UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | ||
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period endedNovember 23, 2007
OR
¨ | ||
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number1-13859
AMERICAN GREETINGS CORPORATION
(Exact name of registrant as specified in its charter)
Ohio | 34-0065325 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
One American Road, Cleveland, Ohio | 44144 | |
(Address of principal executive offices) | (Zip Code) |
(216) 252-7300
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d)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.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x | Accelerated filer ¨ | |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o¨ Noþx
As of December 27, 2007,July 7, 2008, the number of shares outstanding of each of the issuer’s classes of common stock was:
Class A Common 48,743,833
45,346,060
Class B Common 3,442,145
INDEX
Page Number | ||||||||
Item 1. | ||||||||
3 | ||||||||
Item 2. | ||||||||
Item 3. | ||||||||
Item 4. | ||||||||
Item 1. | ||||||||
Risk Factors | 21 | |||||||
Unregistered Sales of Equity Securities and Use of Proceeds | ||||||||
Exhibits | 22 | |||||||
EXHIBITS | ||||||||
AMERICAN GREETINGS CORPORATIONCONDENSED
CONSOLIDATED STATEMENT OF INCOME
(Thousands of dollars except share and per share amounts)
(Unaudited) | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
November 23, | November 24, | November 23, | November 24, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Net sales | $ | 474,995 | $ | 510,102 | $ | 1,258,829 | $ | 1,271,755 | ||||||||
Other revenue | 10,751 | 11,052 | 24,309 | 26,537 | ||||||||||||
Total revenue | 485,746 | 521,154 | 1,283,138 | 1,298,292 | ||||||||||||
Material, labor and other production costs | 223,329 | 245,187 | 547,509 | 593,232 | ||||||||||||
Selling, distribution and marketing expenses | 159,420 | 157,364 | 444,695 | 451,419 | ||||||||||||
Administrative and general expenses | 60,481 | 65,287 | 178,291 | 183,516 | ||||||||||||
Other operating income — net | (127 | ) | (20,541 | ) | (807 | ) | (20,963 | ) | ||||||||
Operating income | 42,643 | 73,857 | 113,450 | 91,088 | ||||||||||||
Interest expense | 4,835 | 6,951 | 14,431 | 27,024 | ||||||||||||
Interest income | (2,115 | ) | (1,258 | ) | (5,834 | ) | (6,716 | ) | ||||||||
Other non-operating (income) expense — net | (4,582 | ) | 91 | (7,478 | ) | (2,811 | ) | |||||||||
Income from continuing operations before income tax expense | 44,505 | 68,073 | 112,331 | 73,591 | ||||||||||||
Income tax expense | 15,017 | 21,058 | 43,495 | 22,583 | ||||||||||||
Income from continuing operations | 29,488 | 47,015 | 68,836 | 51,008 | ||||||||||||
(Loss) income from discontinued operations, net of tax | (472 | ) | 2,692 | (1,395 | ) | 3,593 | ||||||||||
Net income | $ | 29,016 | $ | 49,707 | $ | 67,441 | $ | 54,601 | ||||||||
Earnings per share — basic: | ||||||||||||||||
Income from continuing operations | $ | 0.54 | $ | 0.79 | $ | 1.25 | $ | 0.87 | ||||||||
(Loss) income from discontinued operations | (0.01 | ) | 0.05 | (0.03 | ) | 0.06 | ||||||||||
Net income | $ | 0.53 | $ | 0.84 | $ | 1.22 | $ | 0.93 | ||||||||
Earnings per share — assuming dilution: | ||||||||||||||||
Income from continuing operations | $ | 0.53 | $ | 0.79 | $ | 1.24 | $ | 0.82 | ||||||||
(Loss) income from discontinued operations | (0.01 | ) | 0.04 | (0.03 | ) | 0.06 | ||||||||||
Net income | $ | 0.52 | $ | 0.83 | $ | 1.21 | $ | 0.88 | ||||||||
Average number of shares outstanding | 55,022,689 | 59,502,276 | 55,350,736 | 58,590,857 | ||||||||||||
Average number of shares outstanding — assuming dilution | 55,466,351 | 59,902,127 | 55,726,990 | 64,361,644 | ||||||||||||
Dividends declared per share | $ | 0.10 | $ | 0.08 | $ | 0.30 | $ | 0.24 |
(Unaudited) Three Months Ended | ||||||||
May 30, 2008 | May 25, 2007 | |||||||
Net sales | $ | 425,463 | $ | 418,016 | ||||
Other revenue | 2,837 | 1,951 | ||||||
Total revenue | 428,300 | 419,967 | ||||||
Material, labor and other production costs | 193,342 | 161,128 | ||||||
Selling, distribution and marketing expenses | 150,875 | 140,694 | ||||||
Administrative and general expenses | 62,561 | 62,235 | ||||||
Other operating income – net | (727 | ) | (360 | ) | ||||
Operating income | 22,249 | 56,270 | ||||||
Interest expense | 4,905 | 4,757 | ||||||
Interest income | (990 | ) | (1,499 | ) | ||||
Other non-operating income – net | (901 | ) | (1,543 | ) | ||||
Income from continuing operations before income tax expense | 19,235 | 54,555 | ||||||
Income tax expense | 5,902 | 24,292 | ||||||
Income from continuing operations | 13,333 | 30,263 | ||||||
Loss from discontinued operations, net of tax | — | (213 | ) | |||||
Net income | $ | 13,333 | $ | 30,050 | ||||
Earnings per share – basic: | ||||||||
Income from continuing operations | $ | 0.27 | $ | 0.54 | ||||
Loss from discontinued operations | — | — | ||||||
Net income | $ | 0.27 | $ | 0.54 | ||||
Earnings per share – assuming dilution: | ||||||||
Income from continuing operations | $ | 0.27 | $ | 0.54 | ||||
Loss from discontinued operations | — | — | ||||||
Net income | $ | 0.27 | $ | 0.54 | ||||
Average number of shares outstanding | 48,800,941 | 55,262,716 | ||||||
Average number of shares outstanding – assuming dilution | 48,833,108 | 55,650,033 | ||||||
Dividends declared per share | $ | 0.12 | $ | 0.10 |
See notes to condensed consolidated financial statements (unaudited).
3
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Thousands of dollars)
(Unaudited) | (Note 1) | (Unaudited) | ||||||||||
November 23, | February 28, | November 24, | ||||||||||
2007 | 2007 | 2006 | ||||||||||
ASSETS | ||||||||||||
Current assets | ||||||||||||
Cash and cash equivalents | $ | 71,117 | $ | 144,713 | $ | 86,216 | ||||||
Trade accounts receivable, net | 205,702 | 103,992 | 239,207 | |||||||||
Inventories | 239,209 | 182,618 | 244,181 | |||||||||
Deferred and refundable income taxes | 76,568 | 135,379 | 160,983 | |||||||||
Assets of businesses held for sale | 2,216 | 5,199 | 13,310 | |||||||||
Prepaid expenses and other | 213,529 | 227,380 | 295,866 | |||||||||
Total current assets | 808,341 | 799,281 | 1,039,763 | |||||||||
Goodwill | 267,308 | 224,105 | 219,093 | |||||||||
Other assets | 389,324 | 416,887 | 459,269 | |||||||||
Deferred and refundable income taxes | 111,959 | 52,869 | — | |||||||||
Property, plant and equipment — at cost | 975,721 | 944,534 | 968,755 | |||||||||
Less accumulated depreciation | 684,170 | 659,462 | 668,524 | |||||||||
Property, plant and equipment — net | 291,551 | 285,072 | 300,231 | |||||||||
$ | 1,868,483 | $ | 1,778,214 | $ | 2,018,356 | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||
Current liabilities | ||||||||||||
Debt due within one year | $ | 46,490 | $ | — | $ | 142,000 | ||||||
Accounts payable | 131,099 | 118,204 | 126,956 | |||||||||
Accrued liabilities | 89,751 | 80,389 | 91,108 | |||||||||
Accrued compensation and benefits | 58,969 | 61,192 | 58,720 | |||||||||
Income taxes | 31,255 | 26,385 | 17,412 | |||||||||
Liabilities of businesses held for sale | 1,383 | 1,932 | 1,629 | |||||||||
Other current liabilities | 96,896 | 84,898 | 91,162 | |||||||||
Total current liabilities | 455,843 | 373,000 | 528,987 | |||||||||
Long-term debt | 200,975 | 223,915 | 223,985 | |||||||||
Other liabilities | 149,869 | 162,410 | 101,003 | |||||||||
Deferred income taxes and noncurrent income taxes payable | 31,877 | 6,315 | 25,306 | |||||||||
Shareholders’ equity | ||||||||||||
Common shares — Class A | 49,929 | 50,839 | 53,775 | |||||||||
Common shares — Class B | 3,442 | 4,283 | 4,224 | |||||||||
Capital in excess of par value | 443,326 | 414,859 | 417,444 | |||||||||
Treasury stock | (780,044 | ) | (710,414 | ) | (643,540 | ) | ||||||
Accumulated other comprehensive income (loss) | 22,982 | (1,013 | ) | 36,067 | ||||||||
Retained earnings | 1,290,284 | 1,254,020 | 1,271,105 | |||||||||
Total shareholders’ equity | 1,029,919 | 1,012,574 | 1,139,075 | |||||||||
$ | 1,868,483 | $ | 1,778,214 | $ | 2,018,356 | |||||||
(Unaudited) May 30, 2008 | (Note 1) February 29, 2008 | (Unaudited) May 25, 2007 | ||||||||||
ASSETS | ||||||||||||
Current assets | ||||||||||||
Cash and cash equivalents | $ | 108,192 | $ | 123,500 | $ | 132,582 | ||||||
Short-term investments | — | — | 28,325 | |||||||||
Trade accounts receivable, net | 59,897 | 61,902 | 119,147 | |||||||||
Inventories | 212,032 | 216,671 | 192,399 | |||||||||
Deferred and refundable income taxes | 67,604 | 72,280 | 76,892 | |||||||||
Prepaid expenses and other | 186,977 | 195,017 | 215,983 | |||||||||
Total current assets | 634,702 | 669,370 | 765,328 | |||||||||
Goodwill | 300,323 | 285,072 | 225,318 | |||||||||
Other assets | 405,116 | 420,219 | 399,880 | |||||||||
Deferred and refundable income taxes | 133,118 | 133,762 | 102,060 | |||||||||
Property, plant and equipment – at cost | 983,988 | 974,073 | 947,268 | |||||||||
Less accumulated depreciation | 685,336 | 678,068 | 666,687 | |||||||||
Property, plant and equipment – net | 298,652 | 296,005 | 280,581 | |||||||||
$ | 1,771,911 | $ | 1,804,428 | $ | 1,773,167 | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||
Current liabilities | ||||||||||||
Debt due within one year | $ | 70,835 | $ | 42,790 | $ | — | ||||||
Accounts payable | 110,394 | 123,713 | 100,955 | |||||||||
Accrued liabilities | 73,281 | 79,345 | 77,837 | |||||||||
Accrued compensation and benefits | 39,582 | 68,669 | 43,656 | |||||||||
Income taxes payable | 23,348 | 29,037 | 29,878 | |||||||||
Other current liabilities | 117,160 | 108,867 | 84,621 | |||||||||
Total current liabilities | 434,600 | 452,421 | 336,947 | |||||||||
Long-term debt | 200,541 | 200,518 | 223,800 | |||||||||
Other liabilities | 157,610 | 181,720 | 147,597 | |||||||||
Deferred income taxes and noncurrent income taxes payable | 26,986 | 26,358 | 27,184 | |||||||||
Shareholders’ equity | ||||||||||||
Common shares – Class A | 45,345 | 45,324 | 51,148 | |||||||||
Common shares – Class B | 3,495 | 3,434 | 4,340 | |||||||||
Capital in excess of par value | 446,075 | 445,696 | 424,201 | |||||||||
Treasury stock | (871,379 | ) | (872,949 | ) | (712,147 | ) | ||||||
Accumulated other comprehensive income | 20,746 | 21,244 | 6,030 | |||||||||
Retained earnings | 1,307,892 | 1,300,662 | 1,264,067 | |||||||||
Total shareholders’ equity | 952,174 | 943,411 | 1,037,639 | |||||||||
$ | 1,771,911 | $ | 1,804,428 | $ | 1,773,167 | |||||||
See notes to condensed consolidated financial statements (unaudited).
4
CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of dollars)
(Unaudited) | ||||||||
Nine Months Ended | ||||||||
November 23, 2007 | November 24, 2006 | |||||||
OPERATING ACTIVITIES: | ||||||||
Net income | $ | 67,441 | $ | 54,601 | ||||
Loss (income) from discontinued operations | 1,395 | (3,593 | ) | |||||
Income from continuing operations | 68,836 | 51,008 | ||||||
Adjustments to reconcile to net cash provided (used) by operating activities: | ||||||||
Net (gain) loss on disposal of fixed assets | (481 | ) | 754 | |||||
Loss on extinguishment of debt | — | 5,055 | ||||||
Depreciation and amortization | 36,002 | 37,229 | ||||||
Deferred income taxes | (7,994 | ) | 5,827 | |||||
Other non-cash charges | 5,719 | 9,180 | ||||||
Changes in operating assets and liabilities, net of acquisitions and dispositions: | ||||||||
Increase in trade accounts receivable | (99,268 | ) | (92,821 | ) | ||||
Increase in inventories | (49,911 | ) | (27,202 | ) | ||||
Decrease (increase) in other current assets | 18,090 | (96,250 | ) | |||||
Decrease in deferred costs — net | 29,338 | 110,076 | ||||||
Increase (decrease) in accounts payable and other liabilities | 38,295 | (5,894 | ) | |||||
Other — net | 4,718 | (6,265 | ) | |||||
Cash Provided (Used) by Operating Activities | 43,344 | (9,303 | ) | |||||
INVESTING ACTIVITIES: | ||||||||
Proceeds from sale of short-term investments | 692,985 | 1,026,280 | ||||||
Purchases of short-term investments | (692,985 | ) | (817,540 | ) | ||||
Property, plant and equipment additions | (37,394 | ) | (29,600 | ) | ||||
Cash payments for business acquisitions, net of cash acquired | (51,256 | ) | (11,154 | ) | ||||
Cash receipts related to discontinued operations | 4,283 | 12,559 | ||||||
Proceeds from sale of fixed assets | 2,656 | 695 | ||||||
Cash (Used) Provided by Investing Activities | (81,711 | ) | 181,240 | |||||
FINANCING ACTIVITIES: | ||||||||
Increase in long-term debt | — | 200,000 | ||||||
Reduction of long-term debt | — | (440,588 | ) | |||||
Increase in short-term debt | 23,800 | 142,000 | ||||||
Sale of stock under benefit plans | 26,198 | 5,630 | ||||||
Purchase of treasury shares | (74,572 | ) | (186,331 | ) | ||||
Dividends to shareholders | (16,657 | ) | (13,909 | ) | ||||
Debt issuance costs | — | (8,344 | ) | |||||
Cash Used by Financing Activities | (41,231 | ) | (301,542 | ) | ||||
DISCONTINUED OPERATIONS: | ||||||||
Cash used by operating activities from discontinued operations | (839 | ) | (2,377 | ) | ||||
Cash provided by investing activities from discontinued operations | — | 1,656 | ||||||
Cash Used by Discontinued Operations | (839 | ) | (721 | ) | ||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH | 6,841 | 2,929 | ||||||
DECREASE IN CASH AND CASH EQUIVALENTS | (73,596 | ) | (127,397 | ) | ||||
Cash and Cash Equivalents at Beginning of Year | 144,713 | 213,613 | ||||||
Cash and Cash Equivalents at End of Period | $ | 71,117 | $ | 86,216 | ||||
(Unaudited) Three Months Ended | ||||||||
May 30, 2008 | May 25, 2007 | |||||||
OPERATING ACTIVITIES: | ||||||||
Net income | $ | 13,333 | $ | 30,050 | ||||
Loss from discontinued operations | — | 213 | ||||||
Income from continuing operations | 13,333 | 30,263 | ||||||
Adjustments to reconcile to net cash (used) provided by operating activities: | ||||||||
Net loss (gain) on disposal of fixed assets | 168 | (116 | ) | |||||
Depreciation and amortization | 12,785 | 11,995 | ||||||
Deferred income taxes | 5,459 | 4,466 | ||||||
Other non-cash charges | 1,718 | 1,979 | ||||||
Changes in operating assets and liabilities, net of acquisitions and dispositions: | ||||||||
Decrease (increase) in trade accounts receivable | 5,310 | (14,745 | ) | |||||
Decrease (increase) in inventories | 6,463 | (7,389 | ) | |||||
Decrease in other current assets | 2,001 | 646 | ||||||
Decrease in deferred costs – net | 1,253 | 11,691 | ||||||
Decrease in accounts payable and other liabilities | (57,606 | ) | (21,759 | ) | ||||
Other – net | (2,771 | ) | 4,107 | |||||
Cash (Used) Provided by Operating Activities | (11,887 | ) | 21,138 | |||||
INVESTING ACTIVITIES: | ||||||||
Proceeds from sale of short-term investments | — | 134,900 | ||||||
Purchases of short-term investments | — | (163,225 | ) | |||||
Property, plant and equipment additions | (10,088 | ) | (5,875 | ) | ||||
Cash payments for business acquisitions, net of cash acquired | (15,625 | ) | (6,056 | ) | ||||
Cash receipts related to discontinued operations | — | 2,344 | ||||||
Proceeds from sale of fixed assets | 265 | 890 | ||||||
Cash Used by Investing Activities | (25,448 | ) | (37,022 | ) | ||||
FINANCING ACTIVITIES: | ||||||||
Net increase in short-term debt | 28,045 | — | ||||||
Sale of stock under benefit plans | 363 | 9,358 | ||||||
Purchase of treasury shares | (38 | ) | (3,568 | ) | ||||
Dividends to shareholders | (5,852 | ) | (5,536 | ) | ||||
Cash Provided by Financing Activities | 22,518 | 254 | ||||||
DISCONTINUED OPERATIONS: | ||||||||
Cash used by operating activities from discontinued operations | — | (59 | ) | |||||
Cash Used by Discontinued Operations | — | (59 | ) | |||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH | (491 | ) | 3,558 | |||||
DECREASE IN CASH AND CASH EQUIVALENTS | (15,308 | ) | (12,131 | ) | ||||
Cash and Cash Equivalents at Beginning of Year | 123,500 | 144,713 | ||||||
Cash and Cash Equivalents at End of Period | $ | 108,192 | $ | 132,582 | ||||
See notes to condensed consolidated financial statements (unaudited).
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three and Nine Months Ended November 23,May 30, 2008 and May 25, 2007 and November 24, 2006
Note 1 —– Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of American Greetings Corporation and its subsidiaries (the “Corporation”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary to fairly present financial position, results of operations and cash flows for the periods have been included.
The Corporation’s 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, 20072008 refers to the year ended February 28, 2007.
These interim financial statements should be read in conjunction with the Corporation’s financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended February 28, 2007,29, 2008, from which the Condensed Consolidated Statement of Financial Position at February 28, 2007,29, 2008, presented herein, has been derived. Certain amountsDuring the fourth quarter of 2008, it was determined that the Corporation’s entertainment development and production joint venture no longer met all of the criteria necessary to be classified as held for sale in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144 (“SFAS 144”), “Accounting for the prior year financial statements haveImpairment or Disposal of Long-Lived Assets.” As a result, this business unit has been reclassified to reflectinto continuing operations for all periods presented. In addition, certain business units as discontinued operations and adjusted to reflect the Corporation’s adoption of Staff Accounting Bulletin No. 108 (“SAB 108”). The opening balance of retained earnings in 2007 was adjusted $5.2 million ($3.3 million after-tax) to record the correction of the overstatement of the allowance for rebates (correspondingly, an understatement of net income of prior periods) pursuant to the special transition provision detailed in SAB 108.
Note 2 —– Seasonal Nature of Business
A significant portion of the Corporation’s business is seasonal in nature. Therefore, the results of operations for interim periods are not necessarily indicative of the results for the fiscal year taken as a whole.
Note 3 —– Recent Accounting Pronouncements
In JulySeptember 2006, the Financial Accounting Standards Board (the “FASB”) issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for uncertain tax positions recognized in a company’s financial statements in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes,” including what criteria must be met prior to recognition of the financial statement benefit of a position taken or expected to be taken in a tax return. FIN 48 requires a company to include additional qualitative and quantitative disclosures within its financial statements. The disclosures include potential tax benefits from positions taken for tax return purposes that have not been recognized for financial reporting purposes and a tabular presentation of significant changes during each annual period. The disclosures also include a discussion of the nature of uncertainties, factors that could cause a change and an estimated range of reasonably possible changes in tax uncertainties. FIN 48 requires a company to recognize a financial statement benefit for a position taken for tax return purposes when it is more likely than not that the position will be sustained. The cumulative effect of adopting FIN 48 is recorded as an adjustment to the opening balance of retained earnings in the period of adoption. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Corporation adopted FIN 48 on March 1, 2007. See Note 12.
6
In February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 allows companies to choose to measure financial statements upon adoption.
Note 4 —– Other Income and Expense
Three Months Ended | Nine Months Ended | |||||||||||||||
November 23, | November 24, | November 23, | November 24, | |||||||||||||
(In thousands) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Gain on contract terminations | $ | — | $ | (20,004 | ) | $ | — | $ | (20,004 | ) | ||||||
Other | (127 | ) | (537 | ) | (807 | ) | (959 | ) | ||||||||
Other operating income — net | $ | (127 | ) | $ | (20,541 | ) | $ | (807 | ) | $ | (20,963 | ) | ||||
Foreign exchange gain | $ | (4,054 | ) | $ | (610 | ) | $ | (6,323 | ) | $ | (2,348 | ) | ||||
Rental income | (274 | ) | (261 | ) | (949 | ) | (1,044 | ) | ||||||||
Other | (254 | ) | 962 | (206 | ) | 581 | ||||||||||
Other non-operating (income) expense — net | $ | (4,582 | ) | $ | 91 | $ | (7,478 | ) | $ | (2,811 | ) | |||||
Three Months Ended | ||||||||
(In thousands) | May 30, 2008 | May 25, 2007 | ||||||
Other operating income – net | $ | (727 | ) | $ | (360 | ) | ||
Foreign exchange gain | $ | (537 | ) | $ | (1,120 | ) | ||
Rental income | (537 | ) | (397 | ) | ||||
Miscellaneous | 173 | (26 | ) | |||||
Other non-operating income – net | $ | (901 | ) | $ | (1,543 | ) | ||
“Other”Miscellaneous” includes, among other things, gains and losses on asset disposals and equity income. The $20.0 million gain on contract terminations was a result of retailer consolidations, 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.
Note 5 —– Earnings Per Share
The following table sets forth the computation of earnings per share and earnings per share - assuming dilution:
Three Months Ended | Nine Months Ended | |||||||||||||||
November 23, | November 24, | November 23, | November 24, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Numerator (in thousands): | ||||||||||||||||
Income from continuing operations | $ | 29,488 | $ | 47,015 | $ | 68,836 | $ | 51,008 | ||||||||
Add-back — interest on convertible subordinated notes, net of tax | — | — | — | 1,958 | ||||||||||||
Income from continuing operations — assuming dilution | $ | 29,488 | $ | 47,015 | $ | 68,836 | $ | 52,966 | ||||||||
Denominator (in thousands): | ||||||||||||||||
Weighted average shares outstanding | 55,023 | 59,502 | 55,351 | 58,591 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Convertible debt | — | — | — | 5,353 | ||||||||||||
Stock options and other | 443 | 400 | 376 | 418 | ||||||||||||
Weighted average shares outstanding — assuming dilution | 55,466 | 59,902 | 55,727 | 64,362 | ||||||||||||
Income from continuing operations per share | $ | 0.54 | $ | 0.79 | $ | 1.25 | $ | 0.87 | ||||||||
Income from continuing operations per share — assuming dilution | $ | 0.53 | $ | 0.79 | $ | 1.24 | $ | 0.82 | ||||||||
7
Three Months Ended | ||||||
May 30, 2008 | May 25, 2007 | |||||
Numerator (in thousands): | ||||||
Income from continuing operations | $ | 13,333 | $ | 30,263 | ||
Denominator (in thousands): | ||||||
Weighted average shares outstanding | 48,801 | 55,263 | ||||
Effect of dilutive securities: | ||||||
Stock options and other | 32 | 387 | ||||
Weighted average shares outstanding – assuming dilution | 48,833 | 55,650 | ||||
Income from continuing operations per share | $ | 0.27 | $ | 0.54 | ||
Income from continuing operations per share – assuming dilution | $ | 0.27 | $ | 0.54 | ||
Note 6 —– Comprehensive Income
The Corporation’s total comprehensive income is as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
November 23, | November 24, | November 23, | November 24, | |||||||||||||
(In thousands) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Net income | $ | 29,016 | $ | 49,707 | $ | 67,441 | $ | 54,601 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Foreign currency translation adjustment and other | 11,614 | 6,018 | 23,318 | 25,896 | ||||||||||||
Unrealized gain (loss) on securities | — | 323 | (1 | ) | 348 | |||||||||||
Pension and other postretirement benefit plans | 678 | — | 678 | — | ||||||||||||
Total comprehensive income | $ | 41,308 | $ | 56,048 | $ | 91,436 | $ | 80,845 | ||||||||
Three Months Ended | |||||||
(In thousands) | May 30, 2008 | May 25, 2007 | |||||
Net income | $ | 13,333 | $ | 30,050 | |||
Other comprehensive (loss) income: | |||||||
Foreign currency translation adjustment and other | (273 | ) | 7,043 | ||||
Pension and other postretirement benefit plans | (225 | ) | — | ||||
Total comprehensive income | $ | 12,835 | $ | 37,093 | |||
Note 7 —– Trade Accounts Receivable, Net
Trade accounts receivable are reported net of certain allowances and discounts. The most significant of these are as follows:
(In thousands) | November 23, 2007 | February 28, 2007 | November 24, 2006 | |||||||||
Allowance for seasonal sales returns | $ | 70,014 | $ | 57,584 | $ | 67,365 | ||||||
Allowance for doubtful accounts | 5,402 | 6,350 | 8,392 | |||||||||
Allowance for cooperative advertising and marketing funds | 35,939 | 24,048 | 27,677 | |||||||||
Allowance for rebates | 49,915 | 40,053 | 57,669 | |||||||||
$ | 161,270 | $ | 128,035 | $ | 161,103 | |||||||
(In thousands) | May 30, 2008 | February 29, 2008 | May 25, 2007 | ||||||
Allowance for seasonal sales returns | $ | 59,451 | $ | 59,626 | $ | 67,039 | |||
Allowance for outdated products | 23,199 | 21,435 | 26,769 | ||||||
Allowance for doubtful accounts | 4,111 | 3,778 | 5,009 | ||||||
Allowance for cooperative advertising and marketing funds | 35,247 | 33,662 | 30,528 | ||||||
Allowance for rebates | 57,900 | 41,435 | 47,965 | ||||||
$ | 179,908 | $ | 159,936 | $ | 177,310 | ||||
Note 8 —– Inventories
(In thousands) | November 23, 2007 | February 28, 2007 | November 24, 2006 | |||||||||
Raw materials | $ | 16,211 | $ | 17,590 | $ | 22,334 | ||||||
Work in process | 12,646 | 11,315 | 10,871 | |||||||||
Finished products | 265,013 | 207,676 | 264,940 | |||||||||
293,870 | 236,581 | 298,145 | ||||||||||
Less LIFO reserve | 81,945 | 79,145 | 81,658 | |||||||||
211,925 | 157,436 | 216,487 | ||||||||||
Display materials and factory supplies | 27,284 | 25,182 | 27,694 | |||||||||
$ | 239,209 | $ | 182,618 | $ | 244,181 | |||||||
(In thousands) | May 30, 2008 | February 29, 2008 | May 25, 2007 | ||||||
Raw materials | $ | 20,437 | $ | 17,701 | $ | 19,568 | |||
Work in process | 12,414 | 10,516 | 14,957 | ||||||
Finished products | 234,910 | 244,379 | 209,688 | ||||||
267,761 | 272,596 | 244,213 | |||||||
Less LIFO reserve | 83,194 | 82,085 | 80,567 | ||||||
184,567 | 190,511 | 163,646 | |||||||
Display materials and factory supplies | 27,465 | 26,160 | 28,753 | ||||||
$ | 212,032 | $ | 216,671 | $ | 192,399 | ||||
The valuation of inventory under the Last-In, First-Out (LIFO) method is made at the end of each fiscal year based on inventory levels and costs at that time. Accordingly, interim LIFO calculations, by necessity, are based on estimates of expected fiscal year-end inventory levels and costs and are subject to final fiscal year-end LIFO inventory calculations.
8
Deferred costs and future payment commitments are included in the following financial statement captions:
(In thousands) | November 23, 2007 | February 28, 2007 | November 24, 2006 | |||||||||
Prepaid expenses and other | $ | 135,017 | $ | 131,972 | $ | 142,329 | ||||||
Other assets | 313,928 | 355,115 | 371,745 | |||||||||
Deferred cost assets | 448,945 | 487,087 | 514,074 | |||||||||
Other current liabilities | (57,607 | ) | (47,692 | ) | (58,746 | ) | ||||||
Other liabilities | (28,652 | ) | (49,648 | ) | (47,272 | ) | ||||||
Deferred cost liabilities | (86,259 | ) | (97,340 | ) | (106,018 | ) | ||||||
Net deferred costs | $ | 362,686 | $ | 389,747 | $ | 408,056 | ||||||
(In thousands) | May 30, 2008 | February 29, 2008 | May 25, 2007 | |||||||||
Prepaid expenses and other | $ | 110,633 | $ | 119,069 | $ | 119,741 | ||||||
Other assets | 326,777 | 338,003 | 337,358 | |||||||||
Deferred cost assets | 437,410 | 457,072 | 457,099 | |||||||||
Other current liabilities | (71,348 | ) | (68,457 | ) | (47,609 | ) | ||||||
Other liabilities | (29,182 | ) | (50,491 | ) | (30,681 | ) | ||||||
Deferred cost liabilities | (100,530 | ) | (118,948 | ) | (78,290 | ) | ||||||
Net deferred costs | $ | 336,880 | $ | 338,124 | $ | 378,809 | ||||||
Note 10 —– Debt
The Corporation is party to an amended and restated $450 million secured credit agreement and to an amended and restated receivables purchase agreement that had available financing of up to $150 million. The credit agreement includes a $350 million revolving credit facility and a $100 million delay draw term loan. The agreements were each amended on March 28, 2008. The amendment to the credit agreement extends the period during which the Corporation may borrow on the term loan until April 3, 2009 and changes the start of the amortization period from April 4, 2008 until April 3, 2009. The amendment to the accounts receivable facility decreases the amount of available financing from $150 million to $90 million.
Debt due within one year is as follows:
(In thousands) | November 23, 2007 | February 28, 2007 | November 24, 2006 | |||||||||
Revolving credit facility | $ | 12,800 | $ | — | $ | 60,000 | ||||||
Accounts receivable securitization facility | 11,000 | — | 82,000 | |||||||||
6.10% senior notes, due 2028 | 22,690 | — | — | |||||||||
$ | 46,490 | $ | — | $ | 142,000 | |||||||
(In thousands) | May 30, 2008 | February 29, 2008 | ||||
Revolving credit facility | $ | 35,000 | $ | 20,100 | ||
Accounts receivable securitization facility | 13,145 | — | ||||
6.10% senior notes, due 2028 | 22,690 | 22,690 | ||||
$ | 70,835 | $ | 42,790 | |||
There was no debt due within one year as of May 25, 2007.
At November 23, 2007,May 30, 2008, the balances outstanding on the revolving credit facility and accounts receivable securitization facility bear interest at a rate of approximately 5.7%3.2% and 5.4%3.4%, respectively. In addition to the balances outstanding under the aforementioned agreements, the Corporation has, in the aggregate, $25.7 million outstanding under letters of credit, which reduces the total credit availability thereunder. The balance of the 6.10% senior notes was reclassified to current during the second quarter of 2008 as these notes may be put back to the Corporation on August 1, 2008, at the option of the holders, at 100% of the principal amount provided the holders exercise this option between July 1, 2008 and August 1, 2008.
Long-term debt and their related calendar year due dates are as follows:
(In thousands) | November 23, 2007 | February 28, 2007 | November 24, 2006 | |||||||||
6.10% senior notes, due 2028 | $ | — | $ | 22,690 | $ | 22,633 | ||||||
7.375% senior notes, due 2016 | 200,000 | 200,000 | 200,000 | |||||||||
Other | 975 | 1,225 | 1,352 | |||||||||
$ | 200,975 | $ | 223,915 | $ | 223,985 | |||||||
(In thousands) | May 30, 2008 | February 29, 2008 | May 25, 2007 | ||||||
7.375% senior notes, due 2016 | $ | 200,000 | $ | 200,000 | $ | 200,000 | |||
6.10% senior notes, due 2028 | — | — | 22,690 | ||||||
Other (due 2010) | 541 | 518 | 1,110 | ||||||
$ | 200,541 | $ | 200,518 | $ | 223,800 | ||||
At November 23, 2007,May 30, 2008, the Corporation was in compliance with the financial covenants under its borrowing agreements.
9
The components of periodic benefit cost for the Corporation’s defined benefit pension and postretirement benefit plans are as follows:
Defined Benefit Pension | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
November 23, | November 24, | November 23, | November 24, | |||||||||||||
(In thousands) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Service cost | $ | 251 | $ | 207 | $ | 740 | $ | 621 | ||||||||
Interest cost | 2,249 | 2,192 | 6,769 | 6,713 | ||||||||||||
Expected return on plan assets | (2,143 | ) | (2,182 | ) | (6,479 | ) | (6,503 | ) | ||||||||
Settlement | — | — | 1,067 | — | ||||||||||||
Amortization of prior service cost | 67 | 67 | 200 | 200 | ||||||||||||
Amortization of actuarial loss | 411 | 258 | 1,227 | 1,609 | ||||||||||||
$ | 835 | $ | 542 | $ | 3,524 | $ | 2,640 | |||||||||
Postretirement Benefit | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
November 23, | November 24, | November 23, | November 24, | |||||||||||||
(In thousands) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Service cost | $ | 1,050 | $ | 999 | $ | 3,150 | $ | 2,997 | ||||||||
Interest cost | 2,150 | 1,925 | 6,450 | 5,775 | ||||||||||||
Expected return on plan assets | (1,250 | ) | (1,275 | ) | (3,750 | ) | (3,825 | ) | ||||||||
Amortization of prior service credit | (1,850 | ) | (1,849 | ) | (5,550 | ) | (5,547 | ) | ||||||||
Amortization of actuarial loss | 1,650 | 1,700 | 4,950 | 5,100 | ||||||||||||
$ | 1,750 | $ | 1,500 | $ | 5,250 | $ | 4,500 | |||||||||
Defined Benefit Pension | Postretirement Benefit | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
(In thousands) | May 30, 2008 | May 25, 2007 | May 30, 2008 | May 25, 2007 | ||||||||||||
Service cost | $ | 241 | $ | 244 | $ | 950 | $ | 1,050 | ||||||||
Interest cost | 2,304 | 2,265 | 2,200 | 2,150 | ||||||||||||
Expected return on plan assets | (2,043 | ) | (2,154 | ) | (1,250 | ) | (1,250 | ) | ||||||||
Amortization of prior service cost (credit) | 77 | 64 | (1,850 | ) | (1,850 | ) | ||||||||||
Amortization of actuarial loss | 320 | 410 | 1,075 | 1,650 | ||||||||||||
$ | 899 | $ | 829 | $ | 1,125 | $ | 1,750 | |||||||||
The Corporation has a non-contributory profit-sharing plan with a contributory 401(k) provision covering most of its United States employees. The profit-sharing plan expense for the ninethree months ended November 23, 2007May 30, 2008 was $5.1$1.1 million, compared to $3.6$3.1 million in the prior year period. The profit-sharing plan expense for the ninethree month
periods are estimates as actual contributions to the profit-sharing plan are made after fiscal year-end and are contingent upon final year-end results.year-end. The Corporation also matches a portion of 401(k) employee contributions contingent upon meeting specified annual operating results goals.contributions. The expensesexpense recognized for the three and nine month periods ended November 23, 2007 were $1.0 million and $3.2 million ($0.8 million and $3.0 million401(k) match for the three months ended May 30, 2008 and nine month periods ended November 24, 2006),May 25, 2007 was $1.8 million and $1.2 million, respectively.
At November 23,May 30, 2008, February 29, 2008 and May 25, 2007, February 28, 2007 and November 24, 2006, the liability for postretirement benefits other than pensions was $72.7$64.9 million, $66.7$63.0 million and $15.6$68.5 million, respectively, and is included in “Other liabilities” on the Condensed Consolidated Statement of Financial Position.
Note 12 – Fair Value Measurements
SFAS 157 outlines a valuation framework, which requires use of the market approach, income approach and/or cost approach when measuring fair value and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. SFAS 157 also expands disclosure requirements to include the methods and assumptions used to measure fair value.
The change since November 24, 2006hierarchy is duebased upon the transparency of inputs to the adoptionvaluation of SFAS No. 158, “Employers’ Accountingan asset or liability as of the measurement date. The classification of fair value measurements within the hierarchy is based upon the lowest level of input that is significant to the measurement. The three levels are defined as follows:
Level 1 – Valuation is based upon quoted prices (unadjusted) in active markets for Defined Benefit Pensionidentical assets or liabilities.
Level 2 – Valuation is based upon quoted prices for similar assets and Other Postretirement Plans —liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – Valuation is based upon unobservable inputs that are significant to the fair value measurement.
As of May 30, 2008, the Corporation had $6.3 million of mutual fund assets held in a rabbi trust and $6.3 million of a non-qualified deferred compensation plan liability. The fair value of the mutual fund assets was based on each fund’s quoted market value per share in an amendmentactive market and was considered a Level 1 valuation. Although the Corporation is under no obligation to fund employees’ nonqualified accounts, the fair value of FASB Statements No. 87, 88, 106, and 132(R),” effective February 28, 2007.
Note 12 —13 – Income Taxes
Effective March 1, 2007, the Corporation adopted FASB Interpretation No. 48 (“FIN 48,48”), “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109,” including the provisions of FASB Staff Position No. FIN-48-1, “Definition of Settlement in FASB Interpretation No. 48.” In connection with the adoption of FIN 48, the Corporation recorded a decrease to retained earnings of $14.0 million to recognize an increase in its liability (or decrease to its refundable) for unrecognized tax benefits, interest and penalties under the recognition and measurement criteria of FIN 48. As
Included in the balance of March 1, 2007, the Corporation had $33.5unrecognized tax benefits at February 29, 2008, was $21.0 million of total gross
10
The Corporation is subject to examination by the U.S. Internal Revenue Service (“IRS”) and various U.S. state and local jurisdictions for tax years 19991996 to the present. The Corporation is also subject to tax examination in various foreign tax jurisdictions, including Canada, the United Kingdom, Australia, France, Italy, Mexico and New Zealand for tax years 2003 to the present.
There were no significant changes to any of these amounts during the first quarter of 2008, the Corporation’s net unrecognized tax benefits decreased $1.1 million as the Corporation reached an agreement with the IRS on a significant tax issue that was not anticipated at the beginning of the year. During the second quarter of 2008, the Corporation’s net unrecognized tax benefits increased $2.4 million primarily related to a prior year outstanding tax issue in one of the international jurisdictions in which the Corporation operates. During the third quarter of 2008, the Corporation’s net unrecognized tax benefits increased $1.9 million primarily related to interest accruing on the unrecognized tax benefits.
Note 13 —14 – Business Segment Information
11
Total Revenue | Segment Earnings (Loss) | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
(In thousands) | May 30, 2008 | May 25, 2007 | May 30, 2008 | May 25, 2007 | ||||||||||||
North American Social Expression Products | $ | 302,418 | $ | 299,944 | $ | 53,695 | $ | 88,862 | ||||||||
Intersegment items | (14,644 | ) | (8,503 | ) | (11,243 | ) | (6,522 | ) | ||||||||
Exchange rate adjustment | 513 | (2,509 | ) | 59 | (1,650 | ) | ||||||||||
Net | 288,287 | 288,932 | 42,511 | 80,690 | ||||||||||||
International Social Expression Products | 69,873 | 64,417 | 2,862 | 176 | ||||||||||||
Exchange rate adjustment | 1,087 | (668 | ) | (57 | ) | 11 | ||||||||||
Net | 70,960 | 63,749 | 2,805 | 187 | ||||||||||||
Retail Operations | 41,493 | 40,539 | (3,407 | ) | (2,769 | ) | ||||||||||
Exchange rate adjustment | 490 | (1,611 | ) | (6 | ) | (12 | ) | |||||||||
Net | 41,983 | 38,928 | (3,413 | ) | (2,781 | ) | ||||||||||
AG Interactive | 20,527 | 19,899 | (1,096 | ) | 3,279 | |||||||||||
Exchange rate adjustment | 34 | (3 | ) | 35 | 8 | |||||||||||
Net | 20,561 | 19,896 | (1,061 | ) | 3,287 | |||||||||||
Non-reportable segments | 6,509 | 8,385 | (1,966 | ) | 563 | |||||||||||
Unallocated | — | 77 | (19,633 | ) | (27,352 | ) | ||||||||||
Exchange rate adjustment | — | — | (8 | ) | (39 | ) | ||||||||||
Net | — | 77 | (19,641 | ) | (27,391 | ) | ||||||||||
Consolidated total | $ | 428,300 | $ | 419,967 | $ | 19,235 | $ | 54,555 | ||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
November 23, | November 24, | November 23, | November 24, | |||||||||||||
(In thousands) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Total Revenue: | ||||||||||||||||
North American Social Expression Products | $ | 339,543 | $ | 371,726 | $ | 892,518 | $ | 908,909 | ||||||||
Intersegment items | (19,423 | ) | (14,953 | ) | (41,532 | ) | (47,811 | ) | ||||||||
Exchange rate adjustment | 2,972 | 218 | 4,318 | 325 | ||||||||||||
Net | 323,092 | 356,991 | 855,304 | 861,423 | ||||||||||||
International Social Expression Products | 80,604 | 82,526 | 199,648 | 209,019 | ||||||||||||
Exchange rate adjustment | 8,606 | 794 | 17,958 | (1,527 | ) | |||||||||||
Net | 89,210 | 83,320 | 217,606 | 207,492 | ||||||||||||
Retail Operations | 39,550 | 42,252 | 115,856 | 125,206 | ||||||||||||
Exchange rate adjustment | 2,467 | 178 | 3,540 | 299 | ||||||||||||
Net | 42,017 | 42,430 | 119,396 | 125,505 | ||||||||||||
AG Interactive | 18,912 | 21,663 | 55,964 | 62,151 | ||||||||||||
Exchange rate adjustment | (2 | ) | 31 | (1 | ) | 76 | ||||||||||
Net | 18,910 | 21,694 | 55,963 | 62,227 | ||||||||||||
Non-reportable segments | 12,486 | 16,679 | 34,754 | 41,510 | ||||||||||||
Unallocated | 31 | 40 | 115 | 135 | ||||||||||||
$ | 485,746 | $ | 521,154 | $ | 1,283,138 | $ | 1,298,292 | |||||||||
Segment Earnings (Loss): | ||||||||||||||||
North American Social Expression Products | $ | 64,549 | $ | 98,533 | $ | 192,288 | $ | 182,111 | ||||||||
Intersegment items | (14,481 | ) | (10,296 | ) | (31,203 | ) | (34,125 | ) | ||||||||
Exchange rate adjustment | 1,557 | 80 | 2,360 | 129 | ||||||||||||
Net | 51,625 | 88,317 | 163,445 | 148,115 | ||||||||||||
International Social Expression Products | 10,037 | 6,092 | 11,470 | 7,148 | ||||||||||||
Exchange rate adjustment | 1,117 | (30 | ) | 1,464 | 34 | |||||||||||
Net | 11,154 | 6,062 | 12,934 | 7,182 | ||||||||||||
Retail Operations | (5,833 | ) | (5,056 | ) | (15,098 | ) | (21,428 | ) | ||||||||
Exchange rate adjustment | 86 | 4 | 83 | 1 | ||||||||||||
Net | (5,747 | ) | (5,052 | ) | (15,015 | ) | (21,427 | ) | ||||||||
AG Interactive | 2,194 | 2,249 | 8,667 | 5,498 | ||||||||||||
Exchange rate adjustment | 15 | (18 | ) | (2 | ) | (17 | ) | |||||||||
Net | 2,209 | 2,231 | 8,665 | 5,481 | ||||||||||||
Non-reportable segments | 636 | 3,668 | 3,598 | 8,308 | ||||||||||||
Unallocated | (15,312 | ) | (27,157 | ) | (61,161 | ) | (73,919 | ) | ||||||||
Exchange rate adjustment | (60 | ) | 4 | (135 | ) | (149 | ) | |||||||||
Net | (15,372 | ) | (27,153 | ) | (61,296 | ) | (74,068 | ) | ||||||||
$ | 44,505 | $ | 68,073 | $ | 112,331 | $ | 73,591 | |||||||||
12
Termination benefits are primarily considered part of an ongoing benefit arrangement, accounted for in accordance with SFAS No. 112, “Employers’ Accounting for Postemployment Benefits,” and are recorded when payment of the benefits is probable and can be reasonably estimated.
The balance of the severance accrual was $6.9$7.0 million, $8.4$9.6 million and $5.7$6.8 million at November 23,May 30, 2008, February 29, 2008 and May 25, 2007, February 28, 2007 and November 24, 2006, respectively, and is included in “Accrued liabilities” on the Condensed Consolidated Statement of Financial Position.
Deferred Revenue
Deferred revenue, included in “Other current liabilities” on the Condensed Consolidated Statement of Financial Position, totaled $32.5$37.8 million, $35.5$37.9 million and $27.0$34.9 million at November 23,May 30, 2008, February 29, 2008 and May 25, 2007, February 28, 2007 and November 24, 2006, respectively. The amounts relate primarily to the Corporation’s AG Interactive segment and the licensing activitiesbusiness included in non-reportable segments.
AcquisitionAcquisitions
In March 2008, the AG Interactive segmentCorporation acquired Webshots, an online digital photography business,a card publisher and franchised distributor of greeting cards in the United Kingdom (“U.K.”), for approximately $45$16 million. Cash paid, net of cash acquired was $45.2$15.6 million and is reflected in investing activities in the Condensed Consolidated Statement of Cash Flows. Although the allocation of the purchase price has not yet been finalized, preliminary estimatesgoodwill of approximately $12 million and $37has been recorded as of May 30, 2008. The purchase agreement provides for a contingent payment of up to 2 million were recorded for intangible assets and goodwill, respectively.U.K. Pounds Sterling to be paid based on the company’s operating results over a three-year period from the date of acquisition. The financial results of this acquisition are included in the Corporation’s consolidated results from the date of acquisition. The proPro forma results of operations have not been presented because the effect of this acquisition was not deemed material.
During the first quarter of 2009, a preliminary valuation of the intangible assets of PhotoWorks, Inc., which was acquired in the second half of 2008, was completed. Although the allocation of the purchase price has not yet been finalized, the value of the intangible assets acquired was reduced approximately $4 million with a corresponding increase in goodwill recorded as a result of the preliminary valuation.
Note 14 —15 – Discontinued Operations
Discontinued operations include Learning Horizons, the Corporation’s educational products business, its entertainment development and production joint venture, its South African business unit and its nonprescription reading glasses business. Learning Horizons, the Hatchery, Magnivision and the South African business units each meetThis subsidiary meets the definition of a “component of an entity” and havehas been accounted for as a discontinued operationsoperation under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”144. Accordingly, the Corporation’s consolidated financial statements and related notes have been presented to reflect all fourLearning Horizons as a discontinued operationsoperation for all periods presented. Learning Horizons the Hatchery and Magnivision werewas previously included within the Corporation’s “non-reportable segments” and the South African business unit was included within the former “Social Expression Products” segment.
Three Months Ended | Nine Months Ended | |||||||||||||||
November 23, | November 24, | November 23, | November 24, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Total revenue | $ | 20 | $ | 2,122 | $ | 379 | $ | 11,275 | ||||||||
Pre-tax loss from operations | $ | (368 | ) | $ | (388 | ) | $ | (1,122 | ) | $ | (2,371 | ) | ||||
(Loss) gain on sale | (161 | ) | 5,100 | 34 | 5,784 | |||||||||||
(529 | ) | 4,712 | (1,088 | ) | 3,413 | |||||||||||
Income tax (benefit) expense | (57 | ) | 2,020 | 307 | (180 | ) | ||||||||||
(Loss) income from discontinued operations, net of tax | $ | (472 | ) | $ | 2,692 | $ | (1,395 | ) | $ | 3,593 | ||||||
13
The following summarizes the Corporation committed to a plan to exit its investment in the Hatchery, which seeks growth from opportunities that are inconsistent with the Corporation’s objectives and that would require significant capital commitments. The Corporation is taking this action as it has decided to focus its efforts on opportunities in children’s animation.
(In thousands) | November 23, 2007 | February 28, 2007 | November 24, 2006 | |||||||||
Assets of businesses held for sale: | ||||||||||||
Current assets | $ | 13 | $ | 2,933 | $ | 8,035 | ||||||
Other assets | 2,135 | 2,185 | 5,085 | |||||||||
Fixed assets | 68 | 81 | 190 | |||||||||
$ | 2,216 | $ | 5,199 | $ | 13,310 | |||||||
Liabilities of businesses held for sale: | ||||||||||||
Current liabilities | $ | 158 | $ | 610 | $ | 292 | ||||||
Noncurrent liabilities | 1,225 | 1,322 | 1,337 | |||||||||
$ | 1,383 | $ | 1,932 | $ | 1,629 | |||||||
14
Total revenue Pre-tax loss from operations Gain on sale Income tax expense Loss from discontinued operations, net of tax(In thousands) Three Months Ended
May 25, 2007 $ 299 $ (47 ) 195 148 361 $ (213 )
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited 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 description of the uncertainties, risks and assumptions associated with these statements. 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
During the first quarter, we continued to transition fresh new products to retail, which continues to drive sales growth in the card business. The level of activity, including production, distribution and earnings duringmerchandising, needed to drive these sales provided increased costs that put downward pressure on earnings. The growth in the thirdvalue card line continued in the quarter, driving down the average selling price of 2008,both everyday and seasonal cards, while overall card unit sales increased compared to the prior year period. The content costs of cards also continued to increase with growth in the sale of technology cards and changes in product design that add creative embellishments to the card line.
We experienced higher consolidated total revenues and lower earnings during the first quarter dueof 2009, compared to lower salesthe prior year quarter. The higher revenues were primarily the result of favorable foreign currency translation. Revenue improvement in all reporting segments butthe International Social Expression Products segment, primarily in the United Kingdom (“U.K.”), was substantially offset by decreased revenue in the North American Social Expression Products segment. In the card businesses, growth in card unit sales was partially offset by lower average selling prices caused by a higher mix of value line cards.
Our lower earnings were driven by several factors within our North American Social Expression Products segment, which experienced a decrease in sales of seasonal gift packaging products and party goods. Also significantly impacting the year-over-year comparison of this segment was the impact of the candle products divestiture and the gain on contract terminationsincreased costs in the prior year quarter.
As noted in our fiscal year 2008 Annual Report on improvingForm 10-K, the design, production, displayrecent parity of the currency exchange rate between the U.S. dollar and promotionthe Canadian dollar have created some challenges in the marketplace. To address these challenges, we have created a new Canadian line of our cards, creating relevant and on-trend products brought to market quickly and merchandisedresulting in a manner that enhances the shopping experience. The most significant costs associated with this strategy are incentive allowances for new fixturestemporary reduction in revenues and removal of product at retail (to improve productivity), as credits issued to customers exceed new product shipments. Due to the nature of these costs, generally sales incentives and credits for removed product, they are reported as reductions to net sales. In addition, there area temporary increase in costs to implementcreate, manufacture and distribute the strategy, including installation services, information system improvements, point of purchase materials, scrapnew product. These impacts continued during the first quarter and order filling costs, which are reported within the appropriate expense lines of the Condensed Consolidated Statement of Income.
As also noted in the prior year, period, nonewe have experienced increases in card product costs associated with more technology cards (paper cards that include light and/or sound) and other creative content costs. These costs continue to be higher compared to the prior year first quarter, particularly in seasonal cards, as we add technology and other creative embellishments that increase consumers’ perceived value of which were individually significant.the card product.
Increases in card shipments outpaced increases of card net sales, particularly seasonal cards, driving up supply chain, scrap and distribution costs during the first quarter compared to the prior year period. In total, actionsthese costs along with the increased card product content costs impacted pre-tax earnings by approximately $24 million compared to the prior year period.
The AG Interactive segment also contributed to the decrease in first quarter earnings, primarily related to the investment in cards strategy and SBT implementations reduced consolidated pre-tax income by approximately $8 million, compared with approximately $12 milliontwo acquisitions in the prior year period.
In March 2008, we acquired a card publisher and franchised distributor of greeting cards in the U.K. This acquisition provides us with additional distribution in an increasingly fragmented U.K. market and we anticipate leveraging supply chain synergies as we integrate this new business.
Results of Operations
Three months ended November 23,May 30, 2008 and May 25, 2007 total revenue
Net income was reduced by approximately $10$13.3 million, for actions related to our investment in cards strategy and approximately $5 million for SBT implementations, compared to approximately $23 million and $14 million, respectively, in the prior year. Other related costs to implement the strategy were approximately $4 million in the current nine month period, compared to approximately $7 million in the prior year period, none of which were individually significant. In total, actions related to the investment in cards strategy and SBT implementations reduced consolidated pre-tax income by approximately $19 million, compared with approximately $44 million in the prior year period.
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Our results for the three months ended November 23,May 30, 2008 and May 25, 2007 and November 24, 2006 are summarized below:
% Total | % Total | |||||||||||||||
(Dollars in thousands) | 2007 | Revenue | 2006 | Revenue | ||||||||||||
Net sales | $ | 474,995 | 97.8 | % | $ | 510,102 | 97.9 | % | ||||||||
Other revenue | 10,751 | 2.2 | % | 11,052 | 2.1 | % | ||||||||||
Total revenue | 485,746 | 100.0 | % | 521,154 | 100.0 | % | ||||||||||
Material, labor and other production costs | 223,329 | 46.0 | % | 245,187 | 47.0 | % | ||||||||||
Selling, distribution and marketing expenses | 159,420 | 32.8 | % | 157,364 | 30.2 | % | ||||||||||
Administrative and general expenses | 60,481 | 12.5 | % | 65,287 | 12.5 | % | ||||||||||
Other operating income – net | (127 | ) | (0.1 | %) | (20,541 | ) | (3.9 | %) | ||||||||
Operating income | 42,643 | 8.8 | % | 73,857 | 14.2 | % | ||||||||||
Interest expense | 4,835 | 1.0 | % | 6,951 | 1.3 | % | ||||||||||
Interest income | (2,115 | ) | (0.4 | %) | (1,258 | ) | (0.2 | %) | ||||||||
Other non-operating (income) expense – net | (4,582 | ) | (1.0 | %) | 91 | 0.0 | % | |||||||||
Income from continuing operations before income tax expense | 44,505 | 9.2 | % | 68,073 | 13.1 | % | ||||||||||
Income tax expense | 15,017 | 3.1 | % | 21,058 | 4.1 | % | ||||||||||
Income from continuing operations | 29,488 | 6.1 | % | 47,015 | 9.0 | % | ||||||||||
(Loss) income from discontinued operations, net of tax | (472 | ) | (0.1 | %) | 2,692 | 0.5 | % | |||||||||
Net income | $ | 29,016 | 6.0 | % | $ | 49,707 | 9.5 | % | ||||||||
(Dollars in thousands) | 2008 | % Total Revenue | 2007 | % Total Revenue | ||||||||||
Net sales | $ | 425,463 | 99.3 | % | $ | 418,016 | 99.5 | % | ||||||
Other revenue | 2,837 | 0.7 | % | 1,951 | 0.5 | % | ||||||||
Total revenue | 428,300 | 100.0 | % | 419,967 | 100.0 | % | ||||||||
Material, labor and other production costs | 193,342 | 45.1 | % | 161,128 | 38.4 | % | ||||||||
Selling, distribution and marketing expenses | 150,875 | 35.2 | % | 140,694 | 33.5 | % | ||||||||
Administrative and general expenses | 62,561 | 14.6 | % | 62,235 | 14.8 | % | ||||||||
Other operating income – net | (727 | ) | (0.1 | )% | (360 | ) | (0.1 | )% | ||||||
Operating income | 22,249 | 5.2 | % | 56,270 | 13.4 | % | ||||||||
Interest expense | 4,905 | 1.1 | % | 4,757 | 1.1 | % | ||||||||
Interest income | (990 | ) | (0.2 | )% | (1,499 | ) | (0.3 | )% | ||||||
Other non-operating income – net | (901 | ) | (0.2 | )% | (1,543 | ) | (0.4 | )% | ||||||
Income from continuing operations before income tax expense | 19,235 | 4.5 | % | 54,555 | 13.0 | % | ||||||||
Income tax expense | 5,902 | 1.4 | % | 24,292 | 5.8 | % | ||||||||
Income from continuing operations | 13,333 | 3.1 | % | 30,263 | 7.2 | % | ||||||||
Loss from discontinued operations, net of tax | — | (0.0 | )% | (213 | ) | (0.0 | )% | |||||||
Net income | $ | 13,333 | 3.1 | % | $ | 30,050 | 7.2 | % | ||||||
For the three months ended November 23, 2007,May 30, 2008, consolidated net sales were $475.0$425.5 million, downup from $510.1$418.0 million in the prior year thirdfirst quarter. This 6.9%1.8%, or approximately $35$7.4 million, decreaseincrease was primarily the result of higher net sales in our International Social Expression Products segment of approximately $5 million and a favorable foreign currency translation impact of approximately $7 million. These increases were partially offset by lower net sales in our North American Social Expression Products segment of approximately $37 million and lower net sales of approximately $2 to $3 million$4 million.
The increase in each of our International Social Expression Products Retail Operationssegment’s net sales was driven by our U.K. operations where approximately half of the increase was due to the acquisition completed in the current quarter. The remaining increase was primarily the result of a comparison to a soft prior period and AG Interactive segments and our fixtures business. These decreases were partially offsetadditional distribution in the current year at existing customers in the U.K. The prior period was unfavorably impacted by a favorable foreign exchange impactcosts associated with incentive allowances for removal of approximately $13 million.
Net sales of our North American Social Expression Products segment decreased approximately $37$4 million. Our candle product lines, which were sold in January 2007, contributed approximately $14 million to net sales in the
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Other revenue, primarily royalty revenue, increased $0.8 million from $2.0 million during the decrease in store doors of approximately 13%.
Wholesale Unit and Pricing Analysis for Greeting Cards
Unit and pricing comparatives (on a sales less returns basis) for the three months ended November 23,May 30, 2008 and May 25, 2007 and November 24, 2006 are summarized below:
Increase (Decrease) From the Prior Year | ||||||||||||||||||||||||
Everyday Cards | Seasonal Cards | Total Greeting Cards | ||||||||||||||||||||||
2007 | 2006 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||||||
Unit volume | 1.7 | % | (4.2 | %) | 4.2 | % | (23.4 | %) | 2.3 | % | (9.7 | %) | ||||||||||||
Selling prices | (2.5 | %) | 2.1 | % | (3.3 | %) | 15.0 | % | (2.7 | %) | 5.3 | % | ||||||||||||
Overall increase / (decrease) | (0.9 | %) | (2.2 | %) | 0.8 | % | (11.9 | %) | (0.4 | %) | (5.0 | %) |
Increase (Decrease) From the Prior Year | ||||||||||||||||||
Everyday Cards | Seasonal Cards | Total Greeting Cards | ||||||||||||||||
2008 | 2007 | 2008 | 2007 | 2008 | 2007 | |||||||||||||
Unit volume | 11.2 | % | 8.0 | % | 7.1 | % | (1.5 | )% | 9.7 | % | 4.3 | % | ||||||
Selling prices | (4.6 | )% | (4.7 | )% | (5.8 | )% | 1.5 | % | (5.2 | )% | (2.5 | )% | ||||||
Overall increase / (decrease) | 6.0 | % | 2.9 | % | 0.9 | % | 0.0 | % | 4.0 | % | 1.7 | % |
During the thirdfirst quarter, combined everyday and seasonal greeting card sales less returns were virtually flat, down 0.4%improved 4.0%, compared to the prior year quarter, with a slightmost of the increase in seasonal greeting cards and a slight decrease incoming from everyday greeting cards.
Everyday card sales less returns for the thirdfirst quarter were down slightly, 0.9%up 6.0%, compared to the prior year quarter primarily due to lower performance from ourwith improvement in both the North American Social Expression Products segment and International Social Expression Products segment. Overall, unit volume was up 1.7%11.2% and selling prices were down 2.5%4.6%. The higher unit volume was driven by the North American Social Expression Products segment, which also drove the lower selling prices withwere the result of a higher mix of value line cards compared to the prior year period.
Seasonal card unit volume increased 4.2%7.1%, driven primarily inby the fall and Christmas programs.Mother’s Day program. Lower selling prices of 3.3% were5.8% related to these same programs, with a higher mix of value priced cards across most programs in the North American Social Expression Products segment compared to the prior year period.
Expense Overview
During the current quarter, we experienced increased costs. These higher costs were due to the rollout of the new single priced card line in Canada, added content to our cards, including music and lights, and increased shipments outpacing increased net sales. These activities were undertaken to drive profitable sales growth.
Material, labor and other production costs (“MLOPC”) for the three months ended November 23, 2007May 30, 2008 were $223.3$193.3 million, a decreasean increase from $245.2$161.1 million for the comparable period in the prior year. As a percentage of total revenue, these costs were 46.0%45.1% in the current period compared to 47.0%38.4% for the three months ended November 24, 2006.May 25, 2007. The decreaseincrease of $21.9$32.2 million is the result of favorable volume variances of approximately $17 million due to the lower sales volumeunfavorable spending and favorable product mix of approximately $12$20 million partially offset by increased spendingand $10 million, respectively, and foreign currency translation impacts of approximately $2 million and foreign exchange impacts of approximately $5 million. The favorable product mix is due to a change to a richer mix (as defined by higher gross margins) of card versus non-card products, partially due to the sale of our candle product lines in January 2007. The increased spending wasis primarily attributable to higher scrap costs.
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Administrative and general expenses were $60.5$62.6 million for the three months ended November 23, 2007, a decreaseMay 30, 2008, an increase from $65.3$62.2 million for the three months ended November 24, 2006.May 25, 2007. The decreaseincrease of $4.8$0.4 million is primarily related to favorable spending variances of approximately $6 million partially offset by unfavorable foreign exchange impacts of approximately $1 million. The decreased spending is attributable to lower profit-sharing expense of approximately $2 million as well as reductions in information technology-related expenses, stock-based compensation expense, severance charges, consulting expenses and payroll and benefits related expenses.
Interest expense for the three months ended November 23, 2007May 30, 2008 was $4.8$4.9 million, downup from $7.0$4.8 million for the prior year quarter. The decreaseincrease of $2.2$0.1 million is attributable to savings of $1.5 million due to the reduced debt balances forincreased short-term borrowings on the revolving credit facility and the accounts receivable securitization facility. Commitment fees paid onfacility in the available balance of our credit facility decreased $0.4current period.
Other non-operating income – net was $0.9 million primarily as a result ofin the current year first quarter compared to $1.5 million for the three months ended May 25, 2007. The $0.6 million reduction in income is due primarily to decreased foreign exchange gains in the size of the term loan facility.
The effective tax rate on income from continuing operations was 33.7%30.7% and 30.9%44.5% for the three months ended November 23,May 30, 2008 and May 25, 2007, and November 24, 2006, respectively. The lowerhigher effective tax rate in the prior quarter relatesrelated to several discrete events during that period, including interest expense on estimated tax payments, return to provision adjustments and the effect of amended tax returns on deferred tax assets.
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% Total | % Total | |||||||||||||||
(Dollars in thousands) | 2007 | Revenue | 2006 | Revenue | ||||||||||||
Net sales | $ | 1,258,829 | 98.1 | % | $ | 1,271,755 | 98.0 | % | ||||||||
Other revenue | 24,309 | 1.9 | % | 26,537 | 2.0 | % | ||||||||||
Total revenue | 1,283,138 | 100.0 | % | 1,298,292 | 100.0 | % | ||||||||||
Material, labor and other production costs | 547,509 | 42.7 | % | 593,232 | 45.7 | % | ||||||||||
Selling, distribution and marketing expenses | 444,695 | 34.7 | % | 451,419 | 34.8 | % | ||||||||||
Administrative and general expenses | 178,291 | 13.9 | % | 183,516 | 14.1 | % | ||||||||||
Other operating income – net | (807 | ) | (0.1 | %) | (20,963 | ) | (1.6 | %) | ||||||||
Operating income | 113,450 | 8.8 | % | 91,088 | 7.0 | % | ||||||||||
Interest expense | 14,431 | 1.1 | % | 27,024 | 2.0 | % | ||||||||||
Interest income | (5,834 | ) | (0.5 | %) | (6,716 | ) | (0.5 | %) | ||||||||
Other non-operating income – net | (7,478 | ) | (0.6 | %) | (2,811 | ) | (0.2 | %) | ||||||||
Income from continuing operations before income tax expense | 112,331 | 8.8 | % | 73,591 | 5.7 | % | ||||||||||
Income tax expense | 43,495 | 3.4 | % | 22,583 | 1.8 | % | ||||||||||
Income from continuing operations | 68,836 | 5.4 | % | 51,008 | 3.9 | % | ||||||||||
(Loss) income from discontinued operations, net of tax | (1,395 | ) | (0.1 | %) | 3,593 | 0.3 | % | |||||||||
Net income | $ | 67,441 | 5.3 | % | $ | 54,601 | 4.2 | % | ||||||||
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Increase (Decrease) From the Prior Year | ||||||||||||||||||||||||
Everyday Cards | Seasonal Cards | Total Greeting Cards | ||||||||||||||||||||||
2007 | 2006 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||||||
Unit volume | 9.3 | % | (12.2 | %) | 4.8 | % | (9.4 | %) | 8.1 | % | (11.5 | %) | ||||||||||||
Selling prices | (5.5 | %) | 7.0 | % | (3.4 | %) | 7.5 | % | (4.9 | %) | 7.2 | % | ||||||||||||
Overall increase / (decrease) | 3.3 | % | (6.1 | %) | 1.3 | % | (2.6 | %) | 2.8 | % | (5.1 | %) |
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Segment Information
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 Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,” 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. At November 23, 2007,May 30, 2008, we owned and operated 429417 card and gift retail stores in the United States and Canada through our Retail Operations segment. The stores are primarily located in malls and strip shopping centers. The stores sell products purchased from the North American Social Expression Products segment as well as products purchased from other vendors. AG Interactive is an electronic provider ofdistributes social expression contentproducts, 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. AG Interactive also offers online photo sharing space and a platform to provide consumers the Internetability to use their own photos to create unique, high quality physical products, including greeting cards, calendars, photo albums and wireless platforms.
We review segment results using consistent exchange rates between periods to eliminate the impact of foreign currency fluctuations.
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(Dollars in | Three Months Ended November | % | Nine Months Ended November | % | ||||||||||||||||||||
thousands) | 23, 2007 | 24, 2006 | Change | 23, 2007 | 24, 2006 | Change | ||||||||||||||||||
Total revenue | $ | 320,120 | $ | 356,773 | (10.3 | %) | $ | 850,986 | $ | 861,098 | (1.2 | %) | ||||||||||||
Segment earnings | 50,068 | 88,237 | (43.3 | %) | 161,085 | 147,986 | 8.9 | % |
Three Months Ended | |||||||||
(Dollars in thousands) | May 30, 2008 | May 25, 2007 | % Change | ||||||
Total revenue | $ | 287,774 | $ | 291,441 | (1.3 | )% | |||
Segment earnings | 42,452 | 82,340 | (48.4 | )% |
Total revenue of our North American Social Expression Products segment for the quarter ended November 23, 2007,May 30, 2008, excluding the impact of foreign exchange and intersegment items, decreased $36.7$3.7 million, or 10.3%1.3%, from the prior year period. Our candle product lines, which were sold in January 2007, contributed approximately $14 million to total revenue in the prior year quarter. Approximately $4 million of the decrease resulted from more SBT implementations in the current quarter compared to the prior year third quarter. The majority of the remaining decrease was due to lowerdriven by the rollout of the new Canadian card line. The effect of implementing the new product line was a reduction of approximately $5 million in revenue. Lower sales of our gift packaging products and party goods. Both seasonal and everyday cards weregoods also down slightly comparedcontributed to the prior year period.decrease. These decreases were partially offset by our reduced spending on our investment in cards strategy. In the current quarter, we spent approximately $2 million on our investment in cards strategy, compared to approximately $10 million in the prior year quarter. Total revenue of our North American Social Expression Products segment for the nine months ended November 23, 2007, excluding the impact of foreign exchange and intersegment items, decreased $10.1 million, or 1.2%, from the prior year period. Our candle product lines, which were sold in January 2007, contributed approximately $28 million to total revenue in the prior year nine months. As a result, revenue from products other than candles increased approximately $18 million. Approximately $13 million of the increase was due to lower spending on our investment in cards strategy and approximately $9 million resulted from fewer SBT implementations. Improvements in everyday card sales added approximately $20 million to net sales in the current nine months. These increases were partially offset by reducedhigher sales of our gift packaging products, stationeryboth everyday and party goods of approximately $25 million.
Segment earnings, excluding the impact of foreign exchange and intersegment items, decreased $38.1$39.9 million from $88.2 million for the three months ended November 24, 2006 to $50.1 million for the three months ended November 23, 2007. The prior year quarter included the $20.0 million gain related to terminations of long-term supply agreements associated with retailer consolidations. The remaining decrease is primarily attributable to the reduction in variable margin due to the reduced sales in the current quarter (primarily our candle product lines and party goods). Segment earnings in the current quarter were also favorably impacted approximately $4 million by reduced spending on our investment in cards strategy and SBT implementations in the current period compared to the prior year quarter. Segment earnings, excluding the impact of foreign exchange and intersegment items, increased $13.1 million during the ninethree months ended November 23, 2007May 25, 2007. The conversion to the new Canadian card line reduced earnings by approximately $10 million in the current three months. Also contributing to the decrease are lower margins and increased supply chain costs. The lower margins are a result of a shift in product mix toward cards with more content, including music, lights and other embellishments. The additional supply chain spending,
specifically freight and distribution costs, is due to an increase in products shipped. In total, these costs along with the increased card product content costs impacted segment earnings by approximately $24 million compared to the prior year period. The lower spending on our investment in cards strategy and SBT implementations accounted for approximately $25 million of the increase. Also contributing to the increase are higher everyday card sales as well as lower costs. The lower costs are due to product mix, including the favorable impact from the sale of our lower margin candle product lines, plant efficiencies and supply chain cost reduction programs. Partially offsetting these increases is the $20.0 million gain related to terminations of long-term supply agreements associated with retailer consolidations that was recorded in the prior year nine months.
International Social Expression Products Segment
(Dollars in | Three Months Ended November | % | Nine Months Ended November | % | ||||||||||||||||||||
thousands) | 23, 2007 | 24, 2006 | Change | 23, 2007 | 24, 2006 | Change | ||||||||||||||||||
Total revenue | $ | 80,604 | $ | 82,526 | (2.3 | %) | $ | 199,648 | $ | 209,019 | (4.5 | %) | ||||||||||||
Segment earnings | 10,037 | 6,092 | 64.8 | % | 11,470 | 7,148 | 60.5 | % |
Three Months Ended | |||||||||
(Dollars in thousands) | May 30, 2008 | May 25, 2007 | % Change | ||||||
Total revenue | $ | 69,873 | $ | 64,417 | 8.5 | % | |||
Segment earnings | 2,862 | 176 | 1,526.1 | % |
Total revenue of our International Social Expression Products segment, excluding the impact of foreign exchange, decreased $1.9increased $5.5 million, or 2.3%8.5%, compared to the prior year quarter and decreased $9.4 million, or 4.5%, compared to the prior year nine months. The majorityquarter. Approximately half of the decreaserevenue improvement in both the three and nine month periodsthree-month period is attributable to lower salesthe acquisition completed in the U.K., which continuescurrent period. The remaining increase was primarily the result of a comparison to experience a challengingsoft prior period and additional distribution in the current year at existing customers in the U.K. The prior period was unfavorably impacted by costs associated with incentive allowances for removal of product at retail, environment including reductions of inventory at retail.
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Retail Operations Segment
(Dollars in | Three Months Ended November | % | Nine Months Ended November | % | ||||||||||||||||||||
thousands) | 23, 2007 | 24, 2006 | Change | 23, 2007 | 24, 2006 | Change | ||||||||||||||||||
Total revenue | $ | 39,550 | $ | 42,252 | (6.4 | %) | $ | 115,856 | $ | 125,206 | (7.5 | %) | ||||||||||||
Segment loss | (5,833 | ) | (5,056 | ) | (15.4 | %) | (15,098 | ) | (21,428 | ) | 29.5 | % |
Three Months Ended | |||||||||||
(Dollars in thousands) | May 30, 2008 | May 25, 2007 | % Change | ||||||||
Total revenue | $ | 41,493 | $ | 40,539 | 2.4 | % | |||||
Segment loss | (3,407 | ) | (2,769 | ) | (23.0 | )% |
Total revenue, excluding the impact of foreign exchange, in our Retail Operations segment decreased $2.7increased $1.0 million, or 6.4%2.4%, for the three months ended November 23, 2007,May 30, 2008, compared to the prior year period asdue to favorable same-store sales of approximately $2 million, or 4.6%, were more than offset by the reduction in store doors. Total revenue for the quarter decreased approximately $5 million due to fewer stores as the average number of stores was approximately 13% less than in the prior year quarter. For the nine months ended November 23, 2007, total revenue decreased $9.4 million compared to the prior year period, as favorable same-store sales of approximately $5 million, or 4.6%, were more than offset by the reduction in store doors which decreased total revenue approximately $14 million. Bothsales. The current year periodsperiod benefited from the performance of children’s gifting products, which was the driver of the same-store sales increases.
Segment earnings, excluding the impact of foreign exchange, was a loss of $5.8$3.4 million in the three months ended November 23, 2007,May 30, 2008, compared to a loss of $5.1$2.8 million during the three months ended November 24, 2006.May 25, 2007. Segment earnings were favorablyunfavorably impacted by lower store expensesa weakening of approximately $2 million primarily due to fewer stores in the current period. The impact on earnings of these expense reductions was more than offset by the decrease in sales in the current period. For the nine months ended November 23, 2007, segment earnings was a loss of $15.1 million compared to a loss of $21.4 million in the prior year period. The impact on earnings of the lower revenue in the period was more than offset by lower store expenses of approximately $9 million due to fewer stores. Lower information technology expenses in the current period also contributed to the reduced segment loss in the period. Earnings were favorably impacted by improved gross margins as a result of lessmore promotional pricing. Gross margins increaseddecreased by approximately 1.61.9 percentage points.
AG Interactive Segment
(Dollars in | Three Months Ended November | % | Nine Months Ended November | % | ||||||||||||||||||||
thousands) | 23, 2007 | 24, 2006 | Change | 23, 2007 | 24, 2006 | Change | ||||||||||||||||||
Total revenue | $ | 18,912 | $ | 21,663 | (12.7 | %) | $ | 55,964 | $ | 62,151 | (10.0 | %) | ||||||||||||
Segment earnings | 2,194 | 2,249 | (2.5 | %) | 8,667 | 5,498 | 57.6 | % |
Three Months Ended | ||||||||||
(Dollars in thousands) | May 30, 2008 | May 25, 2007 | % Change | |||||||
Total revenue | $ | 20,527 | $ | 19,899 | 3.2 | % | ||||
Segment (loss) earnings | (1,096 | ) | 3,279 | (133.4 | )% |
Total revenue of AG Interactive for the three months ended November 23, 2007,May 30, 2008, excluding the impact of foreign exchange, was $18.9$20.5 million compared to $21.7$19.9 million in the prior year thirdfirst quarter. TotalThe current year period includes approximately $3 million of revenue from the digital photography acquisitions completed during the second half of AG Interactive for the nine months ended November 23, 2007, excluding the impact of foreign exchange, was $56.0 million compared to $62.2 million in the prior year nine months. Growth in2008. These revenues were partially offset by lower advertising and subscription revenuerevenues in our online product group, due to both ongoing operations and the second quarter 2007 acquisition of an online greeting card business, was more than offset by the decrease in revenue of our mobile product group due to reduced offerings for both the three and nine month periods.group. At the end of the thirdfirst quarter of 2008,2009, AG Interactive had approximately 3.73.9 million online paid subscriberssubscriptions versus 3.43.6 million at the prior year quarter end.
Segment earnings, excluding the impact of foreign exchange, were flatwas a loss of $1.1 million for the quarter ended November 23, 2007,May 30, 2008, compared to earnings of $3.3 million in the prior year period. Segment earnings, excluding the impact of foreign exchange, increased from $5.5 million in the nine months ended November 24, 2006The decrease is primarily attributable to $8.7 millionexpenses incurred in the current year period. Growthperiod associated with the digital photo product line, including marketing and technology costs. Included in
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The seasonal nature of our business precludes a useful comparison of the current period and the fiscal year-end financial statements; therefore, a Condensed Consolidated Statement of Financial Position as of November 24, 2006,May 25, 2007, has been included.
Operating Activities
Operating activities provided $43.3used $11.9 million of cash during the ninethree months ended November 23, 2007,May 30, 2008, compared to a use of $9.3providing $21.1 million of cash in the prior year period.
Accounts receivable was a source of cash of $5.3 million forduring the ninethree months ended November 23, 2007,May 30, 2008, compared to $9.2a use of cash of $14.7 million in the prior year period.first quarter. The decrease is primarily related to the prior period write-off of deferred financing fees associated with our old credit facility and lower amortization of debt financing fees and reduced stock-based compensation expense in the current period.
Deferred costs —- net generally represents payments under agreements with retailers net of the related amortization of those payments. However, forDuring the ninethree months ended November 23, 2007, deferred costs — net also includes the impact of a $15 million reduction of deferred contract costs associated with the termination of a long-term supply agreement and related refund received. For the nine months ended November 24, 2006, deferred costs — net includes the impact of a $76 million reduction of deferred contract costs associated with the termination of several long-term supply agreements and related refunds received. In addition,May 30, 2008, amortization exceeded payments by approximately $14 million during$1.3 million; in the ninethree months ended November 23,May 25, 2007, andamortization exceeded payments by approximately $34 million during the nine months ended November 24, 2006.$11.7 million. See Note 9 to the condensed consolidated financial statements for further detail of deferred costs related to customer agreements.
Accounts payable and other liabilities provided $38.3used $57.6 million of cash during the ninethree months ended November 23, 2007,May 30, 2008, compared to using $5.9$21.8 million in the prior year period. The change from the prior year is due primarily to income taxes andas well as the change in profit-sharing paymentsaccrued compensation and accruals duringbenefits. The change in income taxes is primarily the respective periods.
Investing Activities
Investing activities used $81.7$25.4 million of cash during the ninethree months ended November 23, 2007,May 30, 2008, compared to providing $181.2$37.0 million in the prior year period. The use of cash in the current yearquarter is related to cash payments for business acquisitions as well as capital expenditures of $37.4 million$10.1 million. During the first quarter of fiscal 2009, we purchased a card publisher and franchised distributor of greeting cards in the U.K. for $15.6 million. The use of cash in the prior quarter is related to purchases exceeding sales of short-term investments as well as cash payments for business acquisitions. During the third quarter of fiscal 2008, we purchased the assets of Webshots, an online photo and video sharing site, for $45.2 million. Also, theThe final payment of $6.1 million for the online greeting card business purchased in the prior year’s second quarter of fiscal 2007 was made during the first quarter of fiscal 2008. These amounts were partially offset by cash receipts related to discontinued operations and proceeds from the sale of fixed assets. The source of cash in the prior year is primarily related to sales of short-term investments exceeding purchases. Short-term investments decreased $208.7 million during the nine months ended November 24, 2006.
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Financing activities used $41.2provided $22.5 million of cash during the ninethree months ended November 23, 2007,May 30, 2008, compared to using $301.5$0.3 million during the ninethree months ended November 24, 2006.May 25, 2007. The usecurrent year source of cash in the current period is attributablerelates primarily to share repurchases and dividend payments as discussed below. These amounts were partially offset by short-term debt borrowings of $23.8$28.0 million and our receipt of the exercise price on stock options, which provided $26.2$0.4 million in the current period. TheOur receipt of the exercise price on stock options provided $9.4 million in the prior year amount relates primarily to our refinancing activities during the period. We issued $200.0 million of 7.375% senior unsecured notesquarter, but was almost completely offset by dividend payments and retired $277.3 million of our 6.10% senior notes, approximately 92% of the total outstanding, and had net borrowings under our revolving credit facility and accounts receivable facility of $142.0 million. We also repaid $159.1 million of our 7.00% convertible subordinated notes. We paid $8.3 million of debt issuance costs during the prior period for our new credit facility, the 7.375% senior unsecured notes and the 7.00% convertible subordinated notes exchange offer. These amounts were deferred and are being amortized over the respective periods of the instruments.
During the ninethree months ended November 23,May 30, 2008 and May 25, 2007, and November 24, 2006, we paid quarterly dividends of $0.10$0.12 and $0.08$0.10 per common share, respectively, which totaled $16.7$5.9 million and $13.9$5.5 million, respectively.
Credit Sources
Substantial credit sources are available to us. In total, we had available sources of approximately $600$540 million at November 23, 2007.May 30, 2008. This included our $450 million senior secured credit facility and our $150$90 million accounts receivable securitization facility. The credit agreement includes a $350Borrowings under the accounts receivable securitization facility are limited based on our eligible receivables outstanding. We had $35.0 million revolving credit facility and a $100 million delay draw term loan. Approximately $13 million was outstanding under the revolving credit facility and approximately $11$13.1 million was outstanding under the accounts receivable securitization programagreement at November 23, 2007.May 30, 2008. In addition to these borrowings, we have, in the aggregate, $25.7 million outstanding under letters of credit, which reduces the total credit availability thereunder.
Please refer to the discussion of our borrowing arrangements as disclosed in the “Credit Sources” section of our Annual Report on Form 10-K for the year ended February 28, 200729, 2008 for further information.
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 the business results in peak working capital requirements that may be financed through short-term borrowings.
Critical Accounting Policies
Please refer to the discussion of our Critical Accounting Policies as disclosed in our Annual Report on Form 10-K for the year ended February 28, 2007.
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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;
retail consolidations, acquisitions and bankruptcies, including the possibility of resulting adverse changes to retail contract terms;
competitive terms of sale offered to customers;
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 on core product sales;
the timing and impact of converting customers to a scan-based trading model;
the escalation in the cost of providing employee health care;
the ability to successfully integrate acquisitions;
our ability to successfully implement, or achieve the desired benefits associated with, any information systems refresh that we may implement;
the ability to execute share repurchase programs or the ability to achieve the desired accretive effect from such repurchases;
the ability to comply with our debt covenants;
our ability to successfully complete, or achieve the desired benefits associated with, dispositions;
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 public’s acceptance of online greetings and other social expression products.
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 our periodic filings with the Securities and Exchange Commission, including the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended February 28, 2007.
2629, 2008.
For further information, refer to our Annual Report on Form 10-K for the year ended February 28, 2007.29, 2008. There were no material changes in market risk, specifically interest rate and foreign currency exposure, for us from February 28, 2007,29, 2008, the end of our preceding fiscal year, to November 23, 2007,May 30, 2008, the end of our most recent fiscal quarter.
American Greetings maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and that such information is accumulated and communicated to the Corporation’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
American Greetings carries out a variety of on-going procedures, under the supervision and with the participation of the Corporation’s management, including its Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on the foregoing, the Chief Executive Officer and Chief Financial Officer of American Greetings concluded that the Corporation’s disclosure controls and procedures were effective as of the end of the period covered by this report.
There has been no change in the Corporation’s internal control over financial reporting during the Corporation’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
We are involved in certain legal proceedings arising in the ordinary course of business. We, however, do not believe that any of the 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.
There have been no material changes in the risk factors that were discussed in our Annual Report on Form 10-K for the year ended February 28, 2007.
(a) Not applicable.
(b) Not applicable.
(c) The following table provides information with respect to our purchases of our common shares during the three months ended May 30, 2008.
Period | Total Number of | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans | Maximum Number of Shares (or Approximate Dollar Value) that May Yet Be Purchased Under the Plans | ||||||||||
March 2008 | Class A – | — | — | — | (2) | $ | 50,935,815 | |||||||
Class B – | 890 | (1) | $ | 18.65 | — | |||||||||
April 2008 | Class A – | — | — | — | (2) | $ | 50,935,815 | |||||||
Class B – | 500 | (1) | $ | 17.75 | — | |||||||||
May 2008 | Class A – | — | — | — | (2) | $ | 50,935,815 | |||||||
Class B – | 670 | (1) | $ | 18.31 | — | |||||||||
Total | Class A – | — | — | (2) | ||||||||||
Class B – | 2,060 | (1) | — |
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Maximum Number of | |||||||||||||||||||
Shares (or | |||||||||||||||||||
Total Number of | Approximate Dollar | ||||||||||||||||||
Shares Purchased as | Value) that May Yet Be | ||||||||||||||||||
Total Number of Shares | Average Price | Part of Publicly | Purchased Under the | ||||||||||||||||
Period | Repurchased | Paid per Share | Announced Plans | Plans | |||||||||||||||
September 2007 | Class A – | 395,000 | $ | 24.41 | (2) | 395,000 | (3) | $ | 79,969,524 | ||||||||||
Class B – | 1,404 | (1) | $ | 25.56 | — | ||||||||||||||
October 2007 | Class A – | 425,000 | $ | 26.51 | (2) | 425,000 | (3) | $ | 68,702,396 | ||||||||||
Class B – | 688 | (1) | $ | 26.64 | — | ||||||||||||||
November 2007 | Class A – | 842,302 | $ | 24.27 | (2) | 842,302 | (3) | $ | 48,258,793 | ||||||||||
Class B – | 852,400 | (1) | $ | 24.92 | — | ||||||||||||||
Total | Class A – | 1,662,302 | 1,662,302 | (3) | |||||||||||||||
Class B – | 854,492 | (1) | — |
(1) | There is no public market for the Class B common shares of the Corporation. 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 holder’s 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 Corporation’s 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. All of the shares were repurchased by American Greetings for cash pursuant to this right of first refusal. | |
(2) | ||
On |
Exhibits required by Item 601 of Regulation S-K
Exhibit Number | Description | ||
10.1 | Key Management Annual Incentive Plan (fiscal year 2009 Description) | ||
10.2 | |||
(31) a | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
(31) b | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
(32) | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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AMERICAN GREETINGS CORPORATION | ||||||
By: | /s/ Joseph B. Cipollone | |||||
Joseph B. Cipollone | ||||||
Vice President, Corporate Controller, and Chief Accounting Officer * | ||||||
29July 9, 2008
* (Signing on behalf of Registrant as a duly authorized officer of the Registrant and signing as the chief accounting officer of the Registrant.)
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