NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2019
(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’s fiscal year ends on March 31. References to a particular year refer to the fiscal year ending in March of that year. For example, fiscal
2019
refers to the fiscal year ended March 31,
2019
.
Principles of Consolidation
The consolidated financial statements include the accounts of CSS Industries, Inc. 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 seasonal, gift and craft 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.
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.
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.
Craft
The craft category includes sewing patterns, ribbons and trims, buttons, sewing patterns, 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.
CSS’ product breadth provides its retail customers the opportunity to use a single vendor for much of their seasonal, gift and craft 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 year-end exchange rates and all income and expense accounts at average rates during the year. 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, income tax accounting and resolution of litigation and other proceedings. Actual results could differ from these estimates.
Accounts Receivable
The Company offers seasonal dating programs related to certain seasonal product offerings pursuant to which customers that qualify for such programs are offered extended payment terms. With some exceptions, customers do not have the right to return product except for reasons the Company believes are typical of our industry, including damaged goods, shipping errors or similar occurrences. The Company generally is not required to repurchase products from its customers, nor does the Company have any regular practice of doing so. In addition, the Company mitigates its exposure to bad debts by evaluating the creditworthiness of its major customers, utilizing established credit limits, and purchasing credit insurance when appropriate and available on terms satisfactory to the Company. Bad debt and returns and allowances reserves are recorded as an offset to accounts receivable while reserves for customer programs are recorded as accrued liabilities. The Company evaluates accounts receivable related reserves and accruals monthly by specifically reviewing customers’ creditworthiness, historical recovery percentages and outstanding customer deductions and program arrangements. Customer account balances are charged off against the allowance reserve after reasonable means of collection have been exhausted and the potential for recovery is considered unlikely.
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, which was
$162,000
and
$98,000
at March 31,
2019
and
2018
, respectively. Had all inventories been valued at the lower of FIFO cost or market, inventories would have been greater by
$576,000
and
$524,000
at March 31,
2019
and
2018
, respectively. During fiscal 2019, the Company recognized a charge of
$1,771,000
as a result of the Company's initiative to streamline product offerings. Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
2019
|
|
2018
|
Raw material
|
$
|
14,246
|
|
|
$
|
11,602
|
|
Work-in-process
|
16,816
|
|
|
17,809
|
|
Finished goods
|
65,169
|
|
|
73,025
|
|
|
$
|
96,231
|
|
|
$
|
102,436
|
|
Finished goods inventory includes $
11,598,000
and $
19,555,000
of inventory on consignment as of March 31,
2019
and
2018
, respectively. In connection with the acquisition of McCall on December 13, 2016, Simplicity on November 3, 2017, and 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, recorded at the date of such acquisition. This was a result of the inventory acquired being marked up to estimated fair value in purchase accounting and is recognized through cost of sales as the inventory turns. The amount of step-up to fair value of the acquired inventory remaining as of March 31,
2019
and
2018
was $
284,000
and $
10,683,000
, respectively. The Company expects the acquired Simplicity inventory to be sold through the first quarter of fiscal 2020. See Note 2 to the consolidated financial statements for further discussion of the McCall, Simplicity, and Fitlosophy acquisitions.
Asset Held for Sale
Asset held for sale of $
131,000
as of 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 the next 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
such assets classified as held for sale as of March 31, 2018.
On March 29, 2019, the Company sold a distribution facility in Havant, England for
$2,366,000
that was previously classified as asset held for sale for
$2,570,000
. The Company received cash proceeds of
$1,778,000
with the remaining balance placed in escrow. The purpose of the escrow is to ensure that current licensees of the building exit the building as their licenses expire. As each license agreement expires and the applicable licensee vacates its unit, the funds held
in escrow related to such unit will be released to the Company. It is expected that the funds held in escrow as of March 31, 2019 will be released within six months. The Company incurred
$118,000
of costs to sell the facility and recognized a loss of
$322,000
on the sale that is included in other expense (income), net in the consolidated statement of operations.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and include the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
2019
|
|
2018
|
Land
|
$
|
5,738
|
|
|
$
|
7,100
|
|
Buildings, leasehold interests and improvements
|
40,893
|
|
|
45,164
|
|
Machinery, equipment and other
|
113,946
|
|
|
104,497
|
|
|
160,577
|
|
|
156,761
|
|
Less – Accumulated depreciation and amortization
|
(109,657
|
)
|
|
(104,635
|
)
|
Net property, plant and equipment
|
$
|
50,920
|
|
|
$
|
52,126
|
|
Depreciation is provided generally on the straight-line method and is based on estimated useful lives or terms of leases as follows:
|
|
|
|
Buildings, leasehold interests and improvements
|
|
Lease term to 45 years
|
Machinery, equipment and other
|
|
3 to 15 years
|
When property is retired or otherwise disposed of, the related cost and accumulated depreciation and amortization are eliminated from the consolidated balance sheet. Any gain or loss from the disposition of property, plant and equipment is included in other expense (income), net. Maintenance and repairs are expensed as incurred while improvements are capitalized and depreciated over their estimated useful lives.
For property, plant, and equipment, depreciation and amortization expense was
$8,807,000
,
$6,455,000
and
$5,173,000
for the years ended March 31,
2019
,
2018
and
2017
, respectively.
The Company maintains various operating leases and records rent expense on a straight-line basis over the lease term. See Note 9 for further discussion.
Impairment of Long-Lived Assets including Other Intangible Assets and Property, Plant and Equipment
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. We believe 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.
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.
Derivative Financial Instruments
The Company uses certain derivative financial instruments as part of its risk management strategy to reduce interest rate and foreign currency risk. Derivatives are not used for trading or speculative activities.
The Company recognizes all derivatives on the consolidated balance sheet at fair value. On the date the derivative instrument is entered into, the Company generally designates the derivative as either (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), or (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”). Changes in the fair value of a derivative that is designated as, and meets all the required criteria for, a fair value hedge, along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings. Changes in the fair value of a derivative that is designated as, and meets all the required criteria for, a cash flow hedge are recorded in accumulated other comprehensive income (loss) and reclassified into earnings as the underlying hedged item affects earnings. The portion of the change in fair value of a derivative associated with hedge ineffectiveness or the component of a derivative instrument excluded from the assessment of hedge effectiveness is recorded currently in earnings. Also, changes in the entire fair value of a derivative that is not designated as a hedge are recorded immediately in earnings. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes relating all derivatives that are designated as fair value or cash flow hedges to specific assets and liabilities on the consolidated balance sheet or to specific firm commitments or forecasted transactions.
The Company also formally assesses, both at the inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in fair values or cash flows of the hedged item. If it is determined that a derivative is not highly effective as a hedge or if a derivative ceases to be a highly effective hedge, the Company will discontinue hedge accounting prospectively.
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 forward exchange contracts. Gains and losses arising from foreign currency forward contracts are recorded in other expense (income), net as offsets of gains and losses resulting from the underlying hedged transactions. A realized gain of
$3,000
and
$56,000
was recorded in the years ended March 31, 2019 and 2017, respectively, and a realized loss of $
108,000
was recorded in the year ended March 31, 2018. There were
no
open foreign currency forward exchange contracts as of March 31,
2019
and
2018
.
On February 1, 2018, the Company entered into an interest rate swap agreement with a term of
five years
to manage its exposure to interest rate movements by effectively converting a portion of its anticipated working capital debt from variable to fixed rates. The notional amount of the interest rate swap contract subject to fixed rates was
$40,000,000
in fiscal 2019 and 2018. Fixed interest rate payments were at a weighted average rate of
2.575%
in fiscal 2018. Interest rate differentials paid under this agreement were recognized as adjustments to interest expense and were $
147,000
and $
60,000
for the years ended March 31, 2019 and 2018, respectively. This interest rate swap effectively converted
$40,000,000
of the Company's variable-rate debt into fixed-rate debt with an effective interest rate of
3.525%
(
2.575%
fixed +
.95%
spread) through March 2019. On March 7, 2019, the Company terminated its Prior Credit Facility and entered into an asset-based senior secured revolving credit facility (see Note 8). As of March 31, 2019, the Company updated its assessment of the swap and determined it was no longer probable the original forecasted transaction would occur. Accordingly, the Company reclassified into earnings a realized loss of
$580,000
for the March 31, 2019 fair value of the interest rate swap agreement as a result of the discontinuance of the hedge. The related loss is included in interest expense (income) in the consolidated statements of operations. The interest rate swap agreement tied to the
$40,000,000
debt was terminated on April 1, 2019. There were
no
interest rate swap agreements in fiscal 2017.
Interest Expense (Income)
Interest expense was
$3,459,000
,
$904,000
and
$298,000
in the years ended March 31,
2019
,
2018
and
2017
, respectively. Interest income was
$275,000
,
$223,000
and
$269,000
in the years ended March 31,
2019
,
2018
and
2017
, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. An assessment is made to determine the likelihood that
our deferred tax assets will be recovered from future taxable income, and whether a valuation allowance is required to offset all or a portion of those deferred tax assets. To the extent the Company increases or decreases a valuation allowance, additional tax expense (benefit) is recorded in the consolidated statement of operations. 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 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. See Note 7 for further discussion.
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 Accounting Standards Codification 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 are 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.
Product Development Costs
Product development costs consist of purchases of outside artwork, printing plates, cylinders, catalogs and samples. For seasonal products, the Company typically begins to incur product development costs
18
to
20 months
before the applicable holiday event. These costs are amortized monthly over the selling season, which is generally within
two
to
four months
of the holiday event. Development costs related to gift and craft products are incurred within a period beginning
six
to
nine months
prior to the applicable sales period. These costs generally are amortized over a
six
to
twelve
month selling period. The
expense of certain product development costs that are related to the manufacturing process are recorded in cost of sales while the portion that relates to creative and selling efforts are recorded in selling, general and administrative expenses.
Product development costs capitalized as of March 31,
2019
were
$2,495,000
, of which $
2,323,000
was recorded in other current assets and $
172,000
was recorded in other long-term assets in the consolidated balance sheets. Product development costs capitalized as of March 31,
2018
were
$3,835,000
, of which
$3,350,000
was recorded in prepaid expenses and other current assets and
$485,000
was recorded in other long-term assets in the consolidated balance sheets. Product development expense of
$8,051,000
,
$8,296,000
and
$8,268,000
was recognized in the years ended March 31,
2019
,
2018
and
2017
, respectively.
Shipping and Handling Costs
Shipping and handling costs are reported in cost of sales in the consolidated statements of operations.
Share-Based Compensation
Share-based compensation cost is estimated at the grant date based on a fair-value model. Calculating the fair value of share-based awards at the grant date requires judgment, including estimating stock price volatility and expected option life.
The Company uses the Black-Scholes option valuation model to value service-based stock options and uses Monte Carlo simulation to value performance-based stock options and restricted stock units. The fair value of each service-based restricted stock unit 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 Company estimates stock price volatility based on historical volatility of its common stock. Estimated option life assumptions are also derived from historical data. The Company recognizes compensation cost over the stated vesting period consistent with the terms of the arrangement (i.e. either on a straight-line or graded-vesting basis).
Net Income (Loss) Per Common Share
The following table sets forth the computation of basic net income (loss) per common share and diluted net income (loss) per common share for the years ended March 31,
2019
,
2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended March 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(in thousands, except per share amounts)
|
Numerator:
|
|
|
|
|
|
Net income (loss)
|
$
|
(53,545
|
)
|
|
$
|
(36,520
|
)
|
|
$
|
28,504
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
Weighted average shares outstanding for basic income (loss) per common share
|
8,964
|
|
|
9,108
|
|
|
9,074
|
|
Effect of dilutive stock options
|
—
|
|
|
—
|
|
|
41
|
|
Adjusted weighted average shares outstanding for diluted income (loss) per common share
|
8,964
|
|
|
9,108
|
|
|
9,115
|
|
|
|
|
|
|
|
Basic net income (loss) per common share
|
$
|
(5.97
|
)
|
|
$
|
(4.01
|
)
|
|
$
|
3.14
|
|
Diluted net income (loss) per common share
|
$
|
(5.97
|
)
|
|
$
|
(4.01
|
)
|
|
$
|
3.13
|
|
The Company has excluded
512,000
shares,
495,000
shares, and
505,175
shares, consisting of outstanding stock options and unearned restricted stock units, in computing diluted net income (loss) per common share for the years ended March 31,
2019
,
2018
and
2017
, respectively, because their effects were antidilutive.
Statements of Cash Flows
For purposes of the consolidated statements of cash flows, the Company considers all holdings of highly liquid investments with a maturity at time of purchase of three months or less to be cash equivalents.
Supplemental Schedule of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended March 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(in thousands)
|
Cash paid during the year for:
|
|
|
|
|
|
Interest
|
$
|
2,303
|
|
|
$
|
511
|
|
|
$
|
264
|
|
Income taxes
|
$
|
1,467
|
|
|
$
|
1,484
|
|
|
$
|
2,270
|
|
|
|
|
|
|
|
Details of acquisitions:
|
|
|
|
|
|
Fair value of assets acquired
|
$
|
4,268
|
|
|
$
|
92,666
|
|
|
$
|
50,445
|
|
Liabilities assumed
|
168
|
|
|
23,049
|
|
|
15,416
|
|
Net assets acquired
|
4,100
|
|
|
69,617
|
|
|
35,029
|
|
Amount due seller
|
—
|
|
|
2,500
|
|
|
—
|
|
Total consideration
|
4,100
|
|
|
67,117
|
|
|
35,029
|
|
Less cash acquired
|
—
|
|
|
1,889
|
|
|
—
|
|
Less contingent consideration
|
1,600
|
|
|
—
|
|
|
—
|
|
Less gain on bargain purchases
|
—
|
|
|
—
|
|
|
19,990
|
|
Net cash paid for acquisitions
|
$
|
2,500
|
|
|
$
|
65,228
|
|
|
$
|
15,039
|
|
Components of Accumulated Other Comprehensive Income (Loss), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended March 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(in thousands)
|
Accumulated effect of currency translation adjustment:
|
|
|
|
|
|
Balance at beginning of year
|
$
|
988
|
|
|
$
|
45
|
|
|
$
|
—
|
|
Currency translation adjustment during period
|
(976
|
)
|
|
943
|
|
|
45
|
|
Balance at end of year
|
$
|
12
|
|
|
$
|
988
|
|
|
$
|
45
|
|
|
|
|
|
|
|
|
|
|
Accumulated effect of pension and postretirement benefits:
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
259
|
|
|
$
|
(108
|
)
|
|
$
|
(62
|
)
|
Net gain (loss) arising from pension and postretirement benefits
|
194
|
|
|
367
|
|
|
(46
|
)
|
Balance at end of year
|
$
|
453
|
|
|
$
|
259
|
|
|
$
|
(108
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated effect interest rate swap agreement:
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
(84
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Amounts reclassified from accumulated other comprehensive income (loss):
(a)
|
|
|
|
|
|
|
|
Termination of interest rate swap agreement
|
84
|
|
|
—
|
|
|
—
|
|
Fair value adjustment
|
—
|
|
|
(84
|
)
|
|
—
|
|
Balance at end of year
|
$
|
—
|
|
|
$
|
(84
|
)
|
|
$
|
—
|
|
|
|
(a)
|
Amounts reclassified are recorded in interest expense on the consolidated statement of operations.
|
(2) BUSINESS ACQUISITIONS
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. The contingent consideration
payments will be paid, if at all, 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 March 31, 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):
|
|
|
|
|
Cash
|
$
|
2,500
|
|
Contingent earn-out consideration
|
1,600
|
|
Purchase price
|
$
|
4,100
|
|
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 deemed impaired as a result of the 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 fiscal 2019 (in thousands):
|
|
|
|
|
Accounts receivable
|
$
|
389
|
|
Inventory
|
452
|
|
Other assets
|
5
|
|
Total current assets
|
846
|
|
Intangible assets
|
2,032
|
|
Goodwill
|
1,390
|
|
Total assets acquired
|
4,268
|
|
Current liabilities
|
168
|
|
Net assets acquired
|
$
|
4,100
|
|
The consolidated statement of operations include the operating results of Fitlosophy from the acquisition date through March 31, 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.
On November 3, 2017, the Company completed the acquisition of substantially all of the net assets and business of Simplicity Creative Group from Wilton Brands LLC ("Wilton") for a total consideration of $
69,617,000
and transaction costs of $
3,411,000
. Simplicity is a leading provider of home sewing patterns, decorative trims, knitting and crocheting tools, needle arts and kids' crafts products under the Simplicity®, Wrights®, Boye®, Dimensions®, and Perler® brand names. Simplicity's products are sold to mass-market retailers, specialty fabric and craft chains, wholesale distributors and online customers. The Company primarily financed the acquisition with borrowings of
$60,000,000
under its credit facility. A portion of the purchase price is being held in escrow for certain indemnification obligations. 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 $
9,642,000
was recorded as goodwill. This goodwill was subsequently written off as a result of the Company’s annual impairment testing performed in the fourth quarter of fiscal 2018 as further described in Note 3.
The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition in fiscal 2018 (in thousands):
|
|
|
|
|
Cash
|
$
|
1,889
|
|
Accounts receivable
|
11,787
|
|
Inventory
|
30,804
|
|
Other assets
|
1,460
|
|
Total current assets
|
45,940
|
|
Property, plant and equipment
|
15,188
|
|
Intangible assets
|
20,982
|
|
Goodwill
|
9,642
|
|
Other
|
914
|
|
Total assets acquired
|
92,666
|
|
Current liabilities
|
16,912
|
|
Deferred tax liability
|
840
|
|
Other long-term obligations
|
5,297
|
|
Total liabilities assumed
|
23,049
|
|
Net assets acquired
|
$
|
69,617
|
|
In connection with the acquisition of Simplicity, the Company recorded an asset, within property, plant and equipment, and a liability of $
1,163,000
related to an asset retirement obligation at a leased location which was subsequently remeasured as of March 31, 2018 and 2019 due to accretion and a revision in estimated cost. During fiscal
2019
, the impact of the asset retirement obligation included $
126,000
of the subsequent reduction in the fair value, $
166,000
of depreciation expense and $
129,000
of accretion expense. The asset retirement obligation of $
1,217,000
and
$1,214,000
as of
March 31, 2019
and
2018
is included in other long-term obligations in the consolidated balance sheets.
The financial results of Simplicity, from the acquisition date of November 3, 2017, are included in the Company's results of operations for the year ended March 31, 2018 and 2019.
On December 13, 2016, the Company completed the acquisition of substantially all of the net assets and business of The McCall Pattern Company and certain subsidiaries ("McCall"), for
$13,914,000
in cash plus transaction costs of $
1,484,000
. McCall designs, manufactures, and sells home sewing patterns under the McCall’s®, Butterick®, Kwik Sew® and Vogue Patterns® brand names. McCall is a leading provider of home sewing patterns, selling to mass market retailers, specialty fabric and craft chains, and wholesale distributors. The acquisition was accounted for using the acquisition method and, due to McCall's distressed financial condition and a motivated previous foreign owner who was seeking to exit operations in the United States, the transaction resulted in a bargain purchase due to the fair value of the net assets acquired of $
33,528,000
exceeding the amount paid.
On July 8, 2016, a subsidiary of the Company completed the acquisition of substantially all of the assets and business of Lawrence Schiff Silk Mills, Inc. ("Schiff") for $
1,125,000
in cash. Schiff was a leading U.S. manufacturer and distributor of narrow woven ribbon prior to its April 2016 Chapter 11 bankruptcy filing. The acquisition was accounted for using the acquisition method and resulted in a bargain purchase due to the fair value of the net assets acquired of $
1,501,000
exceeding the amount paid.
The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisitions in fiscal 2017 (in thousands):
|
|
|
|
|
Accounts receivable
|
$
|
2,762
|
|
Inventory
|
32,206
|
|
Other assets
|
553
|
|
Total current assets
|
35,521
|
|
Property, plant and equipment
|
9,473
|
|
Intangible assets
|
4,900
|
|
Other
|
551
|
|
Total assets acquired
|
50,445
|
|
Current liabilities
|
5,328
|
|
Deferred tax liability
|
9,419
|
|
Long-term debt
|
516
|
|
Other long-term obligations
|
153
|
|
Total liabilities assumed
|
15,416
|
|
Net assets acquired
|
$
|
35,029
|
|
As the fair value of identifiable net assets acquired exceeded the fair value of the consideration transferred, the Company reassessed the recognition and measurement of identifiable assets acquired and liabilities assumed and concluded that all acquired assets and liabilities assumed were recognized and that the valuation procedures and resulting measures were appropriate. As a result, the Company recorded a gain on bargain purchases of $
19,990,000
in fiscal 2017.
The following table summarizes the revenue and earnings of the Company had the date of the Simplicity, McCall, and Schiff acquisitions been April 1, 2016 (unaudited and in thousands):
|
|
|
|
|
|
|
|
|
|
For the Years Ended March 31,
|
|
2018
|
|
2017
|
Supplemental pro forma revenue
|
$
|
413,577
|
|
|
$
|
440,676
|
|
Supplemental pro forma earnings
(1)
|
$
|
(18,131
|
)
|
|
$
|
15,465
|
|
Supplemental pro forma earnings per basic share
(1)
|
$
|
(1.99
|
)
|
|
$
|
1.70
|
|
Supplemental pro forma earnings per diluted share
(1)
|
$
|
(1.99
|
)
|
|
$
|
1.70
|
|
(1)
Earnings and earnings per share in the above pro forma table exclude bargain purchase gains and recognition of inventory step-up through cost of sales as the inventory turns.
(3) GOODWILL, OTHER INTANGIBLE ASSETS AND LONG-LIVED ASSETS
The following table shows changes in goodwill for the fiscal years ended March 31, 2018 and 2019 (in thousands):
|
|
|
|
|
Balance as of March 31, 2017
|
$
|
19,916
|
|
Acquisition of Simplicity
|
9,642
|
|
Impairment charge
|
(29,558
|
)
|
Balance as of March 31, 2018
|
—
|
|
Acquisition of Fitlosophy
|
1,390
|
|
Impairment charge
|
(1,390
|
)
|
Balance as of March 31, 2019
|
$
|
—
|
|
In connection with the Company's review of the recoverability of its goodwill for fiscal 2018, the Company determined that a triggering event occurred due to the decline in the Company's trading price of its common stock and related decrease in 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 $
29,558,000
, which was the carrying amount of its goodwill immediately before the charge. The Company determined that no impairment of goodwill existed in fiscal 2017. 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 March 31, 2019 and 2018, the Company had
no
goodwill.
The change in the gross carrying amount of other intangible assets for the years ended
March 31, 2018
and
2019
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames and Trademarks
|
|
Customer Relationships
|
|
Favorable Lease Contracts
|
|
Patent
|
|
Trademarks
|
Balance as of March 31, 2017
|
$
|
19,953
|
|
|
$
|
39,757
|
|
|
$
|
—
|
|
|
$
|
1,164
|
|
|
$
|
403
|
|
Acquisition of Simplicity
|
8,200
|
|
|
8,900
|
|
|
3,882
|
|
|
—
|
|
|
—
|
|
Impairment charge
|
(3,800
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance as of March 31, 2018
|
24,353
|
|
|
48,657
|
|
|
3,882
|
|
|
1,164
|
|
|
403
|
|
Acquisition of Fitlosophy
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,032
|
|
Asset Acquisition of Dimensional
|
—
|
|
|
—
|
|
|
—
|
|
|
302
|
|
|
—
|
|
Impairment charge
|
(9,299
|
)
|
|
(4,620
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance as of March 31, 2019
|
$
|
15,054
|
|
|
$
|
44,037
|
|
|
$
|
3,882
|
|
|
$
|
1,466
|
|
|
$
|
2,435
|
|
With the acquisition of Fitlosophy, the Company recorded an intangible asset for trademarks subject to amortization of $
2,032,000
that is being amortized over
7 years
. The Company also acquired patents of $
302,000
in connection with Dimensional Paperworks asset acquisition which are subject to amortization over
15 years
. With the acquisition of Simplicity, the Company recorded intangible assets of $
8,200,000
for tradenames that are not subject to amortization, $
8,900,000
for customer relationships with an estimated life of
ten years
, and $
3,882,000
for favorable lease contracts with a weighted-average amortization period of
eight
years.
The Company assesses the impairment of long-lived assets, including identifiable intangible assets subject to amortization and property and plant and equipment, whenever events or changes in circumstances indicate the carrying value may not be recoverable. Factors the Company considers important that could trigger an impairment review include significant changes in the use of any assets, changes in historical trends in operating performance, changes in projected operating performance, stock price, loss of a major customer and significant negative economic trends. For fiscal 2019, the current-period operating loss combined with historic operating losses was determined to be a triggering event for its other long-lived assets for impairment for fiscal 2019. The decline in the Company's trading price of its common stock at and around the end of fiscal 2018, and related decrease in the Company's market capitalization, was determined to be a triggering event in connection with the Company's review of the recoverability of its long-lived assets for fiscal 2018. The Company performed a recoverability test during the fourth quarter of fiscal 2019 and 2018 using an undiscounted cash flow approach and determined that the carrying value of property, plant, and equipment, and certain amortizing intangibles are recoverable and not impaired. In connection with the Company’s review of the recoverability of its long-lived assets subject to amortization for fiscal
2017
, no circumstances were identified that indicated the carrying value of the assets may not be recoverable and there was no impairment of assets recorded in fiscal
2017
.
During the fourth quarter annual impairment test of indefinite lived and amortizing intangible assets performed in fiscal 2019, the Company determined that the carrying values of the C.R. Gibson, McCall's, and Blumenthal tradenames, as well as the C.R. Gibson customer relationships exceeded their fair value. The Company recorded non-cash tradename and customer relationships impairment charges of $
9,299,000
and $
4,620,000
, respectively. During the fourth quarter annual impairment test of indefinite lived intangibles performed in fiscal 2018, the Company determined that the carrying value of the C.R. Gibson tradename exceeded its fair value. The Company recorded a non-cash tradename impairment charge of
$3,800,000
related to the C.R. Gibson tradename. The Company determined that
no
impairment of indefinite-lived intangible assets existed in fiscal
2017
.
The gross carrying amount and accumulated amortization of other intangible assets as of March 31,
2019
and
2018
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
March 31, 2018
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
Tradenames and trademarks
|
$
|
15,054
|
|
|
$
|
—
|
|
|
$
|
24,353
|
|
|
$
|
—
|
|
Customer relationships
|
44,037
|
|
|
23,942
|
|
|
48,657
|
|
|
19,976
|
|
Favorable lease contracts
|
3,882
|
|
|
1,016
|
|
|
3,882
|
|
|
299
|
|
Patents
|
1,466
|
|
|
1,059
|
|
|
1,164
|
|
|
941
|
|
Trademarks
|
2,435
|
|
|
645
|
|
|
403
|
|
|
393
|
|
Covenants not to compete
|
530
|
|
|
457
|
|
|
530
|
|
|
351
|
|
|
$
|
67,404
|
|
|
$
|
27,119
|
|
|
$
|
78,989
|
|
|
$
|
21,960
|
|
The weighted-average amortization period of customer relationships, favorable lease contracts, patents, trademarks and covenants not to compete are
11
years,
8
years,
11
years,
7
years, and
5
years, respectively.
Amortization expense was
$5,159,000
for fiscal
2019
,
$4,032,000
for fiscal
2018
, and
$3,304,000
for fiscal
2017
. The estimated amortization expense for the next five fiscal years is as follows (in thousands):
|
|
|
|
|
Fiscal
|
|
2020
|
$
|
3,801
|
|
2021
|
3,314
|
|
2022
|
3,218
|
|
2023
|
2,922
|
|
2024
|
2,835
|
|
(4) TREASURY STOCK TRANSACTIONS
Under a stock repurchase program that had been previously authorized by the Company’s Board of Directors, the Company repurchased
303,166
shares of the Company’s common stock for
$4,372,000
in fiscal
2019
. There were
no
repurchases of the Company's common stock by the Company during fiscal 2018 and 2017. As of March 31,
2019
, the Company had
no
shares remaining available for repurchase under the Board’s authorization.
(5) SHARE-BASED PLANS
On July 30, 2013, the Company's stockholders approved the CSS Industries, Inc. 2013 Equity Compensation Plan ("
2013 Plan
"). Under the terms of the Company's 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. The Human Resources Committee of the Company's Board of Directors ("Board"), or other committee appointed by the Board (collectively with the Human Resources Committee, the "2013 Equity Plan Committee") 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 2013 Equity Plan Committee, but in no event greater than
ten
years from the date of grant, and at the date of grant the 2013 Equity Plan Committee has discretion to determine the date or dates on which granted options become exercisable. Service-based options outstanding as of March 31,
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 March 31,
2019
, will 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 at
March 31, 2019
vest on July 29, 2019. Market-based and performance-based RSUs outstanding as of March 31,
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 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 March 31,
2019
, there were
593,655
shares available for grant.
Compensation cost is recognized over the stated vesting period consistent with the terms of the arrangement (i.e. either on a straight-line or graded-vesting basis).
Stock Options
Activity and related information pertaining to stock options for the year ended March 31,
2019
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual Life
|
|
Aggregate
Intrinsic
Value
|
Outstanding at April 1, 2018
|
537,800
|
|
|
$
|
26.35
|
|
|
|
|
|
Granted
|
10,000
|
|
|
$
|
13.39
|
|
|
|
|
|
Canceled
|
(123,856
|
)
|
|
$
|
25.34
|
|
|
|
|
|
Forfeited
|
(19,969
|
)
|
|
$
|
27.61
|
|
|
|
|
|
Outstanding at March 31, 2019
|
403,975
|
|
|
$
|
26.27
|
|
|
4.5 years
|
|
$
|
—
|
|
Exercisable at March 31, 2019
|
227,125
|
|
|
$
|
25.89
|
|
|
3.2 years
|
|
$
|
—
|
|
Expected to vest at March 31, 2019
|
176,850
|
|
|
$
|
26.76
|
|
|
6.2 years
|
|
$
|
—
|
|
The Company issues treasury shares for stock option exercises. The cash flows resulting from the tax benefits from tax deductions in excess of the compensation cost recognized for those share awards (referred to as excess tax benefits) are presented as operating cash flows in the consolidated statements of cash flows.
The fair value of each stock option granted was estimated on the date of grant using the Black-Scholes option valuation model with the following average assumptions:
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended March 31,
|
|
2019
|
|
2018
|
|
2017
|
Expected dividend yield at time of grant
|
5.97
|
%
|
|
2.91
|
%
|
|
2.91
|
%
|
Expected stock price volatility
|
31
|
%
|
|
34
|
%
|
|
35
|
%
|
Risk-free interest rate
|
3.22
|
%
|
|
2.21
|
%
|
|
1.66
|
%
|
Expected life of option (in years)
|
6.3
|
|
|
6.3
|
|
|
4.8
|
|
Expected volatilities are based on historical volatility of the Company’s common stock. The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant. The expected option life reflects the average of the contractual term of the options and the weighted-average vesting period for all option tranches.
The weighted average fair value of stock options granted during fiscal
2019
,
2018
and
2017
was
$2.19
,
$7.40
and
$6.25
, per share, respectively. The total intrinsic value of options exercised during the years ended March 31,
2019
,
2018
and
2017
was
$0
,
$217,000
and
$253,000
, respectively. The total fair value of stock options vested during fiscal
2019
,
2018
and
2017
was
$832,000
,
$850,000
and
$1,048,000
, respectively.
As of March 31,
2019
, there was
$718,000
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
1.8
years.
Compensation cost related to stock options recognized in operating results (included in selling, general and administrative expenses) was
$378,000
,
$628,000
, and
$666,000
in the years ended March 31,
2019
,
2018
and
2017
, respectively, and the associated future income tax benefit recognized was
$0
,
$159,000
, and
$256,000
in the years ended March 31,
2019
,
2018
and
2017
, respectively.
Restricted Stock Units
Activity and related information pertaining to RSUs for the year ended March 31,
2019
was as follows:
|
|
|
|
|
|
|
|
|
|
|
Number
of RSUs
|
|
Weighted
Average
Fair
Value
|
|
Weighted
Average
Remaining
Contractual Life
|
Outstanding at April 1, 2018
|
211,255
|
|
|
$
|
21.66
|
|
|
|
Granted
|
201,013
|
|
|
$
|
14.46
|
|
|
|
Vested
|
(21,320
|
)
|
|
$
|
26.65
|
|
|
|
Canceled
|
(39,215
|
)
|
|
$
|
17.88
|
|
|
|
Forfeited
|
(54,560
|
)
|
|
$
|
19.25
|
|
|
|
Outstanding at March 31, 2019
|
297,173
|
|
|
$
|
17.37
|
|
|
2.1 years
|
There were
no
market-based RSUs granted during fiscal 2019 or 2018. The fair value of each market-based RSU granted during fiscal
2017
was estimated on the date of grant using a Monte Carlo simulation model with the following assumptions:
|
|
|
|
|
March 31, 2017
|
Expected dividend yield at time of grant
|
2.99
|
%
|
Expected stock price volatility
|
33
|
%
|
Risk-free interest rate
|
1.20
|
%
|
The fair value of each performance-based and service-based RSU granted to employees was estimated on the day of grant based on the closing price of the Company's common stock reduced by the present value of the expected dividend stream during the vesting period using the risk-free interest rate. The fair value of each service-based RSU granted to directors, for which dividend equivalents are paid upon vesting of the underlying awards, was estimated on the day of grant based on the closing price of the Company's common stock.
The total fair value of restricted stock units vested during fiscal
2019
,
2018
and
2017
was
$1,204,000
,
$1,108,000
and
$806,000
, respectively.
As of March 31,
2019
, there was
$2,351,000
of total unrecognized compensation cost related to non-vested RSUs granted under the Company’s equity incentive plans which is expected to be recognized over a weighted average period of
1.9
years.
Compensation cost related to RSUs recognized in operating results (included in selling, general and administrative expenses) was
$1,666,000
,
$1,368,000
and
$1,118,000
in the years ended March 31,
2019
,
2018
and
2017
, respectively, and the associated future income tax benefit recognized was
$0
,
$345,000
and
$431,000
in the years ended March 31,
2019
,
2018
and
2017
, respectively. During the fiscal 2019 annual employee grant, the Company issued performance-based RSUs. As of
March 31, 2019
, the Company assessed the likelihood of achievement to be improbable over the
three
-year term of the grant and no compensation cost related to this grant was recognized. The Company will reassess the probability of achievement on a quarterly basis until the expiration of the grant.
(6) RETIREMENT BENEFIT PLANS
Profit Sharing Plans
The Company maintains defined contribution profit sharing and 401(k) plans covering substantially all of the employees of the Company and its subsidiaries as of March 31,
2019
. Annual contributions under the plan are determined by the Board of Directors of the Company. Consolidated expense related to the plans for the years ended March 31,
2019
,
2018
and
2017
was
$1,553,000
,
$1,233,000
and
$864,000
, respectively.
Postretirement Medical Plan
The Company administers a postretirement medical plan covering certain persons who are employees or former employees of a former subsidiary. The plan is unfunded and frozen to new participants. The following table provides a reconciliation of the benefit obligation for the postretirement medical plan (in thousands):
|
|
|
|
|
|
|
|
|
|
For the Years Ended March 31,
|
|
2019
|
|
2018
|
Benefit obligation at beginning of year
|
$
|
730
|
|
|
$
|
787
|
|
Interest cost
|
26
|
|
|
30
|
|
Actuarial gain
|
(46
|
)
|
|
(22
|
)
|
Benefits paid
|
(62
|
)
|
|
(65
|
)
|
Benefit obligation at end of year
|
$
|
648
|
|
|
$
|
730
|
|
As of March 31,
2019
,
$65,000
of the benefit obligation was recorded in accrued other expenses and
$583,000
was recorded in other long-term obligations in the consolidated balance sheet. As of March 31,
2018
,
$62,000
of the benefit obligation was recorded in accrued other expenses and
$668,000
was recorded in other long-term obligations in the consolidated balance sheet.
The net loss recognized in accumulated other comprehensive income (loss) as of March 31,
2019
was
$17,000
, net of tax, and the actuarial gain/loss expected to be amortized from accumulated other comprehensive loss into net periodic benefit cost during fiscal
2020
is
zero
.
The assumptions used to develop the net periodic benefit cost for the years ended
March 31, 2019
,
2018
and
2017
were a discount rate of
3.75%
,
4.00%
, and
4.25%
, respectively, and assumed health care cost trend rate of
9%
for fiscal 2019,
2018
and
2017
, trending down to an ultimate rate of
5%
in
2027
. The assumption used to develop the benefit obligation as of the years ended
March 31, 2019
and
2018
was a discount rate of
4.00%
and
3.75%
, respectively. The discount rate is determined based on the average of the FTSE Pension Liability Index, Moody's Long Term Corporate Bond Yield, and Moody's Seasoned Aaa Corporate Bond Yield.
Net periodic benefit costs for the postretirement medical plan were
$26,000
,
$30,000
and
$33,000
for the years ended March 31,
2019
,
2018
and
2017
, respectively.
Pension Plan
The Company administers a defined benefit pension plan that was acquired through the acquisition of McCall and covers certain employees of its United Kingdom subsidiary. The plan covers employees who meet the eligibility requirements as defined. The Company's funding policy is to make the minimum annual contribution that is required by applicable regulations, plus such amounts as the Company may determine to be appropriate from time to time. The plan is frozen to future accrual of benefits.
Reconciliations of changes in the defined benefit obligation, fair value of plan assets and statement of funded status are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
For the Years Ended March 31,
|
|
2019
|
|
2018
|
Change in benefit obligation:
|
|
|
|
Benefit obligation as of April 1, 2018 and 2017
|
$
|
3,883
|
|
|
$
|
4,027
|
|
Interest cost
|
88
|
|
|
107
|
|
Plan amendment
|
46
|
|
|
—
|
|
Actuarial gain
|
(243
|
)
|
|
(233
|
)
|
Benefits paid
|
(882
|
)
|
|
(455
|
)
|
Foreign currency impact
|
(262
|
)
|
|
437
|
|
Benefit obligation as of March 31, 2019 and 2018
|
$
|
2,630
|
|
|
$
|
3,883
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
Fair value of assets as of April 1, 2018 and 2017
|
$
|
4,453
|
|
|
$
|
3,929
|
|
Actual return on plan assets
|
105
|
|
|
451
|
|
Employer contributions
|
131
|
|
|
66
|
|
Benefits paid
|
(882
|
)
|
|
(455
|
)
|
Foreign currency impact
|
(304
|
)
|
|
462
|
|
Fair value of plan assets as of March 31, 2019 and 2018
|
$
|
3,503
|
|
|
$
|
4,453
|
|
|
|
|
|
Funded status as of March 31, 2019 and 2018
|
$
|
873
|
|
|
$
|
570
|
|
As of March 31, 2019 and March 31, 2018, the net pension asset of
$873,000
and
$570,000
, respectively, was recorded in other assets in the consolidated balance sheets.
The net gain recognized in accumulated other comprehensive income (loss) as of
March 31, 2019
and 2018 was
$431,000
and
$304,000
, net of tax, respectively. There is an estimated net gain of
$161,000
, prior service cost of
$35,000
and
no
transition asset or obligation for the defined benefit pension plan that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost during fiscal 2020.
The components of net periodic pension benefit for the years ended
March 31, 2019
and
2018
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
For the Years Ended March 31,
|
|
2019
|
|
2018
|
Interest cost
|
$
|
88
|
|
|
$
|
107
|
|
Expected return on plan assets
|
(151
|
)
|
|
(148
|
)
|
Net periodic pension benefit
|
$
|
(63
|
)
|
|
$
|
(41
|
)
|
The assumptions used to develop the net periodic pension benefit was
2.6%
and
2.7%
for the years ended
March 31, 2019
and
2018
, respectively. The assumptions used to develop the benefit obligation as of
March 31, 2019
and
2018
was a discount rate of
2.3%
and
2.6%
, respectively. The Company has estimated the long-term rate of return on plan assets based primarily on contractual agreements with an insurance company. This rate of return approximated
3.8%
during fiscal
2019
and
2018
.
The Company's overall investment strategy is to outsource investment risk to an insurance company in return for a contractual rate of return. Funds are deposited with the insurance company in return for an agreed upon interest rate return on the principal balance.
The accounting guidance on fair value measurements specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques (Level 1, 2 and 3). See Note 10 for a discussion of the fair value hierarchy. The fair values of the pension plan assets represents a guaranteed investment contract with an insurance company as of
March 31, 2019
and
2018
. The guaranteed investment contract is a Level 3 asset.
The Company expects to make contributions of
$65,000
to the pension plan in fiscal
2020
. The following table reflects the total benefits expected to be paid from the pension plan (in thousands):
|
|
|
|
|
Fiscal
|
|
2020
|
$
|
—
|
|
2021
|
—
|
|
2022
|
103
|
|
2023
|
52
|
|
2024
|
373
|
|
2025-2029
|
790
|
|
(7) INCOME TAXES
Income (loss) before income tax expense (benefit) was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended March 31,
|
|
2019
|
|
2018
|
|
2017
|
United States
|
$
|
(48,233
|
)
|
|
$
|
(51,270
|
)
|
|
$
|
14,502
|
|
Foreign
|
2,792
|
|
|
5,211
|
|
|
15,185
|
|
|
$
|
(45,441
|
)
|
|
$
|
(46,059
|
)
|
|
$
|
29,687
|
|
The following table summarizes the provision (benefit) for U.S. federal, state and foreign taxes on income (loss) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended March 31,
|
|
2019
|
|
2018
|
|
2017
|
Current:
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
2,828
|
|
|
$
|
728
|
|
State
|
(57
|
)
|
|
236
|
|
|
352
|
|
Foreign
|
1,425
|
|
|
1,522
|
|
|
1,711
|
|
|
1,368
|
|
|
4,586
|
|
|
2,791
|
|
Deferred:
|
|
|
|
|
|
Federal
|
$
|
4,623
|
|
|
$
|
(11,199
|
)
|
|
$
|
(1,260
|
)
|
State
|
2,949
|
|
|
(2,200
|
)
|
|
(161
|
)
|
Foreign
|
(836
|
)
|
|
(726
|
)
|
|
(187
|
)
|
|
6,736
|
|
|
(14,125
|
)
|
|
(1,608
|
)
|
|
$
|
8,104
|
|
|
$
|
(9,539
|
)
|
|
$
|
1,183
|
|
The differences between the statutory and effective federal income tax rates on income before income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended March 31,
|
|
2019
|
|
2018
|
|
2017
|
U.S. federal statutory rate
|
$
|
(9,543
|
)
|
|
$
|
(14,509
|
)
|
|
$
|
10,390
|
|
State income taxes, less federal benefit
|
60
|
|
|
(1,681
|
)
|
|
159
|
|
Non-deductible goodwill impairment
|
—
|
|
|
2,632
|
|
|
—
|
|
Foreign tax rate differential
|
(256
|
)
|
|
(953
|
)
|
|
(2,258
|
)
|
Bargain purchase gain
|
—
|
|
|
—
|
|
|
(6,214
|
)
|
U.S. tax legislation - revaluation of net deferred tax assets and liabilities
|
—
|
|
|
1,939
|
|
|
—
|
|
U.S. tax legislation - tax on unremitted foreign earnings
|
—
|
|
|
2,866
|
|
|
—
|
|
Change in tax reserves and valuation allowance
|
16,971
|
|
|
152
|
|
|
(562
|
)
|
Tax effect of GILTI (U.S. tax reform)
|
798
|
|
|
—
|
|
|
—
|
|
Other permanent differences
|
(32
|
)
|
|
(133
|
)
|
|
(58
|
)
|
Other, net
|
106
|
|
|
148
|
|
|
(274
|
)
|
|
$
|
8,104
|
|
|
$
|
(9,539
|
)
|
|
$
|
1,183
|
|
The Tax Cuts and Jobs Act (the "Tax Act"), was enacted in the U.S. on December 22, 2017. The Tax Act reduced the U.S. federal corporate income tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of foreign subsidiaries that were previously deferred and created new taxes on certain foreign earnings. ASC 740, "Accounting for Income Taxes," required companies to recognize the effect of the tax law changes in the period of enactment for those provisions that had an immediate accounting effect.
Given the significance of the legislation, the Securities and Exchange Commission staff issued Staff Accounting Bulletin 118, "Income Tax Accounting Implications of the Tax Cuts and Jobs Act" ("SAB 118"), which allowed registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations.
In fiscal 2018, the Company accrued
$2,866,000
of tax expense for the one-time transition tax and recognized a tax benefit of
$3,228,000
to re-measure deferred taxes. As of December 31, 2018, the Company completed the accounting for the effects of the Tax Act. In conjunction with filing its fiscal 2018 U.S. federal income tax return, the Company elected to offset the accumulated earnings of foreign subsidiaries subject to the one-time transition tax against other tax losses incurred in fiscal 2018. The net effect of that election eliminated the previously recorded
$2,866,000
transition tax liability but correspondingly reduced the Company’s federal tax net operating loss carryforward to future years. The accounting effect on net tax expense was zero.
In fiscal 2019, the Tax Act subjected the Company to a tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries, base erosion anti-abuse tax (“BEAT”), foreign derived intangible income tax (“FDII”), and IRS Section 163(j) interest limitation (“Interest Limitation”). Companies can make an accounting election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or treat GILTI tax as a current period expense. The Company has elected to account for GILTI tax as a current period expense. In fiscal 2019, all GILTI was offset by other taxable losses, no BEAT was incurred, and the impact of FDII was immaterial. The Company incurred an Interest Limitation, resulting in a deferred tax asset of
$982,000
related to interest expense deduction carried forward, which was fully offset by a valuation allowance, as discussed below.
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 most recent three-year period. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth.
On the basis of that evaluation, as of December 31, 2018, a full valuation allowance was recorded to fully offset our U.S. net deferred tax assets, as they more likely than not will not be realized. The amount of the deferred tax assets considered realizable, however, could be adjusted if estimates of future taxable income are increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence, such as our projections for growth.
Income tax benefits related to the exercise of stock options and vesting of restricted stock units reduced current taxes payable by
$0
,
$243,000
and
$687,000
in fiscal
2019
,
2018
and
2017
, respectively.
Deferred taxes are recorded based upon differences between the financial statement and tax bases of assets and liabilities and available net operating loss and credit carryforwards. The following temporary differences gave rise to net deferred income tax assets (liabilities) as of March 31,
2019
and
2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
2019
|
|
2018
|
Deferred income tax assets:
|
|
|
|
Inventories
|
$
|
4,060
|
|
|
$
|
1,820
|
|
Accrued expenses
|
2,597
|
|
|
1,523
|
|
Federal net operating loss and credit carryforwards
|
7,740
|
|
|
5,204
|
|
State net operating loss and credit carryforwards
|
17,381
|
|
|
19,397
|
|
Foreign net operating loss carryforwards
|
4,676
|
|
|
4,598
|
|
Intangibles
|
7,226
|
|
|
4,361
|
|
Share-based compensation
|
1,724
|
|
|
1,986
|
|
|
45,404
|
|
|
38,889
|
|
Valuation allowance
|
(38,758
|
)
|
|
(23,312
|
)
|
|
6,646
|
|
|
15,577
|
|
Deferred income tax liabilities:
|
|
|
|
Property, plant and equipment
|
7,174
|
|
|
6,529
|
|
Other
|
91
|
|
|
248
|
|
|
7,265
|
|
|
6,777
|
|
Net deferred income tax asset (liability)
|
$
|
(619
|
)
|
|
$
|
8,800
|
|
As of March 31,
2019
and
2018
, the Company had potential federal income tax benefits of $
7,740,000
and $
5,204,000
, respectively, from federal net operating losses that do not expire. As of March 31,
2019
and
2018
, the Company had potential state income tax benefits of
$17,381,000
(net of federal tax of
$4,620,000
) and
$19,397,000
(net of federal tax of
$5,156,000
), respectively, from state deferred tax assets and state net operating loss carryforwards that expire in various years through
2039
. As of March 31,
2019
and
2018
, the Company had potential foreign income tax benefits of $
4,676,000
and $
4,598,000
, respectively, from foreign net operating and capital losses, the majority of which do not expire. As of March 31,
2019
and
2018
, the Company provided valuation allowances of
$38,758,000
and
$23,312,000
, respectively. The valuation allowance reflects management’s assessment of the portion of the deferred tax asset that more likely than not will not be realized through future taxable earnings or implementation of tax planning strategies.
The Company recognizes in its consolidated financial statements the impact of a 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. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
2019
|
|
2018
|
Gross unrecognized tax benefits at April 1
|
$
|
1,852
|
|
|
$
|
1,199
|
|
Additions based on tax positions related to the current year
|
—
|
|
|
24
|
|
Additions based on tax positions related to the Simplicity acquisition
|
—
|
|
|
774
|
|
Reductions for tax positions of prior years
|
(237
|
)
|
|
(145
|
)
|
Gross unrecognized tax benefits at March 31
|
$
|
1,615
|
|
|
$
|
1,852
|
|
The total amount of gross unrecognized tax benefits as of March 31,
2019
of
$1,615,000
was classified in long-term obligations in the accompanying consolidated balance sheet and the amount that would favorably affect the effective tax rate in future periods, if recognized, is
$949,000
. The Company does not anticipate any significant changes to the amount of gross unrecognized tax benefits in the next 12 months.
The Company recognizes potential accrued interest and/or penalties related to unrecognized tax benefits in income tax expense in the consolidated statements of operations. Approximately
$528,000
of interest and penalties are accrued as of March 31,
2019
,
$12,000
of which was recorded during the current year.
The Company is subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years prior to fiscal 2016. State income tax returns generally remain open back to fiscal 2013 and foreign income tax returns generally remain open back to fiscal 2006 in major jurisdictions in which the Company operates.
(8) 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.
Before being amended on November 2, 2018 (the “November 2018 Amendment”), the Prior Credit Facility had a Committed Amount that adjusted upwards and downwards on a periodic basis among “low”, “medium” and “high” levels (each a “Commitment Level”), as follows:
|
|
|
|
|
|
Commitment Period Description
|
|
Commitment Period Time Frame
|
|
Commitment Level
|
Low
|
|
February 1 to June 30 (5 months)
|
|
$50,000,000
|
Medium
|
|
July 1 to October 31 (4 months)
|
|
$100,000,000
|
High
|
|
November 1 to January 31 (3 months)
|
|
$150,000,000
|
Prior to the November 2018 Amendment, the Company had the option under the Prior Credit Facility to increase the Commitment Level during part of any Low Commitment Period from
$50,000,000
to an amount not less than
$62,500,000
and not in excess of
$125,000,000
; except that the Commitment Level must remain at
$50,000,000
for at least
three
consecutive months during each Low Commitment Period. During all or part of any Medium Commitment Period, the Company had the option to increase the Commitment Level from
$100,000,000
to an amount not in excess
$125,000,000
. Prior to the November 2018 Amendment, the Prior Credit Facility had a maturity date of March 16, 2020.
The Prior Credit Facility contained financial covenants requiring the Company to maintain as of the last day of each fiscal quarter: (i) a tangible net worth of not less than
$170,000,000
, and (ii) an interest coverage ratio of not less than
3.50
to
1.00
. The Prior Credit Facility also contained covenants that addressed, among other things, the ability of the Company and its subsidiaries to incur additional indebtedness; grant liens on their assets; engage in mergers, acquisitions, divestitures and/or sale-leaseback transactions; pay dividends and make other distributions in respect of their capital stock; make investments and capital expenditures; and enter into “negative pledge” agreements with respect to their assets. The restriction on the payment of dividends applied only upon the occurrence and continuance of a Company default under the Prior Credit Facility, or when a dividend payment would give rise to such a default. As of March 31, 2018, the Company was in compliance with all debt covenants under the Prior Credit Facility.
The November 2018 Amendment was an agreement in which the lenders under the Prior Credit Facility waived certain events of default thereunder, and the parties amended certain provisions thereof. The events of default that were waived were based on: (A) the Company’s non-compliance as of September 30, 2018 with the financial covenants requiring the Company to maintain: (i) a minimum tangible net worth of at least
$170,000,000
, and (ii) an interest coverage ratio of not less than
3.50
to 1.00; and (B) the making by the Company of certain payments otherwise permitted under the Prior Credit Facility but which were not permitted due to the existence of the foregoing events of default.
The November 2018 Amendment modified the credit agreement that governed the Prior Credit Facility by (i) reducing the Committed Amount to
$100,000,000
until January 31, 2019, and to
$50,000,000
from February 1, 2019 until facility expiration; (ii) providing the lenders with a consent right on all acquisitions; (iii) effectively restricting any further repurchases, redemptions or retirements by the Company of the Company’s capital stock; (iv) providing for a borrowing base (the “Borrowing Base”) based on specified percentage amounts of the Company’s domestic accounts receivable and inventory; (v) limiting the aggregate amount that can be used by the Company at any one time for borrowings and letters of credit to the lesser of the Committed Amount and the Borrowing Base; (vi) increasing the marginal per annum interest rate applicable to borrowings from
0.95%
to (a)
2.00%
from November 1, 2018 through December 31, 2018, (b)
3.00%
from January 1, 2019 through January 31, 2019, and (c)
3.50%
from February 1, 2019 until expiration; and (vii) reducing the minimum required interest coverage ratio to
1.05
to 1.00. Under the November 2018 Amendment, the lenders received a collateral security interest in all of the Company’s domestic property and assets, including all accounts receivable, inventory, equipment, general intangible assets, and commercial personal property.
On February 6, 2019, the Company and the lenders under the Prior Credit Facility entered into a Waiver Agreement (“Waiver Agreement”) in which the lenders waived events of default that then existed under the Prior Credit Facility. The events of default that were waived were based on: (A) the Company’s non-compliance as of December 31, 2018 with financial covenants requiring the Company to maintain: (i) a minimum tangible net worth of at least
$170,000,000
, and (ii) an interest coverage ratio as of that date of not less than
1.05
to 1.00; and (B) the Company’s partial non-compliance with covenants contained in the November 2018 Amendment requiring the provision of certain documents to the lenders and/or the administrative agent within specified timeframes. Under the Waiver Agreement, the Company paid a waiver fee of
$225,000
. As part of the Waiver Agreement, the Company agreed to repay and terminate the Prior Credit Facility by not later than March 7, 2019 and waived the 30-day cure period that would otherwise have applied if the Prior Credit Facility was not repaid and terminated by such date.
On March 7, 2019, the Company and certain of its subsidiaries (together with the Company, the “Borrowers”) entered into the ABL Credit Facility and concurrently repaid and terminated the Prior Credit Facility. The credit agreement for the ABL Credit Facility (the “ABL Credit Agreement”) provides for a
$125,000,000
revolving credit facility, with sublimits of
$10,000,000
for letters of credit and
$12,500,000
for swingline loans. Availability under the ABL Credit Facility is equal to the lesser of
$125,000,000
or a Borrowing Base (as defined in the ABL Credit Agreement), 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 financial covenants contained in the ABL Credit Agreement, as described below. The Borrowing Base consists of specified advance rates applied to certain of the Borrowers’ assets, including accounts receivable, inventory, equipment and real estate, as further set forth in the ABL Credit Agreement. The Borrowers may request an increase of up to
$25,000,000
to the ABL Credit Facility on the terms set forth in the ABL Credit Agreement. The ABL Credit Facility has a maturity date of March 7, 2024, unless earlier terminated.
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 Agreement) plus an applicable rate, subject to adjustment if an event of default under the Credit Agreement 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 Agreement) as further set forth in the ABL Credit Agreement. 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 Borrowers, including certain real estate, subject to certain exceptions and exclusions as set forth in the ABL Credit Agreement and other loan documents, including the Pledge and Security Agreement (the “Pledge Agreement”) entered into by the Borrowers and the Agent contemporaneously with their execution of the ABL Credit Agreement.
The ABL Credit Facility contains certain affirmative and negative covenants that are binding on the Borrowers, including, but not limited to, restrictions (subject to specified exceptions and qualifications) on the ability of the Borrowers 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 Borrowers to abide by certain financial covenants calculated for the Company and its subsidiaries. Specifically, the ABL Credit Agreement requires the Company to not permit the Fixed Charge Coverage Ratio (as defined in the ABL Credit Agreement), as of the end of any fiscal quarter (commencing with the fiscal quarter ending June 30, 2019), to be less than
1.00
to 1.00. The ABL Credit Agreement also requires the Borrowers to maintain the following minimum EBITDA (as defined in the ABL Credit Agreement): (i) at the end of the fiscal quarter ending June 30, 2019, EBITDA for the 3-month period then ended of not less than
$4,310,000
; (ii) at the end of the fiscal quarter ending September 30, 2019, EBITDA for the 6-month period then ended of not less than
$10,193,000
; and (iii) at the end of the fiscal quarter ending December 31, 2019, EBITDA for the 9-month period then ended of not less than
$20,012,000
. See Note 15 for subsequent event.
The ABL Credit Agreement 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 Agreement
o
r other loan documents to be in full force and effect, certain ERISA events and judgments. The ABL Credit Agreement also contains certain prepayment provisions, representations, warranties and conditions. As of March 31, 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 Borrowers under the ABL Credit Facility. Accordingly, the Company has classified its outstanding loan balance under the ABL Credit Facility as of March 31, 2019 as a current liability.
As of March 31,
2019
, there was
$26,139,000
outstanding under the ABL Credit Facility. As of March 31, 2018 there was
$40,000,000
outstanding under the Prior Credit Facility. For the fiscal year ended March 31, 2019, the weighted average interest rate for borrowings under the Prior Credit Facility and ABL Credit Facility was
4.23%
. For the fiscal year ended March 31, 2018, the weighted average interest rate for borrowings under the Prior Credit Facility was
2.49%
. The average and peak borrowings under the ABL Credit Facility and Prior Credit Facility were $
48,676,000
and $
73,695,000
, respectively, for the year ended March 31,
2019
. The average and peak borrowings under the Prior Credit Facility were
$21,526,000
and
$67,766,000
, respectively, for the year ended March 31, 2018. Outstanding letters of credit were were
$2,182,000
as of March 31, 2019. These letters of credit guarantee funding of workers compensation claims and also guarantee the funding of a lease security deposit.
The Company also finances certain equipment which is classified in the accompanying consolidated balance sheets as of March 31,
2019
and
2018
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
2019
|
|
2018
|
Current portion of long-term debt
|
$
|
173
|
|
|
$
|
154
|
|
Long-term debt, net of current portion
|
—
|
|
|
108
|
|
The Company leases certain equipment under capital leases. The future minimum annual lease payments, including interest, associated with the capital lease obligations are as follows (in thousands):
|
|
|
|
|
Fiscal
|
|
2020
|
$
|
145
|
|
2021
|
12
|
|
2022
|
1
|
|
2023
|
—
|
|
2024
|
—
|
|
Total minimum lease obligations
|
158
|
|
Less amount representing interest at 4.89%
|
(2
|
)
|
Present value of future minimum lease obligations
|
$
|
156
|
|
Long-term debt, including capital lease obligations, mature as follows as of
March 31, 2019
(in thousands):
|
|
|
|
|
Fiscal
|
|
2020
|
$
|
316
|
|
2021
|
12
|
|
2022
|
1
|
|
2023
|
—
|
|
2024
|
—
|
|
Total
|
$
|
329
|
|
(9) OPERATING LEASES
The Company maintains various lease arrangements for property and equipment. The future minimum rental payments associated with all non-cancelable lease obligations are as follows (in thousands):
|
|
|
|
|
Fiscal
|
|
2020
|
$
|
10,520
|
|
2021
|
9,360
|
|
2022
|
8,446
|
|
2023
|
7,364
|
|
2024
|
6,200
|
|
Thereafter
|
21,818
|
|
Total
|
$
|
63,708
|
|
The Company records rent expense on a straight-line basis over the lease term. Rent expense was
$11,482,000
,
$9,423,000
and
$6,468,000
for the years ended March 31,
2019
,
2018
and
2017
, respectively. Sublease income was
$200,000
,
$341,000
and
$194,000
for the years ended March 31,
2019
,
2018
and
2017
, respectively.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
Recurring Fair Value Measurements
The Company uses certain derivative financial instruments as part of its risk management strategy to reduce interest rate and foreign currency risk. The Company recognizes 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 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. The fair value of the interest rate swap agreement as of March 31, 2018 was
$110,000
. There was
no
interest rate swap agreement as of March 31, 2017. There were
no
foreign currency contracts outstanding as of March 31,
2019
and
2018
.
The Company maintains a nonqualified Deferred Compensation Plan (the "Deferred Comp Plan") for qualified employees. The Plan provides eligible key employees with the opportunity to elect to defer up to
50%
of their eligible compensation under the Plan. The Company may make matching or discretionary contributions, at the discretion of the Board. All compensation deferred under the SERP and 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
March 31, 2019
and 2018. The employees that maintained account balances under the old nonqualified Supplemental Executive Retirement Plan ("SERP") have been transferred to the new Deferred Comp Plan during the fiscal year.
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 deferred compensation arrangements with
two
former executives. The cash surrender value of the policies are recorded in other long-term assets in the consolidated balance sheets and are based on quotes obtained from the insurance company as of March 31,
2019
and
2018
.
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 liabilities in the consolidated balance sheet as of 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
|
|
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 sheet are categorized based on the inputs to the valuation techniques as follows:
Level 1 – Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access.
Level 2 – Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Examples of Level 2 inputs included 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 March 31,
2019
and
2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
Quoted Prices
In Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
(in thousands)
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
Quoted Prices
In Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
(in thousands)
|
Assets:
|
|
|
|
|
|
|
|
Marketable securities
|
$
|
359
|
|
|
$
|
359
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Cash surrender value of life insurance policies
|
2,007
|
|
|
—
|
|
|
2,007
|
|
|
—
|
|
Total assets
|
$
|
2,366
|
|
|
$
|
359
|
|
|
$
|
2,007
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Interest rate swap agreement
|
$
|
110
|
|
|
$
|
—
|
|
|
$
|
110
|
|
|
$
|
—
|
|
Deferred compensation plans
|
776
|
|
|
776
|
|
|
—
|
|
|
—
|
|
Total liabilities
|
$
|
886
|
|
|
$
|
776
|
|
|
$
|
110
|
|
|
$
|
—
|
|
Cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are reflected at carrying value in the consolidated balance sheets as such amounts are a reasonable estimate of their fair values due to the short-term nature of these instruments. The outstanding balance of the Company's 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, 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, during fiscal 2019, the Company acquired substantially all of the net assets and business of Fitlosophy on June 1, 2018 and determined that the aggregate fair value of the definite life tradename was $
2,032,000
. 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. At the date of acquisition, the estimated fair value of the contingent earn-out consideration was $
1,600,000
. The Company estimated the fair value of the 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).
Also discussed in Note 2, during fiscal 2018, the Company acquired substantially all of the net assets and business of Simplicity on November 3, 2017 and determined that the aggregate fair value of the acquired intangible assets, consisting of tradenames, customer lists and favorable lease contracts, was $
20,982,000
. The Company estimated the fair value of the 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 preliminary fair value of the acquired inventory in the Simplicity acquisition was $
30,804,000
which was estimated as the selling price less costs of disposal (Level 2).
Additionally, as discussed in Note 2, during fiscal 2017, the Company acquired substantially all of the net assets and business of McCall on December 13, 2016 and determined that the fair value of acquired intangible assets, consisting of tradenames, was
$4,400,000
. Also during fiscal 2017, the Company acquired substantially all of the assets of Schiff on July 8, 2016 and determined that the aggregate fair value of the acquired intangible assets, consisting of customer relationships, was
$500,000
. 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). As discussed in Note 3, the Company acquired certain customer lists in the amount of
$100,000
during fiscal 2017. The Company estimated the fair value of the acquired customer lists as the amount paid to acquire such customer lists (Level 1). The Company determined that the aggregate fair value of the acquired inventory in the McCall and Schiff acquisitions was
$32,206,000
which was estimated as the selling price less costs of disposal (Level 2).
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 assumptions of 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 the first quarter fiscal 2019, the Company impaired the goodwill acquired during the Fitlosophy acquisition of
$1,390,000
and in the fourth quarter of fiscal 2019, the Company recorded additional non-cash pre-tax impairment charges of $
13,919,000
due to the full and partial impairment of customer lists and tradenames.
In the fourth quarter of fiscal 2018, the Company recorded a non-cash pre-tax impairment charge of $
33,358,000
due to the full impairment of goodwill and partial impairment of a tradename. See Note 3 for further discussion.
(11) 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.
(12) SEGMENT DISCLOSURE
The Company operates in a single reporting segment, the creative development, manufacture, procurement, distribution and sale of seasonal, gift and craft products, primarily to mass market retailers in the United States. The majority of the Company’s assets are maintained in the United States.
The Company’s detail of net sales from its various products is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended March 31,
|
|
2019
|
|
2018
|
|
2017
|
Craft
|
$
|
158,105
|
|
|
$
|
114,306
|
|
|
$
|
60,476
|
|
Gift
|
110,981
|
|
|
125,399
|
|
|
128,206
|
|
Seasonal
|
113,177
|
|
|
122,191
|
|
|
133,749
|
|
Total
|
$
|
382,263
|
|
|
$
|
361,896
|
|
|
$
|
322,431
|
|
One customer accounted for
23%
,
25%
and
30%
of net sales in fiscal
2019
,
2018
and
2017
, respectively. One other customer accounted for
13%
of net sales in fiscal 2019 and
10%
of net sales in each of fiscal
2018
and
2017
.
(13) RECENT ACCOUNTING PRONOUNCEMENTS
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. ASU 2018-02 requires entities to make new disclosures, regardless of whether they elect to reclassify tax effects. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. 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 May 2017, the FASB issued ASU 2017-09, “Compensation–Stock Compensation (Topic 718): Scope of Modification Accounting,” clarifying when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The new guidance is effective for the Company on a prospective basis beginning on April 1, 2018, with early adoption permitted. The Company adopted the guidance effective April 1, 2018 and it did not have an impact on its consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory" ("ASU 2016-16") which amends the accounting for income taxes. ASU 2016-16 requires the recognition of the income tax consequences of an intra-entity asset transfer, other than transfers of inventory, when the transaction occurs. For intra-entity transfers of inventory, the income tax effects will continue to be deferred until the inventory has been sold to a third party. The standard is effective in annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The new guidance is required to be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company adopted the guidance effective April 1, 2018 and it did not have an impact on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" ("ASU 2016-02"). ASU 2016-02 requires lessees to record a right-of-use asset and lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases,” to clarify how to apply certain aspects of the new standard. In July 2018, the FASB also issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” to give entities another option for transition and to provide lessors with a practical expedient to reduce the cost and complexity of implementing the new standard. The transition option allows entities to not apply the new standard in the comparative periods they present in their financial statements in the year of adoption. ASU 2016-02 and all subsequently issued amendments, collectively "ASC 842," is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The standard also requires certain quantitative and qualitative disclosures.
The Company developed a comprehensive project plan for the adoption of ASC 842 that included representatives from across the Company's domestic and international locations. The project plan included evaluating the Company's lease portfolio, analyzing the standard’s impact on the Company’s various types of lease contracts and identifying the reporting requirements of the new standard. The Company has selected and implemented a software solution to aid in the accounting and disclosure requirements under this new standard. Contract review is complete and are in the process of assessing any potential impacts on our internal controls and processes related to both the implementation and ongoing compliance of the new guidance. The Company also completed its evaluation of transition considerations and decided on the following: the Company elected the package of transition practical expedients related to lease identification, lease classification, and initial direct costs. The Company will also apply the transition requirements as of April 1, 2019. In addition, the Company made the following accounting policy elections: (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. We adopted the new standard on April 1, 2019 and used the effective date as our date of initial application. The standard will have a material impact on its consolidated balance sheets but will not have a material impact on its consolidated net income (loss).
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"). ASU 2014-09 provides a single model for entities to use in accounting for revenue arising from contracts with customers. The new standard also requires expanded disclosures regarding the qualitative and quantitative information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has subsequently issued additional, clarifying standards to address issues arising from implementation of the new revenue recognition standard. ASU 2014-09 and all subsequently issued amendments, collectively “ASC 606,” is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The standard permits the use of either a full retrospective or a modified retrospective approach.
The Company adopted ASC 606 on April 1, 2018 using the modified retrospective method. The amount and timing of revenue recognition was not impacted by the new standard, and therefore, no cumulative adjustment was recognized in retained earnings upon adoption. Certain liabilities for estimated product returns were inconsequential and have been reclassified to accrued customer programs from a contra-asset within accounts receivable, net, in the accompanying consolidated balance sheet as of March 31, 2019. Prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting methods.
(14) RESTRUCTURING PLANS
Business Restructuring
In the first quarter of fiscal 2019, the Company announced a restructuring plan to combine its operations in the United Kingdom and its operations in Australia. 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. As part of this restructuring plan, the Company recorded a restructuring charge of
$557,000
in the second quarter of fiscal 2019. 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
, which is included in restructuring expenses in the accompanying consolidated statement of operations. As of March 31, 2019, the remaining liability of
$39,000
was classified in accrued other liabilities in the accompanying consolidated balance sheet.
Selected information relating to the aforementioned restructuring follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Termination Costs
|
|
Facility Exit Costs
|
|
Other Costs
|
|
Total
|
Initial accrual
|
$
|
297
|
|
|
$
|
127
|
|
|
$
|
133
|
|
|
$
|
557
|
|
Charges to expense
|
132
|
|
|
122
|
|
|
141
|
|
|
395
|
|
Cash paid
|
(428
|
)
|
|
(225
|
)
|
|
(260
|
)
|
|
(913
|
)
|
Restructuring reserve as of March 31, 2019
|
$
|
1
|
|
|
$
|
24
|
|
|
$
|
14
|
|
|
$
|
39
|
|
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. In connection with this initiative, the Company recorded a restructuring reserve of
$797,000
for severance in the third quarter of fiscal 2019. As of March 31, 2019,
$634,000
of the remaining liability was classified in accrued other liabilities in the accompanying consolidated balance sheet.
Selected information relating to the aforementioned restructuring follows (in thousands):
|
|
|
|
|
|
Employee Termination Costs
|
Initial accrual
|
$
|
797
|
|
Charges to expense
|
(44
|
)
|
Cash paid
|
(119
|
)
|
Restructuring reserve as of March 31, 2019
|
$
|
634
|
|
(15) SUBSEQUENT EVENT
On May 23, 2019, the Company and certain of its subsidiaries (together with the Company, the “Borrowers”) entered into a Second Amendment (the “Amendment”) to its ABL Credit Facility, dated March 7, 2019. The Amendment reduces the aggregate principal amount of the revolving credit facility from
$125,000,000
to
$100,000,000
. Availability under the amended ABL Credit Facility is now equal to the lesser of
$100,000,000
or a Borrowing Base (as defined in the ABL Credit Agreement), 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 Credit Agreement), 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 period ending April 30, 2019 and continuing until the calendar month ending March 31, 2020, the Borrowers shall have, at the end of each calendar month set forth in the amended ABL Credit Agreement, 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 amended ABL Credit Agreement. The Amendment also requires capital expenditures (as defined in the amended ABL Credit Agreement) to not exceed
$8,000,000
for fiscal 2020.
Permitted Acquisitions (as defined in the ABL Credit Agreement) are no longer permitted under the amended ABL Credit Agreement, and certain Restricted Payments including dividends (as defined in the Credit Agreement) based upon meeting certain leverage ratio and average Availability criteria are no longer allowed.
Pursuant to the Amendment, the Borrowers are subject to a one-time structuring fee of
$100,000
and an amendment fee of
$850,000
, both payable to the Agent. As a result of the reduction of the aggregate principal amount, the Company is required to write-off approximately
$344,000
of previously capitalized deferred financing costs in May of fiscal 2020.
Performance Improvement Initiative
On May 8, 2019, 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. In connection with this restructuring plan, the Company recorded a severance accrual of approximately
$2,000,000
in fiscal 2020.