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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
February 28, 2011
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File
No. 1-13859
American Greetings
Corporation
(Exact name of registrant as
specified in its charter)
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Ohio
(State or other
jurisdiction
of incorporation or organization)
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34-0065325
(I.R.S. Employer
Identification No.)
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One American Road, Cleveland, Ohio
(Address of principal
executive offices)
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44144
(Zip
Code)
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Registrants telephone number, including area code:
(216) 252-7300
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Class A Common Shares, Par Value $1.00
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
Class B Common Shares, Par Value $1.00
(Title of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. YES þ NO o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. YES o NO þ
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. YES þ NO o
Indicate by a check mark whether the registrant has submitted
electronically and posted on its corporate Website, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). YES þ NO o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See definition of
large accelerated filer accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act) YES o NO þ
State the aggregate market value of the voting stock held by
non-affiliates of the registrant as of the last business day of
the registrants most recently completed second fiscal
quarter, August 27, 2010 $729,061,401
(affiliates, for this purpose, have been deemed to be directors,
executive officers and certain significant shareholders).
Number of
shares outstanding as of April 27, 2011:
CLASS A COMMON 37,482,554
CLASS B COMMON 2,937,927
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the American Greetings Corporation Definitive Proxy
Statement for the Annual Meeting of Shareholders, to be filed
with the Securities and Exchange Commission within 120 days
after the close of the registrants fiscal year
(incorporated into Part III).
AMERICAN
GREETINGS CORPORATION
INDEX
PART I
Unless otherwise indicated or the context otherwise requires,
the Corporation, we, our,
us and American Greetings are used in
this report to refer to the businesses of American Greetings
Corporation and its consolidated subsidiaries.
OVERVIEW
Founded in 1906, American Greetings operates predominantly in a
single industry: the design, manufacture and sale of everyday
and seasonal greeting cards and other social expression
products. Greeting cards, gift wrap, party goods, stationery and
giftware are manufactured or sold by us in North America,
including the United States, Canada and Mexico, and throughout
the world, primarily in the United Kingdom, Australia and New
Zealand. In addition, our subsidiary, AG Interactive, Inc.,
distributes social expression products, including electronic
greetings, physical greeting cards incorporating consumer
photos, and a broad range of graphics and digital services and
products, through a variety of electronic channels, including
Web sites, Internet portals, instant messaging services and
electronic mobile devices. Design licensing is done primarily by
our subsidiary AGC, LLC, and character licensing is done
primarily by our subsidiaries, Those Characters From Cleveland,
Inc. and Cloudco, Inc. Our A.G. Industries, Inc. (doing business
as AGI In-Store) subsidiary manufactures custom display fixtures
for our products and products of others.
Our fiscal year ends on February 28 or 29. References to a
particular year refer to the fiscal year ending in February of
that year. For example, 2011 refers to the year ended
February 28, 2011.
PRODUCTS
American Greetings creates, manufactures
and/or
distributes social expression products including greeting cards,
gift wrap, party goods, giftware and stationery as well as
custom display fixtures. Our major domestic greeting card brands
are American Greetings, Recycled Paper Greetings, Papyrus,
Carlton Cards, Gibson, Tender Thoughts and Just For You. Our
other domestic products include AGI In-Store display fixtures,
as well as other paper product offerings such as Designware
party goods and Plus Mark gift wrap and boxed cards. Electronic
greetings and other digital content, services and products are
available through our subsidiary, AG Interactive, Inc. Our major
Internet brands are AmericanGreetings.com, BlueMountain.com,
Egreetings.com, Kiwee.com, Cardstore.com and Webshots.com.
Through its Webshots site, our AG Interactive business also
operates an online photo sharing space and through its
Cardstore.com site, our AG Interactive business provides
consumers the ability to purchase physical greeting cards,
including custom cards that incorporate their own photos and
sentiments. Until April 2011, we also operated PhotoWorks.com
through which we provided customers the ability to use their own
photos to create a variety of physical products in addition to
greeting cards, including calendars, on-line photo albums and
photo books. As we considered our strategy around these
photo-personalized physical products, we decided to de-emphasize
photo prints and other miscellaneous photo-personalized physical
products. As a result we wound down our PhotoWorks website. We
also create and license our intellectual properties, such as the
Care Bears and Strawberry Shortcake
characters. Information concerning sales by major product
classifications is included in Part II, Item 7.
BUSINESS
SEGMENTS
At February 28, 2011, we operated in four business
segments: North American Social Expression Products,
International Social Expression Products, AG Interactive and
non-reportable operating segments. For information regarding the
various business segments comprising our business, see the
discussion included in Part II, Item 7 and in
Note 16 to the Consolidated Financial Statements included
in Part II, Item 8.
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CONCENTRATION
OF CREDIT RISKS
Net sales to our five largest customers, which include mass
merchandisers and national drug store chains, accounted for
approximately 42%, 39% and 36% of total revenue in 2011, 2010
and 2009, respectively. Net sales to Wal-Mart Stores, Inc. and
its subsidiaries accounted for approximately 15%, 14% and 15% of
total revenue in 2011, 2010 and 2009, respectively. Net sales to
Target Corporation accounted for approximately 14% and 13% of
total revenue in 2011 and 2010, respectively, but less than 10%
of total revenue in 2009. No other customer accounted for 10% or
more of our consolidated total revenue. Approximately 54%, 51%
and 54% of the North American Social Expression Products
segments revenue in 2011, 2010 and 2009, respectively, was
attributable to its top five customers. Approximately 44%, 45%
and 39% of the International Social Expression Products
segments revenue in 2011, 2010 and 2009, respectively, was
attributable to its top three customers.
CONSUMERS
We believe that women purchase the majority of all greeting
cards sold and that the median age of our consumers is
approximately 46. We also believe that approximately 85% of
American households purchase greeting cards each year, the
average number of greeting card occasions for which cards are
purchased each year is approximately seven, and consumers
purchase approximately 15 greeting cards per year.
COMPETITION
The greeting card and gift wrap industries are intensely
competitive. Competitive factors include quality, design,
customer service and terms, which may include payments and other
concessions to retail customers under long-term agreements.
These agreements are discussed in greater detail below. There
are an estimated 3,000 greeting card publishers in the United
States, ranging from small family-run organizations to major
corporations. With the expansion of the Internet as a
distribution channel for greeting cards, together with the
growing use of technology by consumers to create personalized
greetings cards with digital photographs and other personalized
content, we are also seeing increased competition from greeting
card publishers as well as a wide range of personal publishing
businesses distributing greeting cards and other social
expression products directly to the individual consumer through
the Internet. In general, however, the greeting card business is
extremely concentrated. We believe that we are one of only two
main suppliers offering a full line of social expression
products. Our principal competitor is Hallmark Cards, Inc. Based
upon our general familiarity with the greeting card and gift
wrap industries and limited information as to our competitors,
we believe that we are the second-largest company in the
industry and the largest publicly owned greeting card company.
PRODUCTION
AND DISTRIBUTION
In 2011, our channels of distribution continued to be primarily
through mass retail, which is comprised of mass merchandisers,
discount retailers, chain drug stores and supermarkets. Other
major channels of distribution included card and gift retail
stores, department stores, military post exchanges, variety
stores and combo stores (stores combining food, general
merchandise and drug items). From time to time, we also sell our
products to independent, third-party distributors. Our AG
Interactive segment provides social expression content,
including electronic and physical greeting cards, through the
Internet and wireless platforms.
Many of our products are manufactured at common production
facilities and marketed by a common sales force. Our
manufacturing operations involve complex processes including
printing, die cutting, hot stamping and embossing. We employ
modern printing techniques which allow us to perform short runs
and multi-color printing, have a quick changeover and utilize
direct-to-plate
technology, which minimizes time to market. Our products are
manufactured globally, primarily at facilities located in North
America and the United Kingdom. We also source products from
domestic and foreign third party suppliers. Beginning on or
about March 2010, we discontinued manufacturing party goods and
now purchase our party goods from a third party vendor. The
physical products provided through our AG Interactive segment
are provided primarily by third party vendors. Additionally,
information by geographic area is included in Note 16 to
the Consolidated Financial Statements included in Part II,
Item 8.
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Production of our products is generally on a level basis
throughout the year, with the exception of gift wrap for which
production generally peaks in advance of the Christmas season.
Everyday inventories (such as birthday and anniversary related
products) remain relatively constant throughout the year, while
seasonal inventories peak in advance of each major holiday
season, including Christmas, Valentines Day, Easter,
Mothers Day, Fathers Day and Graduation. Payments
for seasonal shipments are generally received during the month
in which the major holiday occurs, or shortly thereafter.
Extended payment terms may also be offered in response to
competitive situations with individual customers. Payments for
both everyday and seasonal sales from customers that are on a
scan-based trading (SBT) model are received
generally within 10 to 15 days of the product being sold by
those customers at their retail locations. As of
February 28, 2011, three of our five largest customers in
2011 conduct business with us under an SBT model. The core of
this business model rests with American Greetings owning the
product delivered to its retail customers until the product is
sold by the retailer to the ultimate consumer, at which time we
record the sale. American Greetings and many of its competitors
sell seasonal greeting cards and other seasonal products with
the right of return. Sales of other products are generally sold
without the right of return. Sales credits for these products
are issued at our discretion for damaged, obsolete and outdated
products. Information regarding the return of product is
included in Note 1 to the Consolidated Financial Statements
included in Part II, Item 8.
During the year, we experienced no material difficulties in
obtaining raw materials from our suppliers.
INTELLECTUAL
PROPERTY RIGHTS
We have a number of trademarks, service marks, trade secrets,
copyrights, inventions, patents, and other intellectual
property, which are used in connection with our products and
services. Our designs, artwork, musical compositions,
photographs and editorial verse are protected by copyright. In
addition, we seek to register our trademarks in the United
States and elsewhere. We routinely seek protection of our
inventions by filing patent applications for which patents may
be granted. We also obtain license agreements for the use of
intellectual property owned or controlled by others. Although
the licensing of intellectual property produces additional
revenue, we do not believe that our operations are dependent
upon any individual invention, trademark, service mark,
copyright, patent or other intellectual property license.
Collectively, our intellectual property is an important asset to
us. As a result, we follow an aggressive policy of protecting
our rights in our intellectual property and intellectual
property licenses.
EMPLOYEES
At February 28, 2011, we employed approximately
7,400 full-time employees and approximately
17,400 part-time employees which, when jointly considered,
equate to approximately 16,100 full-time equivalent
employees. Approximately 1,200 of our employees are unionized
and covered by collective bargaining agreements.
The following table sets forth by location the unions
representing our employees, together with the expiration date,
if any, of the applicable governing collective bargaining
agreement. We believe that labor relations at each location in
which we operate have generally been satisfactory.
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Union
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Location
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Contract Expiration Date
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AMICUS GPMS
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Leeds, England
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N/A
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Australian Municipal, Administrative, Clerical &
Services Union
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South Victoria, Australia
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February 28, 2014
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International Brotherhood of Teamsters
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Bardstown, Kentucky
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March 23, 2014
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International Brotherhood of Teamsters
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Cleveland, Ohio
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March 31, 2013
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Workers United
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Greeneville, Tennessee
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October 19, 2011
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SUPPLY
AGREEMENTS
In the normal course of business, we enter into agreements with
certain customers for the supply of greeting cards and related
products. We view the use of such agreements as advantageous in
developing and maintaining business with our retail customers.
Under these agreements, the customer may receive from American
Greetings a combination of cash payments, credits, discounts,
allowances and other incentive
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considerations to be earned by the customer as product is
purchased from us over the stated term of the agreement or the
minimum purchase volume commitment. The agreements are
negotiated individually to meet competitive situations and,
therefore, while some aspects of the agreements may be similar,
important contractual terms vary. The agreements may or may not
specify American Greetings as the sole supplier of social
expression products to the customer. In the event an agreement
is not completed, in most instances, we have a claim for
unearned advances under the agreement.
Although risk is inherent in the granting of advances, we
subject such customers to our normal credit review. We maintain
an allowance for deferred costs based on estimates developed by
using standard quantitative measures incorporating historical
write-offs. In instances where we are aware of a particular
customers inability to meet its performance obligation, we
record a specific allowance to reduce the deferred cost asset to
our estimate of its value based upon expected recovery. These
agreements are accounted for as deferred costs. Losses
attributed to these specific events have historically not been
material. See Note 10 to the Consolidated Financial
Statements in Part II, Item 8, and the discussion
under the Deferred Costs heading in the
Critical Accounting Policies in Part II,
Item 7 for further information and discussion of deferred
costs.
ENVIRONMENTAL
AND GOVERNMENTAL REGULATIONS
Our business is subject to numerous foreign and domestic
environmental laws and regulations maintained to protect the
environment. These environmental laws and regulations apply to
chemical usage, air emissions, wastewater and storm water
discharges and other releases into the environment as well as
the generation, handling, storage, transportation, treatment and
disposal of waste materials, including hazardous waste. Although
we believe that we are in substantial compliance with all
applicable laws and regulations, because legal requirements
frequently change and are subject to interpretation, these laws
and regulations may give rise to claims, uncertainties or
possible loss contingencies for future environmental remediation
liabilities and costs. We have implemented various programs
designed to protect the environment and comply with applicable
environmental laws and regulations. The costs associated with
these compliance and remediation efforts have not and are not
expected to have a material adverse effect on our financial
condition, cash flows or operating results. In addition, the
impact of increasingly stringent environmental laws and
regulations, regulatory enforcement activities, the discovery of
unknown conditions and third party claims for damages to the
environment, real property or persons could also result in
additional liabilities and costs in the future.
The legal environment of the Internet is evolving rapidly in the
United States and elsewhere. The manner in which existing laws
and regulations will be applied to the Internet in general, and
how they will relate to our business in particular, is unclear
in many cases. Accordingly, we often cannot be certain how
existing laws will apply in the online context, including with
respect to such topics as privacy, defamation, pricing, credit
card fraud, advertising, taxation, sweepstakes, promotions,
content regulation, net neutrality, quality of products and
services and intellectual property ownership and infringement.
In particular, legal issues relating to the liability of
providers of online services for activities of their users are
currently unsettled both within the United States and abroad.
Numerous laws have been adopted at the national and state level
in the United States that could have an impact on our business.
These laws include the following:
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The CAN-SPAM Act of 2003 and similar laws adopted by a number of
states. These laws are intended to regulate unsolicited
commercial
e-mails,
create criminal penalties for unmarked sexually-oriented
material and
e-mails
containing fraudulent headers and control other abusive online
marketing practices.
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The Communications Decency Act, which gives statutory protection
to online service providers who distribute third-party content.
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The Digital Millennium Copyright Act, which is intended to
reduce the liability of online service providers for listing or
linking to third-party websites that include materials that
infringe copyrights or other rights of others.
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The Childrens Online Privacy Protection Act and the
Prosecutorial Remedies and Other Tools to End Exploitation of
Children Today Act of 2003, which are intended to restrict the
distribution of certain materials deemed harmful to children and
impose additional restrictions on the ability of online services
to collect user information from minors. In addition, the
Protection of Children From Sexual Predators Act of 1998
requires online service providers to report evidence of
violations of federal child pornography laws under certain
circumstances.
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Statutes adopted in the State of California require online
services to report certain breaches of the security of personal
data, and to report to California consumers when their personal
data might be disclosed to direct marketers.
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To resolve some of the remaining legal uncertainty, we expect
new U.S. and foreign laws and regulations to be adopted
over time that will be directly or indirectly applicable to the
Internet and to our activities. Any existing or new legislation
applicable to us could expose us to government investigations or
audits, prosecution for violations of applicable laws
and/or
substantial liability, including penalties, damages, significant
attorneys fees, expenses necessary to comply with such
laws and regulations or the need to modify our business
practices.
We post on our websites our privacy policies and practices
concerning the use and disclosure of user data. Any failure by
us to comply with our posted privacy policies, Federal Trade
Commission requirements or other privacy-related laws and
regulations could result in proceedings that could potentially
harm our business, results of operations and financial
condition. In this regard, there are a large number of federal
and state legislative proposals before the United States
Congress and various state legislative bodies regarding privacy
issues related to our business. It is not possible to predict
whether or when such legislation may be adopted, and certain
proposals, such as required use of disclaimers or explicit
opt-in mechanisms, if adopted, could harm our business through a
decrease in user registrations and revenues.
AVAILABLE
INFORMATION
We make available, free of charge, on or through the Investors
section of our www.corporate.americangreetings.com Web site, our
Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and, if applicable, amendments to those reports as soon as
reasonably practicable after such material is electronically
filed with or furnished to the Securities and Exchange
Commission (SEC). Copies of our filings with the SEC
also can be obtained at the SECs Internet site,
www.sec.gov. Information contained on our Web site shall not be
deemed incorporated into, or be part of, this report.
Our Corporate Governance Guidelines, Code of Business Conduct
and Ethics, and the charters of the Boards Audit
Committee, Compensation and Management Development Committee,
and Nominating and Governance Committee are available on or
through the Investors section of our
www.corporate.americangreetings.com Web site.
You should carefully consider each of the risks and
uncertainties we describe below and all other information in
this report. The risks and uncertainties we describe below are
not the only ones we face. Additional risks and uncertainties of
which we are currently unaware or that we currently believe to
be immaterial may also adversely affect our business, financial
condition, cash flows or results of operations. Additional
information on risk factors is included in Item 1.
Business and Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
There
are factors outside of our control that may decrease the demand
for our products and services, which may adversely affect our
performance.
Our success depends on the sustained demand for our products.
Many factors affect the level of consumer spending on our
products, including, among other things, general business
conditions, interest rates, the availability of consumer credit,
taxation, weather, fuel prices and consumer confidence in future
economic
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conditions, all of which are beyond our control. Beginning in
fiscal 2009, economic conditions deteriorated significantly in
the United States, and worldwide, and, while the economy has
improved, unemployment remains at historically high levels.
During periods of economic decline, when discretionary income is
lower, consumers or potential consumers could delay, reduce or
forego their purchases of our products and services, which
reduces our sales. In addition, during such periods, advertising
revenue in our AG Interactive businesses decline, as advertisers
reduce their advertising budgets. A prolonged economic downturn
or slow economic recovery may also lead to restructuring actions
and associated expenses.
Providing
new and compelling products is critical to our future
profitability and cash flow.
One of our key business strategies has been to gain profitable
market share through product leadership, providing relevant,
compelling and a superior product offering. As a result, the
need to continuously update and refresh our product offerings is
an ongoing, evolving process requiring expenditures and
investments that will continue to impact net sales, earnings and
cash flows over future periods. At times, the amount and timing
of such expenditures and investments depends on the success of a
product offering as well as the schedules of our retail
partners. We cannot assure you that this strategy will either
increase our revenue or profitability. In addition, even if our
strategy is successful, our profitability may be adversely
affected if consumer demand for lower priced, value cards
continues to expand, thereby eroding our average selling prices.
Our strategy may also have flaws and may not be successful. For
example, we may not be able to anticipate or respond in a timely
manner to changing customer demands and preferences for greeting
cards. If we misjudge the market, we may significantly sell or
overstock unpopular products and be forced to grant significant
credits, accept significant returns or write-off a significant
amount of inventory, which would have a negative impact on our
results of operations and cash flow. Conversely, shortages of
popular items could materially and adversely impact our results
of operations and financial condition.
We
rely on a few customers for a significant portion of our
sales.
A few of our customers are material to our business and
operations. Net sales to our five largest customers, which
include mass merchandisers and chain drug stores, accounted for
approximately 42%, 39% and 36% of total revenue for fiscal years
2011, 2010 and 2009, respectively. Approximately 54%, 51% and
54% of the North American Social Expression Products
segments revenue in 2011, 2010 and 2009, respectively, was
attributable to its top five customers, and approximately 44%,
45% and 39% of the International Social Expression Products
segments revenue in 2011, 2010 and 2009, respectively, was
attributable to its top three customers. Net sales to Wal-Mart
Stores, Inc. and its subsidiaries accounted for approximately
15%, 14% and 15% of total revenue in 2011, 2010 and 2009,
respectively, and net sales to Target Corporation accounted for
approximately 14% and 13% of total revenue in 2011 and 2010,
respectively. There can be no assurance that our large customers
will continue to purchase our products in the same quantities
that they have in the past. The loss of sales to one of our
large customers could materially and adversely affect our
business, results of operations, cash flows, and financial
condition.
Difficulties
in integrating acquisitions could adversely affect our business
and we may not achieve the cost savings and increased revenues
anticipated as a result of these acquisitions.
We continue to regularly evaluate potential acquisition
opportunities to support and strengthen our business. We cannot
be sure that we will be able to locate suitable acquisition
candidates, acquire candidates on acceptable terms or integrate
acquired businesses successfully. Future acquisitions could
cause us to take on additional compliance obligations as well as
experience dilution and incur debt, contingent liabilities,
increased interest expense, restructuring charges and
amortization expenses related to intangible assets, which may
materially and adversely affect our business, results of
operations and financial condition.
Integrating future businesses that we may acquire involves
significant challenges. In particular, the coordination of
geographically dispersed organizations with differences in
corporate cultures and management philosophies may increase the
difficulties of integration. The integration of these acquired
businesses has and will continue to require the dedication of
significant management resources, which may temporarily distract
managements attention from our
day-to-day
operations. The process of integrating operations may also cause
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an interruption of, or loss of momentum in, the activities of
one or more of our businesses and the loss of key personnel.
Employee uncertainty and distraction during the integration
process may also disrupt our business. Our strategy is, in part,
predicated on our ability to realize cost savings and to
increase revenues through the acquisition of businesses that add
to the breadth and depth of our products and services. Achieving
these cost savings and revenue increases is dependent upon a
number of factors, many of which are beyond our control. In
particular, we may not be able to realize the benefits of
anticipated integration of sales forces, asset rationalization,
systems integration, and more comprehensive product and service
offerings.
If
Schurman Fine Papers is unable to operate its retail stores
successfully, it could have a material adverse effect on
us.
On April 17, 2009, we sold our Retail Operations segment,
including all 341 of our card and gift retail store assets, to
Schurman Fine Papers (Schurman), which now operates
stores under the American Greetings, Carlton Cards and Papyrus
brands. Although we do not control Schurman, because Schurman is
licensing the Papyrus, American
Greetings and Carlton Cards names from us for
its retail stores, actions taken by Schurman may be seen by the
public as actions taken by us, which, in turn, could adversely
affect our reputation or brands. In addition, the failure of
Schurman to operate its retail stores profitably could have a
material adverse effect on us, our reputation and our brands,
and could materially and adversely affect our business,
financial condition, and results of operations, because, under
the terms of the transaction:
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we remain subject to certain of the Retail Operations store
leases on a contingent basis through our subleasing of stores to
Schurman (as described in Note 13 to the Consolidated
Financial Statements included in Part II, Item 8 of
this Annual Report, as of February 28, 2011,
Schurmans aggregate commitments to us under these
subleases was approximately $36 million);
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we are the predominant supplier of greetings cards and other
social expression products to the retail stores operated by
Schurman; and
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we have provided credit support to Schurman, including a
guaranty of up to $12 million in favor of the lenders under
Schurmans senior revolving credit facility, and up to
$10 million of subordinated financing under a loan
agreement with Schurman, each as described in Note 2 to the
Consolidated Financial Statements under Part II,
Item 8 of this Annual Report.
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As a result, if Schurman is unable to operate its retail stores
profitably, we may incur significant costs if (1) Schurman
is unable to pay for product that it has purchased from us,
(2) Schurman is unable to pay rent and other amounts due
with respect to the retail store leases that we have subleased
to it, (3) we become obligated under our guaranty of its
indebtedness, or (4) Schurman is unable to repay amounts
that it may borrow from us from time to time under our loan
agreement with Schurman. Accordingly, we may decide in the
future to provide Schurman with additional financial or
operational support to assist Schurman successfully operate its
stores. Providing such support, however, could result in it
being determined that we have a controlling financial
interest in Schurman under the Financial Accounting
Standards Boards standards pertaining to the consolidation
of a variable interest entity. For information regarding the
consolidation of variable interest entities, see Note 1 to
the Consolidated Financial Statements included in Part II,
Item 8. If it is determined that we have a controlling
financial interest in Schurman, we will be required to
consolidate Schurmans operations into our results, which
could materially affect our reported results of operations and
financial position as we would be required to include a portion
of Schurmans income or losses and assets and liabilities
into our financial statements.
Our
business, results of operations and financial condition may be
adversely affected by retail consolidations.
With continued retail trade consolidations, we are increasingly
dependent upon a reduced number of key retailers whose
bargaining strength is growing. We may be negatively affected by
changes in the policies of our retail customers, such as
inventory de-stocking, limitations on access to display space,
scan-based trading and other conditions. Increased
consolidations in the retail industry could result in other
changes that could damage our business, such as a loss of
customers, decreases in volume, less favorable contractual terms
and
7
the growth of discount chains. In addition, as the bargaining
strength of our retail customers grows, we may be required to
grant greater credits, discounts, allowances and other incentive
considerations to these customers. We may not be able to recover
the costs of these incentives if the customer does not purchase
a sufficient amount of products during the term of its agreement
with us, which could materially and adversely affect our
business, results of operations and financial condition.
Bankruptcy
of key customers could give rise to an inability to pay us and
increase our exposure to losses from bad debts.
Many of our largest customers are mass-market retailers. The
mass-market retail channel has experienced significant shifts in
market share among competitors in recent years. In addition, the
retail industry in general has experienced significant declines
due to the worldwide downturn in the economy and decreasing
consumer demand. As a result, retailers have experienced
liquidity problems and some have been forced to file for
bankruptcy protection. There is a risk that certain of our key
customers will not pay us, or that payment may be delayed
because of bankruptcy or other factors beyond our control, which
could increase our exposure to losses from bad debts and may
require us to write-off deferred cost assets. Additionally, our
business, results of operations and financial condition could be
materially and adversely affected if certain of these
mass-market retailers were to cease doing business as a result
of bankruptcy, or significantly reduce the number of stores they
operate.
We
rely on foreign sources of production and face a variety of
risks associated with doing business in foreign
markets.
We rely to a significant extent on foreign manufacturers and
suppliers for various products we distribute to customers. In
addition, many of our domestic suppliers purchase a portion of
their products from foreign sources. We generally do not have
long-term supply contracts and some of our imports are subject
to existing or potential duties, tariffs or quotas. In addition,
a portion of our current operations are conducted and located
abroad. The success of our sales to, and operations in, foreign
markets depends on numerous factors, many of which are beyond
our control, including economic conditions in the foreign
countries in which we sell our products. We also face a variety
of other risks generally associated with doing business in
foreign markets and importing merchandise from abroad, such as:
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political instability, civil unrest and labor shortages;
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imposition of new legislation and customs regulations
relating to imports that may limit the quantity
and/or
increase the cost of goods which may be imported into the United
States from countries in a particular region;
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lack of effective product quality control procedures by foreign
manufacturers and suppliers;
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currency and foreign exchange risks; and
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potential delays or disruptions in transportation as well as
potential border delays or disruptions.
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Also, new regulatory initiatives may be implemented that have an
impact on the trading status of certain countries and may
include antidumping and countervailing duties or other
trade-related sanctions, which could increase the cost of
products purchased from suppliers in such countries.
Additionally, as a large, multinational corporation, we are
subject to a host of governmental regulations throughout the
world, including antitrust and tax requirements, anti-boycott
regulations, import/export customs regulations and other
international trade regulations, the USA Patriot Act and the
Foreign Corrupt Practices Act. Failure to comply with any such
legal requirements could subject us to criminal or monetary
liabilities and other sanctions, which could harm our business,
results of operations and financial condition.
8
We
have foreign currency translation and transaction risks that may
materially and adversely affect our operating
results.
The financial position and results of operations of our
international subsidiaries are initially recorded in various
foreign currencies and then translated into U.S. dollars at
the applicable exchange rate for inclusion in our financial
statements. The strengthening of the U.S. dollar against
these foreign currencies ordinarily has a negative impact on our
reported sales and operating income (and conversely, the
weakening of the U.S. dollar against these foreign
currencies has a positive impact). For the year ended
February 28, 2011, foreign currency translation favorably
affected revenues by $10.0 million and favorably affected
segment operating income by $5.0 million compared to the
year ended February 28, 2010. Certain transactions,
particularly in foreign locations, are denominated in other than
that locations local currency. Changes in the exchange
rates between the two currencies from the original transaction
date to the settlement date will result in a currency
transaction gain or loss that directly impacts our reported
earnings. For the year ended February 28, 2011, the impact
of currency movements on these transactions unfavorably affected
operating income by $0.2 million. The volatility of
currency exchange rates may materially and adversely affect our
results of operations.
The
greeting card and gift wrap industries are extremely
competitive, and our business, results of operations and
financial condition will suffer if we are unable to compete
effectively.
We operate in highly competitive industries. There are an
estimated 3,000 greeting card publishers in the United States
ranging from small, family-run organizations to major
corporations. With the expansion of the Internet as a
distribution channel for greeting cards, together with the
growing use of technology by consumers to create personalized
greetings cards with digital photographs and other personalized
content, we are also seeing increased competition from greeting
card publishers as well as a wide range of personal publishing
businesses distributing greeting cards and other social
expression products directly to the individual consumer through
the Internet. In general, however, the greeting card business is
extremely concentrated. We believe that we are one of only two
main suppliers offering a full line of social expression
products. Our main competitor, Hallmark Cards, Inc., may have
substantially greater financial, technical or marketing
resources, a greater customer base, stronger name recognition
and a lower cost of funds than we do. This competitor may also
have longstanding relationships with certain large customers to
which it may offer products that we do not provide, putting us
at a competitive disadvantage. As a result, this competitor as
well as other competitors that may be smaller than us, may be
able to:
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adapt to changes in customer requirements or consumer
preferences more quickly;
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take advantage of acquisitions and other opportunities more
readily;
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devote greater resources to the marketing and sale of its
products, including sales directly to consumers through the
Internet; and
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adopt more aggressive pricing policies.
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There can be no assurance that we will be able to continue to
compete successfully in this market or against such competition.
If we are unable to introduce new and innovative products that
are attractive to our customers and ultimate consumers, or if we
are unable to allocate sufficient resources to effectively
market and advertise our products to achieve widespread market
acceptance, we may not be able to compete effectively, our sales
may be adversely affected, we may be required to take certain
financial charges, including goodwill impairments, and our
results of operations and financial condition could otherwise be
adversely affected.
We are
subject to a number of restrictive covenants under our borrowing
arrangements, which could affect our flexibility to fund ongoing
operations, uses of capital and strategic initiatives, and, if
we are unable to maintain compliance with such covenants, could
lead to significant challenges in meeting our liquidity
requirements.
The terms of our borrowing arrangements contain a number of
restrictive covenants, including customary operating
restrictions that limit our ability to engage in such activities
as borrowing and making investments,
9
capital expenditures and distributions on our capital stock, and
engaging in mergers, acquisitions and asset sales. We are also
subject to customary financial covenants, including a leverage
ratio and an interest coverage ratio. These covenants restrict
the amount of our borrowings, reducing our flexibility to fund
ongoing operations and strategic initiatives. These borrowing
arrangements are described in more detail in Liquidity and
Capital Resources under Item 7 and in Note 11 to
the Consolidated Financial Statements under Part II,
Item 8 of this Annual Report. Compliance with some of these
covenants is based on financial measures derived from our
operating results. If economic conditions deteriorate, we may
experience material adverse impacts to our business and
operating results, such as through reduced customer demand and
inflation. A decline in our business could make us unable to
maintain compliance with these financial covenants, in which
case we may be restricted in how we manage our business and
deploy capital, including by limiting our ability to make
acquisitions and dispositions, pay dividends and repurchase our
stock. In addition, if we are unable to maintain compliance with
our financial covenants or otherwise breach the covenants that
we are subject to under our borrowing arrangements, our lenders
could demand immediate payment of amounts outstanding and we
would need to seek alternate financing sources to pay off such
debts and to fund our ongoing operations. Such financing may not
be available on favorable terms, if at all. In addition, our
credit agreement is secured by substantially all of our domestic
assets, including the stock of certain of our subsidiaries. If
we cannot repay all amounts that we have borrowed under our
credit agreement, our lenders could proceed against our assets.
Pending
litigation could have a material, adverse effect on our
business, financial condition, liquidity, results of operations,
and cash flows.
As described in Item 3. Legal Proceedings,
from time to time we are engaged in lawsuits which may require
significant management time and attention and legal expense, and
may result in an unfavorable outcome, which could have a
material, adverse effect on our business, financial condition,
liquidity, results of operations, and cash flows. Current
estimates of loss regarding pending litigation are based on
information that is then available to us and may not reflect any
particular final outcome. The results of rulings, judgments or
settlements of pending litigation may result in financial
liability that is materially higher than what management has
estimated at this time. We make no assurances that we will not
be subject to liability with respect to current or future
litigation. We maintain various forms of insurance coverage.
However, substantial rulings, judgments or settlements could
exceed the amount of insurance coverage, or could be excluded
under the terms of an existing insurance policy.
The
amount of various taxes we pay is subject to ongoing compliance
requirements and audits by federal, state and foreign tax
authorities.
Our estimate of the potential outcome of uncertain tax issues is
subject to our assessment of relevant risks, facts, and
circumstances existing at that time. We use these assessments to
determine the adequacy of our provision for income taxes and
other tax-related accounts. Our future results may include
favorable or unfavorable adjustments to our estimated tax
liabilities in the period the assessments are made or resolved,
which may impact our effective tax rate
and/or our
financial results.
We
have deferred tax assets that we may not be able to use under
certain circumstances.
If we are unable to generate sufficient future taxable income in
certain jurisdictions, or if there is a significant change in
the time period within which the underlying temporary
differences become taxable or deductible, we could be required
to increase our valuation allowances against our deferred tax
assets. This would result in an increase in our effective tax
rate and would have an adverse effect on our future operating
results. In addition, changes in statutory tax rates may change
our deferred tax assets or liability balances, with either
favorable or unfavorable impact on our effective tax rate. Our
deferred tax assets may also be impacted by new legislation or
regulation.
10
We may
not be able to acquire or maintain advantageous content licenses
from third parties to produce products.
To provide an assortment of relevant, compelling and superior
product offerings, an important part of our business involves
obtaining licenses to produce products based on various popular
brands, celebrities, character properties, designs, content, and
other material owned by third parties. In the event that we are
not able to acquire or maintain advantageous licenses, we may
not be able to meet changing customer demands and preferences
for greetings cards and our other products, which could
materially and adversely affect our business, results of
operations and financial condition.
We may
not realize the full benefit of the material we license from
third parties if the licensed material has less market appeal
than expected or if sales revenue from the licensed products is
not sufficient to earn out the minimum guaranteed
royalties.
The agreements under which we license popular brands,
celebrities, character properties, design, content and other
material owned by third parties usually require that we pay an
advance
and/or
provide a minimum royalty guarantee that may be substantial. In
some cases, these advances or minimums may be greater than what
we will be able to recoup in profits from actual sales, which
could result in write-offs of such amounts that would adversely
affect our results of operations. In addition, we may acquire or
renew licenses requiring minimum guarantee payments that may
result in us paying higher effective royalties, if the overall
benefit of obtaining the license outweighs the risk of
potentially losing, not renewing or otherwise not obtaining a
valuable license. When obtaining a license, we realize there is
no guarantee that a particular licensed property will make a
successful greeting card or other product in the eye of the
ultimate consumer. Furthermore, there can be no assurance that a
successful licensed property will continue to be successful or
maintain a high level of sales in the future.
Our
inability to protect or defend our intellectual property rights
could reduce the value of our products and brands.
We believe that our trademarks, copyrights, trade secrets,
patents and other intellectual property rights are important to
our brands, success and competitive position. We rely on
trademark, copyright, trade secrets, and patent laws in the
United States and similar laws in other jurisdictions and on
confidentiality and other types of agreements with some
employees, vendors, consultants and others to protect our
intellectual property rights. Despite these measures, if we are
unable to successfully file for, register or otherwise enforce
our rights or if these rights are infringed, invalidated,
challenged, circumvented, or misappropriated, our business could
be materially and adversely affected. Also, we are, and may in
the future be, subject to intellectual property rights claims in
the United States or foreign countries, which could limit our
ability to use certain intellectual property, products or brands
in the future. Defending any such claims, even claims without
merit, could be time-consuming, result in costly settlements,
litigation or restrictions on our business and damage our
reputation.
Rapidly
changing trends in the childrens entertainment market
could adversely affect our business.
A portion of our business and results of operations depends upon
the appeal of our licensed character properties, which are used
to create various toy and entertainment items for children.
Consumer preferences, particularly among children, are
continuously changing. The childrens entertainment
industry experiences significant, sudden and often unpredictable
shifts in demand caused by changes in the preferences of
children to more on trend entertainment properties.
Moreover, the life cycle for individual youth entertainment
products tends to be short. Therefore, our ability to maintain
our current market share and increase our market share in the
future depends on our ability to satisfy consumer preferences by
enhancing existing entertainment properties and developing new
entertainment properties. If we are not able to successfully
meet these challenges in a timely and cost-effective manner,
demand for our collection of entertainment properties could
decrease and our business, results of operations and financial
condition may be materially and adversely affected. In addition,
we may incur significant costs developing entertainment
properties that may not generate future revenues at the levels
that we anticipated, which could in turn create fluctuations in
our reported results
11
based on when those costs are expensed and could otherwise
materially and adversely affect our results of operations and
financial condition.
Our
results of operations fluctuate on a seasonal
basis.
The social expression industry is a seasonal business, with
sales generally being higher in the second half of our fiscal
year due to the concentration of major holidays during that
period. Consequently, our overall results of operations in the
future may fluctuate substantially based on seasonal demand for
our products. Such variations in demand could have a material
adverse effect on the timing of cash flow and therefore our
ability to meet our obligations with respect to our debt and
other financial commitments. Seasonal fluctuations also affect
our inventory levels, since we usually order and manufacture
merchandise in advance of peak selling periods and sometimes
before new trends are confirmed by customer orders or consumer
purchases. We must carry significant amounts of inventory,
especially before the holiday season selling period. If we are
not successful in selling the inventory during the holiday
period, we may have to sell the inventory at significantly
reduced prices, or we may not be able to sell the inventory at
all.
Increases
in raw material and energy costs may materially raise our costs
and materially impact our profitability.
Paper is a significant expense in the production of our greeting
cards. Significant increases in paper prices, which have been
volatile in past years, or increased costs of other raw
materials or energy, such as fuel, may result in declining
margins and operating results if market conditions prevent us
from passing these increased costs on to our customers through
timely price increases on our greeting cards and other social
expression products.
The
loss of key members of our senior management and creative teams
could adversely affect our business.
Our success and continued growth depend largely on the efforts
and abilities of our current senior management team as well as
upon a number of key members of our creative staff, who have
been instrumental in our success thus far, and upon our ability
to attract and retain other highly capable and creative
individuals. The loss of some of our senior executives or key
members of our creative staff, or an inability to attract or
retain other key individuals, could materially and adversely
affect us. We seek to compensate our key executives, as well as
other employees, through competitive salaries, stock ownership,
bonus plans, or other incentives, but we can make no assurance
that these programs will enable us to retain key employees or
hire new employees.
If we
fail to extend or renegotiate our primary collective bargaining
contracts with our labor unions as they expire from time to
time, or if our unionized employees were to engage in a strike,
or other work stoppage, our business and results of operations
could be materially adversely affected.
We are party to collective bargaining contracts with our labor
unions, which represent a significant number of our employees.
In particular, approximately 1,200 of our employees are
unionized and are covered by collective bargaining agreements.
Although we believe our relations with our employees are
satisfactory, no assurance can be given that we will be able to
successfully extend or renegotiate our collective bargaining
agreements as they expire from time to time. If we fail to
extend or renegotiate our collective bargaining agreements, if
disputes with our unions arise, or if our unionized workers
engage in a strike or other work related stoppage, we could
incur higher ongoing labor costs or experience a significant
disruption of operations, which could have a material adverse
effect on our business.
Employee
benefit costs constitute a significant element of our annual
expenses, and funding these costs could adversely affect our
financial condition.
Employee benefit costs are a significant element of our cost
structure. Certain expenses, particularly postretirement costs
under defined benefit pension plans and healthcare costs for
employees and retirees, may increase significantly at a rate
that is difficult to forecast and may adversely affect our
financial results, financial condition or cash flows. In
addition, the newly enacted federal healthcare legislation is
expected to
12
increase our employer-sponsored medical plan costs, some of
which increases could be significant. Declines in global capital
markets may cause reductions in the value of our pension plan
assets. Such circumstances could have an adverse effect on
future pension expense and funding requirements. Further
information regarding our retirement benefits is presented in
Note 12 to the Consolidated Financial Statements included
in Part II, Item 8.
Various
environmental regulations and risks applicable to a manufacturer
and/or distributor of consumer products may require us to take
actions, which will adversely affect our results of
operations.
Our business is subject to numerous federal, state, provincial,
local and foreign laws and regulations, including regulations
with respect to chemical usage, air emissions, wastewater and
storm water discharges and other releases into the environment
as well as the generation, handling, storage, transportation,
treatment and disposal of waste materials, including hazardous
materials. Although we believe that we are in substantial
compliance with all applicable laws and regulations, because
legal requirements frequently change and are subject to
interpretation, we are unable to predict the ultimate cost of
compliance with these requirements, which may be significant, or
the effect on our operations as these laws and regulations may
give rise to claims, uncertainties or possible loss
contingencies for future environmental remediation liabilities
and costs. We cannot be certain that existing laws or
regulations, as currently interpreted or reinterpreted in the
future, or future laws or regulations, will not have a material
and adverse effect on our business, results of operations and
financial condition. The impact of environmental laws and
regulations, regulatory enforcement activities, the discovery of
unknown conditions, and third party claims for damages to the
environment, real property or persons could result in additional
liabilities and costs in the future.
We may
be subject to product liability claims and our products could be
subject to voluntary or involuntary recalls and other
actions.
We are subject to numerous federal, state, provincial and
foreign laws and regulations governing product safety including,
but not limited to, those regulations enforced by the Consumer
Product Safety Commission. A failure to comply with such laws
and regulations, or concerns about product safety may lead to a
recall of selected products. We have experienced, and in the
future may experience, recalls and defects or errors in products
after their production and sale to customers. Such recalls and
defects or errors could result in the rejection of our products
by our retail customers and consumers, damage to our reputation,
lost sales, diverted development resources and increased
customer service and support costs, any of which could harm our
business. Individuals could sustain injuries from our products,
and we may be subject to claims or lawsuits resulting from such
injuries. Governmental agencies could pursue us and issue civil
fines and/or
criminal penalties for a failure to comply with product safety
regulations. There is a risk that these claims or liabilities
may exceed, or fall outside the scope of, our insurance
coverage. Additionally, we may be unable to obtain adequate
liability insurance in the future. Recalls, post-manufacture
repairs of our products, product liability claims, absence or
cost of insurance and administrative costs associated with
recalls could harm our reputation, increase costs or reduce
sales.
Government
regulation of the Internet and
e-commerce
is evolving, and unfavorable changes or failure by us to comply
with these regulations could harm our business and results of
operations.
We are subject to general business regulations and laws as well
as regulations and laws specifically governing the Internet and
e-commerce.
Existing and future laws and regulations may impede the growth
of the Internet or other online services. These regulations and
laws may cover taxation, restrictions on imports and exports,
customs, tariffs, user privacy, data protection, pricing,
content, copyrights, distribution, electronic contracts and
other communications, consumer protection, the provision of
online payment services, broadband residential Internet access
and the characteristics and quality of products and services. It
is not clear how existing laws governing issues such as property
use and ownership, sales and other taxes, fraud, libel and
personal privacy apply to the Internet and
e-commerce
as the vast majority of these laws were adopted prior to the
advent of the Internet and do not contemplate or address the
unique issues raised by the Internet or
e-commerce.
Those laws that do reference the Internet are only beginning to
be interpreted by the courts and their applicability
13
and reach are therefore uncertain. For example, the Digital
Millennium Copyright Act, or DMCA, is intended, in part, to
limit the liability of eligible online service providers for
including (or for listing or linking to third-party websites
that include) materials that infringe copyrights or other rights
of others. Portions of the Communications Decency Act, or CDA,
are intended to provide statutory protections to online service
providers who distribute third-party content. We rely on the
protections provided by both the DMCA and CDA in conducting our
AG Interactive business. Any changes in these laws or judicial
interpretations narrowing their protections will subject us to
greater risk of liability and may increase our costs of
compliance with these regulations or limit our ability to
operate certain lines of business. The Childrens Online
Privacy Protection Act is intended to impose additional
restrictions on the ability of online service providers to
collect user information from minors. In addition, the
Protection of Children From Sexual Predators Act of 1998
requires online service providers to report evidence of
violations of federal child pornography laws under certain
circumstances. The costs of compliance with these regulations
may increase in the future as a result of changes in the
regulations or the interpretation of them. Further, any failures
on our part to comply with these regulations may subject us to
significant liabilities. Those current and future laws and
regulations or unfavorable resolution of these issues may
substantially harm our business and results of operations.
Information technology infrastructure failures could
significantly affect our business.
We depend heavily on our information technology (IT)
infrastructure in order to achieve our business objectives.
Portions of our IT infrastructure are old and difficult to
maintain. We could experience a problem that impairs this
infrastructure, such as a computer virus, a problem with the
functioning of an important IT application, or an intentional
disruption of our IT systems. In addition, our IT systems could
suffer damage or interruption from human error, fire, flood,
power loss, telecommunications failure, break-ins, terrorist
attacks, acts of war and similar events. The disruptions caused
by any such events could impede our ability to record or process
orders, manufacture and ship in a timely manner, properly store
consumer images, or otherwise carry on our business in the
ordinary course. Any such event could cause us to lose customers
or revenue, damage our reputation, and could require us to incur
significant expense to eliminate these problems and address
related security concerns.
Over the next five to seven years, we expect to allocate
resources, including capital, to refresh our IT systems by
modernizing our systems, redesigning and deploying new
processes, and evolving new organization structures all intended
to drive efficiencies within the business and add new
capabilities. Such an implementation is expensive and carries
substantial operational risk, including loss of data or
information, unanticipated increases in costs, disruption of
operations or business interruption. Further, we may not be
successful implementing new systems or any new system may not
perform as expected. This could have a material adverse effect
on our business.
Acts
of nature could result in an increase in the cost of raw
materials; other catastrophic events, including earthquakes,
could interrupt critical functions and otherwise adversely
affect our business and results of operations.
Acts of nature could result in an increase in the cost of raw
materials or a shortage of raw materials, which could influence
the cost of goods supplied to us. Additionally, we have
significant operations, including our largest manufacturing
facility, near a major earthquake fault line in Arkansas. A
catastrophic event, such as an earthquake, fire, tornado, or
other natural or man-made disaster, could disrupt our operations
and impair production or distribution of our products, damage
inventory, interrupt critical functions or otherwise affect our
business negatively, harming our results of operations.
Members
of the Weiss family and related entities, whose interests may
differ from those of other shareholders, own a substantial
portion of our common shares.
Our authorized capital stock consists of Class A common
shares and Class B common shares. The economic rights of
each class of common shares are identical, but the voting rights
differ. Class A common shares are entitled to one vote per
share and Class B common shares are entitled to ten votes
per share. There is no public trading market for the
Class B common shares, which are held by members of the
extended family of
14
American Greetings founder, officers and directors of
American Greetings and their extended family members, family
trusts, institutional investors and certain other persons. As of
April 27, 2011, Morry Weiss, the Chairman of the Board of
Directors, Zev Weiss, the Chief Executive Officer, Jeffrey
Weiss, the President and Chief Operating Officer, and Erwin
Weiss, the Senior Vice President, Enterprise Resource Planning,
together with other members of the Weiss family and certain
trusts and foundations established by the Weiss family
beneficially owned approximately 93% in the aggregate of our
outstanding Class B common shares (approximately 91%,
excluding restricted stock units that vest, and stock options
that are presently exercisable or exercisable, within
60 days of April 27, 2011), which, together with
Class A common shares beneficially owned by them,
represents approximately 48% of the voting power of our
outstanding capital stock (approximately 40%, excluding
restricted stock units that vest, and stock options that are
presently exercisable or exercisable, within 60 days of
April 27, 2011). Accordingly, these members of the Weiss
family, together with the trusts and foundations established by
them, would be able to significantly influence the outcome of
shareholder votes, including votes concerning the election of
directors, the adoption or amendment of provisions in our
Articles of Incorporation or Code of Regulations, and the
approval of mergers and other significant corporate
transactions, and their interests may not be aligned with your
interests. The existence of these levels of ownership
concentrated in a few persons makes it less likely that any
other shareholder will be able to affect our management or
strategic direction. These factors may also have the effect of
delaying or preventing a change in our management or voting
control or its acquisition by a third party.
Our
charter documents and Ohio law may inhibit a takeover and limit
our growth opportunities, which could adversely affect the
market price of our common shares.
Certain provisions of Ohio law and our charter documents,
together or separately, could have the effect of discouraging,
or making it more difficult for, a third party to acquire or
attempt to acquire control of American Greetings and limit the
price that certain investors might be willing to pay in the
future for our common shares. For example, our charter documents
establish a classified board of directors, serving staggered
three-year terms, allow the removal of directors only for cause,
and establish certain advance notice procedures for nomination
of candidates for election as directors and for shareholder
proposals to be considered at shareholders meetings. In
addition, while shareholders have the right to cumulative voting
in the election of directors, Class B common shares have
ten votes per share which limits the ability of holders of
Class A common shares to elect a director by exercising
cumulative voting rights.
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Item 1B.
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Unresolved
Staff Comments
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None.
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As of February 28, 2011, we owned or leased approximately
9.5 million square feet of plant, warehouse and office
space throughout the world, of which approximately
470,000 square feet is leased space. We believe our
manufacturing and distribution facilities are well maintained
and are suitable and adequate, and have sufficient productive
capacity to meet our current needs.
The following table summarizes, as of February 28, 2011,
our principal plants and materially important physical
properties and identifies as of such date the respective
segments that use the properties described. In addition to the
following, although we sold our Retail Operations segment in
April 2009, we remain subject to certain of the Retail
Operations store leases on a contingent basis through our
subleasing of stores to Schurman Fine Papers, which operates
these retail stores throughout North America. See Note 13
to the Consolidated Financial Statements included in
Part II, Item 8.
* Indicates calendar year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Square
|
|
|
Expiration
|
|
|
|
|
|
Feet
|
|
|
Date of
|
|
|
|
|
|
Occupied
|
|
|
Material
|
|
|
|
Location
|
|
Owned
|
|
|
Leased
|
|
|
Leases*
|
|
|
Principal Activity
|
|
Cleveland,
(1)(3)(4)
Ohio
|
|
|
1,700,000
|
|
|
|
|
|
|
|
|
|
|
World Headquarters: General offices of North American Greeting
Card Division; Plus Mark LLC; AG Interactive, Inc.; and AGC,
LLC; creation and design of greeting cards, gift wrap, party
goods, stationery and giftware; marketing of electronic greetings
|
Bardstown,
(1)
Kentucky
|
|
|
413,500
|
|
|
|
|
|
|
|
|
|
|
Cutting, folding, finishing and packaging of greeting cards
|
Danville,
(1)
Kentucky
|
|
|
1,374,000
|
|
|
|
|
|
|
|
|
|
|
Distribution of everyday products including greeting cards
|
Osceola, (1)
Arkansas
|
|
|
2,552,000
|
|
|
|
|
|
|
|
|
|
|
Cutting, folding, finishing and packaging of greeting cards and
warehousing; distribution of seasonal products
|
Ripley, (1)
Tennessee
|
|
|
165,000
|
|
|
|
|
|
|
|
|
|
|
Greeting card printing (lithography)
|
Kalamazoo,
(1)(5)
Michigan
|
|
|
602,500
|
|
|
|
|
|
|
|
|
|
|
Formerly manufacture and distribution of party goods
|
Forest City,
(4)
North Carolina
|
|
|
498,000
|
|
|
|
|
|
|
|
|
|
|
General offices of A.G. Industries, Inc.; manufacture of
display fixtures and other custom display fixtures by A.G.
Industries, Inc.
|
Forest City,
(4)
North Carolina
|
|
|
|
|
|
|
140,000
|
|
|
|
2012
|
|
|
Warehousing for A.G. Industries, Inc.
|
Greeneville,
(1)
Tennessee
|
|
|
1,044,000
|
|
|
|
|
|
|
|
|
|
|
Printing and packaging of seasonal greeting cards and wrapping
items and order filling and shipping for Plus Mark LLC.
|
Chicago, (1)
Illinois
|
|
|
|
|
|
|
45,000
|
|
|
|
2018
|
|
|
Administrative offices of Papyrus-Recycled Greetings, Inc.
|
Fairfield,
(1)
California
|
|
|
|
|
|
|
34,000
|
|
|
|
2014
|
|
|
General offices of Papyrus-Recycled Greetings, Inc.
|
Mississauga,
(1)
Ontario, Canada
|
|
|
|
|
|
|
38,000
|
|
|
|
2018
|
|
|
General offices of Carlton Cards Limited (Canada)
|
Clayton, (2)
Australia
|
|
|
|
|
|
|
208,000
|
|
|
|
2011
|
|
|
General offices of John Sands companies
|
Dewsbury,
(2)
England (Two Locations)
|
|
|
441,500
|
|
|
|
|
|
|
|
|
|
|
General offices of UK Greetings Ltd. and manufacture and
distribution of greeting cards and related products
|
Gibson House
(2)
Telford, England
|
|
|
55,000
|
|
|
|
|
|
|
|
|
|
|
General offices of UK Greetings Ltd.
|
Corby, England
(2)
|
|
|
85,000
|
|
|
|
|
|
|
|
|
|
|
Distribution of greeting cards and related products
|
|
|
|
1 |
|
North American Social Expression Products |
|
2 |
|
International Social Expression Products |
|
3 |
|
AG Interactive |
|
4 |
|
Non-reportable |
|
5 |
|
In connection with our sale of certain assets, equipment and
processes used in the manufacture and distribution of party
goods, during fiscal 2011, this facility was wound-down and is
currently an asset held for sale. See Note 14 to the
Consolidated Financial Statements included in Part II,
Item 8. |
16
|
|
Item 3.
|
Legal
Proceedings
|
Electrical Workers Pension Fund, Local 103, I.B.E.W.
Litigation. As previously disclosed, on
March 20, 2009, a shareholder derivative complaint was
filed in the Court of Common Pleas of Cuyahoga County, Ohio, by
the Electrical Workers Pension Fund, Local 103, I.B.E.W.,
against certain of our current and former officers and directors
(the Individual Defendants) and names American
Greetings Corporation as a nominal defendant. The suit alleges
that the Individual Defendants breached their fiduciary duties
to American Greetings Corporation by, among other things,
backdating stock options granted to our officers and directors,
accepting backdated options and causing American Greetings
Corporation to file false and misleading financial statements.
The suit seeks an unspecified amount of damages from the
Individual Defendants and modifications to our corporate
governance policies. The parties recently participated in
mediation and have reached an agreement in principle on the
general terms of settlement, which contemplates a payment to
plaintiffs counsel as well as certain modifications to our
corporate governance policies, none of which we believe are
material. Upon finalizing the terms of the settlement, the
settlement will be subject to preliminary and final approval of
the Court of Common Pleas of Cuyahoga County, Ohio.
Cookie Jar/MoonScoop Litigation. As previously
disclosed, on May 6, 2009, American Greetings Corporation
and its subsidiary, Those Characters From Cleveland, Inc.
(TCFC), filed an action in the Cuyahoga County
(Ohio) Court of Common Pleas against Cookie Jar Entertainment
Inc. (Cookie Jar) and its affiliates, Cookie Jar
Entertainment (USA) Inc. (formerly known as DIC Entertainment
Corporation) (DIC), and Cookie Jar Entertainment
Holdings (USA) Inc. (formerly known as DIC Entertainment
Holdings, Inc.) relating to the July 20, 2008 Binding
Letter Agreement between American Greetings Corporation and
Cookie Jar (the Cookie Jar Agreement) for the sale
of the Strawberry Shortcake and Care Bears properties (the
Properties). On May 7, 2009, Cookie Jar removed
the case to the United States District Court for the Northern
District of Ohio. Simultaneously, Cookie Jar filed an action
against American Greetings Corporation, TCFC, Mike Young
Productions, LLC (Mike Young Productions) and
MoonScoop SAS (MoonScoop) in the Supreme Court of
the State of New York, County of New York. Mike Young
Productions and MoonScoop were named as defendants in the action
in connection with the binding term sheet between American
Greetings Corporation and MoonScoop dated March 24, 2009
(the MoonScoop Binding Agreement), providing for the
sale to MoonScoop of the Properties.
On May 7, 2010, the legal proceedings involving American
Greetings Corporation, TCFC, Cookie Jar and DIC were settled,
without a payment to any of the parties. As part of the
settlement, on May 7, 2010, the Cookie Jar Agreement was
amended to, among other things, terminate American Greetings
Corporations obligation to sell to Cookie Jar, and Cookie
Jars obligation to purchase, the Properties. As part of
the settlement, Cookie Jar Entertainment (USA) Inc. will
continue to represent the Strawberry Shortcake property on
behalf of American Greetings Corporation, and will become an
international agent for the Care Bears property. On May 19,
2010, the Northern District of Ohio court granted the
parties joint motion to dismiss all claims and
counterclaims without prejudice.
On August 11, 2009, MoonScoop filed an action against
American Greetings Corporation and TCFC in the United States
District Court for the Northern District of Ohio, alleging
breach of contract and promissory estoppel relating to the
MoonScoop Binding Agreement. On MoonScoops request, the
court agreed to consolidate this lawsuit with the first Ohio
lawsuit (described above) for all pretrial purposes. The parties
filed motions for summary judgment on various claims. On
April 27, 2010, the court granted American Greetings
Corporations motion for summary judgment on
MoonScoops breach of contract and promissory estoppel
claims, dismissing these claims with prejudice. On the same day,
the court also ruled that American Greetings Corporation must
indemnify MoonScoop against Cookie Jars claims in this
lawsuit. On May 21, 2010, MoonScoop appealed the
courts summary judgment ruling. On June 4, 2010,
American Greetings Corporation and TCFC appealed the
courts ruling that it must indemnify MoonScoop against the
cross claims asserted against it. We believe that the
allegations in the lawsuit against American Greetings
Corporation and TCFC are without merit and intend to continue to
defend the actions vigorously. We currently do not believe that
the impact of the lawsuit against American Greetings Corporation
and TCFC, if any, will have a material adverse effect on our
financial position, liquidity or results of operations.
17
In addition to the foregoing, we are involved in certain legal
proceedings arising in the ordinary course of business. We,
however, do not believe that any of the other litigation in
which we are currently engaged, either individually or in the
aggregate, will have a material adverse effect on our business,
consolidated financial position or results of operations.
Executive
Officers of the Registrant
The following table sets forth our executive officers, their
ages as of April 29, 2011, and their positions and offices:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Current Position and Office
|
|
Morry Weiss
|
|
|
70
|
|
|
Chairman
|
Zev Weiss
|
|
|
44
|
|
|
Chief Executive Officer
|
Jeffrey Weiss
|
|
|
47
|
|
|
President and Chief Operating Officer
|
John W. Beeder
|
|
|
51
|
|
|
Senior Vice President, Executive Sales and Marketing Officer
|
Michael L. Goulder
|
|
|
51
|
|
|
Senior Vice President, Executive Supply Chain Officer
|
Thomas H. Johnston
|
|
|
63
|
|
|
Senior Vice President, Creative/Merchandising
|
Catherine M. Kilbane
|
|
|
48
|
|
|
Senior Vice President, General Counsel and Secretary
|
Brian T. McGrath
|
|
|
60
|
|
|
Senior Vice President, Human Resources
|
Douglas W. Rommel
|
|
|
55
|
|
|
Senior Vice President, Chief Information Officer
|
Stephen J. Smith
|
|
|
47
|
|
|
Senior Vice President and Chief Financial Officer
|
Erwin Weiss
|
|
|
62
|
|
|
Senior Vice President, Enterprise Resource Planning
|
Joseph B. Cipollone
|
|
|
52
|
|
|
Vice President, Chief Accounting Officer
|
|
|
|
|
|
Morry Weiss and Erwin Weiss are brothers. Jeffrey Weiss and Zev
Weiss are the sons of Morry Weiss. The Board of Directors
annually elects all executive officers; however, executive
officers are subject to removal, with or without cause, at any
time; provided, however, that the removal of an executive
officer would be subject to the terms of their respective
employment agreements, if any.
|
|
|
|
Morry Weiss has held various positions with the Corporation
since joining in 1961, including most recently Chief Executive
Officer of the Corporation from October 1987 until June 2003.
Mr. Morry Weiss has been Chairman since February 1992.
|
|
|
|
Zev Weiss has held various positions with the Corporation since
joining in 1992, including most recently Executive Vice
President from December 2001 until June 2003 when he was named
Chief Executive Officer.
|
|
|
|
Jeffrey Weiss has held various positions with the Corporation
since joining in 1988, including most recently Executive Vice
President, North American Greeting Card Division of the
Corporation from March 2000 until June 2003 when he was named
President and Chief Operating Officer.
|
|
|
|
John W. Beeder held various positions with Hallmark Cards, Inc.
from 1983 to 2006, most recently as Senior Vice President and
General Manager Greeting Cards from 2002 to 2006.
Thereafter, Mr. Beeder served as the President and Chief
Operating Officer of Handleman Corporation (international music
distribution company) in 2006, and the Managing Partner and
Chief Operating Officer of Compact Clinicals (medical publishing
company) in 2007. He became Senior Vice President, Executive
Sales and Marketing Officer of the Corporation in April 2008.
|
|
|
|
Michael L. Goulder was a Vice President in the management
consulting firm of Booz Allen Hamilton from October 1998 until
September 2002. He became a Senior Vice President of the
Corporation in November 2002 and is currently the Senior Vice
President, Executive Supply Chain Officer.
|
|
|
|
Thomas H. Johnston was Managing Director of Gruppo,
Levey & Co., an investment banking firm focused on the
direct marketing and specialty retail industries, from November
2001 until May 2004,
|
18
|
|
|
|
|
when he became Senior Vice President and President of Carlton
Cards Retail, a position he held until May 2009, shortly after
the sale of the Corporations Retail Operations segment in
April 2009. Mr. Johnston became Senior Vice President,
Creative/Merchandising in December 2004.
|
|
|
|
|
|
Catherine M. Kilbane was a partner with the law firm of
Baker & Hostetler LLP until becoming Senior Vice
President, General Counsel and Secretary in October 2003.
|
|
|
|
Brian T. McGrath has held various positions with the Corporation
since joining in 1989, including most recently Vice President,
Human Resources from November 1998 until July 2006, when he
became Senior Vice President, Human Resources.
|
|
|
|
Douglas W. Rommel has held various positions with the
Corporation since joining in 1978, including most recently Vice
President, Information Services from November 2001 until March
2010, when he became Senior Vice President, Chief Information
Officer.
|
|
|
|
Stephen J. Smith was Vice President and Treasurer of General
Cable Corporation, a wire and cable company, from 1999 until
2002. He became Vice President, Treasurer and Investor Relations
of the Corporation in April 2003, and became Senior Vice
President and Chief Financial Officer in November 2006.
|
|
|
|
Erwin Weiss has held various positions with the Corporation
since joining in 1977, including most recently Senior Vice
President, Program Realization from June 2001 to June 2003, and
Senior Vice President, Specialty Business from June 2003 until
becoming Senior Vice President, Enterprise Resource Planning in
February 2007.
|
|
|
|
Joseph B. Cipollone has held various positions with the
Corporation since joining in 1991, including most recently
Executive Director, International Finance from December 1997
until becoming Vice President and Corporate Controller in April
2001 and Vice President and Chief Accounting Officer in October
2010.
|
19
PART II
|
|
Item 5.
|
Market
for the Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
|
(a) Market Information. Our Class A
common shares are listed on the New York Stock Exchange under
the symbol AM. The high and low sales prices, as reported in the
New York Stock Exchange listing, for the years ended
February 28, 2011 and 2010, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
1st
Quarter
|
|
$
|
26.21
|
|
|
$
|
19.09
|
|
|
$
|
8.85
|
|
|
$
|
3.24
|
|
2nd
Quarter
|
|
|
23.36
|
|
|
|
17.89
|
|
|
|
16.13
|
|
|
|
6.33
|
|
3rd
Quarter
|
|
|
21.64
|
|
|
|
18.02
|
|
|
|
24.10
|
|
|
|
13.20
|
|
4th
Quarter
|
|
|
23.89
|
|
|
|
19.86
|
|
|
|
25.58
|
|
|
|
17.05
|
|
There is no public market for our Class B common shares.
Pursuant to our Amended and Restated Articles of Incorporation,
a holder of Class B common shares may not transfer such
Class B common shares (except to permitted transferees, a
group that generally includes members of the holders
extended family, family trusts and charities) unless such holder
first offers such shares to American Greetings for purchase at
the most recent closing price for our Class A common
shares. If we do not purchase such Class B common shares,
the holder must convert such shares, on a share for share basis,
into Class A common shares prior to any transfer. It is the
Corporations general policy to repurchase Class B
common shares, in accordance with the terms set forth in our
Amended and Restated Articles of Incorporation, whenever they
are offered by a holder, unless such repurchase is not otherwise
permitted under agreements to which the Corporation is a party.
Wells Fargo, St. Paul, Minnesota, is our registrar and transfer
agent.
Shareholders. At February 28, 2011, there were
approximately 11,300 holders of Class A common shares and
132 holders of Class B common shares of record and
individual participants in security position listings.
Dividends. The following table sets forth the
dividends declared by us in 2011 and 2010.
|
|
|
|
|
|
|
|
|
Dividends per share declared in
|
|
2011
|
|
|
2010
|
|
|
1st
Quarter
|
|
$
|
0.14
|
|
|
$
|
*
|
|
2nd
Quarter
|
|
|
0.14
|
|
|
|
0.12
|
|
3rd
Quarter
|
|
|
0.14
|
|
|
|
0.12
|
|
4th
Quarter
|
|
|
0.14
|
|
|
|
0.12
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
0.56
|
|
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
|
On March 21, 2011, we raised our quarterly dividend by 1
cent, from 14 cents per share to 15 cents per share. Although we
expect to continue paying dividends, payment of future dividends
will be determined by the Board of Directors in light of
appropriate business conditions. In addition, our borrowing
arrangements, including our senior secured credit facility and
our 7.375% Notes due 2016 restrict our ability to pay
shareholder dividends. Our borrowing arrangements also contain
certain other restrictive covenants that are customary for
similar credit arrangements. For example, our credit facility
contains covenants relating to financial reporting and
notification, compliance with laws, preservation of existence,
maintenance of books and records, use of proceeds, maintenance
of properties and insurance, and limitations on liens,
dispositions, issuance of debt, investments, repurchases of
capital stock, acquisitions and transactions with affiliates.
There are also financial covenants that require us to maintain a
maximum leverage ratio (consolidated indebtedness minus
unrestricted cash over consolidated EBITDA) and a minimum
interest coverage ratio (consolidated EBITDA over consolidated
interest expense). These restrictions are subject to customary
baskets and financial covenant tests. For a further description
of the limitations imposed by our borrowing arrangements, see
the discussion in Part II, Item 7, under the heading
Liquidity and Capital Resources, and Note 11 to
the Consolidated Financial Statements included in Part II,
Item 8.
|
|
|
* |
|
We generally pay dividends on a quarterly basis. During the
fourth quarter of fiscal 2009, however, two dividends were
declared, but only one dividend of $0.12 per share was paid in
the fourth quarter. The other $0.12 per share dividend was paid
in the first quarter of fiscal 2010. |
20
COMPARISON
OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG
AMERICAN GREETINGS CORPORATION, THE S&P 400 INDEX AND PEER
GROUP INDEX
Set forth below is a line graph comparing the cumulative total
return of a hypothetical investment in our Class A common
shares with the cumulative total return of hypothetical
investments in the S&P 400 Index, and the Peer Group
described below based on the respective market price of each
investment at February 28, 2006, February 28, 2007,
February 29, 2008, February 27, 2009,
February 26, 2010 and February 28, 2011, the last
trading days of our fiscal years over the past five years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/06
|
|
2/07
|
|
2/08
|
|
2/09
|
|
2/10
|
|
2/11
|
American Greetings
|
|
|
$100
|
|
|
|
$113
|
|
|
|
$93
|
|
|
|
$19
|
|
|
|
$103
|
|
|
|
$120
|
|
S & P 400
|
|
|
$100
|
|
|
|
$110
|
|
|
|
$104
|
|
|
|
$61
|
|
|
|
$101
|
|
|
|
$134
|
|
Peer Group*
|
|
|
$100
|
|
|
|
$116
|
|
|
|
$110
|
|
|
|
$76
|
|
|
|
$132
|
|
|
|
$183
|
|
Source: Bloomberg L.P.
|
|
|
|
|
*Peer Group
|
|
|
|
|
Blyth Inc. (BTH)
|
|
Fossil Inc. (FOSL)
|
|
McCormick & Co.-Non Vtg Shrs (MKC)
|
Central Garden & Pet Co. (CENT)
|
|
Jo-Ann Stores Inc. (JAS)
|
|
Scotts Miracle-Gro Co. (The) - CL A (SMG)
|
CSS Industries Inc. (CSS)
|
|
Lancaster Colony Corp. (LANC)
|
|
Tupperware Brands Corp. (TUP)
|
The Peer Group Index takes into account companies selling
cyclical nondurable consumer goods with the following
attributes, among others, that are similar to those of American
Greetings: customer demographics, sales, market capitalizations
and distribution channels.
21
Securities Authorized for Issuance Under Equity Compensation
Plans. Please refer to the information set forth
under the heading Equity Compensation Plan
Information included in Item 12 of this Annual Report
on
Form 10-K.
(b) Not applicable.
(c) The following table provides information with respect
to our purchases of our common shares made during the three
months ended February 28, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
(or Approximate
|
|
|
|
|
|
|
|
|
|
Purchased as
|
|
|
Dollar Value) of Shares
|
|
|
|
|
|
|
Average
|
|
|
Part of Publicly
|
|
|
that May Yet Be
|
|
|
|
Total Number of
|
|
|
Price Paid
|
|
|
Announced Plans or
|
|
|
Purchased Under
|
|
Period
|
|
Shares Purchased
|
|
|
per Share
|
|
|
Programs
|
|
|
the Plans or Programs
|
|
|
December 2010
|
|
|
Class A -
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
46,578,874
|
(2)
|
|
|
|
Class B -
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
January 2011
|
|
|
Class A -
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
46,578,874
|
(2)
|
|
|
|
Class B -
|
|
|
|
3,701
|
(1)
|
|
$
|
22.12
|
|
|
|
-
|
|
|
|
|
|
February 2011
|
|
|
Class A -
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
46,578,874
|
(2)
|
|
|
|
Class B -
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Total
|
|
|
Class A -
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
Class B -
|
|
|
|
3,701
|
(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
(1) |
|
There is no public market for our Class B common shares.
Pursuant to our Articles of Incorporation, a holder of
Class B common shares may not transfer such Class B
common shares (except to permitted transferees, a group that
generally includes members of the holders extended family,
family trusts and charities) unless such holder first offers
such shares to the Corporation for purchase at the most recent
closing price for the Corporations Class A common
shares. If the Corporation does not purchase such Class B
common shares, the holder must convert such shares, on a share
for share basis, into Class A common shares prior to any
transfer. It is the Corporations general policy to
repurchase Class B common shares, in accordance with the
terms set forth in our Amended and Restated Articles of
Incorporation, whenever they are offered by a holder, unless
such repurchase is not otherwise permitted under agreements to
which the Corporation is a party. All of the shares were
repurchased by American Greetings for cash pursuant to this
right of first refusal. |
|
(2) |
|
On January 13, 2009, American Greetings announced that its
Board of Directors authorized a program to repurchase up to
$75 million of its Class A common shares. There is no
set expiration date for this repurchase program. No repurchases
were made in the current quarter under this program. |
22
|
|
Item 6.
|
Selected
Financial Data
|
Thousands
of dollars except share and per share amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010(1)
|
|
|
2009
|
|
|
2008
|
|
|
2007(2)
|
|
|
Summary of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,560,213
|
|
|
$
|
1,598,292
|
|
|
$
|
1,646,399
|
|
|
$
|
1,730,784
|
|
|
$
|
1,744,798
|
|
Total revenue
|
|
|
1,592,568
|
|
|
|
1,635,858
|
|
|
|
1,690,738
|
|
|
|
1,776,451
|
|
|
|
1,794,290
|
|
Goodwill and other intangible asset impairments
|
|
|
-
|
|
|
|
-
|
|
|
|
290,166
|
|
|
|
-
|
|
|
|
2,196
|
|
Interest expense
|
|
|
25,389
|
|
|
|
26,311
|
|
|
|
22,854
|
|
|
|
20,006
|
|
|
|
34,986
|
|
Income (loss) from continuing operations
|
|
|
87,018
|
|
|
|
81,574
|
|
|
|
(227,759)
|
|
|
|
83,320
|
|
|
|
39,938
|
|
(Loss) income from discontinued operations, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(317)
|
|
|
|
2,440
|
|
Net income (loss)
|
|
|
87,018
|
|
|
|
81,574
|
|
|
|
(227,759)
|
|
|
|
83,003
|
|
|
|
42,378
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
2.18
|
|
|
|
2.07
|
|
|
|
(4.89)
|
|
|
|
1.54
|
|
|
|
0.69
|
|
(Loss) income from discontinued operations, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(0.01)
|
|
|
|
0.04
|
|
Earnings (loss) per share
|
|
|
2.18
|
|
|
|
2.07
|
|
|
|
(4.89)
|
|
|
|
1.53
|
|
|
|
0.73
|
|
Earnings (loss) per share assuming dilution
|
|
|
2.11
|
|
|
|
2.03
|
|
|
|
(4.89)
|
|
|
|
1.52
|
|
|
|
0.71
|
|
Cash dividends declared per share
|
|
|
0.56
|
|
|
|
0.36
|
|
|
|
0.60
|
|
|
|
0.40
|
|
|
|
0.32
|
|
Fiscal year end market price per share
|
|
|
21.65
|
|
|
|
19.07
|
|
|
|
3.73
|
|
|
|
18.82
|
|
|
|
23.38
|
|
Average number of shares outstanding
|
|
|
39,982,784
|
|
|
|
39,467,811
|
|
|
|
46,543,780
|
|
|
|
54,236,961
|
|
|
|
57,951,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
179,730
|
|
|
|
163,956
|
|
|
|
194,945
|
|
|
|
207,629
|
|
|
|
174,426
|
|
Working capital
|
|
|
358,379
|
|
|
|
310,704
|
|
|
|
229,817
|
|
|
|
245,654
|
|
|
|
434,041
|
|
Total assets
|
|
|
1,532,402
|
|
|
|
1,529,651
|
|
|
|
1,448,049
|
|
|
|
1,809,133
|
|
|
|
1,784,748
|
|
Property, plant and equipment additions
|
|
|
36,346
|
|
|
|
26,550
|
|
|
|
55,733
|
|
|
|
56,623
|
|
|
|
41,716
|
|
Long-term debt
|
|
|
232,688
|
|
|
|
328,723
|
|
|
|
389,473
|
|
|
|
220,618
|
|
|
|
223,915
|
|
Shareholders equity(3)
|
|
|
748,911
|
|
|
|
636,064
|
|
|
|
529,189
|
|
|
|
943,411
|
|
|
|
1,012,574
|
|
Shareholders equity per share
|
|
|
18.53
|
|
|
|
16.11
|
|
|
|
13.05
|
|
|
|
19.35
|
|
|
|
18.37
|
|
Net return on average shareholders equity from continuing
operations
|
|
|
12.6
|
%
|
|
|
14.0
|
%
|
|
|
(30.9)
|
%
|
|
|
8.5
|
%
|
|
|
3.6
|
%
|
|
|
|
(1) |
|
During 2010, the Corporation incurred a loss of
$29.3 million on the disposition of the Retail Operations
segment. The Corporation also recorded a gain of
$34.2 million related to the party goods transaction and a
charge of approximately $15.8 million for asset impairments
and severance associated with a facility closure. Also in 2010,
the Corporation recognized a cost of $18.2 million in
connection with the shutdown of its distribution operations in
Mexico. See Notes 2 and 3 to the Corporations 2011
financial statements. |
|
(2) |
|
During 2007, as a result of retailer consolidation, wherein
multiple long-term supply agreements were terminated and a new
agreement was negotiated with a new legal entity with
substantially different terms and sales commitments, a gain of
$20.0 million was recorded. Also, in 2007, the Corporation
sold substantially all of the assets associated with its candle
product lines and recorded a loss of approximately
$16.0 million. |
|
(3) |
|
The Corporation adopted accounting guidance for convertible debt
instruments in 2010. This guidance requires an issuer of certain
convertible instruments that may be settled in cash or other
assets on conversion to separately account for the liability and
equity components of the instrument in a manner that reflects
the issuers nonconvertible debt borrowing rate. The impact
on shareholders equity of retrospectively applying this
guidance related to the Corporations 7.00% convertible
subordinated notes issued in 2002 and settled in 2007 would have
been $35 million for 2007. The convertible subordinated
notes were not outstanding in the four years ended
February 28, 2011. |
23
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
This Managements Discussion and Analysis of Financial
Condition and Results of Operations should be read in
conjunction with the audited consolidated financial statements.
This discussion and analysis, and other statements made in this
Report, contain forward-looking statements. See Factors
That May Affect Future Results at the end of this
discussion and analysis for a discussion of the uncertainties,
risks and assumptions associated with these statements.
OVERVIEW
Founded in 1906, we are the worlds largest publicly owned
creator, manufacturer and distributor of social expression
products. Headquartered in Cleveland, Ohio, as of
February 28, 2011, we employ approximately 16,100
associates around the world and are home to one of the
worlds largest creative studios.
Our major domestic greeting card brands are American Greetings,
Recycled Paper Greetings, Papyrus, Carlton Cards, Gibson, Tender
Thoughts and Just For You. Our other domestic products include
DesignWare party goods, Plus Mark gift wrap and boxed cards, and
AGI In-Store display fixtures. We also create and license our
intellectual properties such as the Care Bears and Strawberry
Shortcake characters. The Internet and wireless business unit,
AG Interactive, is a leading provider of electronic greetings
and other content for the digital marketplace. Our major
Internet and wireless brands are AmericanGreetings.com,
BlueMountain.com, Egreetings.com, Kiwee.com, Cardstore.com and
WebShots.com.
Our international operations include wholly-owned subsidiaries
in the United Kingdom (U.K.), Canada, Australia and
New Zealand as well as licensees in approximately 70 other
countries. During 2010, we shut down our subsidiary in Mexico
and now supply the Mexican market through a third party
distributor.
During 2011, our sales and operating results continued to be
impacted by the strategic actions taken over the past couple of
years related to our strategy of product leadership and focusing
our resources on growing our core competencies within greeting
cards. These actions, all of which occurred prior to 2011,
included the acquisition of Recycled Paper Greetings
(RPG), the acquisition of the Papyrus trademark and
wholesale division of Schurman Fine Papers
(Schurman), and the change in our operating model in
Mexico and the party goods transaction with Amscan. In addition,
we divested our Retail Operations segment, shut down our Mexican
operations and closed our party goods operation in Michigan. The
integration and shutdown activities associated with these
strategic changes to our portfolio of businesses are now
substantially complete and we are beginning to realize the
associated cost savings and synergies. To further this strategy
on an international dimension, in March 2011 we acquired
Watermark, a greeting card company in the United Kingdom. The
acquisition of Watermark adds another unique style and tone to
our greeting card brand portfolio.
Total revenue for 2011 was $1.59 billion, down
$43 million from the prior year. The decreased revenue was
primarily driven by lower sales of party goods as a result of
the prior year transaction and the divestiture of the Retail
Operations segment. All other revenue factors offset each other,
with favorable foreign exchange impacts, higher sales in the
fixtures business and improved seasonal card sales offset by
lower royalty revenue, lower sales of both everyday cards and
other accessory products, and the impact of a scan-based trading
implementation.
Operating income for 2011 was $174.7 million compared to
$139.1 million in 2010. A significant amount of the
year-over-year
variance of $35.6 million was the result of the strategic
actions described above and other charges that reduced the prior
years operating income.
24
Operating income in 2010 included the following items:
|
|
|
|
|
Loss on divestiture of our Retail Operations segment
|
|
$
|
(29.2
|
)
|
Changes to distribution model in Mexico
|
|
|
(18.2
|
)
|
Settlement of a lawsuit
|
|
|
(24.0
|
)
|
Severance expense
|
|
|
(9.4
|
)
|
Net benefit related to party goods transaction
|
|
|
21.2
|
|
LIFO liquidation
|
|
|
13.0
|
|
Income associated with certain corporate-owned life insurance
programs
|
|
|
7.0
|
|
Gain on liquidation of operation in France
|
|
|
3.3
|
|
|
|
|
|
|
Total 2010 impact
|
|
$
|
(36.3
|
)
|
|
|
|
|
|
Operating income in 2011 was unfavorably impacted by integration
costs of approximately $10 million, severance costs of
approximately $7 million and lower revenues. Favorably
impacting the current year were cost savings and synergies from
the integrations, improvements driven by a higher mix of card
versus non-card products and lower manufacturing and
distribution costs driven by efficiency and cost reduction
initiatives.
Our operating income for the year, and during the fourth quarter
in particular, was impacted by changes to certain customer
agreements in the value channel that are expected to provide
expanded distribution. As discussed in our
Form 10-Q
for the third quarter ended November 26, 2010, we expected
to incur incremental costs of approximately $7 million to
$11 million during the fourth quarter, prior to generating
the incremental revenue that is expected through this expanded
distribution. During the fourth quarter, these costs totaled
approximately $9 million, including fixture costs, field
sales expenses and retailer allowances, as well as approximately
$5 million associated with the implementation of a new SBT
arrangement in one of those retailers.
Our effective tax rate for 2011 was 44.2%. The higher than
statutory tax rate was primarily driven by the effective
settlement of ten years of domestic tax audits which increased
our estimated tax assessment and associated interest reserves by
approximately $7 million. In addition, tax expense was
impacted by the unfavorable settlements of audits in a foreign
jurisdiction, the release of insurance reserves that generated
taxable income, as well as the recognition of the deferred tax
effects of the reduced deductibility of postretirement
prescription drug coverage due to the recently enacted
U.S. Patient Protection and Affordable Care Act.
25
RESULTS
OF OPERATIONS
Comparison
of the years ended February 28, 2011 and 2010
In 2011, net income was $87.0 million, or $2.11 per diluted
share, compared to $81.6 million, or $2.03 per diluted
share, in 2010.
Our results for 2011 and 2010 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Total
|
|
|
|
|
|
% Total
|
|
(Dollars in thousands)
|
|
2011
|
|
|
Revenue
|
|
|
2010
|
|
|
Revenue
|
|
|
Net sales
|
|
$
|
1,560,213
|
|
|
|
98.0
|
%
|
|
$
|
1,598,292
|
|
|
|
97.7
|
%
|
Other revenue
|
|
|
32,355
|
|
|
|
2.0
|
%
|
|
|
37,566
|
|
|
|
2.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,592,568
|
|
|
|
100.0
|
%
|
|
|
1,635,858
|
|
|
|
100.0
|
%
|
Material, labor and other production costs
|
|
|
682,368
|
|
|
|
42.8
|
%
|
|
|
713,075
|
|
|
|
43.6
|
%
|
Selling, distribution and marketing expenses
|
|
|
478,227
|
|
|
|
30.0
|
%
|
|
|
507,960
|
|
|
|
31.0
|
%
|
Administrative and general expenses
|
|
|
260,476
|
|
|
|
16.4
|
%
|
|
|
276,031
|
|
|
|
16.9
|
%
|
Other operating income net
|
|
|
(3,205
|
)
|
|
|
(0.2
|
)%
|
|
|
(310
|
)
|
|
|
(0.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
174,702
|
|
|
|
11.0
|
%
|
|
|
139,102
|
|
|
|
8.5
|
%
|
Interest expense
|
|
|
25,389
|
|
|
|
1.6
|
%
|
|
|
26,311
|
|
|
|
1.6
|
%
|
Interest income
|
|
|
(853
|
)
|
|
|
(0.0
|
)%
|
|
|
(1,676
|
)
|
|
|
(0.1
|
)%
|
Other non-operating income net
|
|
|
(5,841
|
)
|
|
|
(0.4
|
)%
|
|
|
(6,487
|
)
|
|
|
(0.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
156,007
|
|
|
|
9.8
|
%
|
|
|
120,954
|
|
|
|
7.4
|
%
|
Income tax expense
|
|
|
68,989
|
|
|
|
4.3
|
%
|
|
|
39,380
|
|
|
|
2.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
87,018
|
|
|
|
5.5
|
%
|
|
$
|
81,574
|
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Overview
During 2011, consolidated net sales were $1.56 billion,
down from $1.60 billion in the prior year. This 2.4%, or
approximately $38 million, decline was primarily the result
of decreased net sales in our North American Social Expression
Products segment and our Retail Operations segment of
approximately $53 million and $12 million,
respectively. These decreases were partially offset by higher
net sales in our fixtures business and in our International
Social Expression Products segment of approximately
$11 million and $7 million, respectively. Foreign
currency translation also favorably impacted net sales by
approximately $10 million.
Net sales in our North American Social Expression Products
segment decreased approximately $53 million. This decrease
is attributable to lower sales of party goods of approximately
$31 million, gift packaging and other non-card products of
approximately $13 million, and everyday cards of
approximately $8 million. Net sales of party goods
decreased due to the transaction completed in the prior year
fourth quarter. SBT implementations unfavorably impacted net
sales by approximately $6 million. These decreases were
partially offset by improved seasonal card sales of
approximately $5 million.
Net sales in our Retail Operations segment decreased
approximately $12 million due to the sale of our retail
store assets in April 2009. There were no net sales in our
Retail Operations segment during the twelve months ended
February 28, 2011.
The increase in our International Social Expression Products
segments net sales of approximately $7 million was
driven by our U.K. operations where boxed cards associated with
our Christmas program and favorable overall card sales.
26
The contribution of each major product category as a percentage
of net sales for the past two fiscal years was as follows:
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Everyday greeting cards
|
|
|
48
|
%
|
|
|
48
|
%
|
Seasonal greeting cards
|
|
|
24
|
%
|
|
|
23
|
%
|
Gift packaging
|
|
|
14
|
%
|
|
|
14
|
%
|
All other products*
|
|
|
14
|
%
|
|
|
15
|
%
|
|
|
|
* |
|
The all other products classification includes,
among other things, giftware, party goods, stationery, custom
display fixtures, stickers, online greeting cards and other
digital products. |
Other revenue, primarily royalty revenue from our Strawberry
Shortcake and Care Bears properties, decreased $5.2 million
from $37.6 million during 2010 to $32.4 million in
2011.
Wholesale
Unit and Pricing Analysis for Greeting Cards
Unit and pricing comparatives (on a sales less returns basis)
for 2011 and 2010 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) From the Prior Year
|
|
|
|
Everyday Cards
|
|
|
Seasonal Cards
|
|
|
Total Greeting Cards
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Unit volume
|
|
|
(2.2
|
)%
|
|
|
7.2
|
%
|
|
|
(1.8
|
)%
|
|
|
6.7
|
%
|
|
|
(2.1
|
)%
|
|
|
7.0
|
%
|
Selling prices
|
|
|
1.0
|
%
|
|
|
1.4
|
%
|
|
|
2.3
|
%
|
|
|
(1.6
|
)%
|
|
|
1.4
|
%
|
|
|
0.4
|
%
|
Overall increase / (decrease)
|
|
|
(1.2
|
)%
|
|
|
8.7
|
%
|
|
|
0.4
|
%
|
|
|
5.0
|
%
|
|
|
(0.7
|
)%
|
|
|
7.5
|
%
|
During 2011, combined everyday and seasonal greeting card sales
less returns declined 0.7%, compared to the prior year, driven
by a decrease in everyday card sales less returns of 1.2%. The
overall decrease was driven by our North American Social
Expression Products segment, where increases in our seasonal
card sales less returns are more than offset by decreases of
everyday card sales less returns.
Everyday card sales less returns were down 1.2%, compared to the
prior year, as a result of decreases in unit volume of 2.2% more
than offsetting increases in selling prices of 1.0%. The selling
price improvement was largely driven by our prior year
acquisitions, which more than offset the impact of the continued
shift to a higher mix of value line cards.
Seasonal card sales less returns increased 0.4%, with improved
selling prices of 2.3% partially offset by a decline in unit
volume of 1.8%. The increase in selling prices was primarily a
result of our prior year acquisitions within our North American
Social Expression Products segment, which more than offset the
impact of the continued shift to a higher mix of value line
cards. Based on current trends in the market, we expect the
general shift to a higher mix of value line cards will continue
in the foreseeable future for both everyday and seasonal cards.
Expense
Overview
Material, labor and other production costs (MLOPC)
for 2011 were $682.4 million, a decrease of approximately
$31 million from $713.1 million during 2010. As a
percentage of total revenue, these costs were 42.8% in the
current year compared to 43.6% in 2010. About 70% of the lower
expense was due to the elimination of operating costs as a
result of the divestiture of the retail store operations
($5 million), the wind down of our Mexican operations
($8 million) and the shutdown of party goods operations
($8 million). In addition, inventory levels increased
during the current year fourth quarter related to the
anticipated expanded distribution in the dollar channel, causing
an overall increase in inventory levels compared to the prior
year. As a result, an additional amount of certain production
and product related costs were absorbed into ending inventory,
providing a benefit to MLOPC expense. During the prior year,
inventory decreased during the year, causing less absorption of
these production and product related costs, increasing MLOPC
expense in the prior year. The net impact of these changing
inventory levels and related absorption rates was a net
year-over-year
27
MLOPC reduction of approximately $16 million. Partially
offsetting these favorable items was an increase in product
content costs ($6 million) and increased scrap and shrink
expenses ($5 million). The prior year included impairment
and severance charges related to the closure of the Kalamazoo,
Michigan facility ($16 million) and the benefit of a
favorable LIFO liquidation ($13 million) adjustment.
Selling, distribution and marketing expenses (SDM)
for 2011 were $478.2 million, decreasing $29.8 million
from $508.0 million in the prior year. The decrease in the
current year was partially due to the elimination of operating
costs due to the disposition of our retail stores
($13 million) and the wind down of our Mexican operations
($4 million), which both occurred in the prior year. Lower
supply chain costs, specifically field sales and service
operations costs ($18 million) and freight and distribution
costs ($5 million) were the result of RPG and the Papyrus
trademark and wholesale division of Schurman (collectively,
Papyrus-Recycled Greetings or PRG)
integration savings and a reduction in units shipped during the
current year. These reductions were partially offset by
increases in merchandiser expense ($3 million) and
marketing, product management and product innovation costs
($4 million). Foreign currency translation
($3 million) was also unfavorable compared to the prior
year.
Administrative and general expenses were $260.5 million in
2011, a decrease from $276.0 million during 2010. The
decrease of $15.5 million in the current year is largely
due to a prior year legal claim settlement ($24 million).
Reductions in expense related to our pension and postretirement
benefit plans ($6 million), as well as variable
compensation expense ($7 million) also contributed to the
decreased expense during the current year. Partially offsetting
these favorable variances was increased stock compensation
expense ($7 million) and continued PRG integration costs
($6 million). In addition, the prior year included a
benefit related to corporate-owned life insurance
($7 million), which did not recur in the current year.
Other operating (income) expense net was
$3.2 million during the current year compared to
$0.3 million in the prior year. The prior year included a
loss on the sale of our retail stores to Schurman
($28 million) and a gain as a result of the party goods
transaction ($34 million). The prior year also included a
net loss on the recognition of cumulative foreign currency
translation adjustments ($9 million) related to the
shutdown of our distribution facility in Mexico and the
liquidation of an operation in France.
Interest expense was $25.4 million during the current year,
down from $26.3 million in 2010. The decrease of
$0.9 million is primarily attributable to interest savings
resulting from the $99.3 million repayment of our term
loan, previously outstanding under our senior secured credit
facility, as well as reduced borrowings under this facility in
the current year.
Other non-operating income was $5.8 million during 2011
compared to $6.5 million during 2010. The decrease in the
current year is primarily due to a swing from foreign exchange
gain in the prior year to a loss in the current year, partially
offset by $3.5 million of gains on the disposal of assets,
primarily land and buildings in Mexico and Australia.
The effective tax rate was 44.2% and 32.6% during 2011 and 2010,
respectively. The higher than statutory tax rate in 2011 was
primarily driven by the effective settlement of ten years of
domestic tax audits which increased our estimated tax assessment
and associated interest reserves by approximately
$7 million. The impact of unfavorable settlements of audits
in a foreign jurisdiction, the release of insurance reserves
that generated taxable income, as well as the recognition of the
deferred tax effects of the reduced deductibility of
postretirement prescription drug coverage due to the recently
enacted U.S. Patient Protection and Affordable Care Act
also contributed to the higher than statutory rate in 2011. The
lower than statutory rate during 2010 is primarily a result of
favorable impacts of the wind down of our Mexican operations,
settlements with taxing authorities in foreign jurisdictions,
and the benefit of certain tax free proceeds from
corporate-owned life insurance.
Segment
Results
Our operations are organized and managed according to a number
of factors, including product categories, geographic locations
and channels of distribution. Our North American Social
Expression Products and our International Social Expression
Products segments primarily design, manufacture and sell
greeting cards and
28
other related products through various channels of distribution,
with mass retailers as the primary channel. As permitted under
Accounting Standards Codification (ASC) Topic 280
(ASC280), Segment Reporting, certain
operating divisions have been aggregated into both the North
American Social Expression Products and International Social
Expression Products segments. The aggregated operating divisions
have similar economic characteristics, products, production
processes, types of customers and distribution methods. The AG
Interactive segment distributes social expression products,
including electronic greetings, personalized printable greeting
cards and a broad range of graphics and digital services and
products, through a variety of electronic channels, including
Web sites, Internet portals, instant messaging services and
electronic mobile devices.
We review segment results, including the evaluation of
management performance, using consistent exchange rates between
years to eliminate the impact of foreign currency fluctuations
from operating performance. The 2011 segment results below are
presented using our planned foreign exchange rates, which were
set at the beginning of the year. For a consistent presentation,
2010 segment results have been recast to reflect the 2011
foreign exchange rates. Refer to Note 16, Business
Segment Information, to the Consolidated Financial
Statements for further information and a reconciliation of total
segment revenue to consolidated Total revenue and
total segment earnings (loss) to consolidated Income
before income tax expense.
North
American Social Expression Products Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2011
|
|
2010
|
|
% Change
|
|
Total revenue
|
|
$
|
1,173,599
|
|
|
$
|
1,226,520
|
|
|
|
(4.3
|
)%
|
Segment earnings
|
|
|
210,154
|
|
|
|
232,614
|
|
|
|
(9.7
|
)%
|
Total revenue of our North American Social Expression Products
segment, excluding the impact of foreign exchange and
intersegment items, decreased $52.9 million compared to
2010. Decreased sales of party goods due to the transaction
completed in the prior year fourth quarter reduced total revenue
by approximately $31 million during 2011. Also contributing
to the decline was a decrease in gift packaging and other
non-card products of approximately $13 million and a
decrease in everyday card sales of approximately
$8 million. SBT implementations unfavorably impacted net
sales by approximately $6 million. These decreases were
partially offset by improved seasonal card sales of
approximately $5 million.
Segment earnings, excluding the impact of foreign exchange and
intersegment items, decreased $22.5 million in 2011
compared to the prior year. This decrease was primarily driven
by the gross margin impact of lower sales volume of
approximately $32 million due to the party goods
transaction in the prior year fourth quarter and lower sales of
gift packaging and other non-card products compared to the prior
year. In addition, the prior year included a gain of
approximately $34 million as a result of the party goods
transaction, and a favorable LIFO liquidation adjustment of
approximately $13 million, both of which did not recur in
the current year. Incremental integration costs of approximately
$6 million associated with our PRG acquisition, and
increases in marketing, product management and product
innovation costs of approximately $8 million also had an
unfavorable impact on earnings. Partially offsetting these
unfavorable items were reduced supply chain costs, specifically
field sales and service operations, of approximately
$18 million as a result of savings achieved through PRG
integration efforts and a reduction in units shipped. In
addition, inventory levels increased during the current year
fourth quarter related to the anticipated expanded distribution
in the dollar channel, causing an overall increase in inventory
levels compared to the prior year. As a result, an additional
amount of certain production and product related costs were
absorbed into ending inventory, providing a benefit to MLOPC
expense. During the prior year, inventory decreased during the
year, causing less absorption of these production and product
related costs, increasing MLOPC expense in the prior year. The
net impact of these changing inventory levels and related
absorption rates was a net
year-over-year
MLOPC reduction of approximately $16 million. The prior
year included impairment and severance charges related to the
closure of the Kalamazoo, Michigan facility of approximately
$16 million, which did not recur in 2011. The elimination
of operating costs due to the wind down of our Mexican
operations during the prior year third quarter also favorably
impacted segment earnings by approximately $22 million.
29
International
Social Expression Products Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2011
|
|
2010
|
|
% Change
|
|
Total revenue
|
|
$
|
256,507
|
|
|
$
|
250,026
|
|
|
|
2.6
|
%
|
Segment earnings
|
|
|
19,536
|
|
|
|
16,693
|
|
|
|
17.0
|
%
|
Total revenue of our International Social Expression Products
segment, excluding the impact of foreign exchange, increased
$6.5 million, or 2.6%, compared to the prior year. The
increase in the current year was primarily driven by an increase
in boxed cards associated with our Christmas program and
favorable overall card sales.
Segment earnings, excluding the impact of foreign exchange,
increased $2.8 million, or 17.0%, from the prior year to
$19.5 million in the current year. This increase was
attributable to higher sales, a gain on the sale of a building,
reduced inventory scrap expense and reduced freight and
distribution expense, partially offset by higher product costs
and bad debt expense.
Retail
Operations Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2011
|
|
2010
|
|
% Change
|
|
Total revenue
|
|
$
|
-
|
|
|
$
|
11,727
|
|
|
|
(100
|
)%
|
Segment loss
|
|
|
-
|
|
|
|
(34,830
|
)
|
|
|
100
|
%
|
In April 2009, we sold our retail store assets to Schurman. As a
result, there was no activity in the Retail Operations segment
during 2011. The prior year results included the loss on
disposition of the segment of approximately $28 million.
AG
Interactive Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2011
|
|
2010
|
|
% Change
|
|
Total revenue
|
|
$
|
78,407
|
|
|
$
|
80,320
|
|
|
|
(2.4
|
)%
|
Segment earnings
|
|
|
14,103
|
|
|
|
11,319
|
|
|
|
24.6
|
%
|
Total revenue of our AG Interactive segment, excluding the
impact of foreign exchange, was $78.4 million compared to
$80.3 million in the prior year. During the current year,
we experienced lower
e-commerce
revenue in our digital photography product group of
approximately $1.9 million. Higher revenue from advertising
and new product introductions was offset by lower subscription
revenue in our online product group. At February 28, 2011,
AG Interactive had approximately 3.8 million online paid
subscriptions versus 3.9 million at February 28, 2010.
Segment earnings, excluding the impact of foreign exchange,
increased $2.8 million during 2011 compared to the prior
year. The increase in 2011 compared to the prior year was driven
by the continued decrease in overhead expenses and technology
costs that is being driven by ongoing efficiency and cost
reduction initiatives. In addition, marketing expenses were down
in the current year compared to the prior year. The prior year
included a benefit of approximately $3 million related to
the currency translation adjustment of equity that was
recognized in conjunction with the liquidation of an operation
in France.
Unallocated
Items
Centrally incurred and managed costs, excluding the impact of
foreign exchange, totaled $106.3 million and
$116.5 million in 2011 and 2010, respectively, and are not
allocated back to the operating segments. The unallocated items
included interest expense for centrally incurred debt of
$25.4 million and $26.3 million in 2011 and 2010,
respectively, and domestic profit-sharing expense of
$9.8 million and $9.3 million in 2011 and 2010,
respectively. Unallocated items also included stock-based
compensation expense of $13.0 million and $5.8 million
in 2011 and 2010, respectively. In 2010, unallocated items
included the settlement of a lawsuit totaling
$24.0 million. In addition, unallocated items included
costs associated with corporate operations including the senior
management, corporate finance, legal and human resource
functions, as well as insurance programs. These costs totaled
$58.1 million and $51.1 million in 2011 and 2010,
respectively.
30
Comparison
of the years ended February 28, 2010 and 2009
In 2010, net income was $81.6 million, or $2.03 per diluted
share, compared to a net loss of $227.8 million, or $4.89
per diluted share, in 2009.
Our results for 2010 and 2009 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Total
|
|
|
|
|
|
% Total
|
|
(Dollars in thousands)
|
|
2010
|
|
|
Revenue
|
|
|
2009
|
|
|
Revenue
|
|
|
Net sales
|
|
$
|
1,598,292
|
|
|
|
97.7
|
%
|
|
$
|
1,646,399
|
|
|
|
97.4
|
%
|
Other revenue
|
|
|
37,566
|
|
|
|
2.3
|
%
|
|
|
44,339
|
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,635,858
|
|
|
|
100.0
|
%
|
|
|
1,690,738
|
|
|
|
100.0
|
%
|
Material, labor and other production costs
|
|
|
713,075
|
|
|
|
43.6
|
%
|
|
|
809,956
|
|
|
|
47.9
|
%
|
Selling, distribution and marketing expenses
|
|
|
507,960
|
|
|
|
31.0
|
%
|
|
|
618,899
|
|
|
|
36.6
|
%
|
Administrative and general expenses
|
|
|
276,031
|
|
|
|
16.9
|
%
|
|
|
226,317
|
|
|
|
13.4
|
%
|
Goodwill and other intangible assets impairment
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
290,166
|
|
|
|
17.2
|
%
|
Other operating income net
|
|
|
(310
|
)
|
|
|
(0.0
|
)%
|
|
|
(1,396
|
)
|
|
|
(0.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
139,102
|
|
|
|
8.5
|
%
|
|
|
(253,204
|
)
|
|
|
(15.0
|
)%
|
Interest expense
|
|
|
26,311
|
|
|
|
1.6
|
%
|
|
|
22,854
|
|
|
|
1.4
|
%
|
Interest income
|
|
|
(1,676
|
)
|
|
|
(0.1
|
)%
|
|
|
(3,282
|
)
|
|
|
(0.2
|
)%
|
Other non-operating (income) expense net
|
|
|
(6,487
|
)
|
|
|
(0.4
|
)%
|
|
|
2,157
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense (benefit)
|
|
|
120,954
|
|
|
|
7.4
|
%
|
|
|
(274,933
|
)
|
|
|
(16.3
|
)%
|
Income tax expense (benefit)
|
|
|
39,380
|
|
|
|
2.4
|
%
|
|
|
(47,174
|
)
|
|
|
(2.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
81,574
|
|
|
|
5.0
|
%
|
|
$
|
(227,759
|
)
|
|
|
(13.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Overview
Consolidated net sales in 2010 were $1.60 billion, compared
to $1.65 billion in the prior year. This 2.9%, or
approximately $48 million, decrease was primarily the
result of lower net sales in our Retail Operations segment of
approximately $158 million, unfavorable foreign currency
translation of approximately $32 million and a decrease in
net sales in our AG Interactive segment of approximately
$3 million. These decreases were partially offset by higher
net sales in our North American Social Expression Products
segment of approximately $140 million and increased net
sales in our International Social Expression Products segment of
approximately $4 million due to improved sales of gifting
and other non-card products.
Net sales of our North American Social Expression Products
segment increased approximately $140 million compared to
the prior year. Greeting cards improved approximately
$169 million, due to the acquisition of PRG, which added
approximately $129 million, as well as growth in our legacy
greeting card business of approximately $26 million and the
impact of lower deferred cost reserves of approximately
$14 million. This increase was partially offset by lower
accessories sales of approximately $24 million, including
gift packaging, calendars and party goods, as well as lower
sales of approximately $5 million in Mexico as we began
winding down our operations there in the third quarter of 2010.
Net sales of our Retail Operations segment decreased
approximately $158 million due to the sale of this business
in April 2009. Approximately $12 million of sales is
included in 2010 compared to approximately $170 million of
sales in the prior year.
Net sales of our AG Interactive segment decreased approximately
$3 million compared to 2009. The decrease is due primarily
to lower
e-commerce
revenue in our digital photography product group and lower
advertising revenue in our online product group, as market
conditions continue to be challenging, partially offset by
increased subscription revenue in our online product group.
31
The contribution of each major product category as a percentage
of net sales for the past two fiscal years was as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Everyday greeting cards
|
|
|
48%
|
|
|
|
43%
|
|
Seasonal greeting cards
|
|
|
23%
|
|
|
|
22%
|
|
Gift packaging
|
|
|
14%
|
|
|
|
14%
|
|
All other products*
|
|
|
15%
|
|
|
|
21%
|
|
|
|
|
* |
|
The all other products classification includes,
among other things, giftware, party goods, stationery, custom
display fixtures, stickers, online greeting cards and other
digital products. |
Other revenue, primarily royalty revenue from our Strawberry
Shortcake and Care Bears properties, decreased $6.7 million
from $44.3 million during 2009 to $37.6 million in
2010.
Wholesale
Unit and Pricing Analysis for Greeting Cards
Unit and pricing comparatives (on a sales less returns basis)
for 2010 and 2009 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) From the Prior Year
|
|
|
|
Everyday Cards
|
|
|
Seasonal Cards
|
|
|
Total Greeting Cards
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Unit volume
|
|
|
7.2
|
%
|
|
|
1.7
|
%
|
|
|
6.7
|
%
|
|
|
3.4
|
%
|
|
|
7.0
|
%
|
|
|
2.2
|
%
|
Selling prices
|
|
|
1.4
|
%
|
|
|
(1.5
|
)%
|
|
|
(1.6
|
)%
|
|
|
(5.3
|
)%
|
|
|
0.4
|
%
|
|
|
(2.7
|
)%
|
Overall increase / (decrease)
|
|
|
8.7
|
%
|
|
|
0.2
|
%
|
|
|
5.0
|
%
|
|
|
(2.1
|
)%
|
|
|
7.5
|
%
|
|
|
(0.5
|
%)
|
During 2010, combined everyday and seasonal greeting card sales
less returns improved 7.5%, compared to the prior year, with
increases coming from both everyday and seasonal cards. The
overall increase was driven by the PRG acquisition.
Everyday card sales less returns were up 8.7%, compared to the
prior year, as a result of increases in both unit volume and
selling prices of 7.2% and 1.4%, respectively. The increase in
unit volume was the result of the PRG acquisition. Increased
selling prices were driven primarily by our North American
Social Expression Products segment where higher priced
technology and Papyrus cards are continuing to improve average
prices despite the growing volume of value line cards.
Seasonal card sales less returns increased 5.0% compared to the
prior year as a result of increases in unit volume of 6.7%. This
increase in unit volume was driven by the acquisition of PRG as
well as improvements in the Easter, Christmas and Fathers
Day seasonal programs. The decrease in selling prices of 1.6%
related primarily to the continued mix shift towards value
priced cards across most seasonal programs and a more balanced
offering of technology cards.
Expense
Overview
MLOPC Expenses for 2010 were $713.1 million, a decrease
from $810.0 million in 2009. As a percentage of total
revenue, these costs were 43.6% in 2010 compared to 47.9% in
2009. The decrease of $96.9 million is driven by our
continued focus on the efficiency of our operations, including
tightened control of costs, reductions in supply chain, scrap,
and distribution costs due to an improved balance of card unit
shipments with card unit net sales, a favorable change in the
product mix, and a favorable foreign currency translation impact
of approximately $16 million. The favorable product mix of
approximately $27 million is primarily due to a sales shift
towards lower cost card products versus non-card products. This
shift to a higher mix of greeting cards was due to the
acquisition of PRG as well as increased net sales within our
legacy greeting card business, as well as lower sales of gift
packaging, calendars and party goods products. The disposition
of the Retail Operations segment, which sold many non-card
gifting products, also contributed to the favorable mix. The
lower costs are also attributable to decreased scrap and shrink
($23 million) and the LIFO liquidation ($13 million)
that we experienced during 2010 as a result of improved
inventory management. The remaining
32
decrease of approximately $17 million is attributable to
lower product input costs, realization of other cost savings
initiatives put in place during the fourth quarter of 2009 and a
favorable volume variance. Included in 2009 were costs
($5 million) associated with the conversion to our new
Canadian line of cards and expenses ($16 million)
associated with our production of film-based entertainment, both
of which did not recur in 2010. Partially offsetting these
decreases were impairment and severance charges related to the
closure of the Kalamazoo, Michigan facility ($16 million)
and inventory charges associated with the wind down of our
Mexico distribution facility ($4 million) during 2010.
SDM expenses were $508.0 million in 2010, decreasing from
$618.9 million in 2009. The decrease of $110.9 million
is due to lower spending ($97 million) and favorable
foreign currency translation ($14 million). The decreased
spending is a result of the elimination of the costs to operate
our retail stores ($98 million) due to the disposition of
those stores during the first quarter of 2010, reduced supply
chain costs ($36 million), specifically freight and
distribution costs, due to a decrease in units shipped, as well
as less expenses in our licensing business ($11 million).
The lower expenses in our licensing business are attributable to
the benefits from 2009 overhead reductions and less agency fees
in line with the decrease in royalty revenue in 2010. These
favorable variances were substantially offset by ongoing SDM
expenses ($48 million) from our PRG acquisition.
Administrative and general expenses were $276.0 million in
2010, an increase from $226.3 million in 2009. The
$49.7 million increase is due to increased spending
($53 million) offset by favorable foreign currency
translation impacts ($3 million). The increase in spending
is primarily driven by variable compensation expense
($47 million) which includes bonus, profit-sharing
contributions, and 401(k) matching contributions and the
settlement of a legal claim ($24 million). The fiscal year
2009 included a nominal amount of variable compensation
expenses, as we did not meet the 2009 operating results required
to make these variable compensation payments. These increases
were partially offset by a corporate-owned life insurance
benefit ($10 million) due to higher than average death
benefit income reported by our third party administrators, lower
bad debt expense ($4 million) and savings from prior year
cost reduction initiatives.
During 2009, goodwill and other intangible assets impairment
charges of $290.2 million were recorded. In the third
quarter of 2009, indicators emerged during the period that led
us to conclude that an impairment test was required prior to the
annual test. As a result, impairment was recorded for a
reporting unit in the International Social Expression Products
segment, located in the U.K., and in our AG Interactive segment.
The goodwill impairment charge recorded in the U.K. was
$82.1 million, which represented all of the goodwill for
this reporting unit. The goodwill and intangible assets
impairment charge for the AG Interactive segment was
$160.1 million, which included all of the goodwill for AG
Interactive. An additional impairment analysis was performed at
the end of the fourth quarter of 2009 as a result of the
continued significant deterioration of the global economic
environment and the decline in the price of our common shares.
Based on that analysis, we recorded goodwill charges of
$47.9 million, which included all the goodwill for our
North American Greeting Card Division (NAGCD). NAGCD
is part of our North American Social Expression Products segment.
Interest expense was $26.3 million in 2010, compared to
$22.9 million in 2009. The increase of $3.4 million is
attributable to increased borrowings on the new
7.375% notes and the $100 million term loan facility
that were issued and drawn down, respectively, during the fourth
quarter of 2009. These increases were partially offset by
decreased borrowings on our revolving credit facility.
Other operating income net was $0.3 million in
2010 compared to $1.4 million in 2009. 2010 includes a loss
of approximately $28 million on the sale of our retail
stores to Schurman and a net loss of approximately
$8.6 million on the recognition of cumulative foreign
currency translation adjustments related to the shutdown of our
distribution facility in Mexico and the liquidation of an
operation in France. These losses were partially offset by a
gain of approximately $34 million associated with the party
goods transaction.
Other non-operating (income) expense net was income
of $6.5 million during 2010 compared to expense of
$2.2 million in 2009. The $8.7 million increase in
income is due primarily to a swing from foreign exchange loss in
2009 to a gain in 2010.
33
The effective tax rate was 32.6% and 17.2% during 2010 and 2009,
respectively. The lower than statutory rate in 2010 is primarily
a result of the favorable effect of the wind down of our
operations in Mexico, settlements with taxing authorities in
foreign jurisdictions and the benefit of certain tax free
proceeds from corporate-owned life insurance. The lower
effective tax rate in 2009 is primarily related to the goodwill
impairment and its impact on the pretax loss in that period as
only a portion of the charge was deductible for tax purposes.
Segment
Results
Our operations are organized and managed according to a number
of factors, including product categories, geographic locations
and channels of distribution. Our North American Social
Expression Products and our International Social Expression
Products segments primarily design, manufacture and sell
greeting cards and other related products through various
channels of distribution, with mass retailers as the primary
channel. As permitted under ASC 280 certain operating
divisions have been aggregated into both the North American
Social Expression Products and International Social Expression
Products segments. The aggregated operating divisions have
similar economic characteristics, products, production
processes, types of customers and distribution methods. The AG
Interactive segment distributes social expression products,
including electronic greetings, personalized printable greeting
cards and a broad range of graphics and digital services and
products, through a variety of electronic channels, including
Web sites, Internet portals, instant messaging services and
electronic mobile devices. The AG Interactive segment also
offers online photo sharing and a platform to provide consumers
the ability to use their own photos to create unique, high
quality physical products, including greeting cards, calendars,
photo albums and photo books.
We review segment results, including the evaluation of
management performance, using consistent exchange rates between
years to eliminate the impact of foreign currency fluctuations
from operating performance. The segment results of prior years
have been recast to reflect the 2011 foreign exchange rates for
a consistent presentation. Refer to Note 16, Business
Segment Information, to the Consolidated Financial
Statements for further information and a reconciliation of total
segment revenue to consolidated Total revenue and
total segment earnings (loss) to consolidated Income
(loss) before income tax expense (benefit).
North
American Social Expression Products Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2010
|
|
2009
|
|
% Change
|
|
Total revenue
|
|
$
|
1,226,520
|
|
|
$
|
1,086,398
|
|
|
|
12.9
|
%
|
Segment earnings
|
|
|
232,614
|
|
|
|
67,412
|
|
|
|
245.1
|
%
|
Total revenue of our North American Social Expression Products
segment, excluding the impact of foreign exchange and
intersegment items, increased $140.1 million during 2010
compared to 2009. The majority of the revenue improvement is
attributable to higher sales of greetings cards, from the
acquisition of PRG, which added approximately $129 million,
as well as growth in our legacy greeting card business, which
increased by approximately $26 million and the impact of
lower deferred cost reserves of approximately $14 million.
The increased revenue from greeting cards was partially offset
by lower sales in our gift packaging, calendar and party goods
product lines of approximately $24 million. Additionally,
fiscal 2010 included the impact of lower revenue from our
operations in Mexico of approximately $5 million as we
moved to a third party distribution business model during the
third quarter.
Segment earnings, excluding the impact of foreign exchange and
intersegment items, increased $165.2 million in the current
year compared to 2009. Higher net sales combined with
improvements in product mix, lower input costs and other cost
savings initiatives provided benefits of approximately
$35 million. An improved balance of card unit shipments
compared to card unit net sales reduced supply chain, scrap and
distribution costs by approximately $63 million. The gain
on the sale of certain assets, equipment and processes of the
DesignWare party goods product lines in conjunction with the
party goods transaction resulted in a gain of approximately
$34 million. Segment earnings were also favorably impacted
by a reduction of certain deferred cost reserves of
approximately $14 million. The LIFO liquidation resulting
from better inventory management of approximately
$13 million and approximately $7 million in savings
recognized from reductions in non-income tax expenses positively
impacted earnings. Also contributing to the current year
favorability was the
34
prior year goodwill impairment charge of $48 million, which
unfavorably impacted the 2009 earnings. Partially offsetting
these improvements were the impairment and severance charges of
approximately $16 million recorded in connection with the
closing of the Kalamazoo, Michigan facility, increased variable
compensation expense of approximately $17 million and
approximately $18 million associated with the shutdown of
the distribution facility in Mexico.
International
Social Expression Products Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2010
|
|
2009
|
|
% Change
|
|
Total revenue
|
|
$
|
250,026
|
|
|
$
|
245,331
|
|
|
|
1.9
|
%
|
Segment earnings (loss)
|
|
|
16,693
|
|
|
|
(68,545
|
)
|
|
|
-
|
|
Total revenue of our International Social Expression Products
segment, excluding the impact of foreign exchange, increased
$4.7 million, or 1.9% during 2010, compared to the prior
year. The revenue improvement is primarily attributable to
improved sales of non-card products as a result of new product
introductions.
Segment earnings, excluding the impact of foreign exchange,
increased $85.2 million from a loss of $68.5 million
in 2009 to earnings of $16.7 million during the current
year. The increase is primarily the result of the goodwill
impairment charge of approximately $59 million
(approximately $82 million reported above less
approximately $23 million of foreign currency based on the
consistent exchange rates utilized for segment reporting
purposes) that was recorded during the third quarter of 2009.
The remaining increase is attributable to the cost reduction
initiatives implemented during 2009, higher sales in 2010,
customer sales mix and charges taken in the prior year as a
result of the bankruptcy of a major customer.
Retail
Operations Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2010
|
|
2009
|
|
% Change
|
|
Total revenue
|
|
$
|
11,727
|
|
|
$
|
170,066
|
|
|
|
(93.1
|
)%
|
Segment loss
|
|
|
(34,830
|
)
|
|
|
(19,727
|
)
|
|
|
(76.6
|
)%
|
In April 2009, we sold our retail store assets to Schurman. As a
result, 2010 included results for the portion of the period that
we operated the stores as well as the loss on disposition.
Total revenue, excluding the impact of foreign exchange, in our
Retail Operations segment decreased $158.3 million for
2010, compared to the prior year period due to the disposition.
Segment earnings, excluding the impact of foreign exchange, was
a loss of $34.8 million in 2010, compared to a loss of
$19.7 million during 2009. The segment loss in 2010
included a $28 million loss on the disposition and
approximately $1 million of severance expense as a result
of the disposition of the stores.
AG
Interactive Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2010
|
|
2009
|
|
% Change
|
|
Total revenue
|
|
$
|
80,320
|
|
|
$
|
82,623
|
|
|
|
(2.8
|
)%
|
Segment earnings (loss)
|
|
|
11,319
|
|
|
|
(159,670
|
)
|
|
|
-
|
|
Total revenue of our AG Interactive segment for 2010, excluding
the impact of foreign exchange, was $80.3 million compared
to $82.6 million in the prior year. The lower revenue is
due primarily to lower
e-commerce
revenue in our digital photography product group and lower
advertising revenue in our online product group, as market
conditions continue to be challenging, partially offset by
increased subscription revenue in our online product group. At
the end of 2010, AG Interactive had approximately
3.9 million online paid subscriptions versus
4.1 million at the prior year-end.
Segment earnings, excluding the impact of foreign exchange, were
$11.3 million in 2010 compared to a loss of
$159.7 million during the prior year. The increase of
$171.0 million compared to the prior year is primarily
attributable to the goodwill and intangible asset impairments of
approximately $153 million (approximately $160 million
reported above less approximately $7 million of foreign
currency based on the consistent
35
exchange rates utilized for segment reporting purposes). Fiscal
2010 included a benefit of approximately $3 million related
to the currency translation adjustment of equity that was
recognized in conjunction with the liquidation of an operation
in France. Also contributing to the improvement in 2010 were
benefits of cost reduction efforts taken towards the end of the
prior fiscal year and less intangible asset amortization expense
as a result of the intangible asset impairment recorded during
the prior year.
Unallocated
Items
Centrally incurred and managed costs, excluding the impact of
foreign exchange, totaled $116.5 million and
$80.2 million in 2010 and 2009, respectively, and are not
allocated back to the operating segments. The unallocated items
included interest expense for centrally incurred debt of
$26.3 million and $22.9 million in 2010 and 2009,
respectively, and domestic profit-sharing expense of
$9.3 million in 2010. We did not incur profit-sharing
expense during 2009 based on the operating results in the year.
Unallocated items also included stock-based compensation expense
of $5.8 million and $4.4 million in 2010 and 2009,
respectively. In 2010, unallocated items included the settlement
of a lawsuit totaling $24.0 million, all of which was paid
as of February 28, 2010. In addition, unallocated items
included costs associated with corporate operations including
the senior management, corporate finance, legal and human
resource functions, as well as insurance programs. These costs
totaled $51.1 million and $52.9 million in 2010 and
2009, respectively.
Liquidity
and Capital Resources
Operating
Activities
During the year, cash flow from operating activities provided
cash of $179.8 million compared to $197.5 million in
2010, a decrease of $17.7 million. Cash flow from operating
activities for 2010 compared to 2009 resulted in an increase of
$124.5 million from $73.0 million in 2009.
Other non-cash charges were $3.7 million during 2011
compared to $12.4 million in 2010 and $3.8 million in
2009. The decrease from prior year is primarily due to an
$8.6 million loss on foreign currency translation
adjustments that were reclassified to earnings upon liquidation
of our operations in Mexico and France.
Accounts receivable was a source of cash of $15.3 million
in 2011 compared to a use of cash of $56.1 million in 2010
and a use of cash of $6.5 million in 2009. As a percentage
of the prior twelve months net sales, net accounts
receivable was 7.7% at February 28, 2011 compared to 8.5%
at February 28, 2010. The improvement in cash flow in the
current year was the result of a higher accounts receivable
balance at February 28, 2010 as compared to
February 28, 2009. As disclosed with our results for the
year ended February 28, 2010, the increased balance was
partially due to higher sales in the fourth quarter and the
timing of collections from certain customers compared to the
prior year. These amounts were collected during the twelve
months ended February 28, 2011, thus resulting in a source
of cash.
Inventories were a use of cash of $13.1 million in 2011
compared to sources of cash of $14.9 million in 2010 and
$2.9 million in 2009. The use of cash in 2011 is primarily
due to an inventory build during the fourth quarter related to
expanded distribution expected within the dollar channel during
the upcoming year. The source of cash in 2010 is attributable to
the North American Social Expression Products segment, which
lowered inventory levels for all product categories.
Other current assets were a use of cash of $1.9 million
during 2011, compared to sources of cash of $16.9 million
during 2010 and $17.3 million in 2009. The decrease in the
current year is primarily due to a large cash generation in
2010, which was attributable to the use of trust assets to fund
active medical claim expenses. The activity in 2009 is primarily
attributable to a $90 million receivable recorded as part
of the termination of several long-term supply agreements in
fiscal 2007. Approximately $60 million of this receivable
was collected in the fourth quarter of 2007 and the balance was
received in 2008 and 2009.
Deferred costs net generally represents payments
under agreements with retailers net of the related amortization
of those payments. During 2011, 2010 and 2009, amortization
exceeded payments by $14.3 million, $18.4 million and
$27.6 million, respectively.
36
Accounts payable and other liabilities used $31.0 million
of cash in 2011 compared to $0.6 million of cash in 2010
and $68.2 million of cash in 2009. The change was largely
attributable to the difference in variable compensation payments
in the year ended February 28, 2011 compared to the year
ended February 28, 2010. The current year includes the
payment of variable compensation from the year ended
February 28, 2010 where we exceeded our established
compensation targets, thus a large use of cash in the current
year period. The prior year included minimal compensation
payments related to the Corporations performance in the
year ended February 28, 2009, as compensations targets were
not met.
Investing
Activities
Cash provided by investing activities was $8.2 million
during 2011 compared to cash used by investing activities of
$40.0 million during 2010 and $137.3 million during
2009. The source of cash during 2011 included $25.2 million
received for the sale of certain assets, equipment and processes
of the DesignWare party goods product lines, which occurred in
the prior year fourth quarter. This cash was held in escrow at
February 28, 2010. The current year also included a
$5.7 million return of capital related to our investment in
AAH Holdings Corporation, the parent company of Amscan. In
addition, we received approximately $12 million related to
the sale of the land and buildings associated with the closure
of our Mexico facility and a manufacturing facility within the
International Expressions Product segment during the current
year.
Capital expenditures totaled $36.3 million,
$26.6 million and $55.7 million in 2011, 2010 and
2009, respectively. We currently expect 2012 capital
expenditures to total in the range of $45 million to
$50 million.
The use of cash during 2010 was primarily related to cash
payments for business acquisitions and capital expenditures.
During fiscal 2010, we acquired the Papyrus brand and its
related wholesale business division from Schurman. At the same
time, we sold the assets of our Retail Operations segment to
Schurman and acquired an equity interest in Schurman. Cash paid,
net of cash acquired, was $14.0 million. Also, in fiscal
2010, we paid $5.3 million of acquisition costs related to
RPG, which we acquired in the fourth quarter of 2009. Partially
offsetting these uses of cash were proceeds of $4.7 million
from the sale of our calendar and candy product lines and
$1.1 million from the sale of fixed assets.
The use of cash during 2009 was primarily related to investments
in debt securities, business acquisitions and capital
expenditures. During the second quarter of 2009, we paid
$44.2 million to acquire, at a substantial discount, first
lien debt securities of RPG. During the fourth quarter of 2009,
we acquired all of the issued and outstanding capital stock of
RPG for a combination of cash, long-term debt and the
contribution of the debt securities that we acquired during the
second quarter of 2009. The cash paid as a result of this
transaction, net of cash acquired, was $22.3 million. We
also issued approximately $55 million of long-term debt
(with a fair market value of approximately $28 million) and
relinquished the RPG first lien debt securities (with a fair
market value of approximately $41 million), which we had
previously purchased for $44.2 million. Also, in 2009, we
purchased a card publisher and franchised distributor of
greeting cards in the U.K. for $15.6 million.
Financing
Activities
Financing activities used $117.2 million of cash during
2011 compared to using $86.5 million of cash in 2010 and
providing $23.0 million of cash in 2009. The use of cash in
the current year relates primarily to the repayment of the term
loan under our senior secured credit facility in the amount of
$99.3 million as well as share repurchases and dividend
payments. During 2011, we paid $13.5 million to repurchase
approximately 0.5 million Class B common shares in
accordance with our Amended and Restated Articles of
Incorporation and paid dividends of $22.4 million.
In 2010, the cash used related primarily to net repayments of
long-term debt borrowings of $62.4 million as well as share
repurchases and dividend payments. During 2010,
$5.8 million was paid to repurchase approximately
1.5 million Class A common shares under our repurchase
program and $6.0 million was paid to repurchase
approximately 0.3 million Class B common shares in
accordance with our Amended and Restated Articles of
Incorporation. We paid dividends totaling $19.0 million
during 2010.
37
In 2009, the cash provided by financing activities related
primarily to additional long-term debt borrowings of
$141.5 million partially offset by share repurchases and
long-term debt repayments. During 2009, $73.8 million was
paid to repurchase approximately 7.9 million shares under
our Class A common share repurchase programs and
$0.2 million was paid to repurchase approximately 10,000
Class B common shares in accordance with our Amended and
Restated Articles of Incorporation. During the second quarter of
2009, $22.5 million was paid upon exercise of the put
option on our 6.10% senior notes. We paid dividends
totaling $22.6 million during 2009.
Our receipt of the exercise price on stock options provided
$16.6 million, $6.6 million and $0.5 million in
2011, 2010 and 2009, respectively.
Credit
Sources
Substantial credit sources are available to us. In total, we had
available sources of approximately $430 million at
February 28, 2011. This included our $350 million
senior secured credit facility and our $80 million accounts
receivable securitization facility. Borrowings under the
accounts receivable securitization facility are limited based on
our eligible receivables outstanding. At February 28, 2011,
we had no borrowings outstanding under the accounts receivable
securitization facility or the revolving credit facility. We
had, in the aggregate, $44.7 million outstanding under
letters of credit, which reduces the total credit availability
thereunder as of February 28, 2011.
On June 11, 2010, we amended and restated our senior
secured credit facility by entering into an Amended and Restated
Credit Agreement (the Amended and Restated Credit
Agreement). Pursuant to the terms of the Amended and
Restated Credit Agreement, we may continue to borrow, repay and
re-borrow up to $350 million under the revolving credit
facility, with the ability to increase the size of the facility
to up to $400 million, subject to customary conditions. The
Amended and Restated Credit Agreement also continues to provide
for a $25 million
sub-limit
for the issuance of swing line loans and a $100 million
sub-limit
for the issuance of letters of credit.
The obligations under the Amended and Restated Credit Agreement
are guaranteed by our material domestic subsidiaries and are
secured by substantially all of our personal property and our
material domestic subsidiaries, including a pledge of all of the
capital stock in substantially all of our domestic subsidiaries
and 65% of the capital stock of our material first tier
international subsidiaries. The Amended and Restated Credit
Agreement, including revolving loans thereunder, will mature on
June 11, 2015. In connection with the Amended and Restated
Credit Agreement, the term loan under the original credit
facility was terminated and we repaid the full $99 million
outstanding under the term loan using cash on hand. The proceeds
of the borrowings under the Amended and Restated Credit
Agreement may be used to provide working capital and for other
general corporate purposes.
Revolving loans that are denominated in U.S. dollars will
bear interest at either the U.S. base rate or the London
Inter-Bank Offer Rate (LIBOR), at our election, plus
a margin determined according to our leverage ratio. Swing line
loans will bear interest at a quoted rate agreed upon by us and
the swing line lender. In addition to interest, we are required
to pay commitment fees on the unused portion of the revolving
credit facility. The commitment fee rate is initially 0.50% per
annum and is subject to adjustment thereafter based on our
leverage ratio.
The Amended and Restated Credit Agreement contains certain
restrictive covenants that are customary for similar credit
arrangements, including covenants relating to limitations on
liens, dispositions, issuance of debt, investments, payment of
dividends, repurchases of capital stock, acquisitions and
transactions with affiliates. There are also financial
performance covenants that require us to maintain a maximum
leverage ratio and a minimum interest coverage ratio. The
Amended and Restated Credit Agreement also requires us to make
certain mandatory prepayments of outstanding indebtedness using
the net cash proceeds received from certain dispositions, events
of loss and additional indebtedness that we incur.
We are also party to an amended and restated receivables
purchase agreement. The agreement has available financing of up
to $80 million. The maturity date of the agreement is
September 21, 2012, however, the
38
agreement will terminate upon termination of the liquidity
commitments obtained by the purchaser groups from third party
liquidity providers.
Such commitments may be made available to the purchaser groups
for 364-day
periods only (initial
364-day
period began on September 23, 2009), and there can be no
assurances that the third party liquidity providers will renew
or extend their commitments under the receivables purchase
agreement. If that is the case, the receivables purchase
agreement will terminate and we will not receive the benefit of
the entire three-year term of the agreement. On
September 22, 2010, the liquidity commitments were renewed
for an additional
364-day
period.
The interest rate under the accounts receivable securitization
facility is based on (i) commercial paper interest rates,
(ii) LIBOR rates plus an applicable margin or (iii) a
rate that is the higher of the prime rate as announced by the
applicable purchaser financial institution or the federal funds
rate plus 0.50%. AGC Funding pays an annual commitment fee of
60 basis points on the unfunded portion of the accounts
receivable securitization facility, together with customary
administrative fees on outstanding letters of credit that have
been issued and on outstanding amounts funded under the facility.
The amended and restated receivables purchase agreement contains
representations, warranties, covenants and indemnities customary
for facilities of this type, including our obligation to
maintain the same consolidated leverage ratio as it is required
to maintain under its secured credit facility.
On May 24, 2006, we issued $200 million of
7.375% senior unsecured notes, due on June 1, 2016
(the Original Senior Notes). The proceeds from this
issuance were used for the repurchase of our 6.10% senior
notes due on August 1, 2028 that were tendered in the
tender offer and consent solicitation that was completed on
May 25, 2006.
On February 24, 2009, we issued $22 million of
additional 7.375% senior unsecured notes described above
(Additional Senior Notes) and $32.7 million of
new 7.375% unsecured notes due on June 1, 2016 (New
Notes, together with the Original Senior Notes, and the
Additional Senior Notes, the Notes) in conjunction
with the acquisition of RPG. The original issue discount from
the issuance of these notes of $26.2 million was recorded
as a reduction of the underlying debt issuances and is being
amortized over the life of the debt using the effective interest
method. Including the original issue discount, the New Notes and
the Additional Senior Notes have an effective annualized
interest rate of approximately 20.3%. Except as described below,
the terms of the New Notes and the Additional Senior Notes are
the same.
The Notes will mature on June 1, 2016 and bear interest at
a fixed rate of 7.375% per annum, commencing June 1, 2009.
The Notes constitute general, unsecured obligations of the
Corporation. The Notes rank equally with our other senior
unsecured indebtedness and senior in right of payment to all of
our obligations that are, by their terms, expressly subordinated
in right of payment to the Notes, as applicable. The Original
Senior Notes and the Additional Senior Notes are effectively
subordinated to all of our secured indebtedness, including
borrowings under our credit agreement, to the extent of the
value of the assets securing such indebtedness. The New Notes
are contractually subordinated to amounts outstanding under the
credit agreement, and are effectively subordinated to any other
secured indebtedness that we may issue from time to time to the
extent of the value of the assets securing such indebtedness.
The Notes generally contain comparable covenants as described
above for our credit agreement. The New Notes, however, also
provide that if we incur more than an additional
$10 million of indebtedness (other than indebtedness under
the credit agreement or certain other permitted indebtedness),
such indebtedness must be (a) pari passu in right of
payment to the New Notes and expressly subordinated in right of
payment to the credit agreement at least to the same extent as
the New Notes, or (b) expressly subordinated in right of
payment to the New Notes. Alternatively, we can redeem the New
Notes in whole, but not in part, at a purchase price equal to
100% of the principal amount thereof plus accrued but unpaid
interest, if any, or have the subordination provisions removed
from the New Notes.
At February 28, 2011, we were in compliance with our
financial covenants under the borrowing agreements described
above.
39
The total fair value of the Corporations publicly traded
debt, based on quoted market prices, was $237.5 (at a carrying
value of $232.7) and $224.7 (at a carrying value of $230.5) at
February 28, 2011 and 2010, respectively. As of
February 28, 2011, there were no balances outstanding under
our revolving credit facility or receivables purchase
agreements. The total fair value of our non-publicly traded
debt, term loan and revolving credit facility, based on
comparable publicly traded debt prices, was $99.3 million
(at a carrying value of $99.3 million) at February 28,
2010.
Throughout fiscal 2012, we will continue to consider all options
for capital deployment including growth options, capital
expenditures, the opportunity to repurchase our own shares,
reducing debt or, as appropriate, preserving cash. Consistent
with this ongoing objective, in March 2011 we announced that in
fiscal 2012 we expect that we will begin to invest in the
development of a world headquarters in the Northeast Ohio area.
While the state of Ohio has committed to a number of tax
credits, loans and other incentives to encourage us to remain in
Ohio, we expect to spend tens of millions of dollars of our own
funds on the project, the majority of which are expected to be
incurred after fiscal 2012. In addition, as announced in January
2009, our Board of Directors has authorized the repurchase of up
to $75 million of Class A common shares
($46.6 million remaining at February 28, 2011), that
may be made through open market purchases or privately
negotiated transactions as market conditions warrant, at prices
we deem appropriate, and subject to applicable legal
requirements and other factors. There is no set expiration date
for this program. We also may, from time to time, seek to retire
or purchase our outstanding debt through cash purchases
and/or
exchanges, in open market purchases, privately negotiated
transactions or otherwise, including strategically repurchasing
our 7.375% senior unsecured notes due in 2016. Such
repurchases or exchanges, if any, will depend on prevailing
market conditions, our liquidity requirements, contractual
restrictions and other factors. The amounts involved may be
material.
Over the next five to seven years we expect to allocate
resources, including capital, to refresh our information
technology systems by modernizing our systems, redesigning and
deploying new processes, and evolving new organization
structures all intended to drive efficiencies within the
business and add new capabilities. Due to the long-term nature
of this project, together with the fact that we are in the early
stages of this project, currently we cannot reasonably estimate
amounts that we will spend over the life of this project;
however, amounts could be material in any given fiscal year and
over the life of the project. During fiscal 2012, we currently
estimate that we will spend $13 million plus or minus 25%,
including both expense and capital, on these system projects. In
addition, as described in Notes 1 and 11 to the
Consolidated Financial Statements included in Part I of
this report, in connection with our sale of certain of the
assets of our Retail Operations segment to Schurman, we remain
subject to a number of Schurmans retail store leases on a
contingent basis through our subleases, and have provided
Schurman credit support, including a $12 million guaranty
of amounts that may from time to time be owed by Schurman to the
lenders under its senior revolving credit facility, as well as
the ability to borrow from us up to $10 million under a
loan agreement we have with Schurman.
Our future operating cash flow and borrowing availability under
our credit agreement and our accounts receivable securitization
facility are expected to meet currently anticipated funding
requirements. The seasonal nature of our business results in
peak working capital requirements that may be financed through
short-term borrowings when cash on hand is insufficient.
40
Contractual
Obligations
The following table presents our contractual obligations and
commitments to make future payments as of February 28, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period as of February 28, 2011
|
|
(In thousands)
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
Thereafter
|
|
|
Total
|
|
|
Long-term debt
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
254,867
|
|
|
$
|
254,867
|
|
Operating leases (1)
|
|
|
16,195
|
|
|
|
11,599
|
|
|
|
8,075
|
|
|
|
6,143
|
|
|
|
4,831
|
|
|
|
10,525
|
|
|
|
57,368
|
|
Commitments under customer agreements
|
|
|
64,116
|
|
|
|
38,334
|
|
|
|
31,234
|
|
|
|
6,733
|
|
|
|
-
|
|
|
|
-
|
|
|
|
140,417
|
|
Commitments under royalty agreements
|
|
|
9,181
|
|
|
|
10,208
|
|
|
|
3,510
|
|
|
|
3,400
|
|
|
|
9,472
|
|
|
|
2,300
|
|
|
|
38,071
|
|
Interest payments
|
|
|
21,139
|
|
|
|
20,921
|
|
|
|
20,649
|
|
|
|
20,649
|
|
|
|
19,320
|
|
|
|
4,833
|
|
|
|
107,511
|
|
Severance
|
|
|
6,423
|
|
|
|
1,159
|
|
|
|
420
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,002
|
|
Commitments under purchase agreements
|
|
|
4,500
|
|
|
|
4,500
|
|
|
|
4,500
|
|
|
|
4,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,000
|
|
|
|
|
|
|
|
|
|
$
|
121,554
|
|
|
$
|
86,721
|
|
|
$
|
68,388
|
|
|
$
|
41,425
|
|
|
$
|
33,623
|
|
|
$
|
272,525
|
|
|
$
|
624,236
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Approximately $36.1 million of the operating lease
commitments in the table above relate to retail stores acquired
by Schurman that are being subleased to Schurman. The failure of
Schurman to operate the retail stores successfully could have a
material adverse effect on the Corporation, because if Schurman
is not able to comply with its obligations under the subleases,
the Corporation remains contractually obligated, as primary
lessee, under those leases. |
The interest payments in the above table are determined assuming
the same level of debt outstanding in the future years as at
February 28, 2011 for the revolving credit facility at the
current average interest rates for those facilities.
In addition to the contracts noted in the table, we issue
purchase orders for products, materials and supplies used in the
ordinary course of business. These purchase orders typically do
not include long-term volume commitments, are based on pricing
terms previously negotiated with vendors and are generally
cancelable with the appropriate notice prior to receipt of the
materials or supplies. Accordingly, the foregoing table excludes
open purchase orders for such products, materials and supplies
as of February 28, 2011.
Although we do not anticipate that contributions will be
required in 2012 to the defined benefit pension plan that we
assumed in connection with our acquisition of Gibson Greetings,
Inc. in 2001, we may make contributions in excess of the legally
required minimum contribution level. Refer to Note 12 to
the Consolidated Financial Statements. We do anticipate that
contributions will be required beginning in fiscal 2014, but
those amounts have not been determined as of February 28,
2011.
Critical
Accounting Policies
Our consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States. The preparation of these financial statements require us
to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the periods presented. Refer to Note 1 to the
Consolidated Financial Statements. The following paragraphs
include a discussion of the critical areas that required a
higher degree of judgment or are considered complex.
Allowance
for Doubtful Accounts
We evaluate the collectibility of our accounts receivable based
on a combination of factors. In circumstances where we are aware
of a customers inability to meet its financial
obligations, a specific allowance for bad debts against amounts
due is recorded to reduce the receivable to the amount we
reasonably expect will be
41
collected. In addition, we recognize allowances for bad debts
based on estimates developed by using standard quantitative
measures incorporating historical write-offs. The establishment
of allowances requires the use of judgment and assumptions
regarding the potential for losses on receivable balances.
Although we consider these balances adequate and proper, changes
in economic conditions in the retail markets in which we operate
could have a material effect on the required allowance balances.
Sales
Returns
We provide for estimated returns for products sold with the
right of return, primarily seasonal cards and certain other
seasonal products, in the same period as the related revenues
are recorded. These estimates are based upon historical sales
returns, the amount of current year sales and other known
factors. Estimated return rates utilized for establishing
estimated returns reserves have approximated actual returns
experience. However, actual returns may differ significantly,
either favorably or unfavorably, from these estimates if factors
such as the historical data we used to calculate these estimates
do not properly reflect future returns or as a result of changes
in economic conditions of the customer
and/or its
market. We regularly monitor our actual performance to estimated
rates and the adjustments attributable to any changes have
historically not been material.
Deferred
Costs
In the normal course of our business, we enter into agreements
with certain customers for the supply of greeting cards and
related products. We view such agreements as advantageous in
developing and maintaining business with our retail customers.
The customer may receive a combination of cash payments,
credits, discounts, allowances and other incentives to be earned
as product is purchased from us over the stated term of the
agreement or minimum purchase volume commitment. These
agreements are negotiated individually to meet competitive
situations and therefore, while some aspects of the agreements
may be similar, important contractual terms may vary. In
addition, the agreements may or may not specify us as the sole
supplier of social expression products to the customer.
Although risk is inherent in the granting of advances, we
subject such customers to our normal credit review. We maintain
an allowance for deferred costs based on estimates developed by
using standard quantitative measures incorporating historical
write-offs. In instances where we are aware of a particular
customers inability to meet its performance obligation, we
record a specific allowance to reduce the deferred cost asset to
an estimate of its future value based upon expected
recoverability. Losses attributed to these specific events have
historically not been material. The aggregate average remaining
life of our contract base is 6.7 years.
Goodwill
and Other Intangible Assets
Goodwill represents the excess of purchase price over the
estimated fair value of net assets acquired in business
combinations accounted for by the purchase method. In accordance
with ASC Topic 350 (ASC 350),
Intangibles Goodwill and Other, goodwill
and certain intangible assets are presumed to have indefinite
useful lives and are thus not amortized, but subject to an
impairment test annually or more frequently if indicators of
impairment arise. We complete the annual goodwill impairment
test during the fourth quarter. To test for goodwill impairment,
we are required to estimate the fair market value of each of our
reporting units. While we may use a variety of methods to
estimate fair value for impairment testing, our primary methods
are discounted cash flows and a market based analysis. We
estimate future cash flows and allocations of certain assets
using estimates for future growth rates and our judgment
regarding the applicable discount rates. Changes to our
judgments and estimates could result in a significantly
different estimate of the fair market value of the reporting
units, which could result in an impairment of goodwill.
Deferred
Income Taxes
Deferred income taxes are recognized at currently enacted tax
rates for temporary differences between the financial reporting
and income tax bases of assets and liabilities and operating
loss and tax credit carryforwards. In assessing the
realizability of deferred tax assets, we assess whether it is
more likely than not
42
that a portion or all of the deferred tax assets will not be
realized. We consider the scheduled reversal of deferred tax
liabilities, tax planning strategies and projected future
taxable income in making this assessment. The assumptions used
in this assessment are consistent with our internal planning. A
valuation allowance is recorded against those deferred tax
assets determined to not be realizable based on our assessment.
The amount of net deferred tax assets considered realizable
could be increased or decreased in the future if our assessment
of future taxable income or tax planning strategies change.
Recent
Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (the
FASB) issued Accounting Standards Update
(ASU)
No. 2009-17
(ASU
2009-17),
(Consolidations Topic 810), Improvements to Financial
Reporting by Enterprises Involved with Variable Interest
Entities (VIE). ASU
2009-17
requires an ongoing reassessment of determining whether a
variable interest gives a company a controlling financial
interest in a VIE. It also requires an entity to qualitatively,
rather than quantitatively, determine whether a company is the
primary beneficiary of a VIE. Under the new standard, the
primary beneficiary of a VIE is a party that has the controlling
financial interest in the VIE and has both the power to direct
the activities that most significantly impact the VIEs
economic success and the obligation to absorb losses or the
right to receive benefits that could potentially be significant
to the VIE. ASU
2009-17 is
effective for interim and annual reporting periods beginning
after November 15, 2009. Our adoption of this standard on
March 1, 2010 did not have a material effect on our
financial statements.
In January 2010, the FASB issued ASU
No. 2010-06
(ASU
2010-06),
Improving Disclosures about Fair Value Measurements.
ASU 2010-06
provides amendments to ASC Topic 820, Fair Value
Measurements and Disclosures, that require separate
disclosure of significant transfers in and out of Level 1
and Level 2 fair value measurements in addition to the
presentation of purchases, sales, issuances, and settlements for
Level 3 fair value measurements. ASU
2010-06 also
provides amendments to subtopic
820-10 that
clarify existing disclosures about the level of disaggregation,
and inputs and valuation techniques. The new disclosure
requirements are effective for interim and annual periods
beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances, and settlements
of Level 3 fair value measurements, which becomes effective
for interim and annual periods beginning after December 15,
2010. On March 1, 2010, we adopted this standard, except
for the requirement to separately disclose purchases, sales,
issuances, and settlements in the Level 3 rollforward. Our
adoption of this standard did not have a material effect on our
financial statements. Also, we do not expect that the adoption
of the enhanced disclosures for Level 3 fair value
measurements will have a material effect on our financial
statements.
Factors
That May Affect Future Results
Certain statements in this report may constitute forward-looking
statements within the meaning of the Federal securities laws.
These statements can be identified by the fact that they do not
relate strictly to historic or current facts. They use such
words as anticipate, estimate,
expect, project, intend,
plan, believe, and other words and terms
of similar meaning in connection with any discussion of future
operating or financial performance. These forward-looking
statements are based on currently available information, but are
subject to a variety of uncertainties, unknown risks and other
factors concerning our operations and business environment,
which are difficult to predict and may be beyond our control.
Important factors that could cause actual results to differ
materially from those suggested by these forward-looking
statements, and that could adversely affect our future financial
performance, include, but are not limited to, the following:
|
|
|
|
|
a weak retail environment and general economic conditions;
|
|
|
|
competitive terms of sale offered to customers;
|
|
|
|
Schurmans ability to successfully operate its retail
operations and satisfy its obligations to us;
|
|
|
|
retail consolidations, acquisitions and bankruptcies, including
the possibility of resulting adverse changes to retail contract
terms;
|
|
|
|
the ability to achieve the desired benefits associated with our
cost reduction efforts;
|
43
|
|
|
|
|
the timing and impact of converting customers to a scan-based
trading model;
|
|
|
|
our ability to successfully implement, or achieve the desired
benefits associated with, any information systems refresh we may
implement;
|
|
|
|
the timing and impact of investments in new retail or product
strategies as well as new product introductions and achieving
the desired benefits from those investments;
|
|
|
|
consumer acceptance of products as priced and marketed;
|
|
|
|
the impact of technology, including social media, on core
product sales;
|
|
|
|
escalation in the cost of providing employee health care;
|
|
|
|
the ability to achieve the desired accretive effect from any
share repurchase programs;
|
|
|
|
the ability to comply with our debt covenants;
|
|
|
|
fluctuations in the value of currencies in major areas where we
operate, including the U.S. Dollar, Euro, U.K. Pound
Sterling and Canadian Dollar; and
|
|
|
|
the outcome of any legal claims known or unknown.
|
Risks pertaining specifically to AG Interactive include the
viability of online advertising, subscriptions as revenue
generators, and the ability to adapt to rapidly changing social
media and the digital photo sharing space.
The risks and uncertainties identified above are not the only
risks we face. Additional risks and uncertainties not presently
known to us or that we believe to be immaterial also may
adversely affect us. Should any known or unknown risks or
uncertainties develop into actual events, or underlying
assumptions prove inaccurate, these developments could have
material adverse effects on our business, financial condition
and results of operations. For further information concerning
the risks we face and issues that could materially affect our
financial performance related to forward-looking statements,
refer to the Risk Factors section included in
Part I, Item 1A of this Annual Report on
Form 10-K.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Derivative Financial Instruments We had no
derivative financial instruments as of February 28, 2011.
Interest Rate Exposure We manage interest
rate exposure through a mix of fixed and floating rate debt.
Currently, the majority of our debt is carried at fixed interest
rates. Therefore, our overall interest rate exposure risk is
minimal. Based on our interest rate exposure on our non-fixed
rate debt as of and during the year ended February 28,
2011, a hypothetical 10% movement in interest rates would not
have had a material impact on interest expense. Under the terms
of our current credit agreement, we have the ability to borrow
significantly more floating rate debt, which, if incurred could
have a material impact on interest expense in a fluctuating
interest rate environment.
Foreign Currency Exposure Our international
operations expose us to translation risk when the local currency
financial statements are translated into U.S. dollars. As
currency exchange rates fluctuate, translation of the statements
of operations of international subsidiaries to U.S. dollars
could affect comparability of results between years.
Approximately 24%, 23% and 27% of our 2011, 2010 and 2009 total
revenue from continuing operations, respectively, were generated
from operations outside the United States. Operations in
Australia, New Zealand, Canada, Mexico, the European Union and
the U.K. are denominated in currencies other than
U.S. dollars. No assurance can be given that future results
will not be affected by significant changes in foreign currency
exchange rates.
44
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
|
|
|
|
|
|
|
Page
|
Index to Consolidated Financial Statements and Supplementary
Financial Data
|
|
Number
|
|
|
|
|
46
|
|
|
|
|
47
|
|
|
|
|
48
|
|
|
|
|
49
|
|
|
|
|
50
|
|
|
|
|
51
|
|
Supplementary Financial Data:
|
|
|
|
|
|
|
|
90
|
|
45
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
American Greetings Corporation
We have audited the accompanying consolidated statement of
financial position of American Greetings Corporation as of
February 28, 2011 and February 28, 2010, and the
related consolidated statements of operations,
shareholders equity, and cash flows for each of the three
years in the period ended February 28, 2011. Our audits
also included the financial statement schedule listed in the
Index at Item 15(a). These financial statements and
schedule are the responsibility of the Corporations
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of American Greetings Corporation at
February 28, 2011 and February 28, 2010, and the
consolidated results of its operations and its cash flows for
each of the three years in the period ended February 28,
2011, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial
statements, in 2010 the Corporation changed its method of
accounting for business combinations.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
American Greetings Corporations internal control over
financial reporting as of February 28, 2011, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated April 29, 2011
expressed an unqualified opinion thereon.
Cleveland, Ohio
April 29, 2011
46
CONSOLIDATED
STATEMENT OF OPERATIONS
Years ended February 28, 2011,
2010 and 2009
Thousands of dollars except share and per share amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Net sales
|
|
$
|
1,560,213
|
|
|
$
|
1,598,292
|
|
|
$
|
1,646,399
|
|
Other revenue
|
|
|
32,355
|
|
|
|
37,566
|
|
|
|
44,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,592,568
|
|
|
|
1,635,858
|
|
|
|
1,690,738
|
|
Material, labor and other production costs
|
|
|
682,368
|
|
|
|
713,075
|
|
|
|
809,956
|
|
Selling, distribution and marketing expenses
|
|
|
478,227
|
|
|
|
507,960
|
|
|
|
618,899
|
|
Administrative and general expenses
|
|
|
260,476
|
|
|
|
276,031
|
|
|
|
226,317
|
|
Goodwill and other intangible asset impairments
|
|
|
|
|
|
|
|
|
|
|
290,166
|
|
Other operating income net
|
|
|
(3,205
|
)
|
|
|
(310
|
)
|
|
|
(1,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
174,702
|
|
|
|
139,102
|
|
|
|
(253,204
|
)
|
Interest expense
|
|
|
25,389
|
|
|
|
26,311
|
|
|
|
22,854
|
|
Interest income
|
|
|
(853
|
)
|
|
|
(1,676
|
)
|
|
|
(3,282
|
)
|
Other non-operating (income) expense- net
|
|
|
(5,841
|
)
|
|
|
(6,487
|
)
|
|
|
2,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense (benefit)
|
|
|
156,007
|
|
|
|
120,954
|
|
|
|
(274,933
|
)
|
Income tax expense (benefit)
|
|
|
68,989
|
|
|
|
39,380
|
|
|
|
(47,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
87,018
|
|
|
$
|
81,574
|
|
|
$
|
(227,759
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share basic
|
|
$
|
2.18
|
|
|
$
|
2.07
|
|
|
$
|
(4.89
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share assuming dilution
|
|
$
|
2.11
|
|
|
$
|
2.03
|
|
|
$
|
(4.89
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of shares outstanding
|
|
|
39,982,784
|
|
|
|
39,467,811
|
|
|
|
46,543,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of shares outstanding assuming
dilution
|
|
|
41,244,903
|
|
|
|
40,159,651
|
|
|
|
46,543,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share
|
|
$
|
0.56
|
|
|
$
|
0.36
|
|
|
$
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
47
CONSOLIDATED
STATEMENT OF FINANCIAL POSITION
February 28, 2011 and 2010
Thousands of dollars except share and per share amounts
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
ASSETS
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
215,838
|
|
|
$
|
137,949
|
|
Trade accounts receivable, net
|
|
|
119,779
|
|
|
|
135,758
|
|
Inventories
|
|
|
179,730
|
|
|
|
163,956
|
|
Deferred and refundable income taxes
|
|
|
50,051
|
|
|
|
78,433
|
|
Assets held for sale
|
|
|
7,154
|
|
|
|
15,147
|
|
Prepaid expenses and other
|
|
|
128,372
|
|
|
|
148,048
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
700,924
|
|
|
|
679,291
|
|
GOODWILL
|
|
|
28,903
|
|
|
|
31,106
|
|
OTHER ASSETS
|
|
|
436,137
|
|
|
|
428,161
|
|
DEFERRED AND REFUNDABLE INCOME TAXES
|
|
|
124,789
|
|
|
|
148,210
|
|
PROPERTY, PLANT AND EQUIPMENT NET
|
|
|
241,649
|
|
|
|
242,883
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,532,402
|
|
|
$
|
1,529,651
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Debt due within one year
|
|
$
|
|
|
|
$
|
1,000
|
|
Accounts payable
|
|
|
87,105
|
|
|
|
95,434
|
|
Accrued liabilities
|
|
|
69,824
|
|
|
|
78,245
|
|
Accrued compensation and benefits
|
|
|
72,379
|
|
|
|
85,092
|
|
Income taxes payable
|
|
|
10,951
|
|
|
|
13,901
|
|
Other current liabilities
|
|
|
102,286
|
|
|
|
94,915
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
342,545
|
|
|
|
368,587
|
|
LONG-TERM DEBT
|
|
|
232,688
|
|
|
|
328,723
|
|
OTHER LIABILITIES
|
|
|
176,522
|
|
|
|
168,098
|
|
DEFERRED INCOME TAXES AND NONCURRENT
|
|
|
|
|
|
|
|
|
INCOME TAXES PAYABLE
|
|
|
31,736
|
|
|
|
28,179
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Common shares par value $1 per share:
|
|
|
|
|
|
|
|
|
Class A 82,181,659 shares issued less
44,711,736 treasury shares in 2011 and
80,884,505 shares issued less 44,627,298 treasury shares in
2010
|
|
|
37,470
|
|
|
|
36,257
|
|
Class B 6,066,092 shares issued less
3,128,841 treasury shares in 2011 and 6,066,092 shares
issued less 2,843,069 treasury shares in 2010
|
|
|
2,937
|
|
|
|
3,223
|
|
Capital in excess of par value
|
|
|
492,048
|
|
|
|
461,076
|
|
Treasury stock
|
|
|
(952,206
|
)
|
|
|
(946,724
|
)
|
Accumulated other comprehensive loss
|
|
|
(2,346
|
)
|
|
|
(29,815
|
)
|
Retained earnings
|
|
|
1,171,008
|
|
|
|
1,112,047
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
748,911
|
|
|
|
636,064
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,532,402
|
|
|
$
|
1,529,651
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
48
CONSOLIDATED
STATEMENT OF CASH FLOWS
Years ended February 28, 2011,
2010 and 2009
Thousands of dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
87,018
|
|
|
$
|
81,574
|
|
|
$
|
(227,759
|
)
|
Adjustments to reconcile net income (loss) to cash flows from
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangible asset impairments
|
|
|
|
|
|
|
|
|
|
|
290,166
|
|
Stock-based compensation
|
|
|
13,017
|
|
|
|
5,870
|
|
|
|
4,506
|
|
Net gain on dispositions
|
|
|
(254
|
)
|
|
|
(6,507
|
)
|
|
|
|
|
Net (gain) loss on disposal of fixed assets
|
|
|
(3,463
|
)
|
|
|
59
|
|
|
|
1,215
|
|
Depreciation and intangible assets amortization
|
|
|
41,048
|
|
|
|
45,165
|
|
|
|
50,016
|
|
Deferred income taxes
|
|
|
28,642
|
|
|
|
25,268
|
|
|
|
(29,438
|
)
|
Fixed asset impairments
|
|
|
119
|
|
|
|
13,005
|
|
|
|
5,465
|
|
Other non-cash charges
|
|
|
3,663
|
|
|
|
12,419
|
|
|
|
3,764
|
|
Changes in operating assets and liabilities, net of acquisitions
and dispositions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
15,296
|
|
|
|
(56,105
|
)
|
|
|
(6,504
|
)
|
Inventories
|
|
|
(13,097
|
)
|
|
|
14,923
|
|
|
|
2,877
|
|
Other current assets
|
|
|
(1,922
|
)
|
|
|
16,936
|
|
|
|
17,309
|
|
Income taxes
|
|
|
19,947
|
|
|
|
18,863
|
|
|
|
(5,934
|
)
|
Deferred costs net
|
|
|
14,262
|
|
|
|
18,405
|
|
|
|
27,596
|
|
Accounts payable and other liabilities
|
|
|
(31,015
|
)
|
|
|
(633
|
)
|
|
|
(68,154
|
)
|
Other net
|
|
|
6,538
|
|
|
|
8,248
|
|
|
|
7,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cash Flows From Operating Activities
|
|
|
179,799
|
|
|
|
197,490
|
|
|
|
73,040
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment additions
|
|
|
(36,346
|
)
|
|
|
(26,550
|
)
|
|
|
(55,733
|
)
|
Cash payments for business acquisitions, net of cash acquired
|
|
|
(500
|
)
|
|
|
(19,300
|
)
|
|
|
(37,882
|
)
|
Proceeds from sale of fixed assets
|
|
|
14,242
|
|
|
|
1,124
|
|
|
|
433
|
|
Proceeds from escrow related to party goods transaction
|
|
|
25,151
|
|
|
|
|
|
|
|
|
|
Other net
|
|
|
5,663
|
|
|
|
4,713
|
|
|
|
(44,153
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cash Flows From Investing Activities
|
|
|
8,210
|
|
|
|
(40,013
|
)
|
|
|
(137,335
|
)
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in long-term debt
|
|
|
(98,250
|
)
|
|
|
(62,350
|
)
|
|
|
118,991
|
|
Net decrease in short-term debt
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
Sale of stock under benefit plans
|
|
|
16,620
|
|
|
|
6,557
|
|
|
|
525
|
|
Excess tax benefit from share-based payment awards
|
|
|
4,512
|
|
|
|
148
|
|
|
|
|
|
Purchase of treasury shares
|
|
|
(13,521
|
)
|
|
|
(11,848
|
)
|
|
|
(73,983
|
)
|
Dividends to shareholders
|
|
|
(22,354
|
)
|
|
|
(19,049
|
)
|
|
|
(22,566
|
)
|
Debt issuance costs
|
|
|
(3,199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cash Flows From Financing Activities
|
|
|
(117,192
|
)
|
|
|
(86,542
|
)
|
|
|
22,967
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
|
|
7,072
|
|
|
|
6,798
|
|
|
|
(21,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
77,889
|
|
|
|
77,733
|
|
|
|
(63,284
|
)
|
Cash and Cash Equivalents at Beginning of Year
|
|
|
137,949
|
|
|
|
60,216
|
|
|
|
123,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Year
|
|
$
|
215,838
|
|
|
$
|
137,949
|
|
|
$
|
60,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
49
CONSOLIDATED
STATEMENT OF SHAREHOLDERS EQUITY
Years ended February 28, 2011,
2010 and 2009
Thousands of dollars except per share amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
|
Excess of
|
|
|
Treasury
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Par Value
|
|
|
Stock
|
|
|
Income (Loss)
|
|
|
Earnings
|
|
|
Total
|
|
|
BALANCE MARCH 1, 2008
|
|
$
|
45,324
|
|
|
$
|
3,434
|
|
|
$
|
445,696
|
|
|
$
|
(872,949
|
)
|
|
$
|
21,244
|
|
|
$
|
1,300,662
|
|
|
$
|
943,411
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(227,759
|
)
|
|
|
(227,759
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(80,845
|
)
|
|
|
|
|
|
|
(80,845
|
)
|
Pension and postretirement adjustments recognized in accordance
with ASC 715 (net of tax of $6,839)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,674
|
)
|
|
|
|
|
|
|
(7,674
|
)
|
Unrealized loss on
available-for-sale
securities (net of tax of $0)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(316,281
|
)
|
Cash dividends $0.60 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,491
|
)
|
|
|
(27,491
|
)
|
Sale of shares under benefit plans, including tax benefits
|
|
|
26
|
|
|
|
|
|
|
|
384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
410
|
|
Purchase of treasury shares
|
|
|
(8,311
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
(67,158
|
)
|
|
|
|
|
|
|
|
|
|
|
(75,479
|
)
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
4,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,369
|
|
Stock grants and other
|
|
|
4
|
|
|
|
75
|
|
|
|
(1,364
|
)
|
|
|
2,021
|
|
|
|
|
|
|
|
(486
|
)
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE FEBRUARY 28, 2009
|
|
|
37,043
|
|
|
|
3,499
|
|
|
|
449,085
|
|
|
|
(938,086
|
)
|
|
|
(67,278
|
)
|
|
|
1,044,926
|
|
|
|
529,189
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,574
|
|
|
|
81,574
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,467
|
|
|
|
|
|
|
|
22,467
|
|
Reclassification of currency translation adjustment for amounts
recognized in income (net of tax of $0)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,627
|
|
|
|
|
|
|
|
8,627
|
|
Pension and postretirement adjustments recognized in accordance
with ASC 715 (net of tax of $5,837)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,366
|
|
|
|
|
|
|
|
6,366
|
|
Unrealized gain on
available-for-sale
securities (net of tax of $0)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119,037
|
|
Cash dividends $0.36 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,124
|
)
|
|
|
(14,124
|
)
|
Sale of shares under benefit plans, including tax benefits
|
|
|
336
|
|
|
|
|
|
|
|
6,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,508
|
|
Purchase of treasury shares
|
|
|
(1,125
|
)
|
|
|
(292
|
)
|
|
|
|
|
|
|
(9,111
|
)
|
|
|
|
|
|
|
|
|
|
|
(10,528
|
)
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
5,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,819
|
|
Stock grants and other
|
|
|
3
|
|
|
|
16
|
|
|
|
|
|
|
|
473
|
|
|
|
|
|
|
|
(329
|
)
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE FEBRUARY 28, 2010
|
|
|
36,257
|
|
|
|
3,223
|
|
|
|
461,076
|
|
|
|
(946,724
|
)
|
|
|
(29,815
|
)
|
|
|
1,112,047
|
|
|
|
636,064
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87,018
|
|
|
|
87,018
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,165
|
|
|
|
|
|
|
|
15,165
|
|
Pension and postretirement adjustments recognized in accordance
with ASC 715 (net of tax of $8,083)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,303
|
|
|
|
|
|
|
|
12,303
|
|
Unrealized gain on
available-for-sale
securities (net of tax of $0)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114,487
|
|
Cash dividends $0.56 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,354
|
)
|
|
|
(22,354
|
)
|
Sale of shares under benefit plans, including tax benefits
|
|
|
1,213
|
|
|
|
257
|
|
|
|
17,951
|
|
|
|
7,366
|
|
|
|
|
|
|
|
(5,652
|
)
|
|
|
21,135
|
|
Purchase of treasury shares
|
|
|
|
|
|
|
(547
|
)
|
|
|
|
|
|
|
(12,974
|
)
|
|
|
|
|
|
|
|
|
|
|
(13,521
|
)
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
13,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,017
|
|
Stock grants and other
|
|
|
|
|
|
|
4
|
|
|
|
4
|
|
|
|
126
|
|
|
|
|
|
|
|
(51
|
)
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE FEBRUARY 28, 2011
|
|
$
|
37,470
|
|
|
$
|
2,937
|
|
|
$
|
492,048
|
|
|
$
|
(952,206
|
)
|
|
$
|
(2,346
|
)
|
|
$
|
1,171,008
|
|
|
$
|
748,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
50
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years ended February 28, 2011, 2010 and 2009
Thousands of dollars except per share amounts
|
|
NOTE 1
|
SIGNIFICANT
ACCOUNTING POLICIES
|
Consolidation: The consolidated financial statements
include the accounts of American Greetings Corporation and its
subsidiaries (American Greetings or the
Corporation). All significant intercompany accounts
and transactions are eliminated. The Corporations fiscal
year ends on February 28 or 29. References to a particular year
refer to the fiscal year ending in February of that year. For
example, 2011 refers to the year ended February 28, 2011.
The Corporations investments in less than majority-owned
companies in which it has the ability to exercise significant
influence over operating and financial policies are accounted
for using the equity method except when they qualify as variable
interest entities (VIE) and the Corporation is the
primary beneficiary, in which case the investments are
consolidated in accordance with Accounting Standards
Codification (ASC) Topic 810,
Consolidation. Investments that do not meet the
above criteria are accounted for under the cost method.
The Corporation holds an approximately 15% equity interest in
Schurman Fine Papers (Schurman), which is a VIE as
defined in ASC Topic 810, Consolidation. Schurman
owns and operates approximately 430 specialty card and gift
retail stores in the United States and Canada. The stores are
primarily located in malls and strip shopping centers. During
the current period, the Corporation assessed the variable
interests in Schurman and determined that a third party holder
of variable interests has the controlling financial interest in
the VIE and thus, the third party, not the Corporation, is the
primary beneficiary. In completing this assessment, the
Corporation identified the activities that it considers most
significant to the future economic success of the VIE and
determined that it does not have the power to direct those
activities. As such, Schurman is not consolidated in the
Corporations results. The Corporations maximum
exposure to loss as it relates to Schurman as of
February 28, 2011 includes:
|
|
|
the investment in the equity of Schurman of $1,935;
|
|
|
the Liquidity Guaranty of Schurmans indebtedness of
$12,000 and the Bridge Guaranty of Schurmans indebtedness
of $12,000, see Note 11 for further information;
|
|
|
normal course of business trade accounts receivable due from
Schurman, the balance of which fluctuates throughout the year
due to the seasonal nature of the business;
|
|
|
the operating leases currently subleased to Schurman, the
aggregate lease payments for the remaining life of which was
$35,985 and $50,854 as of February 28, 2011 and 2010,
respectively.
|
The Corporation and Schurman are also party to a Subordinated
Credit Facility that provides Schurman with up to $10,000 of
subordinated financing for an initial term of nineteen months,
subject to up to three automatic one-year renewal periods (or
partial-year, in the case of the last renewal), unless either
party provides the appropriate written notice prior to the
expiration of the applicable term. Schurman can only borrow
under the facility if it does not have other sources of
financing available, and borrowings under the Subordinated
Credit Facility may only be used for specified purposes.
Borrowings under the Subordinated Credit Facility are
subordinate to borrowings under the Senior Credit Facility, and
the Subordinated Credit Facility includes affirmative and
negative covenants and events of default customary for such
financings. In addition, availability under the Subordinated
Credit Facility is limited as long as the Bridge Guaranty is in
place to the difference between $10,000 and the current maximum
amount of the Bridge Guaranty. Because the Bridge Guaranty
remained at $12,000 as of February 28, 2011, there were no
loans outstanding, or available under the Subordinated Credit
Facility, as of February 28, 2011.
In accordance with its terms, on April 1, 2011, the Bridge
Guaranty was terminated. As a result of the termination of the
Bridge Guaranty, beginning on April 2, 2011, Schurman may
now borrow up to $10,000 under the Subordinated Credit Facility.
Because the Liquidity Guaranty described above remains in place
but Schurman is now able to borrow under the Subordinated Credit
Facility, the Corporations net exposure under
51
guaranties and available financing to Schurman decreased by
$2,000 due to the termination of the Bridge Guaranty.
In addition to the investment in the equity of Schurman, the
Corporation holds an investment in the common stock of AAH
Holdings Corporation (AAH). These two investments,
totaling $12,546, are accounted for under the cost method. The
Corporation is not aware of any events or changes in
circumstances that had occurred during 2011 that the Corporation
believes are reasonably likely to have had a significant adverse
effect on the carrying amount of these investments. See
Note 2 for further information.
Reclassifications: Certain amounts in the prior year
financial statements have been reclassified to conform to the
2011 presentation.
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 amounts reported in
the financial statements and accompanying notes. Actual results
could differ from those estimates. On an ongoing basis,
management reviews its estimates, including those related to
sales returns, allowance for doubtful accounts, customer
allowances and discounts, recoverability of intangibles and
other long-lived assets, deferred tax asset valuation
allowances, deferred costs and various other allowances and
accruals, based on currently available information. Changes in
facts and circumstances may alter such estimates and affect the
results of operations and the financial position in future
periods.
Cash Equivalents: The Corporation considers all
highly liquid instruments purchased with an original maturity of
less than three months to be cash equivalents.
Allowance for Doubtful Accounts: The Corporation
evaluates the collectibility of its accounts receivable based on
a combination of factors. In circumstances where the Corporation
is aware of a customers inability to meet its financial
obligations, a specific allowance for bad debts against amounts
due is recorded to reduce the receivable to the amount the
Corporation reasonably expects will be collected. In addition,
the Corporation recognizes allowances for bad debts based on
estimates developed by using standard quantitative measures
incorporating historical write-offs. See Note 6 for further
information.
Customer Allowances and Discounts: The Corporation
offers certain of its customers allowances and discounts
including cooperative advertising, rebates, marketing allowances
and various other allowances and discounts. These amounts are
recorded as reductions of gross accounts receivable or included
in accrued liabilities and are recognized as reductions of net
sales when earned. These amounts are earned by the customer as
product is purchased from the Corporation and are recorded based
on the terms of individual customer contracts. See Note 6
for further information.
Concentration of Credit Risks: The Corporation sells
primarily to customers in the retail trade, including those in
the mass merchandise, drug store, discount retailer, supermarket
and other channels of distribution. These customers are located
throughout the United States, Canada, the United Kingdom,
Australia, New Zealand and Mexico. Net sales to the
Corporations five largest customers accounted for
approximately 42%, 39% and 36% of total revenue in 2011, 2010
and 2009, respectively. Net sales to Wal-Mart Stores, Inc. and
its subsidiaries accounted for approximately 15%, 14% and 15% of
total revenue in 2011, 2010 and 2009, respectively. Net sales to
Target Corporation accounted for approximately 14% and 13% of
total revenue in 2011 and 2010, respectively, and less than 10%
in 2009.
The Corporation conducts business based on periodic evaluations
of its customers financial condition and generally does
not require collateral to secure their obligation to the
Corporation. While the competitiveness of the retail industry
presents an inherent uncertainty, the Corporation does not
believe a significant risk of loss exists from a concentration
of credit.
Inventories: Finished products, work in process and
raw materials inventories are carried at the lower of cost or
market. The
last-in,
first-out (LIFO) cost method is used for certain
domestic inventories, which approximate 80% of the total
pre-LIFO consolidated inventories at February 28, 2011 and
2010, respectively. International inventories and the remaining
domestic inventories principally use the
first-in,
first-out (FIFO) method except for display material
and factory supplies which are carried at average cost. The
Corporation
52
allocates fixed production overhead to inventory based on the
normal capacity of the production facilities. Abnormal amounts
of idle facility expense, freight, handling costs and wasted
material are treated as a current period expense. See
Note 7 for further information.
Deferred Costs: In the normal course of its
business, the Corporation enters into agreements with certain
customers for the supply of greeting cards and related products.
The Corporation classifies the total contractual amount of the
incentive consideration committed to the customer but not yet
earned as a deferred cost asset at the inception of an
agreement, or any future amendments. Deferred costs estimated to
be earned by the customer and charged to operations during the
next twelve months are classified as Prepaid expenses and
other on the Consolidated Statement of Financial Position
and the remaining amounts to be charged beyond the next twelve
months are classified as Other assets. Such costs
are capitalized as assets reflecting the probable future
economic benefits obtained as a result of the transactions.
Future economic benefit is further defined as cash inflow to the
Corporation. The Corporation, by incurring these costs, is
ensuring the probability of future cash flows through sales to
customers. The amortization of such deferred costs over the
stated term of the agreement or the minimum purchase volume
commitment properly matches the cost of obtaining business over
the periods to be benefited. The Corporation maintains an
allowance for deferred costs based on estimates developed using
standard quantitative measures incorporating historical
write-offs. In instances where the Corporation is aware of a
particular customers inability to meet its performance
obligation, a specific allowance is recorded to reduce the
deferred cost asset to an estimate of its future value based
upon expected recoverability. See Note 10 for further
discussion.
Deferred Film Production Costs: The Corporation is
engaged in the production of film-based entertainment, which is
generally exploited in the DVD, theatrical release or broadcast
format. This entertainment is related to Strawberry Shortcake,
Care Bears and other properties developed by the Corporation and
is used to support the Corporations merchandise licensing
strategy.
Film production costs are accounted for pursuant to ASC Topic
926 (ASC 926), Entertainment
Films, and are stated at the lower of cost or net
realizable value based on anticipated total revenue (ultimate
revenue). Film production costs are generally capitalized. These
costs are then recognized ratably based on the ratio of the
current periods revenue to estimated remaining ultimate
revenues. Ultimate revenues are calculated in accordance with
ASC 926 and require estimates and the exercise of judgment.
Accordingly, these estimates are periodically updated to include
the actual results achieved or new information as to anticipated
revenue performance of each title.
Production expense totaled $4,736 and $4,360 in 2011 and 2010,
respectively, with no significant amounts related to changes in
ultimate revenue estimates. These production costs are included
in Material, labor and other production costs on the
Consolidated Statement of Operations. Amortization of production
costs totaling $3,380, $2,209 and $10,513 in 2011, 2010 and
2009, respectively, are included in Other
net on the Consolidated Statement of Cash Flows. The
balance of deferred film production costs was $9,246 and $11,479
at February 28, 2011 and 2010, respectively, and are
included in Other assets on the Consolidated
Statement of Financial Position. The Corporation expects to
recognize amortization of approximately $2,000 of production
costs during the next twelve months.
Investment in Life Insurance: The Corporations
investment in corporate-owned life insurance policies is
recorded in Other assets net of policy loans and
related interest payable on the Consolidated Statement of
Financial Position. The net balance was $21,760 and $18,330 as
of February 28, 2011 and 2010, respectively. The net life
insurance expense, including interest expense, is included in
Administrative and general expenses on the
Consolidated Statement of Operations. The related interest
expense, which approximates amounts paid, was $12,122, $12,207
and $11,101 in 2011, 2010 and 2009, respectively.
Goodwill and Other Intangible Assets: Goodwill
represents the excess of purchase price over the estimated fair
value of net assets acquired in business combinations and is not
amortized in accordance with ASC Topic 350 (ASC
350), Intangibles Goodwill and
Other. This topic addresses the amortization of intangible
assets with defined lives and the impairment testing and
recognition for goodwill and indefinite-lived intangible assets.
The Corporation is required to evaluate the carrying value of
its goodwill and indefinite-lived intangible assets for
potential impairment on an annual basis or more frequently if
indicators arise.
53
While the Corporation may use a variety of methods to estimate
fair value for impairment testing, its primary methods are
discounted cash flows and a market based analysis. The required
annual impairment tests are completed during the fourth quarter.
Intangible assets with defined lives are amortized over their
estimated lives. See Note 9 for further discussion.
Property and Depreciation: Property, plant and
equipment are carried at cost. Depreciation and amortization of
buildings, equipment and fixtures are computed principally by
the straight-line method over the useful lives of the various
assets. The cost of buildings is depreciated over 40 years;
computer hardware and software over 3 to 7 years; machinery
and equipment over 3 to 15 years; and furniture and
fixtures over 8 to 20 years. Leasehold improvements are
amortized over the lesser of the lease term or the estimated
life of the leasehold improvement. Property, plant and equipment
are reviewed for impairment in accordance with ASC Topic 360
(ASC 360), Property, Plant and
Equipment. ASC 360 also provides a single accounting
model for the disposal of long-lived assets. In accordance with
ASC 360, assets held for sale are stated at the lower of
their fair values less cost to sell or carrying amounts and
depreciation is no longer recognized. See Note 8 for
further information.
Operating Leases: Rent expense for operating leases,
which may have escalating rentals over the term of the lease, is
recorded on a straight-line basis over the initial lease term.
The initial lease term includes the build-out period
of leases, where no rent payments are typically due under the
terms of the lease. The difference between rent expense and rent
paid is recorded as deferred rent. Construction allowances
received from landlords are recorded as a deferred rent credit
and amortized to rent expense over the initial term of the
lease. The Corporation records lease rent expense net of any
related sublease income. See Note 13 for further
information.
Pension and Other Postretirement Benefits: The
Corporation has several defined benefit pension plans and a
defined benefit health care plan that provides postretirement
medical benefits to full-time United States employees who meet
certain requirements. In accordance with ASC Topic 715
(ASC 715), Compensation-Retirement
Benefits, the Corporation recognizes the plans
funded status in its statement of financial position, measures
the plans assets and obligations as of the end of its
fiscal year and recognizes the changes in a defined benefit
postretirement plans funded status in comprehensive income
in the year in which the changes occur. See Note 12 for
further information.
Revenue Recognition: Sales are recognized when title
and the risk of loss have been transferred to the customer.
Seasonal cards and certain other seasonal products are generally
sold with the right of return on unsold merchandise. The
Corporation provides for estimated returns of these products
when those sales are recognized. These estimates are based on
historical sales returns, the amount of current year sales and
other known factors. Accrual rates utilized for establishing
estimated returns reserves have approximated actual returns
experience.
Products sold without a right of return may be subject to sales
credit issued at the Corporations discretion for damaged,
obsolete and outdated products. The Corporation maintains an
estimated reserve for these sales credits based on historical
information.
For retailers with a scan-based trading (SBT)
arrangement, the Corporation owns the product delivered to its
retail customers until the product is sold by the retailer to
the ultimate consumer, at which time the Corporation recognizes
revenue for both everyday and seasonal products. When a SBT
arrangement with a retailer is finalized, the Corporation
reverses previous sales transactions based on retailer inventory
turn rates and the estimated timing of the store conversions.
Legal ownership of the inventory at the retailers stores
reverts back to the Corporation at the time of the conversion
and the amount of sales reversal is finalized based on the
actual inventory at the time of conversion.
Prior to April 17, 2009, sales at the Corporation owned
retail locations were recognized upon the sale of product to the
consumer.
54
Subscription revenue, primarily for the AG Interactive segment,
represents fees paid by customers for access to particular
services for the term of the subscription. Subscription revenue
is generally billed in advance and is recognized ratably over
the subscription periods.
The Corporation has agreements for licensing the Care Bears and
Strawberry Shortcake characters and other intellectual property.
These license agreements provide for royalty revenue to the
Corporation based on a percentage of net sales and are subject
to certain guaranteed minimum royalties. These license
agreements may include the receipt of upfront advances, which
are recorded as deferred revenue and earned during the period of
the agreement. Certain of these agreements are managed by
outside agents. All payments flow through the agents prior to
being remitted to the Corporation. Typically, the Corporation
receives quarterly payments from the agents. Royalty revenue is
generally recognized upon receipt and recorded in Other
revenue. Expenses associated with the servicing of these
agreements are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Material, labor and other production costs
|
|
$
|
11,806
|
|
|
$
|
9,410
|
|
|
$
|
24,615
|
|
Selling, distribution and marketing expenses
|
|
|
14,046
|
|
|
|
17,970
|
|
|
|
29,146
|
|
Administrative and general expenses
|
|
|
1,697
|
|
|
|
2,050
|
|
|
|
2,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,549
|
|
|
$
|
29,430
|
|
|
$
|
56,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue, included in Other current
liabilities and Other liabilities on the
Consolidated Statement of Financial Position, totaled $39,396
and $40,156 at February 28, 2011 and 2010, respectively.
The amounts relate primarily to subscription revenue in the
Corporations AG Interactive segment and the licensing
activities included in non-reportable segments.
Sales Taxes: Sales taxes are not included in net
sales as the Corporation is a conduit for collecting and
remitting taxes to the appropriate taxing authorities.
Translation of Foreign Currencies: Asset and
liability accounts are translated into United States dollars
using exchange rates in effect at the date of the Consolidated
Statement of Financial Position; revenue and expense accounts
are translated at average exchange rates during the related
period. Translation adjustments are reflected as a component of
shareholders equity within other comprehensive income.
Upon sale, or upon complete or substantially complete
liquidation of an investment in a foreign entity, that component
of shareholders equity is reclassified as part of the gain
or loss on sale or liquidation of the investment. Gains and
losses resulting from foreign currency transactions, including
intercompany transactions that are not considered permanent
investments, are included in other non-operating expense
(income) as incurred.
Shipping and Handling Fees: The Corporation
classifies shipping and handling fees as part of Selling,
distribution and marketing expenses. Shipping and handling
costs were $119,391, $119,989 and $130,271 in 2011, 2010 and
2009, respectively.
Advertising Expenses: Advertising costs are expensed
as incurred. Advertising expenses were $17,434, $16,985 and
$19,784 in 2011, 2010 and 2009, respectively.
Income Taxes: Income tax expense includes both
current and deferred taxes. Current tax expense represents the
amount of income taxes paid or payable (or refundable) for the
year, including interest and penalties. Deferred income taxes,
net of appropriate valuation allowances, are recognized for the
estimated future tax effects attributable to tax carryforwards
and the temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the
amounts realized for income tax purposes. The effect of a change
to the deferred tax assets or liabilities as a result of new tax
law, including tax rate changes, is recognized in the period
that the tax law is enacted. Valuation allowances are recorded
against deferred tax assets when it is more likely than not that
such assets will not be realized. When an uncertain tax position
meets the more likely than not recognition threshold, the
position is measured to determine the amount of benefit to
recognize in the financial statements. See Note 17 for
further discussion.
55
Recent
Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (the
FASB) issued Accounting Standards Update
(ASU)
No. 2009-17
(ASU
2009-17),
(Consolidations Topic 810), Improvements to Financial
Reporting by Enterprises Involved with Variable Interest
Entities. ASU
2009-17
requires an ongoing reassessment of determining whether a
variable interest gives a company a controlling financial
interest in a VIE. It also requires an entity to qualitatively,
rather than quantitatively, determine whether a company is the
primary beneficiary of a VIE. Under the new standard, the
primary beneficiary of a VIE is a party that has the controlling
financial interest in the VIE and has both the power to direct
the activities that most significantly impact the VIEs
economic success and the obligation to absorb losses or the
right to receive benefits that could potentially be significant
to the VIE. ASU
2009-17 is
effective for interim and annual reporting periods beginning
after November 15, 2009. The Corporations adoption of
this standard on March 1, 2010 did not have a material
effect on its financial statements. See Note 2 for further
information.
In January 2010, the FASB issued ASU
No. 2010-06
(ASU
2010-06),
Improving Disclosures about Fair Value Measurements.
ASU 2010-06
provides amendments to ASC Topic 820, Fair Value
Measurements and Disclosures, that require separate
disclosure of significant transfers in and out of Level 1
and Level 2 fair value measurements in addition to the
presentation of purchases, sales, issuances, and settlements for
Level 3 fair value measurements. ASU
2010-06 also
provides amendments to subtopic
820-10 that
clarify existing disclosures about the level of disaggregation,
and inputs and valuation techniques. The new disclosure
requirements are effective for interim and annual periods
beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances, and settlements
of Level 3 fair value measurements, which becomes effective
for interim and annual periods beginning after December 15,
2010. On March 1, 2010, the Corporation adopted this
standard, except for the requirement to separately disclose
purchases, sales, issuances, and settlements in the Level 3
rollforward, which becomes effective in 2012. The
Corporations adoption of this standard did not have a
material effect on its financial statements. Also, the
Corporation does not expect that the adoption of the enhanced
disclosures for Level 3 fair value measurements will have a
material effect on its financial statements. See Note 14
for further information.
|
|
NOTE 2
|
ACQUISITIONS
AND DISPOSITIONS
|
Papyrus
Brand & Wholesale Business Acquisition / Retail
Operations Disposition
Continuing the strategy of focusing on growing its core greeting
card business, on April 17, 2009, the Corporation sold all
rights, title and interest in certain of the assets of the
Corporations Retail Operations segment to Schurman for
$6,000 in cash and Schurmans assumption of certain
liabilities related to the Retail Operations segment. The
Corporation sold all 341 of its card and gift retail store
assets to Schurman, which operates stores under the American
Greetings, Carlton Cards and Papyrus brands. Under the terms of
the transaction, the Corporation remains subject to certain of
its store leases on a contingent basis by subleasing the stores
to Schurman. See Note 13 for further information. Pursuant
to the terms of the agreement, the Corporation also purchased
from Schurman its Papyrus trademark and its wholesale business
division, which supplies Papyrus brand greeting cards primarily
to leading specialty, mass merchandise, grocery and drug store
channels, in exchange for $18,065 in cash and the
Corporations assumption of certain liabilities related to
Schurmans wholesale business. In addition, the Corporation
agreed to provide Schurman limited credit support through the
provision of a limited guaranty (Liquidity Guaranty)
and a limited bridge guaranty (Bridge Guaranty) in
favor of the lenders under Schurmans senior revolving
credit facility (the Senior Credit Facility). See
Note 11 for further information. The Corporation also
purchased shares representing approximately 15% of the issued
and outstanding equity interests in Schurman for $1,935, which
is included in Other assets on the Consolidated
Statement of Financial Position. The net cash paid of $14,000
related to this transaction, which has been accounted for in
accordance with ASC 805, is included in Cash payments
for business acquisitions, net of cash acquired on the
Consolidated Statement of Cash Flows.
56
The purchase accounting for this acquisition was completed
during the fourth quarter of 2010. The fair value of the
consideration given has been allocated to the assets acquired
and the liabilities assumed based upon their fair values at the
date of acquisition. The following represents the final purchase
price allocation:
|
|
|
|
|
Purchase price (in millions):
|
|
|
|
|
Cash paid
|
|
$
|
20.0
|
|
Fair value of Retail Operations
|
|
|
6.0
|
|
Cash acquired
|
|
|
(6.0
|
)
|
|
|
|
|
|
|
|
$
|
20.0
|
|
|
|
|
|
|
Allocation (in millions):
|
|
|
|
|
Current assets
|
|
$
|
9.9
|
|
Property, plant and equipment
|
|
|
0.1
|
|
Other assets
|
|
|
5.4
|
|
Intangible assets
|
|
|
4.7
|
|
Goodwill
|
|
|
0.8
|
|
Liabilities assumed
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
$
|
20.0
|
|
|
|
|
|
|
The financial results of this acquisition are included in the
Corporations consolidated results from the date of
acquisition. Pro forma results of operations have not been
presented because the effect of this acquisition was not deemed
material.
Recycled
Paper Greetings Acquisition
During the second quarter of 2009, the Corporation paid $44,153
to acquire, at a substantial discount, the first lien debt
securities of Recycled Paper Greetings, Inc., now known as
Papyrus-Recycled Greetings, Inc. The principal amount of the
securities was $67,100. The cash paid for this investment is
included in
Other-net
investing activities on the Consolidated Statement of Cash
Flows. This investment was written down to fair market value
during the fourth quarter of 2009. A loss of $2,740 was recorded
as a result.
During the fourth quarter of 2009, the Corporation acquired all
of the issued and outstanding capital stock of RPG Holdings,
Inc. and its subsidiary, Recycled Paper Greetings, Inc.
(together RPG). RPG is a Chicago-based creator and
designer of humorous and alternative greeting cards. RPGs
cards are distributed primarily through mass merchandise
retailers, drug stores and specialty retail stores. The
acquisition was completed pursuant to a petition and
pre-packaged plan of reorganization filed on January 2,
2009, by RPG under the U.S. Bankruptcy Code and an
agreement dated December 30, 2008, between the Corporation
and RPG.
On February 24, 2009, the Corporation acquired all of the
issued and outstanding capital stock of RPG in exchange for:
(a) approximately $17,700 in cash, which includes $4,500 of
U.S. Bankruptcy Court approved professional fees and other
amounts owed by RPG that were paid by the Corporation;
(b) the $67,100 in principal amount of first lien debt
securities held by American Greetings; (c) approximately
$22,000 in aggregate principal amount of American
Greetings 7.375% senior notes due June 1, 2016,
issued under American Greetings existing senior notes
indenture; and (d) approximately $32,700 in aggregate
principal amount of American Greetings 7.375% notes
due June 1, 2016, issued under American Greetings new
indenture. Also in connection with the acquisition,
approximately $6,500 of
debtor-in-possession
financing (the DIP) owed by RPG to American
Greetings under the
debtor-in-possession
credit agreement put in place in the fourth quarter of 2009 was
extinguished. The Corporation also incurred approximately $4,000
in transaction costs associated with this acquisition.
The purchase accounting for the RPG acquisition was completed
during the third quarter of 2010. The fair value of the
consideration given has been allocated to the assets acquired
and the liabilities assumed based
57
upon their fair values at the date of the acquisition. The
following represents the final purchase price allocation:
|
|
|
|
|
Purchase price (in millions):
|
|
|
|
|
Cash paid in 2009
|
|
$
|
22.9
|
|
Cash paid in 2010
|
|
|
5.3
|
|
Fair market value of first lien debt securities
|
|
|
41.4
|
|
Fair market value of long-term debt issued
|
|
|
28.4
|
|
Cash acquired
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
$
|
97.4
|
|
|
|
|
|
|
Allocation (in millions):
|
|
|
|
|
Current assets
|
|
$
|
17.6
|
|
Property, plant and equipment
|
|
|
1.5
|
|
Other assets (including deferred tax assets)
|
|
|
24.2
|
|
Intangible assets
|
|
|
36.4
|
|
Goodwill
|
|
|
28.2
|
|
Liabilities assumed
|
|
|
(10.5
|
)
|
|
|
|
|
|
|
|
$
|
97.4
|
|
|
|
|
|
|
Included in the liabilities assumed in the table above is $4,258
of accrued severance based on a management-approved detailed
integration plan including the shutdown of RPGs
manufacturing and distribution facility as well as the
elimination of certain redundant back office operations. The
financial results of this acquisition are included in the
Corporations consolidated results from the date of
acquisition.
At the date of acquisition, there were two components of
tax-deductible goodwill specifically related to the operations
of RPG. The first component of tax-deductible goodwill of
approximately $28,170 is related to goodwill for financial
reporting purposes, and this asset will generate deferred income
taxes in the future as the asset is amortized for income tax
purposes. The second component of tax-deductible goodwill of
approximately $89,806 is the amount of tax deductible goodwill
in excess of goodwill for financial reporting purposes. In
accordance with ASC 740, the tax benefits associated with
this excess will be applied to first reduce the amount of
goodwill, and then other intangible assets for financial
reporting purposes in the future, if and when such tax benefits
are realized for income tax purposes. See Note 9 for
additional information.
Card
Connection Acquisition
In March 2008, the Corporation acquired a card publisher and
franchised distributor of greeting cards in the United Kingdom
(U.K.). Cash paid, net of cash acquired, was
approximately $15,600 and is reflected in investing activities
on the Consolidated Statement of Cash Flows. In connection with
this acquisition, intangible assets and goodwill of $5,800 and
$6,100, respectively, were recorded. Approximately $8,400 of
current assets and fixed assets were recorded and liabilities of
approximately $4,700 were assumed. The purchase agreement
provided for a contingent payment of up to 2 million U.K.
Pounds Sterling to be paid based on the companys operating
results over an accumulated three-year period from the date of
acquisition. The right to receive the contingent payment has
subsequently been terminated with no additional payment required
by the Corporation. The financial results of this acquisition
are included in the Corporations consolidated results from
the date of acquisition. Pro forma results of operations have
not been presented because the effect of this acquisition was
not deemed material.
Carlton
Mexico Shutdown
On September 3, 2009, the Corporation made the
determination to wind down the operations of Carlton
México, S.A. de C.V. (Carlton Mexico), its
subsidiary that distributes and merchandises greeting cards,
gift wrap and related products for retail customers throughout
Mexico. Going forward, the Corporation will
58
continue to make products available to its Mexican customers by
selling to a third party distributor. The wind down resulted in
the closure of Carlton Mexicos facility in Mexico City,
Mexico, and the elimination of approximately 170 positions.
In connection with the closure of this facility, the North
American Social Expression Products segment recorded charges of
$6,935, including asset impairments, severance charges and other
shut-down costs. Additionally, during 2010, in accordance with
ASC 830, Foreign Currency Matters, the
Corporation recognized foreign currency translation adjustments
totaling $11,300 in Other operating income
net on the Consolidated Statement of Operations. This
amount represents foreign currency adjustments attributable to
Carlton Mexico that, prior to the liquidation, had been
accumulated in the foreign currency translation adjustment
component of equity.
Party
Goods Transaction
On December 21, 2009, the Corporation entered into an Asset
Purchase Agreement under which it sold certain assets, equipment
and processes used in the manufacture and distribution of party
goods to Amscan Holdings, Inc. (Amscan) for a
purchase price of $24,880 (the Party Goods
Transaction). Amscan is a leading designer, manufacturer
and distributor of party goods, and owns or franchises party
good stores throughout the United States. Amscan and certain of
its subsidiaries have historically purchased party goods,
greeting cards and other social expression products from the
Corporation. Under the terms of the Party Goods Transaction, the
Corporation will no longer manufacture party goods, but will
purchase party goods from Amscan. As a result of the Party Goods
Transaction, on December 22, 2009, the Corporation
announced its intention to wind down and close its party goods
manufacturing and distribution facility in Kalamazoo, Michigan
(Kalamazoo facility). The phase-out of manufacturing
at the Kalamazoo facility, which commenced in early March 2010,
was completed by May 2010 and the distribution activities at the
Kalamazoo facility concluded as of December 2010.
In connection with the Party Goods Transaction, the Corporation
also entered into various other agreements with Amscan
and/or its
affiliates, including a supply and distribution agreement dated
December 21, 2009, with a purchase commitment of $22,500
equally spread over five years. During 2011, the Corporation
purchased party goods of $6,435 under this agreement. As a
result of entering into the supply and distribution agreement
and agreeing that Amscan will no longer be required to purchase
party goods from the Corporation, the Corporation also received
a warrant valued at $16,274 to purchase 740.74 shares of
the common stock of AAH, Amscans ultimate parent
corporation at one cent per share. On December 2, 2010, the
Corporation received a cash distribution from AAH totaling
$6,963, which was in part a return of capital that reduced the
investment by $5,663 to $10,611. On February 10, 2011, the
Corporation exercised the warrant and now owns
740.74 shares of AAH. The investment in AAH is included in
Other assets on the Consolidated Statement of
Financial Position.
Through this relationship, each company will sell both
DesignWare and Amscan branded party goods. The Corporation will
purchase its party goods products from Amscan and will continue
to distribute party goods to various channels, including to its
mass merchandise, drug, grocery and specialty retail customers.
Amscan will have exclusive rights to manufacture and distribute
party goods into various channels, including the party store
channel.
During the fourth quarter of 2010, the Corporation recorded a
gain on the Party Goods Transaction of $34,178, which is
included in Other operating income net
on the Consolidated Statement of Operations. See Note 3 for
further information. In addition, the Corporation recorded
$13,005 of asset impairment charges related to the Kalamazoo
facility closure and incurred $2,798 in employee termination
costs.
59
During 2010, the above transactions and activities generated
significant gains, losses and expenses and are reflected on the
Consolidated Statement of Operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Party Goods
|
|
|
Mexico
|
|
|
Retail
|
|
|
|
|
(In millions)
|
|
Transaction
|
|
|
Shutdown
|
|
|
Disposition
|
|
|
Total
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
0.7
|
|
|
$
|
|
|
|
$
|
0.7
|
|
Material, labor and other production costs
|
|
|
15.6
|
|
|
|
4.4
|
|
|
|
1.0
|
|
|
|
21.0
|
|
Selling, distribution and marketing expenses
|
|
|
0.2
|
|
|
|
1.0
|
|
|
|
|
|
|
|
1.2
|
|
Administrative and general expenses
|
|
|
|
|
|
|
0.6
|
|
|
|
|
|
|
|
0.6
|
|
Other operating (income) expense net
|
|
|
(34.2
|
)
|
|
|
11.5
|
|
|
|
28.2
|
|
|
|
5.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(18.4
|
)
|
|
$
|
18.2
|
|
|
$
|
29.2
|
|
|
$
|
29.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These gains, losses and expenses are reflected in the
Corporations reportable segments as follows:
|
|
|
|
|
(In millions)
|
|
|
|
|
North American Social Expression Products
|
|
$
|
(0.2
|
)
|
Retail Operations
|
|
|
29.2
|
|
|
|
|
|
|
|
|
$
|
29.0
|
|
|
|
|
|
|
|
|
NOTE 3
|
OTHER
INCOME AND EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Loss on disposition of retail stores
|
|
$
|
|
|
|
$
|
28,333
|
|
|
$
|
|
|
Gain on disposition of calendar product lines
|
|
|
|
|
|
|
(547
|
)
|
|
|
|
|
Gain on disposition of candy product lines
|
|
|
|
|
|
|
(115
|
)
|
|
|
|
|
Gain on disposition of party goods product lines
|
|
|
(254
|
)
|
|
|
(34,178
|
)
|
|
|
|
|
Loss on recognition of foreign currency translation adjustments
|
|
|
|
|
|
|
8,627
|
|
|
|
|
|
Miscellaneous
|
|
|
(2,951
|
)
|
|
|
(2,430
|
)
|
|
|
(1,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating income net
|
|
$
|
(3,205
|
)
|
|
$
|
(310
|
)
|
|
$
|
(1,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In April 2009, the Corporation sold the rights, title and
interest in certain of the assets of its retail store operations
to Schurman and recognized a loss on disposition of $28,333. See
Note 2 for further information.
The Corporation sold its calendar product lines in July 2009 and
its candy product lines in October 2009, which resulted in gains
totaling $547 and $115, respectively. Proceeds received from the
sales of the calendar and candy product lines of $3,063 and
$1,650, respectively, are included in
Other-net
investing activities on the Consolidated Statement of Cash Flows.
Pursuant to the Party Goods Transaction, in December 2009, the
Corporation sold certain assets, equipment and processes of the
party goods product lines and recorded a gain of $34,178. An
additional gain of $254 was recorded in 2011 as amounts
previously estimated were finalized. Cash proceeds of $24,880,
which were held in escrow and recorded as a receivable at
February 28, 2010, were received in 2011 and are included
in Proceeds from escrow related to party goods
transaction on the Consolidated Statement of Cash Flows.
See Note 2 for further information.
During the fourth quarter of 2010, it was determined that the
wind down of Carlton Mexico was substantially complete. In
accordance with ASC 830, the currency translation
adjustments were removed from the foreign currency translation
adjustment component of equity and a loss was recognized
totaling $11,300. The Corporation also recorded a loss totaling
$601 and a gain of $3,274 for foreign currency translation
adjustments realized in relation to two other entities
determined to be liquidated in accordance with ASC 830.
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Foreign exchange loss (gain)
|
|
$
|
224
|
|
|
$
|
(4,746
|
)
|
|
$
|
483
|
|
Rental income
|
|
|
(1,232
|
)
|
|
|
(1,194
|
)
|
|
|
(1,432
|
)
|
(Gain) loss on asset disposal
|
|
|
(3,463
|
)
|
|
|
59
|
|
|
|
1,215
|
|
Miscellaneous
|
|
|
(1,370
|
)
|
|
|
(606
|
)
|
|
|
1,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-operating (income) expense net
|
|
$
|
(5,841
|
)
|
|
$
|
(6,487
|
)
|
|
$
|
2,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation sold the land and building associated with its
Mexican operation within the North American Social Expression
Products segment in August 2010 and a manufacturing facility
within the International Social Expression Products segment in
January 2011, and recorded gains upon disposal of approximately
$1,000 and $2,819, respectively. Both assets were previously
included in Assets held for sale at net book values
on the Consolidated Statement of Financial Position as of
February 28, 2010. The cash proceeds received from the sale
of the Mexican assets and the manufacturing facility of $2,000
and $9,952, respectively, are included in Proceeds from
sale of fixed assets on the Consolidated Statement of Cash
Flows.
Miscellaneous includes, among other things,
income/loss from debt and equity securities. In 2011,
miscellaneous included $1,300 of dividend income related to the
Corporations investment in AAH. In 2009, miscellaneous
included a loss of $2,740 related to the Corporations
investment in the first lien debt securities of RPG prior to the
acquisition of the capital stock of RPG in February 2009. See
Note 2 for further information.
|
|
NOTE 4
|
EARNINGS
(LOSS) PER SHARE
|
The following table sets forth the computation of earnings
(loss) per share and earnings (loss) per share-assuming dilution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Numerator (thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
87,018
|
|
|
$
|
81,574
|
|
|
$
|
(227,759
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator (thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
39,983
|
|
|
|
39,468
|
|
|
|
46,544
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and other
|
|
|
1,262
|
|
|
|
692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding assuming dilution
|
|
|
41,245
|
|
|
|
40,160
|
|
|
|
46,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
|
|
$
|
2.18
|
|
|
$
|
2.07
|
|
|
$
|
(4.89
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share assuming dilution
|
|
$
|
2.11
|
|
|
$
|
2.03
|
|
|
$
|
(4.89
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately 3.1 million and 5.7 million stock
options, in 2011 and 2010, respectively, were excluded from the
computation of earnings per share-assuming dilution because the
options exercise prices were greater than the average
market price of the common shares during the respective years.
For 2009, all options outstanding (totaling approximately
6.7 million) were excluded from the computation of earnings
per share-assuming dilution, as the effect would have been
antidilutive due to the net loss in the period. Had the
Corporation reported income for the year, approximately
6.0 million stock options outstanding during the period
would have been excluded from the computation of earnings per
share-assuming dilution because the options exercise
prices were greater than the average market price of the common
shares during the year.
61
|
|
NOTE 5
|
ACCUMULATED
OTHER COMPREHENSIVE INCOME (LOSS)
|
The balance of accumulated other comprehensive income consisted
of the following components:
|
|
|
|
|
|
|
|
|
|
|
February 28, 2011
|
|
|
February 28, 2010
|
|
|
Foreign currency translation adjustments
|
|
$
|
26,021
|
|
|
$
|
10,856
|
|
Pension and postretirement benefits adjustments, net of tax (See
Note 12)
|
|
|
(28,369
|
)
|
|
|
(40,672
|
)
|
Unrealized investment gain, net of tax
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,346
|
)
|
|
$
|
(29,815
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 6
|
CUSTOMER
ALLOWANCES AND DISCOUNTS
|
Trade accounts receivable are reported net of certain allowances
and discounts. The most significant of these are as follows:
|
|
|
|
|
|
|
|
|
|
|
February 28, 2011
|
|
|
February 28, 2010
|
|
|
Allowance for seasonal sales returns
|
|
$
|
34,058
|
|
|
$
|
36,443
|
|
Allowance for outdated products
|
|
|
8,264
|
|
|
|
10,438
|
|
Allowance for doubtful accounts
|
|
|
5,374
|
|
|
|
2,963
|
|
Allowance for cooperative advertising and marketing funds
|
|
|
25,631
|
|
|
|
24,061
|
|
Allowance for rebates
|
|
|
24,920
|
|
|
|
29,338
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
98,247
|
|
|
$
|
103,243
|
|
|
|
|
|
|
|
|
|
|
Certain customer allowances and discounts are settled in cash.
These accounts, primarily rebates, which are classified as
Accrued liabilities on the Consolidated Statement of
Financial Position, totaled $11,913 and $15,326 as of
February 28, 2011 and 2010, respectively.
|
|
|
|
|
|
|
|
|
|
|
February 28, 2011
|
|
|
February 28, 2010
|
|
|
Raw materials
|
|
$
|
21,248
|
|
|
$
|
18,609
|
|
Work in process
|
|
|
6,476
|
|
|
|
6,622
|
|
Finished products
|
|
|
212,056
|
|
|
|
194,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
239,780
|
|
|
|
219,514
|
|
Less LIFO reserve
|
|
|
78,358
|
|
|
|
75,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161,422
|
|
|
|
144,023
|
|
Display material and factory supplies
|
|
|
18,308
|
|
|
|
19,933
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
179,730
|
|
|
$
|
163,956
|
|
|
|
|
|
|
|
|
|
|
There were no material LIFO liquidations in 2011 and 2009.
During 2010, inventory quantities declined resulting in the
liquidation of LIFO inventory layers carried at lower costs
compared with current year purchases. The income statement
effect of such liquidation on material, labor and other
production costs was approximately $13,000. Inventory held on
location for retailers with SBT arrangements, which is included
in finished products, totaled approximately $42,000 and $38,000
as of February 28, 2011 and 2010, respectively.
62
|
|
NOTE 8
|
PROPERTY,
PLANT AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2011
|
|
|
February 28, 2010
|
|
|
Land
|
|
$
|
10,552
|
|
|
$
|
10,147
|
|
Buildings
|
|
|
176,879
|
|
|
|
175,086
|
|
Equipment and fixtures
|
|
|
662,121
|
|
|
|
651,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
849,552
|
|
|
|
836,245
|
|
Less accumulated depreciation
|
|
|
607,903
|
|
|
|
593,362
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
241,649
|
|
|
$
|
242,883
|
|
|
|
|
|
|
|
|
|
|
During 2011, the Corporation disposed of approximately $27,000
of property, plant and equipment that included accumulated
depreciation of approximately $24,000. During 2010, the
Corporation disposed of approximately $118,000 with accumulated
depreciation of approximately $102,000, including the fixed
assets that were part of the Retail Operations segment and the
party goods product lines, which were sold during 2010.
During the fourth quarter of 2010, primarily due to the sale of
the party goods product lines, impairment charges of $12,206
were recorded in Material, labor and other production
costs on the Consolidated Statement of Operations.
Depreciation expense totaled $36,465, $39,640 and $42,843 in
2011, 2010 and 2009, respectively.
|
|
NOTE 9
|
GOODWILL
AND OTHER INTANGIBLE ASSETS
|
In accordance with ASC 350, the Corporation is required to
evaluate the carrying value of its goodwill for potential
impairment on an annual basis or an interim basis if there are
indicators of potential impairment. During 2011 and 2010, the
Corporation completed the required annual impairment test of
goodwill in the fourth quarter and based on the results of the
testing, no impairment charges were recorded.
During the third quarter of 2009, indicators emerged within the
AG Interactive segment and one reporting unit located in the
United Kingdom within the International Social Expression
Products segment (the UK Reporting Unit) that led
the Corporations management to conclude that a goodwill
impairment test was required to be performed during the third
quarter. Within the AG Interactive segment, there were three
primary indicators: (1) a substantial decline in
advertising revenues; (2) the
e-commerce
businesses not growing as anticipated; and (3) the
Corporations belief that the segments current
long-term cash flow forecasts may be unattainable based on the
lengthening and deepening economic deterioration. The following
three primary indicators emerged within the UK Reporting Unit:
(1) the recent bankruptcy of a major customer; (2) a
major customer implementing buying freezes, including on the
Corporations everyday products; and (3) the
Corporations belief that current long-term cash flow
forecasts may be unattainable based on the lengthening and
deepening economic deterioration.
Under ASC 350, the test for, and measurement of, impairment
of goodwill consists of two steps. In the first step, the
initial test for potential impairment, the Corporation compares
the fair value of each reporting unit to its carrying amount.
Fair values were determined using a combination of an income
approach and a market based approach which were validated by a
market capitalization reconciliation. Based on this evaluation,
it was determined that the fair values of the AG Interactive
segment and UK Reporting Unit were less than their carrying
values, thus indicating potential impairment. In the second
step, the measurement of the impairment, the Corporation
hypothetically applies purchase accounting to the reporting
units using the fair values from the first step. As a result,
the Corporation recorded goodwill charges of $150,208, which
included all the goodwill for the AG Interactive segment, and
$82,110, which included all of the goodwill for the UK Reporting
Unit. The amounts recorded in the third quarter were estimates.
The AG Interactive segment impairment was adjusted down by $655
in the fourth quarter due to final purchase accounting
adjustments for a final impairment total of $149,553. The
required annual impairment test of goodwill was completed as of
the beginning of the fourth quarter of 2009 and based on the
results of the testing, no additional impairment charges were
recorded.
63
However, based on the continued significant deterioration of the
global economic environment during the fourth quarter of 2009
and the closing share price of the Corporations
Class A common shares at February 28, 2009, that
resulted in the Corporations fair value of equity being
below the carrying value of equity, an additional interim
impairment analysis was performed at the end of the fourth
quarter following the same steps as described above. Based on
this analysis, it was determined that the fair values of the
North American Greeting Card Division (NAGCD) and
the Corporations fixtures business, which are both also
the reporting units for ASC 350 purposes, were less than
their carrying values. As a result, the Corporation recorded
goodwill impairment charges of $47,850, which included all the
goodwill for NAGCD, and $82, which included all the goodwill for
the Corporations fixtures business. NAGCD is included in
the North American Social Expression Products segment and the
fixtures business is included in non-reportable segments.
A summary of the changes in the carrying amount of the
Corporations goodwill during the years ended
February 28, 2011 and 2010 by segment, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
|
|
|
|
North American
|
|
|
Social
|
|
|
|
|
|
|
Social Expression
|
|
|
Expression
|
|
|
|
|
|
|
Products
|
|
|
Products
|
|
|
Total
|
|
|
Balance at February 28, 2009
|
|
$
|
22,465
|
|
|
$
|
4,406
|
|
|
$
|
26,871
|
|
Acquisition related
|
|
|
6,510
|
|
|
|
|
|
|
|
6,510
|
|
Adjustment related to income taxes
|
|
|
(2,501
|
)
|
|
|
|
|
|
|
(2,501
|
)
|
Currency translation
|
|
|
|
|
|
|
226
|
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 28, 2010
|
|
|
26,474
|
|
|
|
4,632
|
|
|
|
31,106
|
|
Adjustment related to income taxes
|
|
|
(2,509
|
)
|
|
|
|
|
|
|
(2,509
|
)
|
Currency translation
|
|
|
|
|
|
|
306
|
|
|
|
306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 28, 2011
|
|
$
|
23,965
|
|
|
$
|
4,938
|
|
|
$
|
28,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above adjustment related to income taxes for 2011 is a
$2,509 reduction related to second component goodwill, as
defined by ASC 740, which results in a reduction of
goodwill for financial reporting purposes when amortized for tax
purposes. See Note 2 for further discussion.
At February 28, 2011 and 2010, intangible assets, net of
accumulated amortization, were $43,049 and $45,828,
respectively. The following table presents information about
these intangible assets, which are included in Other
assets on the Consolidated Statement of Financial Position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2011
|
|
|
February 28, 2010
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Intangible assets with indefinite useful lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames
|
|
$
|
6,200
|
|
|
$
|
|
|
|
$
|
6,200
|
|
|
$
|
6,200
|
|
|
$
|
|
|
|
$
|
6,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
6,200
|
|
|
|
|
|
|
|
6,200
|
|
|
|
6,200
|
|
|
|
|
|
|
|
6,200
|
|
Intangible assets with finite useful lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
4,616
|
|
|
|
(3,558
|
)
|
|
|
1,058
|
|
|
|
4,194
|
|
|
|
(3,417
|
)
|
|
|
777
|
|
Trademarks
|
|
|
10,901
|
|
|
|
(9,097
|
)
|
|
|
1,804
|
|
|
|
10,071
|
|
|
|
(8,496
|
)
|
|
|
1,575
|
|
Artist relationships
|
|
|
19,230
|
|
|
|
(3,201
|
)
|
|
|
16,029
|
|
|
|
19,180
|
|
|
|
(1,598
|
)
|
|
|
17,582
|
|
Customer relationships
|
|
|
24,886
|
|
|
|
(11,672
|
)
|
|
|
13,214
|
|
|
|
24,669
|
|
|
|
(10,544
|
)
|
|
|
14,125
|
|
Other
|
|
|
18,586
|
|
|
|
(13,842
|
)
|
|
|
4,744
|
|
|
|
17,633
|
|
|
|
(12,064
|
)
|
|
|
5,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
78,219
|
|
|
|
(41,370
|
)
|
|
|
36,849
|
|
|
|
75,747
|
|
|
|
(36,119
|
)
|
|
|
39,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
84,419
|
|
|
$
|
(41,370
|
)
|
|
$
|
43,049
|
|
|
$
|
81,947
|
|
|
$
|
(36,119
|
)
|
|
$
|
45,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
The Corporation completed the required annual impairment test of
indefinite-lived intangible assets in the fourth quarter of 2011
and 2010 and based on the results of the testing, no impairment
charges were recorded for continuing operations.
In conjunction with the goodwill impairment analysis performed
in the third quarter of 2009 for the AG Interactive segment and
the UK Reporting Unit discussed above, intangible assets were
also tested for impairment in accordance with ASC 360.
Based on this testing, the Corporation recorded an impairment
charge of $10,571 in the AG Interactive segment. The impairment
charge was determined using a discounted cash flows analysis and
related primarily to customer relationships, developed
technology and trademarks.
Amortization expense for intangible assets totaled $4,583,
$5,533 and $7,173 in 2011, 2010 and 2009, respectively.
Estimated annual amortization expense for the next five years
will approximate $4,748 in 2012, $4,681 in 2013, $4,007 in 2014,
$3,121 in 2015 and $2,845 in 2016.
In the normal course of its business, the Corporation enters
into agreements with certain customers for the supply of
greeting cards and related products. Under these agreements, the
customer may receive from the Corporation a combination of cash
payments, credits, discounts, allowances and other incentive
considerations to be earned by the customer as product is
purchased from the Corporation over the stated term of the
agreement or the minimum purchase volume commitment. In the
event an agreement is not completed because a minimum purchase
volume commitment is not met, in most instances, the Corporation
has a claim for unearned advances under the agreement. The
agreements may or may not specify the Corporation as the sole
supplier of social expression products to the customer.
A portion of the total consideration may not be paid by the
Corporation at the time the agreement is consummated. All future
payment commitments are classified as liabilities at inception
until paid. The payments that are expected to be made in the
next twelve months are classified as Other current
liabilities on the Consolidated Statement of Financial
Position and the remaining payment commitments beyond the next
twelve months are classified as Other liabilities.
The Corporation maintains an allowance for deferred costs
related to supply agreements of $10,700 and $12,400 at
February 28, 2011 and 2010, respectively. This allowance is
included in Other assets on the Consolidated
Statement of Financial Position.
Deferred costs and future payment commitments were as follows:
|
|
|
|
|
|
|
|
|
|
|
February 28, 2011
|
|
|
February 28, 2010
|
|
|
Prepaid expenses and other
|
|
$
|
88,352
|
|
|
$
|
82,914
|
|
Other assets
|
|
|
327,311
|
|
|
|
310,555
|
|
|
|
|
|
|
|
|
|
|
Deferred cost assets
|
|
|
415,663
|
|
|
|
393,469
|
|
Other current liabilities
|
|
|
(64,116
|
)
|
|
|
(53,701
|
)
|
Other liabilities
|
|
|
(76,301
|
)
|
|
|
(51,803
|
)
|
|
|
|
|
|
|
|
|
|
Deferred cost liabilities
|
|
|
(140,417
|
)
|
|
|
(105,504
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred costs
|
|
$
|
275,246
|
|
|
$
|
287,965
|
|
|
|
|
|
|
|
|
|
|
65
A summary of the changes in the carrying amount of the
Corporations net deferred costs during the years ended
February 28, 2011, 2010 and 2009 is as follows:
|
|
|
|
|
Balance at February 29, 2008
|
|
$
|
338,124
|
|
Payments
|
|
|
105,952
|
|
Amortization
|
|
|
(133,548
|
)
|
Currency translation and other
|
|
|
(7,521
|
)
|
|
|
|
|
|
Balance at February 28, 2009
|
|
|
303,007
|
|
Payments
|
|
|
84,345
|
|
Amortization
|
|
|
(102,750
|
)
|
Currency translation and other
|
|
|
3,363
|
|
|
|
|
|
|
Balance at February 28, 2010
|
|
|
287,965
|
|
Payments
|
|
|
83,919
|
|
Amortization
|
|
|
(98,181
|
)
|
Currency translation and other
|
|
|
1,543
|
|
|
|
|
|
|
Balance at February 28, 2011
|
|
$
|
275,246
|
|
|
|
|
|
|
|
|
NOTE 11
|
LONG AND
SHORT-TERM DEBT
|
7.375% Notes
On May 24, 2006, the Corporation issued $200,000 of
7.375% senior unsecured notes, due on June 1, 2016
(the Original Senior Notes). The proceeds from this
issuance were used to repurchase a portion of the
Corporations 6.10% senior notes, due on
August 1, 2028, of which $277,310 were tendered in the
Corporations tender offer and consent solicitation, that
was completed on May 25, 2006.
On February 24, 2009, the Corporation issued $22,000 of
additional 7.375% senior unsecured notes described above
(Additional Senior Notes) and $32,686 of new 7.375%
unsecured notes due on June 1, 2016 (New Notes,
together with the Original Senior Notes, and the Additional
Senior Notes, the Notes) in conjunction with the
acquisition of RPG. The original issue discount from the
issuance of these notes of $26,249 was recorded as a reduction
of the underlying debt issuances and is being amortized over the
life of the debt using the effective interest method. Including
the original issue discount, the New Notes and the Additional
Senior Notes have an effective annualized interest rate of
approximately 20.3%. See Note 2 for further information on
the acquisition of RPG. Except as described below, the terms of
the New Notes and the Additional Senior Notes are the same.
The Notes will mature on June 1, 2016 and bear interest at
a fixed rate of 7.375% per annum, commencing June 1, 2009.
The Notes constitute general, unsecured obligations of the
Corporation. The Notes rank equally with the Corporations
other senior unsecured indebtedness and senior in right of
payment to all of the Corporations obligations that are,
by their terms, expressly subordinated in right of payment to
the Notes, as applicable. The Original Senior Notes and the
Additional Senior Notes are effectively subordinated to all of
the Corporations secured indebtedness, including
borrowings under its revolving credit facility described below,
to the extent of the value of the assets securing such
indebtedness. The New Notes are contractually subordinated to
amounts outstanding under the credit agreement, and are
effectively subordinated to any other secured indebtedness that
the Corporation may issue from time to time to the extent of the
value of the assets securing such indebtedness.
The Notes generally contain comparable covenants as described
below for the Corporations credit agreement. The New
Notes, however, also provide that if the Corporation incurs more
than an additional $10,000 of indebtedness (other than
indebtedness under the revolving credit facility described below
or certain other permitted indebtedness), such indebtedness must
be (a) pari passu in right of payment to the New Notes and
expressly subordinated in right of payment to the credit
agreement at least to the same extent as the New Notes, or
(b) expressly subordinated in right of payment to the New
Notes. Alternatively, the Corporation can
66
redeem the New Notes in whole, but not in part, at a purchase
price equal to 100% of the principal amount thereof plus accrued
but unpaid interest, if any, or have the subordination
provisions removed from the New Notes.
The total fair value of the Corporations publicly traded
debt, based on quoted market prices, was $237,453 (at a carrying
value of $232,688) and $224,709 (at a carrying value of
$230,468) at February 28, 2011 and 2010, respectively.
Credit
Facility
On April 4, 2006, the Corporation entered into a $650,000
secured credit agreement (the Original Credit
Agreement). The credit agreement included a $350,000
revolving credit facility and a $300,000 delay draw term loan.
The Corporation could request one or more term loans until
April 4, 2007. The revolving credit facility was scheduled
to mature on April 4, 2011 and any outstanding term loans
were scheduled to mature on April 4, 2013. Each term loan
was to amortize in equal quarterly installments equal to 0.25%
of the amount of such term loan, beginning on April 4,
2007, with the balance payable on April 4, 2013.
On February 26, 2007, the credit agreement dated
April 4, 2006 was amended. The amendment decreased the size
of the term loan facility to $100,000 and extended the period
during which the Corporation may borrow on the term loan.
On February 23, 2009, the Corporation drew down $100,000 in
principal amount under the term loan.
On June 11, 2010, the Corporation further amended and
restated its Original Credit Agreement by entering into an
Amended and Restated Credit Agreement (the Amended and
Restated Credit Agreement). Pursuant to the terms of the
Amended and Restated Credit Agreement, the Corporation may
continue to borrow, repay and re-borrow up to $350,000 under the
revolving credit facility, with the ability to increase the size
of the facility to up to $400,000, subject to customary
conditions. The Amended and Restated Credit Agreement also
continues to provide for a $25,000
sub-limit
for the issuance of swing line loans and a $100,000
sub-limit
for the issuance of letters of credit. The proceeds of the
borrowings under the Amended and Restated Credit Agreement may
be used to provide working capital and for other general
corporate purposes.
The obligations under the Amended and Restated Credit Agreement
are guaranteed by the Corporations material domestic
subsidiaries and are secured by substantially all of the
personal property of the Corporation and each of its material
domestic subsidiaries, including a pledge of all of the capital
stock in substantially all of the Corporations domestic
subsidiaries and 65% of the capital stock of the
Corporations material first tier international
subsidiaries. The Amended and Restated Credit Agreement,
including revolving loans thereunder, will mature on
June 11, 2015. In connection with the Amended and Restated
Credit Agreement, the term loan was terminated and the
Corporation repaid the full $99,000 outstanding under the term
loan using cash on hand.
Revolving loans that are denominated in U.S. dollars will
bear interest at either the U.S. base rate or the London
Inter-Bank Offer Rate (LIBOR), at the
Corporations election, plus a margin determined according
to the Corporations leverage ratio. Swing line loans will
bear interest at a quoted rate agreed upon by the Corporation
and the swing line lender. In addition to interest, the
Corporation is required to pay commitment fees on the unused
portion of the revolving credit facility. The commitment fee
rate is initially 0.50% per annum and is subject to adjustment
thereafter based on the Corporations leverage ratio.
The Amended and Restated Credit Agreement contains certain
restrictive covenants that are customary for similar credit
arrangements, including covenants relating to limitations on
liens, dispositions, issuance of debt, investments, payment of
dividends, repurchases of capital stock, acquisitions and
transactions with affiliates. There are also financial
performance covenants that require the Corporation to maintain a
maximum leverage ratio and a minimum interest coverage ratio.
The credit agreement also requires the Corporation to make
certain mandatory prepayments of outstanding indebtedness using
the net cash proceeds received from certain dispositions, events
of loss and additional indebtedness that the Corporation may
incur from time to time.
67
Receivables
Purchase Agreement
The Corporation is also party to an amended and restated
receivables purchase agreement that originally had available
financing of up to $150,000. The agreement was set to expire on
October 23, 2009. Under the amended and restated
receivables purchase agreement, the Corporation and certain of
its subsidiaries sell accounts receivable to AGC Funding, which
in turn sells undivided interests in eligible accounts
receivable to third party financial institutions as part of a
process that provides funding to the Corporation similar to a
revolving credit facility. Funding under the facility may be
used for working capital, general corporate purposes and the
issuance of letters of credit. This arrangement is accounted for
as a financing transaction.
On March 28, 2008, the amended and restated receivables
purchase agreement was amended to decrease the amount of
available financing from $150,000 to $90,000.
On September 23, 2009, the amended and restated receivables
purchase agreement was further amended. The amendment decreased
the amount of available financing under the agreement from
$90,000 to $80,000 and allows certain receivables to be excluded
from the program in connection with the exercise of rights under
insurance and other products that may be obtained from time to
time by the Corporation or other originators that are designed
to mitigate credit risks associated with the collection of
accounts receivable. The amendment also extended the maturity
date to September 21, 2012; provided, however, that in
addition to customary termination provisions, the receivables
purchase agreement will terminate upon termination of the
liquidity commitments obtained by the purchaser groups from
third party liquidity providers. Such commitments may be made
available to the purchaser groups for
364-day
periods only (initial
364-day
period began on September 23, 2009), and there can be no
assurances that the third party liquidity providers will renew
or extend their commitments under the receivables purchase
agreement. If that is the case, the receivables purchase
agreement will terminate and the Corporation will not receive
the benefit of the entire three-year term of the agreement. On
September 22, 2010, the liquidity commitments were renewed
for an additional
364-day
period.
The interest rate under the accounts receivable securitization
facility is based on (i) commercial paper interest rates,
(ii) LIBOR rates plus an applicable margin or (iii) a
rate that is the higher of the prime rate as announced by the
applicable purchaser financial institution or the federal funds
rate plus 0.50%. AGC Funding pays an annual commitment fee of
60 basis points on the unfunded portion of the accounts
receivable securitization facility, together with customary
administrative fees on outstanding letters of credit that have
been issued and on outstanding amounts funded under the facility.
The amended and restated receivables purchase agreement contains
representations, warranties, covenants and indemnities customary
for facilities of this type, including the obligation of the
Corporation to maintain the same consolidated leverage ratio as
it is required to maintain under its secured credit facility.
There were no balances outstanding under the amended and
restated receivables purchase agreement as of February 28,
2011 or 2010.
At February 28, 2011, the Corporation was in compliance
with its financial covenants under the borrowing agreements
described above.
As of February 28, 2011, there were no balances outstanding
under the Corporations revolving credit facility or
receivables purchase agreement, neither of which is publicly
traded debt. The total fair value of the Corporations
non-publicly traded debt, term loan and revolving credit
facility, based on comparable publicly traded debt prices, was
$99,250 (at a carrying value of $99,250) at February 28,
2010.
There was no debt due within one year as of February 28,
2011. Debt due within one year as of February 28, 2010 was
$1,000.
68
Long-term debt and their related calendar year due dates, net of
unamortized discounts, were as follows:
|
|
|
|
|
|
|
|
|
|
|
February 28, 2011
|
|
|
February 28, 2010
|
|
|
7.375% senior notes, due 2016
|
|
$
|
213,077
|
|
|
$
|
212,184
|
|
7.375% notes, due 2016
|
|
|
19,430
|
|
|
|
18,103
|
|
Term loan facility
|
|
|
-
|
|
|
|
98,250
|
|
6.10% senior notes, due 2028
|
|
|
181
|
|
|
|
181
|
|
Other
|
|
|
-
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
232,688
|
|
|
$
|
328,723
|
|
|
|
|
|
|
|
|
|
|
The Corporation also provides financing for certain transactions
with some of its vendors, which includes a combination of
various guaranties and letters of credit. At February 28,
2011, the Corporation had credit arrangements to support the
letters of credit in the amount of $134,014 with $44,730 of
credit outstanding.
Aggregate maturities of long-term debt, by fiscal year, are as
follows:
|
|
|
|
|
2012
|
|
$
|
-
|
|
2013
|
|
|
-
|
|
2014
|
|
|
-
|
|
2015
|
|
|
-
|
|
2016
|
|
|
-
|
|
Thereafter
|
|
|
254,867
|
|
|
|
|
|
|
|
|
$
|
254,867
|
|
|
|
|
|
|
Interest paid in cash on short-term and long-term debt was
$21,637 in 2011, $23,294 in 2010 and $21,721 in 2009.
Guaranties
In April 2009, the Corporation sold certain of the assets of its
Retail Operations segment to Schurman and purchased from
Schurman its Papyrus trademark and its Papyrus wholesale
business division. As part of the transaction, the Corporation
agreed to provide Schurman limited credit support through the
provision of a Liquidity Guaranty and a Bridge Guaranty in favor
of the lenders under Schurmans Senior Credit Facility.
Pursuant to the terms of the Liquidity Guaranty, the Corporation
has guaranteed the repayment of up to $12,000 of Schurmans
borrowings under the Senior Credit Facility to help ensure that
Schurman has sufficient borrowing availability under this
facility. The Liquidity Guaranty is required to be backed by a
letter of credit for the term of the Liquidity Guaranty, which
is currently anticipated to end in January 2014. Pursuant to the
terms of the Bridge Guaranty, the Corporation has guaranteed the
repayment of up to $12,000 of Schurmans borrowings under
the Senior Credit Facility until Schurman is able to include the
inventory and other assets of the acquired retail stores in its
borrowing base. The Bridge Guaranty is required to be backed by
a letter of credit. The letters of credit required to back both
guaranties are included within the $44,730 outstanding letters
of credit mentioned above. The Bridge Guaranty is scheduled to
expire in January 2014; however, upon the Corporations
request, the Bridge Guaranty may be reduced as Schurman is able
to include such inventory and other assets in its borrowing
base. Pursuant to such a request, on April 1, 2011, the
Bridge Guaranty was terminated and the associated letter of
credit was released. See Note 1 for further information.
The Corporations obligations under the Liquidity Guaranty
and the Bridge Guaranty generally may not be triggered unless
Schurmans lenders under its Senior Credit Facility have
substantially completed the liquidation of the collateral under
Schurmans Senior Credit Facility, or 91 days after
the liquidation is started, whichever is earlier, and will be
limited to the deficiency, if any, between the amount owed and
the amount collected in connection with the liquidation. There
was no triggering event or liquidation of collateral as of
February 28, 2011 requiring the use of the guaranties.
69
|
|
NOTE 12
|
RETIREMENT
AND POSTRETIREMENT BENEFIT PLANS
|
The Corporation has a discretionary profit-sharing plan with a
contributory 401(k) provision covering most of its United States
employees. Corporate contributions to the profit-sharing plan
were $9,759 and $9,338 for 2011 and 2010, respectively. In
addition, the Corporation matches a portion of 401(k) employee
contributions. The Corporations matching contributions
were $4,875 and $4,787 for 2011 and 2010, respectively. Based on
the 2009 operating results, the Corporation elected not to make
profit-sharing or 401(k) matching contributions for 2009.
The Corporation also participates in a multi-employer pension
plan covering certain domestic employees who are part of a
collective bargaining agreement. Total pension expense for the
multi-employer plan, representing contributions to the plan, was
$467, $417 and $511 in 2011, 2010 and 2009, respectively.
The Corporation has nonqualified deferred compensation plans
that provide certain officers and directors with the opportunity
to defer receipt of compensation and director fees,
respectively, including compensation received in the form of the
Corporations common shares. The Corporation funds these
deferred compensation liabilities by making contributions to a
rabbi trust. In accordance with ASC Topic
710-10-25,
Compensation Recognition Deferred
Compensation Rabbi Trust, both the trust
assets and the related obligation associated with deferrals of
the Corporations common shares are recorded in equity at
cost and offset each other. There were approximately
0.2 million common shares in the trust at February 28,
2011 with a cost of $3,368 compared to approximately
0.2 million common shares with a cost of $2,856 at
February 28, 2010.
In 2001, in connection with its acquisition of Gibson Greetings,
Inc. (Gibson), the Corporation assumed the
obligations and assets of Gibsons defined benefit pension
plan (the Gibson Retirement Plan) that covered
substantially all Gibson employees who met certain eligibility
requirements. Benefits earned under the Gibson Retirement Plan
have been frozen and participants no longer accrue benefits
after December 31, 2000. The Gibson Retirement Plan has a
measurement date of February 28 or 29. No contributions were
made to the plan in either 2011 or 2010. The Gibson Retirement
Plan was under-funded at February 28, 2011 and 2010.
The Corporation also has an unfunded nonqualified defined
benefit pension plan (the Supplemental Executive
Retirement Plan) covering certain management employees.
The Supplemental Executive Retirement Plan has a measurement
date of February 28 or 29.
The Corporation also has several defined benefit pension plans
at its Canadian subsidiary. These include a defined benefit
pension plan covering most Canadian salaried employees, which
was closed to new participants effective January 1, 2006,
but eligible members continue to accrue benefits and an hourly
plan in which benefits earned have been frozen and participants
no longer accrue benefits after March 1, 2000. There are
also two unfunded plans, one that covers a supplemental
executive retirement pension relating to an employment agreement
and one that pays supplemental pensions to certain former hourly
employees pursuant to a prior collective bargaining agreement.
All plans have a measurement date of February 28 or 29. During
2010, the Corporation settled a portion of its obligation under
the Canadian hourly plan. The Corporation made a contribution to
the plan, which was used to purchase annuities for the affected
participants. As a result, a settlement expense of $126 was
recorded.
The Corporation sponsors a defined benefit health care plan that
provides postretirement medical benefits to full-time United
States employees who meet certain age, service and other
requirements. The plan is contributory, with retiree
contributions adjusted periodically, and contains other
cost-sharing features such as deductibles and coinsurance. The
Corporation maintains a trust for the payment of retiree health
care benefits. This trust is funded at the discretion of
management. The plan has a measurement date of February 28 or
29. The Corporation made changes to its postretirement health
care plan in the current year by reducing the employer subsidy
by the Corporation for certain groups as well as removing the
death coverage for the spouses of active employees and removing
the disability coverage for disabled employees unless the
employee was already eligible for retiree medical coverage at
the time of death or disability, respectively.
70
The following table sets forth summarized information on the
defined benefit pension plans and postretirement benefits plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
|
Postretirement Benefits
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
162,845
|
|
|
$
|
140,116
|
|
|
$
|
110,921
|
|
|
$
|
120,113
|
|
Service cost
|
|
|
957
|
|
|
|
730
|
|
|
|
2,290
|
|
|
|
2,365
|
|
Interest cost
|
|
|
8,757
|
|
|
|
9,279
|
|
|
|
6,014
|
|
|
|
7,359
|
|
Participant contributions
|
|
|
28
|
|
|
|
32
|
|
|
|
4,165
|
|
|
|
4,591
|
|
Retiree drug subsidy payments
|
|
|
-
|
|
|
|
-
|
|
|
|
1,670
|
|
|
|
-
|
|
Plan amendments
|
|
|
198
|
|
|
|
53
|
|
|
|
(7,263
|
)
|
|
|
-
|
|
Actuarial loss (gain)
|
|
|
5,825
|
|
|
|
22,034
|
|
|
|
(18,639
|
)
|
|
|
(14,649
|
)
|
Benefit payments
|
|
|
(10,567
|
)
|
|
|
(10,080
|
)
|
|
|
(8,123
|
)
|
|
|
(8,858
|
)
|
Settlements
|
|
|
52
|
|
|
|
(3,512
|
)
|
|
|
-
|
|
|
|
-
|
|
Currency exchange rate changes
|
|
|
2,065
|
|
|
|
4,193
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
|
170,160
|
|
|
|
162,845
|
|
|
|
91,035
|
|
|
|
110,921
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
102,092
|
|
|
|
86,489
|
|
|
|
66,928
|
|
|
|
61,898
|
|
Actual return on plan assets
|
|
|
11,311
|
|
|
|
21,691
|
|
|
|
7,130
|
|
|
|
11,180
|
|
Employer contributions
|
|
|
3,187
|
|
|
|
4,001
|
|
|
|
(3,165
|
)
|
|
|
(1,883
|
)
|
Participant contributions
|
|
|
28
|
|
|
|
32
|
|
|
|
4,165
|
|
|
|
4,591
|
|
Benefit payments
|
|
|
(10,567
|
)
|
|
|
(10,080
|
)
|
|
|
(8,123
|
)
|
|
|
(8,858
|
)
|
Settlements
|
|
|
52
|
|
|
|
(3,512
|
)
|
|
|
-
|
|
|
|
-
|
|
Currency exchange rate changes
|
|
|
1,778
|
|
|
|
3,471
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
107,881
|
|
|
|
102,092
|
|
|
|
66,935
|
|
|
|
66,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(62,279
|
)
|
|
$
|
(60,753
|
)
|
|
$
|
(24,100
|
)
|
|
$
|
(43,993
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized on the Consolidated Statement of Financial
Position consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
|
Postretirement Benefits
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Accrued compensation and benefits
|
|
$
|
(2,347
|
)
|
|
$
|
(2,335
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
Other liabilities
|
|
|
(59,932
|
)
|
|
|
(58,418
|
)
|
|
|
(24,101
|
)
|
|
|
(43,993
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(62,279
|
)
|
|
$
|
(60,753
|
)
|
|
$
|
(24,101
|
)
|
|
$
|
(43,993
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
56,938
|
|
|
$
|
55,275
|
|
|
$
|
1,268
|
|
|
$
|
23,611
|
|
Net prior service cost (credit)
|
|
|
847
|
|
|
|
828
|
|
|
|
(11,316
|
)
|
|
|
(11,766
|
)
|
Net transition obligation
|
|
|
43
|
|
|
|
46
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
$
|
57,828
|
|
|
$
|
56,149
|
|
|
$
|
(10,048
|
)
|
|
$
|
11,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
For the defined benefit pension plans, the estimated net loss,
prior service cost and transition obligation that will be
amortized from accumulated other comprehensive income into
periodic benefit cost over the next fiscal year are
approximately $2,392, $180 and $6, respectively. For the
postretirement benefit plan, the estimated net loss and prior
service credit that will be amortized from accumulated other
comprehensive income into periodic benefit cost over the next
fiscal year are approximately $0 and ($2,500), respectively.
The following table presents significant weighted-average
assumptions to determine benefit obligations and net periodic
benefit cost:
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Postretirement Benefits
|
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
Weighted average discount rate used to determine:
|
|
|
|
|
|
|
|
|
Benefit obligations at measurement date
|
|
|
|
|
|
|
|
|
US
|
|
5.25%
|
|
5.50-5.75%
|
|
5.50%
|
|
5.75%
|
International
|
|
5.15%
|
|
5.50%
|
|
N/A
|
|
N/A
|
Net periodic benefit cost
|
|
|
|
|
|
|
|
|
US
|
|
5.50-5.75%
|
|
6.75%
|
|
5.75%
|
|
6.75%
|
International
|
|
5.50%
|
|
7.50%
|
|
N/A
|
|
N/A
|
Expected long-term return on plan assets:
|
|
|
|
|
|
|
|
|
US
|
|
7.00%
|
|
7.00%
|
|
7.00%
|
|
7.00%
|
International
|
|
5.50%
|
|
6.00%
|
|
N/A
|
|
N/A
|
Rate of compensation increase:
|
|
|
|
|
|
|
|
|
US
|
|
Up to 6.50%
|
|
Up to 6.50%
|
|
N/A
|
|
N/A
|
International
|
|
Up to 3.00%
|
|
Up to 3.50%
|
|
N/A
|
|
N/A
|
Health care cost trend rates:
|
|
|
|
|
|
|
|
|
For year ending February 28 or 29
|
|
N/A
|
|
N/A
|
|
8.50%
|
|
9.00%
|
For year following February 28 or 29
|
|
N/A
|
|
N/A
|
|
10.00%
|
|
8.50%
|
Rate to which the cost trend rate is assumed to decline (the
ultimate trend rate)
|
|
N/A
|
|
N/A
|
|
5.00%
|
|
5.00%
|
Year the rate reaches the ultimate trend rate
|
|
N/A
|
|
N/A
|
|
2021
|
|
2017
|
For 2011, the net periodic pension cost for the pension plans
was based on long-term asset rates of return as noted above. In
developing these expected long-term rate of return assumptions,
consideration was given to expected returns based on the current
investment policy and historical return for the asset classes.
72
For 2011, the Corporation assumed a long-term asset rate of
return of 7% to calculate the expected return for the
postretirement benefit plan. In developing the 7% expected
long-term rate of return assumption, consideration was given to
various factors, including a review of asset class return
expectations based on historical compounded returns for such
asset classes.
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Effect of a 1% increase in health care cost trend rate on:
|
|
|
|
|
|
|
|
|
Service cost plus interest cost
|
|
$
|
915
|
|
|
$
|
1,036
|
|
Accumulated postretirement benefit obligation
|
|
|
7,571
|
|
|
|
10,262
|
|
Effect of a 1% decrease in health care cost trend rate on:
|
|
|
|
|
|
|
|
|
Service cost plus interest cost
|
|
|
(739
|
)
|
|
|
(841
|
)
|
Accumulated postretirement benefit obligation
|
|
|
(6,030
|
)
|
|
|
(8,373
|
)
|
The following table presents selected pension plan information:
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
For all pension plans:
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
164,823
|
|
|
$
|
158,351
|
|
For pension plans that are not fully funded:
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
|
170,160
|
|
|
|
162,845
|
|
Accumulated benefit obligation
|
|
|
164,823
|
|
|
|
158,351
|
|
Fair value of plan assets
|
|
|
107,881
|
|
|
|
102,092
|
|
A summary of the components of net periodic benefit cost for the
pension plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Components of net periodic benefit cost:
|
|
|
|
|
|