NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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(1)
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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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, 2019
. 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
2020
” refers to the fiscal year ending
March 31, 2020
.
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 creative consumer products company, focused on the craft, gift and seasonal categories. For these design-driven categories, the Company engages in the creative development, manufacture, procurement, distribution and sale of our products with an omni-channel approach focused primarily on mass market retailers.
Craft
The craft category includes sewing patterns, ribbons and trims, buttons, knitting needles, needle arts and kids crafts. These products are sold to mass market, specialty, and online retailers, and are generally ordered on a replenishment basis throughout the year.
Gift
The gift category includes products designed to celebrate certain life events or special occasions, such as weddings, birthdays, anniversaries, graduations, or the birth of a child. Products include ribbons and bows, floral accessories, infant products, journals, gift card holders, all occasion boxed greeting cards, memory books, scrapbooks, stationery, and other items that commemorate life's celebrations. Products in this category are primarily sold into mass, specialty, and online retailers, floral and packaging wholesalers and distributors, and are generally ordered on a replenishment basis throughout the year.
Seasonal
The seasonal category includes holiday gift packaging items such as ribbon, bows, greeting cards, bags, tags and gift card holders, in addition to specific holiday-themed decorations, accessories, and activities, such as Easter egg dyes and novelties and Valentine's Day classroom exchange cards. These products are sold to mass market retailers, and production forecasts for these products are generally known well in advance of shipment.
CSS’ product breadth provides its retail customers the opportunity to use a single vendor for much of their craft, gift and seasonal product requirements. A substantial portion of CSS’ products are manufactured and packaged in the United States and warehoused and distributed from facilities in the United States, the United Kingdom and Australia, with the remainder sourced from foreign suppliers, primarily in Asia. The Company also has a manufacturing facility in India that produces certain craft products, including trims, braids and tassels, and also has a distribution facility in India. The Company’s products are sold to its customers by national and regional account sales managers, sales representatives, product specialists and by a network of independent manufacturers’ representatives. CSS maintains purchasing offices in Hong Kong and China to administer Asian sourcing opportunities.
Foreign Currency Translation and Transactions
The Company's foreign subsidiaries generally use the local currency as the functional currency. The Company translates all assets and liabilities at 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 other intangible and long-lived assets and resolution of litigation and other proceedings. Actual results could differ from these estimates.
Inventories
The Company records inventory when title is transferred, which occurs upon receipt or prior to receipt dependent on supplier shipping terms. The Company adjusts unsaleable and slow-moving inventory to its estimated net realizable value. Substantially all of the Company’s inventories are stated at the lower of first-in, first-out (FIFO) cost or net realizable value. The remaining portion of the inventory is valued at the lower of last-in, first-out (LIFO) cost or net realizable value. Inventories consisted of the following (in thousands):
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June 30, 2019
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March 31, 2019
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June 30, 2018
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Raw material
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$
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16,304
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$
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14,246
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$
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13,207
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Work-in-process
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20,737
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16,816
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16,495
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Finished goods
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70,258
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65,169
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88,242
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$
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107,299
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$
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96,231
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$
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117,944
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In connection with the acquisitions of substantially all of the net assets and business of The McCall Pattern Company on December 13, 2016, Simplicity Creative Group ("Simplicity") on November 3, 2017 and Fitlosophy, Inc. ("Fitlosophy") on June 1, 2018, the Company recorded a step-up to fair value of the inventory acquired of $
21,773,000
, $
10,214,000
, and $
312,000
, respectively, at the date of each such 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, 2019
,
March 31, 2019
and
June 30, 2018
was $
0
, $
284,000
and $
5,923,000
, respectively.
Asset Held for Sale
Asset held for sale of $
131,000
as of
June 30, 2019
and
March 31, 2019
represents a distribution facility in Danville, Pennsylvania which the Company is in the process of selling. The Company expects to sell this facility within 12 months and at the end of fiscal 2019, the Company ceased depreciating this facility at the time it was classified as held for sale. There were
no
assets classified as held for sale as of
June 30, 2018
.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and include the following (in thousands):
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June 30, 2019
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March 31, 2019
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June 30, 2018
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Land
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$
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5,738
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$
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5,738
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$
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7,025
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Buildings, leasehold interests and improvements
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40,918
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40,893
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45,348
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Machinery, equipment and other
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116,756
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113,946
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106,292
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163,412
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160,577
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158,665
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Less - Accumulated depreciation and amortization
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(112,071
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)
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(109,657
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)
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(105,532
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)
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Net property, plant and equipment
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$
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51,341
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$
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50,920
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$
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53,133
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Depreciation expense was
$2,414,000
and
$2,030,000
for the quarters ended
June 30, 2019
and
2018
, respectively.
Leases
Effective April 1, 2019, the Company adopted Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 842 - Leases ("ASC 842") using the modified retrospective transition approach. See Note 5 for more information.
The Company determines if an arrangement is a lease at the inception of a contract. Operating lease right-of-use (“ROU”) assets are included in operating lease right-of-use assets on the consolidated balance sheets. The current and long-term components of operating lease liabilities are included in the current portion of operating lease liabilities and operating lease liabilities, respectively, on the consolidated balance sheets. Finance leases are not material to the Company’s consolidated balance sheets.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available on the adoption date for existing leases and as of the commencement date for new leases in determining the present value of future payments. The operating lease ROU assets are subsequently measured throughout the lease term at the carrying amount of the lease liability, adjusted for any prepaid or accrued rent payments, lease incentives and initial direct costs incurred. Certain leases may include options to extend or terminate the lease. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
The Company elected the package of transition practical expedients related to lease identification, lease classification, and initial direct costs. In addition, the Company made the following accounting policy elections for all asset classes: (1) the Company will not separate lease and non-lease components by class of underlying asset, (2) the Company will apply the short-term lease exemption by class of underlying asset, and, (3) the Company will apply the portfolio approach to the development of its discount rates for the leases to be recorded in accordance with ASC 842. The Company has chosen not to elect the hindsight practical expedient for its transition to ASC 842. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application.
Long-Lived Assets including Other Intangible Assets and Property, Plant and Equipment
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.
Other indefinite lived intangible assets consist of tradenames which are required to be tested annually for impairment. An entity has the option to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. To perform a qualitative assessment, an entity must identify and evaluate changes in economic, industry and entity-specific events and circumstances that could affect the significant inputs used to determine the fair value of an indefinite-lived intangible asset. If the result of the qualitative analysis indicates it is more likely than not that an indefinite-lived intangible asset is impaired, a more detailed fair value calculation will need to be performed which is used to identify potential impairments and to measure the amount of impairment losses to be recognized, if any. The fair value of the Company’s tradenames is calculated using a “relief from royalty payments” methodology. This approach involves first estimating reasonable royalty rates for each trademark then applying these royalty rates to a net sales stream and discounting the resulting cash flows to determine the fair value. The royalty rate is estimated using both a market and income approach. The market approach relies on the existence of identifiable transactions in the marketplace involving the licensing of tradenames similar to those owned by the Company. The income approach uses a projected pretax profitability rate relevant to the licensed income stream. The Company believes the use of multiple valuation techniques results in a more accurate indicator of the fair value of each tradename. This fair value is then compared with the carrying value of each tradename to determine if impairment exists.
Long-lived assets (including property, plant and equipment), except for goodwill and indefinite lived intangible assets, are reviewed for impairment when events or circumstances indicate the carrying value of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset group to future net cash flows estimated by the Company to be generated by such assets. If such asset group is considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. Assets to be disposed of are recorded at the lower of their carrying value or estimated net realizable value.
There were no triggering events identified during the first quarter of fiscal 2020 or fiscal 2019 that required interim impairment testing for long-lived assets.
Revenue Recognition
Revenue from the sale of the Company's products is recognized when control of the promised goods is transferred to customers, in the amount that reflects the consideration the Company expects to be entitled to receive from its customers in exchange for those goods. The Company's revenue is recognized using the five-step model identified in ASC 606, "Revenue from Contracts with Customers." These steps are: (i) identify the contract with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue as the performance obligations are satisfied.
The Company's contracts with customers generally include one performance obligation under the revenue recognition standard. For most product sales, the performance obligation is the delivery of a specified product, and is satisfied at the point in time when control of the product has transferred to the customer, which takes place when title and risk of loss transfer in accordance with the applicable shipping terms, typically either at shipping point or at delivery to a specified destination. The Company has certain limited products, primarily sewing patterns, that are sold on consignment at mass market retailers. The Company recognizes revenue on these products as they are sold to end consumers as recorded at point-of-sale terminals, which is the point in time when control of the product is transferred to the customer.
Revenue is recognized based on the consideration specified in a contract with the customer, and is measured as the amount of consideration to which the Company expects to be entitled to receive in exchange for transferring the goods. When applicable, the transaction price includes estimates of variable consideration to the extent it is probable that a significant reversal of revenue recognized will not occur. Variable consideration consists of revenues that are subject to reductions to the transaction price for customer programs, which may include special pricing arrangements for specific customers, volume incentives and other promotions. The Company has significant historical experience with customer programs and estimates the expected consideration considering historical trends. The related reserves are included in accrued customer programs in the consolidated balance sheets. The Company adjusts its estimate of variable consideration at least quarterly or when facts and circumstances used in the estimation process may change. In limited cases, the Company may provide the right to return product to certain customers. The Company also records estimated reductions to revenue, based primarily on known claims, for customer returns and chargebacks that may arise as a result of shipping errors, product damaged in transit or for other reasons that become known subsequent to recognizing the revenue. These provisions are recorded in the period that the related sale is recognized and are reflected as a reduction from gross sales. The related reserves are included as a reduction of accounts receivable in the consolidated balance sheets. If the amount of actual customer returns and chargebacks were to increase or decrease from the estimated amount, revisions to the estimated reserve would be recorded.
The Company treats shipping and handling activities that occur after the customer has obtained control of a good as an activity to fulfill the promise to transfer the product. Costs related to shipping of product are recorded as incurred and classified in cost of sales in the consolidated statements of operations and comprehensive income (loss).
Payment terms with customers vary by customer, but generally range from
30
to
90 days
. Certain seasonal revenues have extended payment terms in accordance with general industry practice. Since the term between invoicing and expected payment is less than one year, the Company does not adjust the transaction price for the effects of a financing component.
Sales commissions are earned and recognized as expense as the related revenue is recognized at a point in time. These costs are recorded in selling, general and administrative expenses. Taxes collected from customers are excluded from revenue and credited directly to obligations to the appropriate governmental agencies.
The Company operates as a single reporting segment, engaged in the creative development, manufacture, procurement, distribution, and sale of craft, gift and seasonal products, primarily to mass market retailers in the United States.
The following represents our net sales disaggregated by product category (in thousands):
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Three Months Ended June 30,
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2019
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2018
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Craft
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$
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35,659
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$
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35,288
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Gift
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19,829
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24,040
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Seasonal
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2,049
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4,799
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Total
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$
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57,537
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$
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64,127
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Net Income (Loss) Per Common Share
Due to the Company's net losses in the first quarter of fiscal 2020 and 2019, potentially dilutive securities of
607,000
shares and
552,000
shares as of June 30, 2019 and June 30, 2018, respectively, consisting of outstanding stock options and unearned time-based restricted stock units, were excluded from the diluted net loss per common share calculation due to their antidilutive effect. Market-based and performance-based restricted stock units are considered contingently issuable shares for diluted income per common share purposes and the dilutive impact, if any, is not included in the weighted-average shares until the market or performance conditions are met even when the Company is profitable for the respective period.
Components of Accumulated Other Comprehensive Income (Loss), Net
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Three Months Ended June 30,
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2019
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2018
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(in thousands)
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Accumulated effect of currency translation adjustment:
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Balance at beginning of period
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$
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12
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$
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988
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Currency translation adjustment during period
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(215
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)
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(720
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)
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Balance at end of period
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$
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(203
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)
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$
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268
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Accumulated effect of pension and postretirement benefits:
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Balance at beginning and end of period
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$
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453
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$
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259
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Accumulated effect interest rate swap agreement:
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Balance at beginning of period
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$
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—
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$
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(84
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)
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Fair value adjustment
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—
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265
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Balance at end of period
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$
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—
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$
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181
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On June 1, 2018, a subsidiary of the Company completed the acquisition of substantially all of the business and net assets of Fitlosophy for
$2,500,000
in cash. In addition to the
$2,500,000
paid at closing, the Company may pay up to an additional
$10,500,000
of contingent earn-out consideration, in cash, if net sales of certain products meet or exceed five different thresholds during the period from the acquisition date through March 31, 2023. If earned, the contingent consideration payments will be paid, generally within
20
days after the end of each rolling twelve-month measurement period (quarterly through March 31, 2023). No such payments of contingent consideration have been earned or paid as of
June 30, 2019
. At the date of acquisition, the estimated fair value of the contingent earn-out consideration was
$1,600,000
. The estimated fair value of the contingent earn-out consideration was determined using a Monte Carlo simulation discounted to a present value. The following table summarizes the purchase price at the date of acquisition (in thousands):
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Cash
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$
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2,500
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Contingent earn-out consideration
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1,600
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Purchase price
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$
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4,100
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Fitlosophy is devoted to creating, marketing, and distributing innovative products that inspire people to develop healthy habits by focusing on effective goal-setting through journaling. Products include a complete line of fitness and wellness planning products all sold under the fitlosophy
TM
, live life fit
TM
and fitbook
TM
brands. The acquisition was accounted for using the acquisition method and the excess of cost over the fair market value of the net tangible and identifiable intangible assets acquired of $
1,390,000
was recorded as goodwill. This goodwill was subsequently deemed impaired as a result of the continued discrepancy between the Company's stockholders' equity balance and its market capitalization, and therefore, was expensed during the first quarter of fiscal 2019.
The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):
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Accounts receivable
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$
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389
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Inventory
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452
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Other assets
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5
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Total current assets
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846
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Intangible assets
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2,032
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Goodwill
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1,390
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Total assets acquired
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4,268
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Current liabilities
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(168
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)
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Net assets acquired
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$
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4,100
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The Company's consolidated statements of operations include the operating results of Fitlosophy from the acquisition date through
June 30, 2019
. Pro forma results of operations for this acquisition have not been presented as the financial impact to our consolidated results of operations is not material.
Business Restructuring
In the first quarter of fiscal 2019, the Company announced a restructuring plan to combine its operations in the United Kingdom and Australia, respectively. This restructuring was undertaken in order to improve profitability and efficiency through the elimination of (i) redundant back office functions; (ii) certain staffing positions and (iii) excess distribution and warehouse capacity, and was substantially completed in the second quarter of fiscal 2019. Commencing in the second quarter of fiscal 2019, the Company recorded an initial restructuring reserve, subsequent additions, and has made cash payments as part of this restructuring plan. Also, in connection with this restructuring plan, the Company recorded an impairment of property, plant and equipment at one of the affected facilities in the United Kingdom of
$1,398,000
in the second quarter of fiscal 2019, which was included in restructuring expenses. As of
June 30, 2019
, the remaining liability of
$11,000
was classified in accrued other expenses in the accompanying consolidated balance sheet.
Selected information relating to the aforementioned restructuring follows (in thousands):
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Employee Termination Costs
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|
Facility Exit Costs
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Other Costs
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Total
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Restructuring reserve as of March 31, 2019
|
$
|
1
|
|
|
$
|
24
|
|
|
$
|
14
|
|
|
$
|
39
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Charges (reversals) to expense
|
(1
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)
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|
(24
|
)
|
|
3
|
|
|
(22
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)
|
|
Cash paid
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
(6
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)
|
|
Restructuring reserve as of June 30, 2019
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11
|
|
|
$
|
11
|
|
Strategic Business Initiative
In the third quarter of fiscal 2019, the Company announced that it engaged an international consulting firm to perform a comprehensive review of its operating structure with the goal of improving the alignment of processes across the business, as the Company continues to integrate recent acquisitions and evaluate its portfolio. Commencing in the third quarter of fiscal 2019, the Company recorded an initial restructuring reserve, subsequent additions, and has made cash payments in connection with this initiative. As of
June 30, 2019
, the remaining liability of
$422,000
was classified in accrued other expenses in the accompanying consolidated balance sheet.
Selected information relating to the aforementioned restructuring follows (in thousands):
|
|
|
|
|
|
|
|
|
Employee Termination Costs
|
|
Restructuring reserve as of March 31, 2019
|
$
|
634
|
|
|
Cash paid
|
(212
|
)
|
|
Restructuring reserve as of June 30, 2019
|
$
|
422
|
|
Performance Improvement Initiative
In the first quarter of fiscal 2020, the Company announced a restructuring plan with the goal of reducing the Company’s cost base to improve business performance, profitability and cash flow generation. Commencing in the first quarter of fiscal 2020, the Company recorded an initial restructuring reserve and has made cash payments in connection with this initiative. As of
June 30, 2019
, the remaining liability of
$1,586,000
was classified in accrued other expenses in the accompanying consolidated balance sheet.
Selected information relating to the aforementioned restructuring follows (in thousands):
|
|
|
|
|
|
|
|
|
Employee Termination Costs
|
|
Initial reserve
|
$
|
2,076
|
|
|
Cash paid
|
(490
|
)
|
|
Restructuring reserve as of June 30, 2019
|
$
|
1,586
|
|
|
|
|
|
(4)
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SHARE-BASED COMPENSATION
|
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. 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. 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. Service-based stock options outstanding as of
June 30, 2019
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, 2019
become exercisable only if certain market conditions and service requirements are satisfied, and the dates 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 either: (i) 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 or (ii) the rate of
25%
of the shares underlying the grant on each of the first four anniversaries of the date on which the award was granted. Service-based RSUs granted to directors and outstanding as of
June 30, 2019
vested on July 29, 2019. Market-based and performance-based RSUs outstanding as of
June 30, 2019
will vest only if certain market or performance conditions and service requirements have been met, and the dates on which they vest will depend on the period in which such market or performance conditions and service requirements are met, if at all, except that vesting and redemption are accelerated upon a change of control. The Company recognizes grants, cancellations, and forfeitures as they occur. As of
June 30, 2019
, there were
570,508
shares available for grant under the 2013 Plan.
The fair value of each stock option granted under the above plan is estimated on the date of grant using a Black-Scholes option pricing model. There were
no
stock options granted during the first quarter of fiscal 2020 and fiscal 2019.
The fair value of each performance-based and service-based RSU granted to employees is estimated on the day of grant based on the closing price of the Company's common stock reduced by the present value of the expected dividend stream during the vesting period using the risk-free interest rate. The fair value of each service-based RSU granted to directors, for which dividend equivalents are paid upon vesting of the underlying awards, is estimated on the day of grant based on the closing price of the Company's common stock.
During the
three
months ended
June 30, 2019
and
2018
, the Company granted
213,804
and
157,803
RSUs, respectively, with a weighted average fair value per share of
$6.28
and
$14.50
, respectively. As of
June 30, 2019
, there were
285,000
and
416,958
outstanding stock options and RSUs, respectively.
As of
June 30, 2019
, there was
$451,000
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
1.7 years
. As of
June 30, 2019
, there was
$2,819,000
of total unrecognized compensation cost related to non-vested service-based, market-based and performance-based RSUs granted under the Company’s equity incentive plans which is expected to be recognized over a weighted average period of
2.2 years
.
Compensation cost related to stock options and RSUs recognized in operating results (included in selling, general and administrative expenses) was
$73,000
and
$471,000
in the quarters ended
June 30, 2019
and
2018
, respectively.
The Company adopted ASC 842 as of April 1, 2019, using the modified retrospective transition approach wherein the Company applied the new lease standard at the adoption date. Accordingly, all periods prior to April 1, 2019 were presented in accordance with the previous ASC Topic 840 - Leases ("ASC 840"), and no retrospective adjustments were made to the comparative periods presented. Adoption of ASC 842 resulted in the recording of operating lease ROU assets of $
51,486,000
, operating lease liabilities of $
50,180,000
, a reduction of favorable lease assets of
$2,866,000
and a reduction of net deferred rent liabilities of
$1,560,000
as of April 1, 2019. Finance leases are not material to the Company and are not impacted by the adoption of ASC 842, as finance lease liabilities and the corresponding assets were already recorded in the balance sheet under the previous guidance, ASC 840. The adoption did not materially impact the Company’s consolidated statements of operations or cash flows.
The Company has operating leases for corporate offices, distribution facilities, manufacturing plants, and certain equipment and vehicles. Leases with an initial term of 12 months or less, which are immaterial to the Company, are not recorded in the balance sheet. For all asset classes, the Company has elected the practical expedient to account for each separate lease component of a contract and its associated non-lease components as a single lease component, thus causing all fixed payments to be capitalized. The Company also elected the package of practical expedients permitted within the new standard, which among other things, allows the Company to carry forward historical lease classification. Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates or usage, are not recorded in the balance sheet.
ROU assets represent the Company’s right to use an underlying asset during the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized on the adoption date for existing leases and on the commencement date for new leases based on the net present value of fixed lease payments over the lease term. The Company’s lease term includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. ROU assets also include any advance lease payments. As most of the Company’s operating leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available on the adoption date for existing leases and as of the commencement date for new leases in determining the present value of lease payments. The Company applies the portfolio approach based on the rate of interest that it would have to pay to borrow an amount equal to the lease payments on collateralized basis over a similar term to the development of its discount rates.
The components of lease costs are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
June 30, 2019
|
|
Lease costs:
|
|
|
Operating lease costs
|
$
|
2,888
|
|
|
Variable operating lease costs
|
77
|
|
|
Total
|
$
|
2,965
|
|
Supplemental cash flow information is as follows (in thousands):
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
June 30, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash flows for operating leases
|
$
|
2,003
|
|
|
Total
|
$
|
2,003
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
June 30, 2019
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
Operating leases
|
$
|
51,597
|
|
|
Total
|
$
|
51,597
|
|
The aggregate future lease payments for operating leases as of June 30, 2019 is projected to be as follows (in thousands):
|
|
|
|
|
|
|
|
Remainder of fiscal 2020
|
$
|
9,739
|
|
|
Fiscal 2021
|
8,763
|
|
|
Fiscal 2022
|
8,182
|
|
|
Fiscal 2023
|
6,882
|
|
|
Fiscal 2024
|
5,959
|
|
|
Thereafter
|
20,028
|
|
|
Total lease payments
|
59,553
|
|
|
Less: Interest
|
(11,284
|
)
|
|
Present value of lease liabilities
|
$
|
48,269
|
|
The future minimum lease payments associated with all non-cancelable lease obligations under ASC 840 as of March 31, 2019 is as follows (in thousands):
|
|
|
|
|
|
|
|
Fiscal 2020
|
$
|
10,520
|
|
|
Fiscal 2021
|
9,360
|
|
|
Fiscal 2022
|
8,446
|
|
|
Fiscal 2023
|
7,364
|
|
|
Fiscal 2024
|
6,200
|
|
|
Thereafter
|
21,818
|
|
|
Total lease payments
|
$
|
63,708
|
|
Weighted-average lease terms and discount rates are as follows:
|
|
|
|
|
|
|
|
June 30, 2019
|
|
Weighted-average remaining lease term (years) of operating leases
|
7.1
|
|
|
Weighted-average discount rate of operating leases
|
5.77
|
%
|
|
|
|
|
(6)
|
GOODWILL, OTHER INTANGIBLE ASSETS AND LONG-LIVED ASSETS
|
During the first quarter of fiscal 2019, the Fitlosophy acquisition was accounted for using the acquisition method and the excess of cost over the fair market value of the net tangible and identifiable intangible assets acquired of
$1,390,000
was recorded as goodwill. The Company determined that a triggering event occurred due to the fact that the Company’s total stockholders’ equity was in excess of the Company's market capitalization. Given this circumstance, the Company bypassed the option to assess qualitative factors to determine the existence of impairment and proceeded directly to the quantitative goodwill impairment test. Based on the results of its impairment test, the Company recorded an impairment charge of
$1,390,000
. As of June 30, 2019 and 2018, the Company had
no
goodwill.
The change in the carrying amount of goodwill during the
three
months ended June 30, 2018 is as follows (in thousands):
|
|
|
|
|
|
|
|
Balance as of March 31, 2018
|
$
|
—
|
|
|
Acquisition of Fitlosophy
|
1,390
|
|
|
Impairment charge
|
(1,390
|
)
|
|
Balance as of June 30, 2018
|
$
|
—
|
|
The gross carrying amount and accumulated amortization of other intangible assets is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
March 31, 2019
|
|
June 30, 2018
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Tradenames and trademarks
|
$
|
15,054
|
|
|
$
|
—
|
|
|
$
|
15,054
|
|
|
$
|
—
|
|
|
$
|
24,353
|
|
|
$
|
—
|
|
|
Customer relationships
|
44,037
|
|
|
24,615
|
|
|
44,037
|
|
|
23,942
|
|
|
48,657
|
|
|
20,976
|
|
|
Favorable lease contracts
|
—
|
|
|
—
|
|
|
3,882
|
|
|
1,016
|
|
|
3,882
|
|
|
478
|
|
|
Trademarks
|
2,435
|
|
|
717
|
|
|
2,435
|
|
|
645
|
|
|
2,435
|
|
|
425
|
|
|
Patents
|
1,466
|
|
|
1,092
|
|
|
1,466
|
|
|
1,059
|
|
|
1,164
|
|
|
971
|
|
|
Covenants not to compete
|
530
|
|
|
481
|
|
|
530
|
|
|
457
|
|
|
530
|
|
|
377
|
|
|
|
$
|
63,522
|
|
|
$
|
26,905
|
|
|
$
|
67,404
|
|
|
$
|
27,119
|
|
|
$
|
81,021
|
|
|
$
|
23,227
|
|
Amortization expense related to intangible assets was
$801,000
and
$1,267,000
for the quarters ended
June 30, 2019
and
2018
, respectively. Based on the current composition of intangibles, amortization expense for the remainder of fiscal
2020
and each of the succeeding four years is projected to be as follows (in thousands):
|
|
|
|
|
|
|
|
Remainder of fiscal 2020
|
$
|
2,382
|
|
|
Fiscal 2021
|
2,997
|
|
|
Fiscal 2022
|
2,900
|
|
|
Fiscal 2023
|
2,604
|
|
|
Fiscal 2024
|
2,518
|
|
|
|
|
|
(7)
|
SHORT-TERM BORROWINGS AND CREDIT ARRANGEMENTS
|
On March 7, 2019, the Company entered into a
$125,000,000
asset based senior secured credit facility with
three
banks (the “ABL Credit Facility”). The Company used the proceeds from borrowings under the ABL Credit Facility to repay in full the Company’s prior credit facility with
two
banks (the “Prior Credit Facility”), under which the maximum credit available to the Company at any one time (the “Committed Amount”) was
$50,000,000
at the time the Prior Credit Facility was repaid and terminated on March 7, 2019. The ABL Credit Facility has a maturity date of March 7, 2024, unless earlier terminated.
On May 23, 2019, the Company entered into a Second Amendment (the “Amendment”) to the ABL Credit Facility. The Amendment reduced the maximum amount available under the revolving credit facility from
$125,000,000
to
$100,000,000
. Availability under the Amendment is equal to the lesser of
$100,000,000
or a Borrowing Base (as defined in the Amendment), in each case minus (i) revolving loans outstanding and (ii)
$15,000,000
until the Agent’s receipt of a compliance certificate demonstrating compliance with the amended financial covenants. The Amendment requires the Company to not permit the Fixed Charge Coverage Ratio (as defined in the Amendment), as of the end of any calendar month (commencing with the twelve-month period ending March 31, 2020), to be less than
1.00
to 1.00. In addition, commencing with the month ending April 30, 2019 and continuing until the month ending March 31, 2020, the Company is required to have, at the end of each calendar month during such period, EBITDA for the corresponding period (which such period shall be based on a cumulative monthly build-up commencing with the month ending April 30, 2019) then ending of not less than the corresponding amount set forth in the Amendment. The Amendment also limits Capital Expenditures (as defined in the Amendment) for fiscal 2020 to
$8,000,000
or less.
Permitted Acquisitions (as defined in the ABL Credit Facility) are no longer permitted under the Amendment, and certain Restricted Payments (as defined in the ABL Credit Facility) including dividends previously allowed based upon meeting certain leverage ratio and average Availability (as defined in the ABL Credit Facility) criteria are no longer allowed.
At the Company’s election, loans made under the ABL Credit Facility will bear interest at either: (i) a base rate (“Base Rate”) plus an applicable rate or (ii) an “Adjusted LIBO Rate” (as defined in the ABL Credit Facility) plus an applicable rate, subject to adjustment if an event of default under the ABL Credit Facility has occurred and is continuing. The Base Rate means the highest of (a) the Agent’s “prime rate,” (b) the federal funds effective rate plus
0.50%
and (c) the Adjusted LIBO Rate for an interest period of one month plus
1%
. During the period prior to March 31, 2020, Adjusted LIBO Rate loans made under the ABL Credit Facility will bear interest at the Adjusted LIBO Rate plus an applicable rate of
2.50%
, and Base Rate loans made under the ABL Credit Facility will bear interest at the Base Rate plus an applicable rate of
1.50%
. After March 31, 2020, the applicable rate will be adjusted based on the Company’s Fixed Charge Coverage Ratio (as defined in the ABL Credit Facility) as further set forth in the ABL Credit Facility. Additionally, the Company is subject to a commitment fee equal to
0.25%
per annum on the average daily unused portion of the revolving commitment, payable monthly to the Agent for the ratable benefit of the lenders.
The ABL Credit Facility is secured by a first priority perfected security interest in substantially all of the assets of the Company, including certain real estate, subject to certain exceptions and exclusions as set forth in the ABL Credit Facility and other loan documents, including the Pledge and Security Agreement (the “Pledge Agreement”) entered into by the Company and the Agent contemporaneously with their execution of the ABL Credit Facility.
The ABL Credit Facility contains certain affirmative and negative covenants that are binding on the Company, including, but not limited to, restrictions (subject to specified exceptions and qualifications) on the ability of the Company to incur indebtedness, to create liens, to merge or consolidate, to make dispositions, to make restricted payments such as dividends, distributions or equity repurchases, to make investments or undertake acquisitions, to prepay other indebtedness, to enter into certain transactions with affiliates, to enter into sale and leaseback transactions, or to enter into any restrictive agreements. In addition, the ABL Credit Facility requires the Company to abide by certain financial covenants calculated for the Company and its subsidiaries as noted above.
The ABL Credit Facility contains customary events of default (which are in some cases subject to certain exceptions, thresholds, notice requirements and grace periods), including, but not limited to, non-payment of principal or interest or other amounts, misrepresentations, failure to perform or observe covenants, cross-defaults with certain other material indebtedness, certain change in control events, voluntary or involuntary bankruptcy proceedings, certain judgments or decrees, failure of the ABL Credit Facility
o
r other loan documents to be in full force and effect, certain ERISA events and judgments. The ABL Credit Facility also contains certain prepayment provisions, representations, warranties and conditions. As of June 30, 2019, the Company was in compliance with all debt covenants under the ABL Credit Facility.
Under the ABL Credit Facility, all collections on account of collateralized accounts receivable are required to be deposited into lock boxes that are subject to the control of the administrative agent (“Agent”) for the ABL Credit Facility (“Agent-Controlled Lock Boxes”). All funds deposited into Agent-Controlled Lock Boxes are swept daily and are required to be applied by the Agent as repayments of amounts owed by the Company under the ABL Credit Facility. Accordingly, the Company has classified its outstanding loan balance under the ABL Credit Facility as a current liability. The outstanding balance under the ABL Credit Facility as of
June 30, 2019
and
March 31, 2019
was $
43,661,000
and $
26,139,000
, respectively. As of June 30, 2018, there was
$40,000,000
outstanding under the Company's Prior Credit Facility classified as a long term liability.
The Company leases certain equipment under finance leases which is classified in the accompanying balance sheets as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
March 31, 2019
|
|
June 30, 2018
|
|
Current portion of long-term debt
|
$
|
11
|
|
|
$
|
145
|
|
|
$
|
73
|
|
|
Long-term debt, net of current portion
|
10
|
|
|
13
|
|
|
102
|
|
|
|
$
|
21
|
|
|
$
|
158
|
|
|
$
|
175
|
|
The Company also finances certain equipment which is classified in the accompanying balance sheets as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
March 31, 2019
|
|
June 30, 2018
|
|
Current portion of long-term debt
|
$
|
68
|
|
|
$
|
173
|
|
|
$
|
156
|
|
|
Long-term debt, net of current portion
|
—
|
|
|
—
|
|
|
68
|
|
|
|
$
|
68
|
|
|
$
|
173
|
|
|
$
|
224
|
|
|
|
|
|
(8)
|
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.
|
|
|
|
(9)
|
FAIR VALUE MEASUREMENTS
|
Recurring Fair Value Measurements
The Company historically used certain derivative financial instruments as part of its risk management strategy to reduce interest rate and foreign currency risk. The Company recognized all derivatives on the consolidated balance sheets at fair value based on quotes obtained from financial institutions. As of March 31, 2019, the interest rate swap agreement was discontinued and the fair value of the interest rate swap agreement as of March 31, 2019 of
$580,000
was reclassified into earnings with a realized loss included in other expense (income), net in the consolidated statement of operations and comprehensive income (loss). There was
no
interest rate swap agreement as of June 30, 2019. There were
no
foreign currency contracts outstanding as of June 30, 2019 and March 31, 2019.
The Company maintains a nonqualified Deferred Compensation Plan (the "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 sheets as of
June 30, 2019
and
March 31, 2019
.
The Company maintains life insurance policies in connection with the Deferred Comp Plan discussed above. The Company also maintains
two
life insurance policies in connection with separate 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 insurance companies as of
June 30, 2019
and
March 31, 2019
.
In connection with the acquisition of Fitlosophy in fiscal 2019, the Company may pay up to an additional
$10,500,000
of contingent earn-out consideration, in cash, if net sales of certain products meet or exceed five different thresholds during the period from the acquisition date through March 31, 2023. The estimated fair value of the contingent earn-out consideration is determined using a Monte Carlo simulation discounted to a present value which is accreted over the earn-out period. The contingent consideration liability is included in accrued other expenses in the consolidated balance sheets as of June 30, 2019 and March 31, 2019.
Selected information relating to the aforementioned contingent consideration follows (in thousands):
|
|
|
|
|
|
|
|
|
Contingent Earn-out Consideration
|
|
Estimated fair value as of June 1, 2018
|
$
|
1,600
|
|
|
Accretion
|
64
|
|
|
Remeasurement adjustment
|
(298
|
)
|
|
Contingent Earn-out Consideration as of March 31, 2019
|
1,366
|
|
|
Accretion
|
16
|
|
|
Contingent Earn-out Consideration as of June 30, 2019
|
$
|
1,382
|
|
To increase consistency and comparability in fair value measurements, the 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 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 sheets 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 sheets as of
June 30, 2019
and
March 31, 2019
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
Quoted Prices In
Active Markets
for Identical
Assets (Level 1)
|
|
Significant Other
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash surrender value of life insurance policies
|
$
|
2,805
|
|
|
$
|
—
|
|
|
$
|
2,805
|
|
|
$
|
—
|
|
|
Total assets
|
$
|
2,805
|
|
|
$
|
—
|
|
|
$
|
2,805
|
|
|
$
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Contingent earn-out consideration
|
$
|
1,382
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,382
|
|
|
Deferred compensation plans
|
1,263
|
|
|
1,263
|
|
|
—
|
|
|
—
|
|
|
Total liabilities
|
$
|
2,645
|
|
|
$
|
1,263
|
|
|
$
|
—
|
|
|
$
|
1,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
Quoted Prices In
Active Markets
for Identical
Assets (Level 1)
|
|
Significant Other
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash surrender value of life insurance policies
|
$
|
2,765
|
|
|
$
|
—
|
|
|
$
|
2,765
|
|
|
$
|
—
|
|
|
Total assets
|
$
|
2,765
|
|
|
$
|
—
|
|
|
$
|
2,765
|
|
|
$
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Contingent earn-out consideration
|
$
|
1,366
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,366
|
|
|
Interest rate swap agreement
|
580
|
|
|
—
|
|
|
580
|
|
|
—
|
|
|
Deferred compensation plans
|
1,156
|
|
|
1,156
|
|
|
—
|
|
|
—
|
|
|
Total liabilities
|
$
|
3,102
|
|
|
$
|
1,156
|
|
|
$
|
580
|
|
|
$
|
1,366
|
|
Cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are reflected at carrying value in the consolidated balance sheets and such amounts are a reasonable estimate of their fair values due to the short-term nature of these instruments. The outstanding balance of the Company’s short-term borrowings and long-term debt approximated its fair value based on the 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 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.
As discussed in Note 2, a subsidiary of the Company acquired substantially all of the business and net assets of Fitlosophy on June 1, 2018 and determined that the aggregate fair value of acquired intangible assets, consisting of tradenames, was $
2,032,000
. The Company estimated the fair value of the aforementioned acquired intangible assets using discounted cash flow techniques which included an estimate of future cash flows discounted to present value with an appropriate risk-adjusted discount rate (Level 3). The Company determined that the aggregate fair value of the acquired inventory in the Fitlosophy acquisition was $
452,000
, which was estimated as the selling price less costs of disposal (Level 2). The Company estimated the fair value of the Fitlosophy contingent earn-out consideration of $
1,600,000
using a Monte Carlo simulation discounted to a present value (Level 3).
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. In the first quarter of fiscal 2019, the Company recorded an impairment charge of $
1,390,000
due to impairment of goodwill associated with the acquisition of Fitlosophy. See Note 2 and 6 for further discussion.
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. Management assesses all available positive and negative evidence to estimate whether sufficient future taxable income will be generated to realize existing deferred tax assets. A significant piece of objective negative evidence evaluated in fiscal 2019 was the cumulative U.S. pretax loss incurred over the then most recent three-year period. Such objective evidence limits the ability to consider other subjective evidence, such as projections for future taxable income. On the basis of that evaluation, as of December 31, 2018, a full valuation allowance was recorded to fully offset the U.S. net deferred tax assets, as they more likely than not will not be realized. Management updated this assessment as of June 30, 2019, and concluded that the full valuation allowance for U.S. net deferred tax assets is still required.
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.
The income tax provision for interim periods is comprised of tax on ordinary income (loss) provided at the most recent estimated annual effective tax rate, adjusted for the tax effect of discrete items. Management estimates the annual effective tax rate quarterly based on the forecasted pretax income (loss) results of its U.S. and non-U.S. jurisdictions. Items unrelated to current year ordinary income (loss) are recognized entirely in the period identified as a discrete item of tax. These discrete items generally relate to changes in tax laws, adjustments to the actual liability determined upon filing tax returns, and adjustments to previously recorded reserves for uncertain tax positions.
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RECENT ACCOUNTING PRONOUNCEMENTS
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In August 2018, the FASB issued Accounting Standards Update ("ASU") 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement," which is designed to improve the effectiveness of disclosures by removing, modifying and adding disclosures related to fair value measurements. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of this standard, but it does not expect that it will have a material impact on the Company's consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefits Plans" ("ASU 2018-14"), which is designed to improve the effectiveness of disclosures by removing and adding disclosures related to defined benefit pension or other postretirement plans. ASU 2018-14 is required to be applied on a retrospective basis to all periods presented and is effective for the Company in its fiscal year ending March 31, 2021. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this standard, but it does not expect that it will have a material impact on the Company's consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," ("ASU 2018-15"). ASU 2018-15 aligns the accounting for implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, the updated guidance requires an entity to determine the stage of a project that the implementation activity relates to and the nature of the associated costs in order to determine whether those costs should be expensed as incurred or capitalized. Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting
arrangement is ready for its intended use. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of this standard, but it does not expect that it will have a material impact on the Company's consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" ("ASU 2018-02"). ASU 2018-02 allows a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the Tax Act. The amount of the reclassification is calculated based on the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts at the date of the enactment of the Tax Act related to items that remained in accumulated other comprehensive income (loss) at that time. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company elected not to reclassify any stranded tax effects resulting from the Tax Act from accumulated other comprehensive income (loss) to retained earnings.
CSS INDUSTRIES, INC. AND SUBSIDIARIES