CSS INDUSTRIES INC - FORM 10-Q - XML - IDEA: XBRL DOCUMENT - February 8, 2012

(2)     DISCONTINUED OPERATIONS AND RESTRUCTURING CHARGES

On May 24, 2011, the Company approved a plan to close its Cleo manufacturing facility located in Memphis, Tennessee. The Company exited the Memphis facility in December 2011. During its fiscal year ending March 31, 2012, the Company expects to incur pre-tax expenses of up to $8,500,000 (inclusive of $2,503,000 and $7,582,000 expensed in the three and nine months ended December 31, 2011, respectively), which costs primarily relate to cash expenditures for facility and staff costs (approximately $6,500,000) and non-cash asset write-downs that were already recognized in the first six months of fiscal 2012 (approximately $2,000,000). The Company expects to complete the restructuring plan by March 31, 2012. In connection with this restructuring plan, the Company recorded a restructuring reserve of $3,042,000 in the first quarter of fiscal 2012 primarily related to severance of 573 employees. During the quarter and nine months ended December 31, 2011, there were restructuring charges of $2,286,000 and $3,620,000, respectively, primarily related to facility and severance costs. During the quarter and nine months ended December 31, 2011, the Company made payments of $2,246,000 and $4,747,000, respectively. Additionally during the second quarter, there was a non-cash reduction of $177,000 related to severance that was less than originally estimated. As of December 31, 2011, the remaining liability of $1,738,000 was classified in current liabilities of discontinued operations in the accompanying condensed consolidated balance sheet. The Company expects to pay the remaining cash expenditures through fiscal 2013. In the second quarter of fiscal 2012, the Company sold most of the remaining equipment located in Cleo’s Memphis, Tennessee manufacturing facility to a third party for $825,000. The Company received these proceeds during the second quarter. The Company also paid $883,000 in cash during fiscal 2012 relating to this plan which was expensed in fiscal 2011, and expects to pay approximately $200,000 in cash in the fourth quarter of fiscal 2012 that was expensed in fiscal 2011. These amounts remain subject to change due to uncertainty as to the final amount of costs related to the closure of this manufacturing facility. In fiscal 2012, the Company expects that a portion of these pre-tax expenses of $8,500,000 will be recorded in continuing operations (approximately $800,000) and the balance within discontinued operations (approximately $7,700,000). In the third quarter of fiscal 2012, the Company recorded $53,000 of these pre-tax expenses as selling, general and administrative expenses of continuing operations. The full year projected pre-tax expenses of $8,500,000 includes the $5,540,000 expenses recognized in the first quarter, $364,000 of expense offset by the $825,000 gain on the equipment sale in the second quarter, and the $2,450,000 in discontinued operations and the $53,000 in selling, general and administrative expenses of continuing operations in the third quarter of fiscal 2012.

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

On September 9, 2011, the Company’s Cleo subsidiary sold the Cleo Christmas gift wrap business and certain Cleo assets to Impact. Impact acquired the Christmas gift wrap portion of Cleo’s business and certain of Cleo’s assets relating to such business, including certain equipment, contract rights, customer lists, intellectual property and other intangible assets. Cleo’s remaining assets, including accounts receivable and inventory, were excluded from the sale. Cleo retained the right and obligation to fulfill all customer orders for Cleo Christmas gift wrap products for Christmas 2011. The purchase price was $7,500,000, of which $2,000,000 was paid to Cleo in cash at closing. The remainder of the purchase price was paid through the issuance by Impact of an unsecured subordinated promissory note, which provides for quarterly payments of interest at 7% and principal payments as follows: $500,000 on March 1, 2012; $2,500,000 on March 1, 2013; and all remaining principal and interest on March 1, 2014. As of December 31, 2011, $500,000 of this note receivable was recorded in other current assets and $5,000,000 of this note receivable was recorded in other long term assets in the accompanying condensed consolidated balance sheet. This transaction resulted in a pre-tax gain of $5,849,000. During the fourth quarter of fiscal 2011, the Company recorded a non-cash impairment charge of $11,051,000 as it determined that the fair value of the Cleo asset group was less than the carrying value.

The effective tax rates used to determine income tax expense of discontinued operations were based on the statutory tax rates in effect during the respective periods, adjusted for permanent differences related to the assets and liabilities not being transferred to Impact. The effective tax rates used in the calculations for each period were as follows:

As a result of the sale of its Cleo Christmas gift wrap business, the Company has reported these operations, including the operating income (loss) of the business and all exit activities, as discontinued operations, as shown in the following table (in thousands):

The following table presents the carrying values of the major accounts of discontinued operations that are included in the December 31, 2011 condensed consolidated balance sheet (in thousands):