as provided herein during such Revocation Period.

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Mr. David J.M. Erskine

April 3, 2006

Page 6

7. You understand that by signing the attached Release and delivering it to the Company, you will waive and discharge any and all legal claims set forth in the Release, excepting only a claim for any compensation or benefits that you may be entitled to under this Agreement. You agree further that except as stated expressly herein, this Agreement supersedes any and all prior agreements and contracts between you and the Company relating to your employment, your compensation and your benefits.

In order to accept this Agreement, you must sign below, and you must sign the attached Release. By signing these documents, you accept the foregoing terms and conditions and represent to the Company that you are in compliance with such terms and conditions.

	Very truly yours,

	CSS Industries, Inc.
	By:

		Jack Farber Chairman of the Board of Directors


Witness to Employee’s Signature:	Agreed and Accepted:


Witness signature	David J.M. Erskine

Print Name:	Date:

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GENERAL RELEASE OF CLAIMS

For good and valuable consideration, the receipt of which is acknowledged, I, the undersigned, agree to and hereby do, intending to be legally bound, release and forever discharge CSS Industries, Inc., its affiliates, and related companies, their past, present and future officers, directors, attorneys, employees, shareholders and agents and their respective successors and assigns (jointly and severally, the “Company”) from any and all actions, charges, causes of action or claims of any kind, known or unknown, which I, my heirs, agents, successors or assigns ever had, now have or hereafter may have against the Company arising heretofore, now or in the future, out of any matter, occurrence or event existing or occurring prior to the execution hereof, relating to or arising out of my employment, and/or termination of employment, with the Company, any claim of discrimination based on age, sex, race, religion, color, creed, disability, citizenship, national origin or any other factor prohibited by federal, state or local law (including any claims under the Age Discrimination in Employment Act (or state counterpart), Title VII of the Civil Rights Act of 1964 (or state counterpart) and other applicable federal, state and local laws), any claim for breach of contract, and/or any common law claim, now existing or hereinafter recognized, such as libel, slander, fraud, promissory estoppel, equitable estoppel, misrepresentation or wrongful discharge. Excluded from this general release are only: (i) any claim which I may have against the Company for non-payment of any compensation and benefits (other than any claims for severance) owed me with respect to the period prior to the Separation Date (as defined in the attached Agreement between the Company and me); (ii) the Severance Payments, Medical Benefits and other compensation and payment expressly due to me under the terms of the attached Agreement; (iii) any claims I may have for indemnification or advancement under state or other law or the charter, articles, or by-laws of the Company, or under any insurance policy providing directors’ and officers’ coverage for any lawsuit or claim relating to the period when I was a director or officer of the Company; and (iv) any claim that arises out of any matter, occurrence or event occurring exclusively after the execution hereof. This Release does not affect any rights I may have in my capacity as a stockholder of CSS Industries, Inc.

I agree to the terms set forth above and understand them. I acknowledge that the Company has advised me to consult an attorney concerning the effect of this general release. I acknowledge that I have been told by the Company that I will receive no payments under the attached Agreement, or any other consideration, if I do not execute this general release of all claims and deliver it to the Company on or after the Separation Date but no later than twenty-two (22) days after the Separation Date. Thus, I understand that I have a minimum of twenty-one (21) days from the Separation Date to consider whether to sign this general release. I also understand that I have eight (8) days after signing and delivering this general release to revoke it as to potential claims under the Age Discrimination in Employment Act. I acknowledge that I have been told by the Company that I will receive no payments or any other consideration under the attached Agreement if I revoke the Release during that eight (8) day period.



Witness signature			David J.M. Erskine

Print Name:			Date:

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Exhibit 10.2

May 12, 2006

Personal and Confidential

Mr. Christopher J. Munyan

20 Steeplechase Drive

Bloomsburg, PA 17815

Dear Chris:

Subject to and conditioned upon approval by the Human Resources Committee (the “Committee”) of the Board of Directors of CSS Industries, Inc. (“CSS”), we are pleased to extend an offer of employment to you as President and Chief Executive Officer of CSS effective July 1, 2006. You acknowledge and agree that, effective with, and as a result of, this promotion, you will resign your position as Executive Vice President and Chief Operating Officer of CSS, and that the offer letter, dated October 25, 2005, between you and CSS will be deemed to be null and void. You further acknowledge and agree that there are no other valid oral or written agreements relating to the terms and conditions of your employment with CSS as its President and Chief Executive Officer.

1. Contract Term – The term of your employment will be three (3) years, commencing July 1, 2006 and ending June 30, 2009, unless terminated earlier by you or by CSS at any time as provided herein. Thereafter, your employment status with CSS will continue to be that of an employee at-will, subject to termination by either you or CSS at any time.

2. Compensation - Subject to and conditioned upon approval by the Committee, the compensation package for this position will be as follows:

A. Base Salary – A base salary in the gross amount of $450,000 per annum payable at such times as CSS pays its executives. There will be an annual performance review thereafter and you will then be considered for an increase in base salary, commencing April 1, 2007, consistent with the then current CSS policy.

B. Incentive Compensation – For CSS’ current fiscal year ending March 31, 2007, you will continue to be eligible to participate in the Management Incentive Plan (“MIP”), and you will have the potential of earning incentive compensation for the full 2007 fiscal year of up to 100% of your base salary specified in Section 2.A. above. Your potential 2007 fiscal year incentive compensation will be determined based upon the actual full 2007 fiscal year financial results of CSS and your achievement of established personal objectives.

C. Stock Option Grant – A stock option will be granted to you to acquire 100,000 shares of CSS Common Stock. This grant will in all respects be subject to and in accordance with the provisions of the CSS 2004 Equity Compensation Plan, and the terms of the grant letter to be provided to you at the time of the grant. The effective date of such grant will be the date on which you execute and deliver this letter to CSS.

3. Benefits Coverage; Relocation –You will continue to be entitled to participate in those CSS benefit programs available to its officer level personnel in accordance with the applicable terms of these programs. In addition, you will also be eligible to be reimbursed for expenses associated with the relocation of your primary residence to the Philadelphia, Pennsylvania area in accordance with the applicable terms of the CSS relocation policy.

Christopher J. Munyan

Page 2

May 12, 2006

4. Employment Status; Severance Pay - Your employment status with CSS will be that of an employee at-will, and thus this employment status is subject to termination by either you or CSS at any time. However, in the event that CSS terminates your employment without cause at any time prior to July 1, 2009, and subject to your compliance with the terms and conditions of this letter agreement, CSS will pay you an amount equal to the greater of (i) one year of your then-current annual base salary (less applicable tax withholdings and payroll deductions) or (ii) an amount equal to your then-current annual base salary (less applicable tax withholdings and payroll deductions) for the period from the effective date of such termination to July 1, 2009, such amount reduced by and to the extent of any earnings and other compensation received by you or accrued for your benefit for your services (whether as an employee or as an independent contractor) during the period commencing on the day following the one year anniversary of your termination. In addition to the foregoing, in the event that CSS terminates your employment without cause at any time prior to July 1, 2009, and subject to your compliance with the terms and conditions of this letter agreement, CSS will make the services of an “outplacement” firm available to you to assist you in finding new employment; provided, however, that CSS’ expenditures to make such services available to you shall not exceed the aggregate amount of $6,500. For purposes of this letter agreement, termination “without cause” means termination other than termination resulting from or related to your breach of any of your obligations under this letter agreement, your failure to comply with any lawful directive of CSS’ Chairman of the Board of Directors or the Board of Directors of CSS, your failure to comply with CSS’ Code of Ethics, your conviction of a felony or of any moral turpitude crime, or your willful or intentional engagement in conduct injurious to CSS or any of its affiliates.

The foregoing payment obligation, and the foregoing obligation to make “outplacement” services available to you, is contingent upon (x) receipt by CSS of a valid and fully effective release (in form and substance reasonably satisfactory to CSS) of all claims of any nature which you might have at such time against CSS, its affiliates and their respective officers, directors and agents, excepting therefrom only any payments due to you from CSS pursuant to this paragraph, and (y) your resignation from all positions of any nature which you may then hold with CSS and its affiliates. If you are eligible to receive the foregoing payment, such amount will be paid to you in equal installments, with such installments being paid on the then-applicable paydays for CSS executives, commencing on or about the first such payday following the termination of your employment by CSS without cause and your satisfaction of the conditions specified in the immediately preceding sentence.

Further, if you are eligible to receive the payment set forth in clause (ii) of the first paragraph of this Section 4, you covenant and agree that commencing with the one year anniversary of the date of your termination you will promptly advise CSS in writing on a bi-weekly basis of any earnings and other compensation received by you or accrued for your benefit for your services (whether as an employee or as an independent contractor) during the period commencing on the day following the one year anniversary of your termination.

5. Confidential Information . You recognize and acknowledge that by reason of employment by and service to CSS, you have had and will continue to have access to confidential information of CSS, and its affiliates, including, without limitation, information and knowledge pertaining to products and services offered, inventions, innovations, designs, ideas, plans, trade secrets, proprietary information, computer systems and software, packaging, advertising, distribution and sales methods and systems, sales and profit figures, customer and client lists, and relationships between CSS and its affiliates and dealers, distributors, wholesalers, customers, clients, suppliers and others who have business dealings with CSS and such affiliates (“Confidential Information”). You acknowledge that such Confidential Information is a valuable and unique asset of CSS and covenant that you will not, either during or at any time after your employment with CSS, disclose any such Confidential Information to any person for any reason whatsoever (except as your duties described herein may require) without the prior written consent of the Committee, unless such information is in the public domain through no fault of you or except as may be required by law.

Christopher J. Munyan

Page 3

May 12, 2006

6. Non-Competition . During your employment with CSS, and for a period of one year thereafter, you will not, without the prior written consent of the Committee, directly or indirectly, own, manage, operate, join, control, finance or participate in the ownership, management, operation, control or financing of, or be connected as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise with or use or permit your name to be used in connection with, any business or enterprise engaged within any portion of the United States or Canada (collectively, the “Territory”) (whether or not such business is physically located within the Territory) that is engaged in the creation, design, manufacture, distribution or sale of any products or services that are the same or of a similar type then manufactured or otherwise provided by CSS or by any of its affiliates during your employment with CSS (the “Business”). You recognize that you will be involved in the activity of the Business throughout the Territory, and that more limited geographical limitations on this non-competition covenant (and the non-solicitation covenant set forth in Section 7 of this letter agreement) are therefore not appropriate. The foregoing restriction shall not be construed to prohibit your ownership of not more than five percent (5%) of any class of securities of any corporation which is engaged in any of the foregoing businesses having a class of securities registered pursuant to the Securities Act of 1933, provided that such ownership represents a passive investment and that neither you nor any group of persons including you in any way, either directly or indirectly, manages or exercises control of any such corporation, guarantees any of its financial obligations, otherwise takes any part in business, other than exercising his rights as a shareholder, or seeks to do any of the foregoing.

7. No Solicitation . During your employment with CSS, and for a period of one year thereafter, you agree not to, either directly or indirectly, (i) call on or solicit with respect to the Business any person, firm, corporation or other entity who or which at the time of termination of your employment with CSS was, or within two years prior thereto had been, a customer of CSS or any of its affiliates, or (ii) solicit the employment of any person who was employed by CSS or by any of its affiliates on a full or part-time basis at any time during the course of your employment with CSS, unless prior to such solicitation of employment, such person’s employment with CSS or any of its affiliates was terminated.

8. Equitable Relief .

A. You acknowledge that the restrictions contained in Sections 5, 6 and 7 of this letter agreement are reasonable and necessary to protect the legitimate interests of CSS and its affiliates, that CSS would not have entered into this letter agreement in the absence of such restrictions, and that any violation of any provision of those Sections will result in irreparable injury to CSS. You represent that your experience and capabilities are such that the restrictions contained in Sections 5 and 6 hereof will not prevent you from obtaining employment or otherwise earning a living at the same general level of economic benefit as is anticipated by this letter agreement. YOU FURTHER REPRESENT AND ACKNOWLEDGE THAT (i) YOU HAVE BEEN ADVISED BY CSS TO CONSULT YOUR OWN LEGAL COUNSEL IN RESPECT OF THIS LETTER AGREEMENT, (ii) THAT YOU HAVE HAD FULL OPPORTUNITY, PRIOR TO EXECUTION OF THIS LETTER AGREEMENT, TO REVIEW THOROUGHLY THIS LETTER AGREEMENT WITH YOUR COUNSEL, AND (iii) YOU HAVE READ AND FULLY UNDERSTAND THE TERMS AND PROVISIONS OF THIS LETTER AGREEMENT.

B. You agree that CSS shall be entitled to preliminary and permanent injunctive relief, without the necessity of proving actual damages, as well as any other remedies provided by law arising from any violation of Sections 5, 6 and 7 of this letter agreement, which rights shall be cumulative and in addition to any other rights or remedies to which CSS may be entitled. In the event that any of the provisions of Sections 5, 6 and 7 hereof should ever be adjudicated to exceed the time, geographic, product or service, or other limitations permitted by applicable law in any jurisdiction, then such provisions shall be deemed reformed in such jurisdiction to the maximum time, geographic, product or service, or other limitations permitted by applicable law.

Christopher J. Munyan

Page 4

May 12, 2006

C. You and CSS irrevocably and unconditionally (i) agree that any suit, action or other legal proceeding arising out of Sections 5, 6 and 7 of this letter agreement, including without limitation, any action commenced by CSS for preliminary or permanent injunctive relief or other equitable relief, may be brought in the United States District Court for the Eastern District of Pennsylvania, or if such court does not have jurisdiction or will not accept jurisdiction, in any court of general jurisdiction in Philadelphia County, Pennsylvania, (ii) consent to the non-exclusive jurisdiction of any such court in any such suit, action or proceeding, and (iii) waive any objection to the laying of venue of any such suit, action or proceeding in any such court.

D. You agree that CSS may provide a copy of Sections 5, 6 and 7 of this letter agreement to any business or enterprise (i) which you may directly or indirectly own, manage, operate, finance, join, participate in the ownership, management, operation, financing, control or control of, or (ii) with which you may be connected with as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise, or in connection with which you may use or permit your name to be used.

9. Governing Law . This letter agreement shall be governed by and interpreted under the laws of the Commonwealth of Pennsylvania without giving effect to any conflict of laws provisions.

Please confirm your understanding of the foregoing provisions by executing the enclosed counterpart of this letter and returning this executed counterpart to me.

			Sincerely yours,

			Jack Farber Chairman of the Board of Directors CSS Industries, Inc.

The aforementioned is confirmed:



Christopher J. Munyan

cc:	William G. Kiesling

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 officer 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 officer 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 9, 2006

/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, Clifford E. Pietrafitta, certify that:

1. I have reviewed this quarterly report on Form 10-Q of CSS Industries, Inc.;

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 9, 2006
/s/ Clifford E. Pietrafitta

Clifford E. Pietrafitta 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, 2006 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:

(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 9, 2006

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, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Clifford E. Pietrafitta, 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:

(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/ Clifford E. Pietrafitta

Clifford E. Pietrafitta Vice President – Finance and Chief Financial Officer (principal financial officer)

August 9, 2006