UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended November 27, 2015August 26, 2016
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 number 1-13859
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 | |||
(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) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨☐ No x☒
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No ¨
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer | |||||
Non-accelerated filer | 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 ¨☐ No x☒
All of the outstanding capital stock of the registrant is held by Century Intermediate Holding Company. As of January 8,October 7, 2016, 100 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.
AMERICAN GREETINGS CORPORATION
INDEX
Page Number | ||||||||||
Item 1. | 3 | |||||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||||||
Item 3. | ||||||||||
Item 4. | ||||||||||
Item 1. | ||||||||||
Item 6. | ||||||||||
EXHIBITS |
PART I - FINANCIAL INFORMATION
AMERICAN GREETINGS CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Thousands of dollars)
(Unaudited) | (Unaudited) | |||||||||||||||||||||||||||||||
Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
November 27, 2015 | November 28, 2014 | November 27, 2015 | November 28, 2014 | August 26, 2016 | August 28, 2015 | August 26, 2016 | August 28, 2015 | |||||||||||||||||||||||||
Net sales | $ | 480,700 | $ | 508,006 | $ | 1,371,203 | $ | 1,432,370 | $ | 374,748 | $ | 418,611 | $ | 811,935 | $ | 890,503 | ||||||||||||||||
Other revenue | 3,331 | 6,052 | 7,299 | 17,697 | 2,265 | 2,417 | 4,386 | 3,968 | ||||||||||||||||||||||||
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Total revenue | 484,031 | 514,058 | 1,378,502 | 1,450,067 | 377,013 | 421,028 | 816,321 | 894,471 | ||||||||||||||||||||||||
Material, labor and other production costs | 238,496 | 249,518 | 611,955 | 630,413 | 159,214 | 177,985 | 338,114 | 373,459 | ||||||||||||||||||||||||
Selling, distribution and marketing expenses | 169,001 | 175,039 | 486,401 | 513,132 | 142,061 | 153,641 | 295,589 | 317,400 | ||||||||||||||||||||||||
Administrative and general expenses | 59,443 | 64,829 | 177,029 | 200,974 | 55,797 | 59,365 | 119,815 | 117,586 | ||||||||||||||||||||||||
Other operating income – net | (481 | ) | (699 | ) | (70,210 | ) | (26,495 | ) | (1,741 | ) | (7,309 | ) | (3,631 | ) | (69,729 | ) | ||||||||||||||||
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Operating income | 17,572 | 25,371 | 173,327 | 132,043 | 21,682 | 37,346 | 66,434 | 155,755 | ||||||||||||||||||||||||
Interest expense | 6,467 | 9,533 | 21,066 | 27,782 | 5,940 | 6,486 | 11,537 | 14,599 | ||||||||||||||||||||||||
Interest income | (64 | ) | (2,517 | ) | (247 | ) | (2,658 | ) | (230 | ) | (84 | ) | (335 | ) | (183 | ) | ||||||||||||||||
Other non-operating expense (income) – net | 1,609 | 833 | 617 | (546 | ) | 698 | (54 | ) | 710 | (992 | ) | |||||||||||||||||||||
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Income before income tax expense | 9,560 | 17,522 | 151,891 | 107,465 | 15,274 | 30,998 | 54,522 | 142,331 | ||||||||||||||||||||||||
Income tax expense | 3,010 | 6,261 | 48,097 | 29,625 | 4,970 | 6,518 | 17,748 | 45,087 | ||||||||||||||||||||||||
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Net income | $ | 6,550 | $ | 11,261 | $ | 103,794 | $ | 77,840 | $ | 10,304 | $ | 24,480 | $ | 36,774 | $ | 97,244 | ||||||||||||||||
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See notes to consolidated financial statements (unaudited).
AMERICAN GREETINGS CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(Thousands of dollars)
(Unaudited) | (Unaudited) | |||||||||||||||||||||||||||||||
Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
November 27, 2015 | November 28, 2014 | November 27, 2015 | November 28, 2014 | August 26, 2016 | August 28, 2015 | August 26, 2016 | August 28, 2015 | |||||||||||||||||||||||||
Net income | $ | 6,550 | $ | 11,261 | $ | 103,794 | $ | 77,840 | $ | 10,304 | $ | 24,480 | $ | 36,774 | $ | 97,244 | ||||||||||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||||||||||||||||||
Other comprehensive (loss) income, net of tax: | ||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | (3,657 | ) | (15,662 | ) | (8,036 | ) | (15,917 | ) | (12,152 | ) | (2,351 | ) | (5,342 | ) | (4,379 | ) | ||||||||||||||||
Pension and postretirement benefit adjustments | 73 | 173 | 794 | 287 | 227 | 505 | 230 | 721 | ||||||||||||||||||||||||
Unrealized (loss) gain on equity securities | (8,839 | ) | — | 25,638 | — | |||||||||||||||||||||||||||
Unrealized gain (loss) on equity securities | 8,252 | (10,133 | ) | 16,110 | 34,477 | |||||||||||||||||||||||||||
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Other comprehensive (loss) income, net of tax | (12,423 | ) | (15,489 | ) | 18,396 | (15,630 | ) | (3,673 | ) | (11,979 | ) | 10,998 | 30,819 | |||||||||||||||||||
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Comprehensive (loss) income | $ | (5,873 | ) | $ | (4,228 | ) | $ | 122,190 | $ | 62,210 | ||||||||||||||||||||||
Comprehensive income | $ | 6,631 | $ | 12,501 | $ | 47,772 | $ | 128,063 | ||||||||||||||||||||||||
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See notes to consolidated financial statements (unaudited).
AMERICAN GREETINGS CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Thousands of dollars except share and per share amounts)
(Unaudited) | (Note 1) | (Unaudited) | ||||||||||||||||||||||
(Unaudited) November 27, 2015 | (Note 1) February 28, 2015 | (Unaudited) November 28, 2014 | August 26, 2016 | February 29, 2016 | August 28, 2015 | |||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Current assets | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 20,414 | $ | 43,327 | $ | 31,431 | $ | 25,236 | $ | 100,893 | $ | 33,501 | ||||||||||||
Trade accounts receivable, net | 186,433 | 102,339 | 173,691 | 77,875 | 94,392 | 104,690 | ||||||||||||||||||
Inventories | 279,520 | 248,577 | 286,190 | 288,644 | 227,456 | 297,338 | ||||||||||||||||||
Deferred and refundable income taxes | 46,077 | 45,976 | 46,247 | 4,782 | 8,056 | 45,082 | ||||||||||||||||||
Assets held for sale | — | 35,529 | — | |||||||||||||||||||||
Prepaid expenses and other | 140,676 | 157,669 | 144,086 | 132,907 | 129,071 | 131,635 | ||||||||||||||||||
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Total current assets | 673,120 | 633,417 | 681,645 | 529,444 | 559,868 | 612,246 | ||||||||||||||||||
Other assets | 507,158 | 431,838 | 501,392 | 509,564 | 473,100 | 535,436 | ||||||||||||||||||
Deferred and refundable income taxes | 66,575 | 90,143 | 91,905 | 90,268 | 99,512 | 60,897 | ||||||||||||||||||
Property, plant and equipment – at cost | 909,086 | 828,028 | 810,526 | 999,723 | 945,059 | 878,035 | ||||||||||||||||||
Less accumulated depreciation | 473,291 | 447,731 | 443,761 | 489,355 | 477,349 | 467,304 | ||||||||||||||||||
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Property, plant and equipment – net | 435,795 | 380,297 | 366,765 | 510,368 | 467,710 | 410,731 | ||||||||||||||||||
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$ | 1,682,648 | $ | 1,535,695 | $ | 1,641,707 | $ | 1,639,644 | $ | 1,600,190 | $ | 1,619,310 | |||||||||||||
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LIABILITIES AND SHAREHOLDER’S EQUITY | ||||||||||||||||||||||||
Current liabilities | ||||||||||||||||||||||||
Debt due within one year | $ | — | $ | — | $ | 23,800 | ||||||||||||||||||
Accounts payable | 114,042 | 133,135 | 122,637 | $ | 115,262 | $ | 109,014 | $ | 116,450 | |||||||||||||||
Accrued liabilities | 78,552 | 75,992 | 60,125 | 51,675 | 79,873 | 69,196 | ||||||||||||||||||
Accrued compensation and benefits | 76,071 | 95,193 | 63,596 | 40,024 | 101,014 | 63,301 | ||||||||||||||||||
Income taxes payable | 6,262 | 22,512 | 21,835 | 28,684 | 11,151 | 14,398 | ||||||||||||||||||
Liabilities held for sale | — | 1,712 | — | |||||||||||||||||||||
Deferred revenue | 21,391 | 27,200 | 22,961 | 22,235 | 26,271 | 23,044 | ||||||||||||||||||
Other current liabilities | 75,144 | 63,199 | 67,450 | 77,908 | 50,617 | 67,850 | ||||||||||||||||||
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Total current liabilities | 371,462 | 418,943 | 382,404 | 335,788 | 377,940 | 354,239 | ||||||||||||||||||
Long-term debt | 497,835 | 472,729 | 570,232 | 418,962 | 403,058 | 458,155 | ||||||||||||||||||
Other liabilities | 370,703 | 303,231 | 311,265 | 411,093 | 379,769 | 359,427 | ||||||||||||||||||
Deferred income taxes and noncurrent income taxes payable | 11,856 | 11,466 | 12,303 | 10,628 | 10,129 | 10,824 | ||||||||||||||||||
Shareholder’s equity | ||||||||||||||||||||||||
Common shares – par value $.01 per share: 100 shares issued and outstanding | — | — | — | — | — | — | ||||||||||||||||||
Capital in excess of par value | 240,000 | 240,000 | 240,000 | 240,000 | 240,000 | 240,000 | ||||||||||||||||||
Accumulated other comprehensive income (loss) | (6,007 | ) | (24,403 | ) | (14,878 | ) | ||||||||||||||||||
Accumulated other comprehensive (loss) income | (8,660 | ) | (19,658 | ) | 6,416 | |||||||||||||||||||
Retained earnings | 196,799 | 113,729 | 140,381 | 231,833 | 208,952 | 190,249 | ||||||||||||||||||
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Total shareholder’s equity | 430,792 | 329,326 | 365,503 | 463,173 | 429,294 | 436,665 | ||||||||||||||||||
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$ | 1,682,648 | $ | 1,535,695 | $ | 1,641,707 | $ | 1,639,644 | $ | 1,600,190 | $ | 1,619,310 | |||||||||||||
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See notes to consolidated financial statements (unaudited).
AMERICAN GREETINGS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of dollars)
(Unaudited) | ||||||||||||||||
(Unaudited) Nine Months Ended | Six Months Ended | |||||||||||||||
November 27, 2015 | November 28, 2014 | August 26, 2016 | August 28, 2015 | |||||||||||||
OPERATING ACTIVITIES: | ||||||||||||||||
Net income | $ | 103,794 | $ | 77,840 | $ | 36,774 | $ | 97,244 | ||||||||
Adjustments to reconcile net income to cash flows from operating activities: | ||||||||||||||||
Gain on sale of Strawberry Shortcake | (61,234 | ) | — | — | (61,625 | ) | ||||||||||
Adjustment to gain/(net gain) on sale of AGI In-Store | 1,073 | (38,663 | ) | |||||||||||||
Contract asset recovery | (853 | ) | — | |||||||||||||
Net loss on disposal of fixed assets | 108 | 15,823 | 28 | 66 | ||||||||||||
Depreciation and intangible assets amortization | 42,047 | 45,581 | 25,305 | 28,114 | ||||||||||||
Clinton Cards secured debt recovery | — | (3,390 | ) | |||||||||||||
Interest on Clinton Cards secured debt | — | (2,507 | ) | |||||||||||||
Provision for doubtful accounts | 680 | 767 | 231 | 367 | ||||||||||||
Deferred income taxes | 9,736 | (15,716 | ) | 4,469 | 8,076 | |||||||||||
Other non-cash charges | 4,483 | 5,039 | 2,057 | 3,614 | ||||||||||||
Changes in operating assets and liabilities, net of acquisitions and dispositions: | ||||||||||||||||
Trade accounts receivable | (86,815 | ) | (83,981 | ) | 17,918 | (3,431 | ) | |||||||||
Inventories | (34,275 | ) | (57,791 | ) | (65,528 | ) | (49,866 | ) | ||||||||
Other current assets | 1,049 | (185 | ) | (3,416 | ) | (7,193 | ) | |||||||||
Net payable/receivable with related parties | 8,289 | 95 | (754 | ) | (1,698 | ) | ||||||||||
Income taxes | (17,179 | ) | 886 | 15,625 | (7,554 | ) | ||||||||||
Deferred costs – net | 17,547 | (1,376 | ) | 17,470 | 19,377 | |||||||||||
Accounts payable and other liabilities | (73,941 | ) | (23,688 | ) | (83,462 | ) | (91,698 | ) | ||||||||
Other – net | (4,469 | ) | 4,216 | 1,277 | 680 | |||||||||||
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Total Cash Flows From Operating Activities | (89,960 | ) | (77,050 | ) | (32,006 | ) | (65,527 | ) | ||||||||
INVESTING ACTIVITIES: | ||||||||||||||||
Property, plant and equipment additions | (55,184 | ) | (70,263 | ) | (46,005 | ) | (31,735 | ) | ||||||||
Proceeds from sale of fixed assets | 813 | 55 | ||||||||||||||
Cash paid for acquired character property rights | (2,800 | ) | — | — | (2,800 | ) | ||||||||||
Proceeds from sale of fixed assets | 319 | 23,811 | ||||||||||||||
(Adjustment to proceeds)/proceeds from sale of AGI In-Store | (3,200 | ) | 73,659 | |||||||||||||
Adjustment to proceeds from sale of AGI In-Store | — | (3,200 | ) | |||||||||||||
Proceeds from sale of Strawberry Shortcake | 105,000 | — | — | 105,000 | ||||||||||||
Proceeds from surrender of corporate-owned life insurance policies | 24,068 | — | — | 24,068 | ||||||||||||
Net (lending)/repayments on loans to related parties | (1,319 | ) | — | |||||||||||||
Proceeds from Clinton Cards administration | — | 11,926 | ||||||||||||||
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Total Cash Flows From Investing Activities | 66,884 | 39,133 | (45,192 | ) | 91,388 | |||||||||||
FINANCING ACTIVITIES: | ||||||||||||||||
Proceeds from revolving line of credit | 441,470 | 347,200 | 73,275 | 191,200 | ||||||||||||
Repayments on revolving line of credit | (353,970 | ) | (299,900 | ) | (58,275 | ) | (139,500 | ) | ||||||||
Dividends to shareholder | (13,894 | ) | (20,724 | ) | ||||||||||||
Repayments on term loan | (65,000 | ) | (15,000 | ) | — | (65,000 | ) | |||||||||
Dividends to shareholder | (20,724 | ) | (24,154 | ) | ||||||||||||
Financing fees | — | (1,065 | ) | |||||||||||||
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Total Cash Flows From Financing Activities | 1,776 | 7,081 | 1,106 | (34,024 | ) | |||||||||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH | (1,613 | ) | (1,696 | ) | 435 | (1,663 | ) | |||||||||
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DECREASE IN CASH AND CASH EQUIVALENTS | (22,913 | ) | (32,532 | ) | (75,657 | ) | (9,826 | ) | ||||||||
Cash and Cash Equivalents at Beginning of Year | 43,327 | 63,963 | 100,893 | 43,327 | ||||||||||||
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Cash and Cash Equivalents at End of Period | $ | 20,414 | $ | 31,431 | $ | 25,236 | $ | 33,501 | ||||||||
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See notes to consolidated financial statements (unaudited).
AMERICAN GREETINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three and NineSix Months Ended November 27,August 26, 2016 and August 28, 2015 and November 28, 2014
Note 1 – Basis of Presentation
The accompanying unaudited 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, 20152016 refers to the year ended February 28, 2015.29, 2016. The Corporation’s subsidiary, AG Retail Cards Limited is consolidated on a one-month lag corresponding with its fiscal year-end of January 3028 for 2016.2017.
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, 2015,29, 2016, from which the Consolidated Statement of Financial Position at February 28, 2015,29, 2016, presented herein, has been derived. Certain amounts in the prior year financial statements have been reclassified to conform to the 2017 presentation. These reclassifications had no material impact on financial position, earnings or cash flows.
The Corporation’s investments in less than majority-owned companies in which it has the ability to exercise significant influence over the operating and financial policies are accounted for using the equity method except when they qualify as variable interest entities (“VIE”) and the Corporation is the primary beneficiary, in which case, the investments are consolidated in accordance with Accounting Standards Codification (“ASC”) Topic 810 (“ASC 810”), “Consolidation.” Investments that do not meet the above criteria but have a readily determinable fair value are measured at fair value with unrealized gains and losses reported in other comprehensive income. Such investments that do not have a readily determinable fair value are accounted for under the cost method.
The Corporation provides limited credit support to Schurman Fine Papers (“Schurman”) which is a VIE as defined in ASC 810. Schurman owns and operates specialty card and gift retail stores in the United States and Canada. The stores are primarily located in malls and strip shopping centers. This limited credit support is provided through the provision of a liquidity guaranty (“Liquidity Guaranty”) in favor of the lenders under Schurman’s senior revolving credit facility (the “Senior Credit Facility”). Pursuant to the terms of the Liquidity Guaranty, the Corporation has guaranteed the repayment of up to $10.0 million of Schurman’s borrowings under the Senior Credit Facility to help ensure that Schurman has sufficient borrowing availability under this facility. The Liquidity Guaranty is required to be backed by a letter of credit for the term of the Liquidity Guaranty, which expires in January 2019. The Corporation’s obligations under the Liquidity Guaranty generally may not be triggered unless Schurman’s lenders under its Senior Credit Facility have substantially completed the liquidation of the collateral under Schurman’s Senior Credit Facility, or 91 days after the liquidation is started, whichever is earlier, and will be limited to the deficiency, if any, between the amount owed and the amount collected in connection with the liquidation. There was no triggering event or liquidation of collateral as of November 27, 2015August 26, 2016 requiring the use of the Liquidity Guaranty.
During the current period, the Corporation assessed the variable interests in Schurman and determined that a third party holder of variable interests has the controlling financial interest in the VIE and thus, the third party, not the Corporation, is the primary beneficiary. In completing this assessment, the Corporation identified the activities that it considers most significant to the future economic success of the VIE and determined that it does not have the power to direct those activities. As such, Schurman is not consolidated in the Corporation’s results.
The Corporation’s maximum exposure to loss as it relates to Schurman as of November 27, 2015August 26, 2016 includes:
Correction of Immaterial Errors
During the prior year first quarter, the Corporation identified and corrected errors in the accounting for income taxes that related to the year ended February 28, 2014. These errors primarily related to the Corporation’s failure to consider all sources of available taxable income when assessing the need for a valuation allowance against certain deferred tax assets and the recognition of a liability for an uncertain tax position. These errors were the result of the significant complexity created as a result of the going private transaction. The impact of correcting these items had a non-cash effect, decreasing tax expense and increasing net income by $4.1 million. Based on its evaluation as discussed more fully below, the Corporation concluded that the corrections to the financial statements were immaterial to its financial results for the years ended February 28, 2014 and 2015.
In accordance with ASC Topic 250, Accounting Changes and Error Corrections, the Corporation evaluated the effects of the errors on its financial statements for the years ended February 28, 2014 and 2015 and concluded that the results of operations for these periods were not materially misstated. In reaching its conclusion, the Corporation considered numerous qualitative and quantitative factors, including but not limited to the following:
Based on its evaluation, the Corporation concluded that it is not probable that the judgment of a reasonable person relying on the financial statements would have been changed or influenced by the error or correction of the error.
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 November 2015,August 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”)No. 2015-17 (“2016-15, “Statement of Cash Flows (Topic 230): Clarification of Certain Cash Receipts and Cash Payments.” The objective of ASU 2015-17”), “Balance Sheet Classification2016-15 is to eliminate the diversity in practice related to the classification of Deferred Taxes”. ASU 2015-17 eliminatescertain cash receipts and payments in the current requirement for entities to separate deferred income tax assets and liabilities into current and noncurrent amounts in a classified balance sheet. Instead, entities will be required to classify all deferred income tax assets and liabilities as noncurrent.statement of cash flows, by adding or clarifying guidance on eight specific cash flow issues. For public business entities, ASU 2015-172016-15 is effective for financial statements issued for annual and interim reporting periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is2017, with early adoption permitted. The amendments in ASU 2015-17 maythis update should be applied either prospectively to all deferred tax assets and liabilities or retrospectively to all periods presented. The Corporation currently expects to adopt ASU2015-17 and prospectively apply the amendmentspresented, unless deemed impracticable, in this standards update in its consolidated financial statements for the year ending February 29, 2016. The adoption of ASU 2015-17 will change the balance sheet classification of deferred taxes to non-current that would have otherwise been recorded in the current section of the Consolidated Statement of Financial Position.
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory”. ASU 2015-11 requires an entity to measure inventory that is within the scope of this ASU at the lower of cost and net realizable value. Existing impairment models will continue to be used for inventories that are accounted for using the last-in first-out (“LIFO”) method. ASU 2015-11 requireswhich case, prospective adoption for inventory measurements for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years for public business entities. Early adoption is permitted. At November 27, 2015, approximately 44% of the Corporation’s pre-LIFO consolidated inventory is measured using a method other than LIFO. The Corporation does not expect that the adoption of this standards update will have a material impact on its consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-05 (“ASU 2015-05”), “Customers’ Accounting for Fees Paid in a Cloud Computing Arrangement.” ASU 2015-05 provides guidance to customers on determining whether a cloud computing arrangement contains a software license that should be accounted for as internal-use software under ASC 350-40. Cloud computing arrangements not deemed to contain a software license would be accounted for as service contracts. For public business entities, ASU 2015-05 is effective for annual periods, including interim periods within those annual periods beginning after December 15, 2015. Entities may adopt the guidance (1) retrospectively or (2) prospectively to arrangements entered into, or materially modified, after the effective date. Early adoptionapplication is permitted. The Corporation is currently evaluating the new guidance and has not determined the impact this standards update willmay have on its consolidated financial statements.
In April 2015,June 2016, the FASB issued ASU No. 2015-03 (“2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2015-03”), “Simplifying2016-13 introduces a new forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. This ASU also expands the Presentationdisclosure requirements to enable users of Debt Issuance Costs”.financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses. For public business entities, ASU 2015-03 requires that all costs incurred to issue debt be presented in the balance sheet as a direct deduction from the carrying value of the debt, similar to the presentation of debt discounts. ASU 2015-032016-13 is effective for public business entities for fiscal yearsannual and interim reporting periods beginning after December 15, 20152019, and the guidance is to be applied using the modified-retrospective approach. Earlier adoption is permitted for annual and interim reporting periods within those fiscal years, with early adoption permitted.beginning after December 15, 2018. The Corporation doesis currently evaluating the new guidance and has not expect thatdetermined the adoption ofimpact this standards update willmay have a material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” ASU 2016-02 will require lessees to recognize aright-of-use asset and a lease liability. Theright-of-use asset and lease liability will be initially measured at the present value of the lease payments in the statement of financial position. Lessor accounting under the new guidance is largely unchanged. For public business entities, ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified-retrospective approach, which includes a number of optional practical expedients. The Corporation is currently evaluating the new guidance and has not determined the impact this standards update may have on its consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. In particular, this ASU requires equity investments (except those accounted for under the equity method or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. ASU 2016-01 is effective for interim and annual periods beginning after December 15, 2017. The Corporation is currently evaluating the new guidance and has not determined the impact this standards update may have on its consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15, (“ASU 2014-15”), “Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern”.Concern.” ASU 2014-15 requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued and provides guidance on determining when and how to disclose going concern uncertainties in the financial statements. Certain disclosures will be required if conditions give rise to substantial doubt about an entity’s ability to continue as a going concern. ASU 2014-15 applies to all entities and is effective for annual and interim reporting periods ending after December 15, 2016, with early adoption permitted. The Corporation does not expect that the adoption of this standards update will impact its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, (“ASU 2014-09”), “Revenue from Contracts with Customers”.Customers.” Subsequent accounting standards updates have been issued which amend and/or clarify the application of ASU 2014-09. The objective ofASU 2014-09, and its related amendments and clarifications, is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle of ASU 2014-09the new guidance is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applyingMore detailed disclosures will also be required to enable users of financial statements to understand the new guidance, an entity will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations;nature, amount, timing and (5) recognizeuncertainty of revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to alland cash flows arising from contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. In August 2015, the FASB issued ASU 2015-14, (“ASU 2015-14”), “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”. The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. Accordingly,customers. For public business entities, should apply the new revenue recognition guidance in ASU 2014-09 towill be effective for annual and interim reporting periods (including interim periods within those periods) beginning after December 15, 2017. EarlyEarlier adoption is permitted but not beforefor annual and interim reporting periods beginning after December 15, 2016. Entities haveThe new guidance permits the optionuse of using either a full retrospective or modified approach to adopt ASU 2014-09.modified-retrospective transition method. The Corporation is currently evaluating the new guidance and has not determined the impact this standardit may have on its consolidated financial statements, nor decided upon the preferred method of adoption.
Note 4 – Acquisitions and Dispositions
Sale of Strawberry Shortcake
As reported in its Annual Report on Form 10-K for the year ended February 28,29, 2016, in March 2015, the Corporation entered into an agreement to sellcompleted the sale of its Strawberry Shortcake property and related intangible assets and licensing agreements (“Strawberry Shortcake”) on February 2, 2015. At February 28, 2015, the assets and liabilities related to the pending sale were classified as held for sale. In March 2015, the sale was completed and the Corporation received cash proceeds of $105.0 million, in cash which is includedare reflected in “Proceeds from sale of Strawberry Shortcake” within “Investing Activities” on the Consolidated Statement of Cash Flows. DuringFlows for the ninesix months ended November 27, 2015, theAugust 28, 2015. The Corporation also recognized a net gain of $61.2$61.6 million from the sale, which is included in “Other operating income – net” on the Consolidated Statement of Strawberry Shortcake.Income for the six months ended August 28, 2015.
Character Property Rights Acquisition
As reported in its Annual Report on Form 10-K for the year ended February 28,29, 2016, in conjunction with and based on the proceeds resulting from the March 2015 in order to secure complete control and ownership over the rights in certain character properties, including thesale of Strawberry Shortcake, property, that the Corporation paid an additional $2.8 million for character property rights associated with Strawberry Shortcake, that were previously granted topurchased from a third party (the “Character Property Rights”), on December 18, 2014, the Corporation paid $37.7 million to purchase these rights, and recorded the rights as indefinite-lived intangible assets. At February 28, 2015, approximately $26 million of this amount was classified as held for sale related to the expected sale of Strawberry Shortcake. In addition, under the agreement by which it acquired these rights, the Corporation agreed that in the event of a future sale of these Character Property Rights and the associated character properties, the Corporation will, depending on the proceeds of such sale, pay up to an additional $4.0 million of the proceeds that it receives from any such sale. Accordingly, as a result of the sale of the Strawberry Shortcake property described above, in March 2015, the Corporation made an additional payment in the amount of $2.8 million.during 2015. This payment is included in “Cash paid for acquired character property rights” within “Investing Activities” on the Consolidated Statement of Cash Flows.Flows for the six months ended August 28, 2015.
Sale of AGI In-Store
On AugustAs reported in its Annual Report on Form 10-K for the year ended February 29, 2014,2016, in March 2015, the Corporation completedfinalized the working capital adjustments related to the 2015 sale of its wholly-owned display fixtures business, AGI In-Store, for $73.7which resulted in a payment of $3.2 million in cash, subject to closing-date working capital and inventory adjustments. Through the nine months ended November 28, 2014, a net gain of $38.7 million was recognized from the sale and wasbuyer. This payment is included in “Other operating income – net” on the Consolidated Statement of Income. In the prior year fourth quarter, post-closing date adjustments, including the $3.2 million final working capital adjustment, of $3.7 million was recorded. Cash proceeds from the sale and cash flows related“Adjustment to the adjustments are included in “(Adjustment to proceeds)/proceeds from sale of AGI In-Store” within “Investing Activities” on the Consolidated Statement of Cash Flows. In November 2015, the Corporation recorded an adjustment of $1.1 millionFlows for the repayment of proceeds related to certain non-saleable closing-date inventory that the buyer had the right to return to the Corporation after twelvesix months from the date of sale. This adjustment combined with the adjustments recorded in the prior year fourth quarter, reduced the overall net gain to $33.9 million as of November 27,ended August 28, 2015.
Sale of World Headquarters
On July 1, 2014, the Corporation sold its current world headquarters location and entered into an operating lease arrangement with the new owner of the building. The Corporation expects to remain in this current location until the completion of the new world headquarters, which the Corporation anticipates will occur in calendar year 2016. Net of transaction costs, the Corporation received $13.5 million in cash from the sale, and recorded a non-cash loss on disposal of $15.5 million in the prior year second fiscal quarter, which loss is included in “Other operating income – net” on the Consolidated Statement of Income. The cash proceeds are included in “Proceeds from sale of fixed assets” on the Consolidated Statement of Cash Flows.
Surrender of Certain Corporate-Owned Life Insurance Policies
As reported in its Annual Report on Form 10-K for the year ended February 28, 2015, the Corporation,29, 2016, in order to mitigate the ongoing risks to the Corporation that may arise from retaining certain corporate-owned life insurance policies, surrendered those policies during the prior year fourth quarter. In March 2015, in connection with the 2015 surrender of thosecertain corporate-owned life insurance policies, the Corporation received proceeds of $24.1 million. These proceedsmillion that are included in “Proceeds from surrender of corporate-owned life insurance policies” within “Investing Activities” on the Consolidated Statement of Cash Flows.Flows for the six months ended August 28, 2015.
Note 5 – Royalty Revenue and Related Expenses
The Corporation has agreements for licensing certain characters and other intellectual property. These license agreements provide for royalty revenue to the Corporation, which is recorded in “Other revenue” on the Consolidated Statement of Income. These license agreements may include the receipt of upfront advances, which are recorded as deferred revenue and earned during the period of the agreement. Revenues and expenses associated with the servicing of these agreements, primarily relating to the licensing activities included in the Non-reportable segment, are summarized as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
(In thousands) | November 27, 2015 | November 28, 2014 | November 27, 2015 | November 28, 2014 | ||||||||||||
Royalty revenue | $ | 2,956 | $ | 5,666 | $ | 6,060 | $ | 16,527 | ||||||||
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Royalty expenses: | ||||||||||||||||
Material, labor and other production costs (credit) | $ | 801 | $ | (1,527 | ) | $ | 2,976 | $ | 1,508 | |||||||
Selling, distribution and marketing expenses | 601 | 1,562 | 2,292 | 4,837 | ||||||||||||
Administrative and general expenses | 381 | 447 | 1,092 | 1,228 | ||||||||||||
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$ | 1,783 | $ | 482 | $ | 6,360 | $ | 7,573 | |||||||||
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As disclosed in Note 4, the Corporation completed the sale of Strawberry Shortcake in March 2015. As such, royalty revenue and expenses related to Strawberry Shortcake for the prior year three and nine month periods do not have comparative amounts in the current year.
Three Months Ended | Six Months Ended | |||||||||||||||
(In thousands) | August 26, 2016 | August 28, 2015 | August 26, 2016 | August 28, 2015 | ||||||||||||
Royalty revenue | $ | 1,922 | $ | 1,975 | $ | 3,684 | $ | 3,104 | ||||||||
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Royalty expenses: | ||||||||||||||||
Material, labor and other production costs | $ | 702 | $ | 1,241 | $ | 1,315 | $ | 2,175 | ||||||||
Selling, distribution and marketing expenses | 942 | 988 | 1,498 | 1,691 | ||||||||||||
Administrative and general expenses | 212 | 344 | 492 | 711 | ||||||||||||
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$ | 1,856 | $ | 2,573 | $ | 3,305 | $ | 4,577 | |||||||||
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Note 6 – Other Income and Expense
Other Operating Income – Net
Three Months Ended | Nine Months Ended | |||||||||||||||
(In thousands) | November 27, 2015 | November 28, 2014 | November 27, 2015 | November 28, 2014 | ||||||||||||
Gain adjustment (gain) on sale of Strawberry Shortcake | $ | 391 | $ | — | $ | (61,234 | ) | $ | — | |||||||
Gain adjustment (gain) on sale of AGI In-Store | 1,073 | 139 | 1,073 | (38,663 | ) | |||||||||||
Clinton Cards secured debt recovery | — | — | — | (3,390 | ) | |||||||||||
State tax credits | (975 | ) | — | (7,516 | ) | — | ||||||||||
Loss on asset disposal | 41 | 90 | 108 | 15,823 | ||||||||||||
Miscellaneous | (1,011 | ) | (928 | ) | (2,641 | ) | (265 | ) | ||||||||
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Other operating income – net | $ | (481 | ) | $ | (699 | ) | $ | (70,210 | ) | $ | (26,495 | ) | ||||
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During the nine months ended November 27, 2015, the Corporation recognized a net gain of $61.2 million from the sale of Strawberry Shortcake, which included a first quarter gain of $61.7 million and an adjustment to the gain of $0.1 million and $0.4 million in the second and third quarters, respectively. See Note 4 for further information.
Three Months Ended | Six Months Ended | |||||||||||||||
(In thousands) | August 26, 2016 | August 28, 2015 | August 26, 2016 | August 28, 2015 | ||||||||||||
State tax credits | $ | (1,050 | ) | $ | (6,541 | ) | $ | (2,100 | ) | $ | (6,541 | ) | ||||
Gain adjustment (gain) on sale of Strawberry Shortcake | — | 41 | — | (61,625 | ) | |||||||||||
Loss on asset disposal | 31 | 57 | 28 | 66 | ||||||||||||
Miscellaneous | (722 | ) | (866 | ) | (1,559 | ) | (1,629 | ) | ||||||||
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Other operating income – net | $ | (1,741 | ) | $ | (7,309 | ) | $ | (3,631 | ) | $ | (69,729 | ) | ||||
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During the three and ninesix months ended November 27, 2015,August 26, 2016, the Corporation recognized income of $1.0$1.1 million and $7.5$2.1 million, respectively, from tax credits received from the State of Ohio under certain incentive programs made available to the Corporation in connection with its decision to maintain its world headquarters in the state of Ohio. Tax credits of $6.5 million were recognized in the quarter ended August 28, 2015.
During the three and ninesix months ended November 27,August 28, 2015, the Corporation recorded an adjustment to reduce the gain by $1.1 million in accordance with the contractual terms of the sale of AGI In-Store in the prior year second quarter. During the nine months ended November 28, 2014, the Corporation recognized a net gain of $38.7$61.6 million from the sale of AGI In-Store,Strawberry Shortcake, which included a secondfirst quarter gain of $38.8$61.7 million and an adjustment to the gain in the thirdsecond quarter of approximately $0.1 million. See Note 4 for further information.
“Loss on asset disposal” during the nine month period ended November 28, 2014 included a non-cash loss of $15.5 million related to the sale of the Corporation’s current world headquarters location. See Note 4 for further information.
During the prior year first quarter, the Corporation recorded an impairment recovery of $3.4 million related to the senior secured debt of Clinton Cards that the Corporation acquired in May 2012 and subsequently impaired. This recovery, which was based on current estimated recovery information provided by the bankruptcy administrators of the Clinton Cards liquidation (“Administrators”), represented the final amount of a full recovery of the prior impairment. During the prior year third quarter, as part of the liquidation process, the Corporation received a distribution of $11.3 million which included the full recovery of the remaining senior secured debt claim as well as accumulated interest that was previously not expected to be received. The interest portion of the final distribution amounted to $2.5 million and is included in “Interest income” on the Consolidated Statement of Income.
Other Non-Operating Expense (Income) – Net
Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
(In thousands) | November 27, 2015 | November 28, 2014 | November 27, 2015 | November 28, 2014 | August 26, 2016 | August 28, 2015 | August 26, 2016 | August 28, 2015 | ||||||||||||||||||||||||
Foreign exchange loss (gain) | $ | 1,758 | $ | 955 | $ | 1,085 | $ | 432 | $ | 842 | $ | 111 | $ | 1,002 | $ | (673 | ) | |||||||||||||||
Rental income | (148 | ) | (122 | ) | (430 | ) | (877 | ) | (142 | ) | (129 | ) | (290 | ) | (281 | ) | ||||||||||||||||
Miscellaneous | (1 | ) | — | (38 | ) | (101 | ) | (2 | ) | (36 | ) | (2 | ) | (38 | ) | |||||||||||||||||
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Other non-operating expense (income) – net | $ | 1,609 | $ | 833 | $ | 617 | $ | (546 | ) | $ | 698 | $ | (54 | ) | $ | 710 | $ | (992 | ) | |||||||||||||
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Note 7 – Accumulated Other Comprehensive (Loss) Income (Loss)
The changes in accumulated other comprehensive (loss) income (loss) are as follows:
(In thousands) | Foreign Currency Translation Adjustments | Pensions and Other Postretirement Benefits | Unrealized Investment Gain | Total | ||||||||||||
Balance at February 28, 2015 | $ | 1,836 | $ | (26,239 | ) | $ | — | $ | (24,403 | ) | ||||||
Other comprehensive income (loss) before reclassifications | (8,036 | ) | 301 | 25,638 | 17,903 | |||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) | — | 493 | — | 493 | ||||||||||||
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Net current period other comprehensive income (loss) | (8,036 | ) | 794 | 25,638 | 18,396 | |||||||||||
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Balance at November 27, 2015 | $ | (6,200 | ) | $ | (25,445 | ) | $ | 25,638 | $ | (6,007 | ) | |||||
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Balance at February 29, 2016 Other comprehensive income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive income (loss) Other comprehensive income (loss), net of tax Balance at August 26, 2016 (In thousands) Foreign
Currency
Translation
Adjustments Pensions and
Postretirement
Benefits Unrealized
Investment
Gain Total $ (13,535 ) $ (26,628 ) $ 20,505 $ (19,658 ) (5,660 ) (222 ) 16,110 10,228 318 452 — 770 (5,342 ) 230 16,110 10,998 $ (18,877 ) $ (26,398 ) $ 36,615 $ (8,660 )
The reclassifications out of accumulated other comprehensive (loss) income (loss) are as follows:
(In thousands) | Nine Months Ended November 27, 2015 | Consolidated Statement of Income | Six Months Ended August 26, 2016 | |||||||
Pensions and Postretirement Benefits: | ||||||||||
Amortization of pensions and other postretirement benefits items | ||||||||||
Amortization of pensions and postretirement benefits items | ||||||||||
Actuarial losses, net | $ | (1,279 | ) | Administrative and general expenses | $ | (1,043 | )(1) | |||
Prior service credit, net | 521 | Administrative and general expenses | 347 | (1) | ||||||
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(758 | ) | (696 | ) | |||||||
Tax benefit | 265 | Income tax expense | 244 | (2) | ||||||
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Total, net of tax | (493 | ) | (452 | ) | ||||||
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Loss upon dissolution of business | (318 | )(3) | ||||||||
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Total reclassifications | $ | (493 | ) | $ | (770 | ) | ||||
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As reported in its Annual Report
Classification on Form 10-K for the year ended February 28, 2015, the Corporation held a minority investment in the common stock of a privately held company which was classified as available for sale and accounted for under the cost method due to the Corporation’s inability to exercise significant influence over the investee’s operating and financial policies and the absence of a readily determinable fair value for its investment. At February 28, 2015, the carrying value of this investment was zero as a result of a cash distribution in 2014 that included a return of capital. During the current year first quarter, the investee successfully completed an initial public offering of its common stock and thereby established a readily determinable fair value for the Corporation’s previously nonmarketable investment. In accordance with ASC Topic 320, “Investments – Debt and Equity Securities,” the investment is now reported at fair value and is included in “Other assets” on the Corporation’s Consolidated Statement of Financial Position. See Note 14 for further information. As a result of the initial fair value measurement at May 29, 2015 and subsequent revaluation at the end of the third quarter, an unrealized gain, net of tax, of $25.6 million was recognized in other comprehensive income during the nine months ended November 27, 2015.Income:
(1) | Administrative and general expenses |
(2) | Income tax expense |
(3) | Other operating income – net |
Note 8 – Customer Allowances and Discounts
Trade accounts receivable is reported net of certain allowances and discounts. The most significant of these are as follows:
(In thousands) | November 27, 2015 | February 28, 2015 | November 28, 2014 | August 26, 2016 | February 29, 2016 | August 28, 2015 | ||||||||||||||||||
Allowance for seasonal sales returns | $ | 25,760 | $ | 18,895 | $ | 26,651 | $ | 17,707 | $ | 21,518 | $ | 16,437 | ||||||||||||
Allowance for outdated products | 9,246 | 11,074 | 9,624 | 10,396 | 8,372 | 10,109 | ||||||||||||||||||
Allowance for doubtful accounts | 1,942 | 1,730 | 1,752 | 1,827 | 1,628 | 1,814 | ||||||||||||||||||
Allowance for marketing funds | 25,739 | 26,841 | 33,155 | 27,273 | 26,371 | 23,495 | ||||||||||||||||||
Allowance for rebates | 25,143 | 34,214 | 31,987 | 16,203 | 24,373 | 21,465 | ||||||||||||||||||
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$ | 87,830 | $ | 92,754 | $ | 103,169 | $ | 73,406 | $ | 82,262 | $ | 73,320 | |||||||||||||
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Certain customer allowances and discounts are settled in cash. These accounts, primarily rebates, which are classified as “Accrued liabilities” on the Consolidated Statement of Financial Position, totaled $16.6$9.7 million, $17.0$16.0 million and $16.1$13.9 million as of November 27, 2015,August 26, 2016, February 29, 2016 and August 28, 2015, and November 28, 2014, respectively.
Note 9 – Inventories
(In thousands) | November 27, 2015 | February 28, 2015 | November 28, 2014 | August 26, 2016 | February 29, 2016 | August 28, 2015 | ||||||||||||||||||
Raw materials | $ | 13,743 | $ | 14,809 | $ | 11,668 | $ | 15,277 | $ | 13,516 | $ | 19,861 | ||||||||||||
Work in process | 7,229 | 7,578 | 6,404 | 10,410 | 8,116 | 12,869 | ||||||||||||||||||
Finished products | 331,188 | 297,899 | 343,460 | 336,014 | 277,480 | 337,344 | ||||||||||||||||||
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352,160 | 320,286 | 361,532 | 361,701 | 299,112 | 370,074 | |||||||||||||||||||
Less LIFO reserve | 81,661 | 80,755 | 84,132 | 80,860 | 80,159 | 81,659 | ||||||||||||||||||
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270,499 | 239,531 | 277,400 | 280,841 | 218,953 | 288,415 | |||||||||||||||||||
Display materials and factory supplies | 9,021 | 9,046 | 8,790 | 7,803 | 8,503 | 8,923 | ||||||||||||||||||
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$ | 279,520 | $ | 248,577 | $ | 286,190 | $ | 288,644 | $ | 227,456 | $ | 297,338 | |||||||||||||
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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.
Inventory held on location for retailers with scan-based trading arrangements, which is included in finished products, totaled $84.4$65.3 million, $63.3$63.5 million and $85.8$64.2 million as of November 27, 2015,August 26, 2016, February 29, 2016 and August 28, 2015, and November 28, 2014, respectively.
Note 10 – Deferred Costs
Deferred costs and future payment commitments for retail supply agreements are included in the following financial statement captions:
(In thousands) | November 27, 2015 | February 28, 2015 | November 28, 2014 | August 26, 2016 | February 29, 2016 | August 28, 2015 | ||||||||||||||||||
Prepaid expenses and other | $ | 104,572 | $ | 98,061 | $ | 107,729 | $ | 93,622 | $ | 92,639 | $ | 89,305 | ||||||||||||
Other assets | 395,086 | 364,311 | 389,533 | 392,139 | 378,223 | 411,909 | ||||||||||||||||||
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Deferred cost assets | 499,658 | 462,372 | 497,262 | 485,761 | 470,862 | 501,214 | ||||||||||||||||||
Other current liabilities | (60,593 | ) | (59,018 | ) | (66,007 | ) | (74,458 | ) | (47,142 | ) | (64,117 | ) | ||||||||||||
Other liabilities | (157,763 | ) | (104,127 | ) | (136,111 | ) | (152,324 | ) | (145,856 | ) | (160,558 | ) | ||||||||||||
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Deferred cost liabilities | (218,356 | ) | (163,145 | ) | (202,118 | ) | (226,782 | ) | (192,998 | ) | (224,675 | ) | ||||||||||||
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Net deferred costs | $ | 281,302 | $ | 299,227 | $ | 295,144 | $ | 258,979 | $ | 277,864 | $ | 276,539 | ||||||||||||
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The Corporation maintains an allowance for deferred costs related to supply agreements of $3.2 million, $3.6 million $2.3 million and $2.6$3.5 million at November 27, 2015,August 26, 2016, February 29, 2016 and August 28, 2015, and November 28, 2014, respectively. This allowance is included in “Other assets” on the Consolidated Statement of Financial Position.
Note 11 – Other Liabilities
Included in “Other liabilities” on the Consolidated Statement of Financial Position is a deferred lease obligation related to an operating lease with H L & L Property Company (“H L & L”), for a building that will function as the Corporation’s world headquarters. The relocation to the building is currently being constructed and expected towill be available for occupancycompleted in calendar year 2016.the third quarter of fiscal 2017.
H L & L is an indirect affiliate of the Corporation as it is indirectly owned by members of the Weiss Family (as defined in Note 17). Due to, among other things, the Corporation’s involvement in the construction of the building, the Corporation is required to be treated, for accounting purposes only, as the “deemed owner” of the new world headquarters building during the construction period. Accordingly, the Corporation has recorded an asset and associated offsetting liability during the construction of the building, even though the Corporation does not own the
asset and is not the obligor on the corresponding construction debt. The asset and corresponding liability was $73.3 million, $31.7 million and $19.0 million as of November 27, 2015, February 28, 2015 and November 28, 2014, respectively. The asset is included in “Property, plant and equipment – net”at cost” and corresponding liability included in “Other liabilities” on the Corporation’s Consolidated Statement of Financial Position.Position, was $117.7 million, $94.7 million and $57.4 million as of August 26, 2016, February 29, 2016 and August 28, 2015, respectively. See Note 17 for further information.
Note 12 – Debt
Debt due within one year was as follows:
(In thousands) | November 27, 2015 | February 28, 2015 | November 28, 2014 | |||||||||
Current portion of term loan | $ | — | $ | — | $ | 20,000 | ||||||
Accounts receivable facility | — | — | 3,800 | |||||||||
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$ | — | $ | — | $ | 23,800 | |||||||
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Long-term debt and their related calendar year due dates as of November 27, 2015,August 26, 2016, February 29, 2016 and August 28, 2015, and November 28, 2014, respectively, were as follows:
(In thousands) | November 27, 2015 | February 28, 2015 | November 28, 2014 | August 26, 2016 | February 29, 2016 | August 28, 2015 | ||||||||||||||||||
Term loan, due 2019 | $ | 185,000 | $ | 250,000 | $ | 325,000 | $ | 185,000 | $ | 185,000 | $ | 185,000 | ||||||||||||
7.375% senior notes, due 2021 | 225,000 | 225,000 | 225,000 | 225,000 | 225,000 | 225,000 | ||||||||||||||||||
Revolving credit facility, due 2018 | 91,800 | 4,300 | 48,000 | 15,000 | — | 56,000 | ||||||||||||||||||
6.10% senior notes, due 2028 | 181 | 181 | 181 | 181 | 181 | 181 | ||||||||||||||||||
Unamortized financing fees | (4,146 | ) | (6,752 | ) | (7,949 | ) | (6,219 | ) | (7,123 | ) | (8,026 | ) | ||||||||||||
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497,835 | 472,729 | 590,232 | $ | 418,962 | $ | 403,058 | $ | 458,155 | ||||||||||||||||
Current portion of term loan | — | — | (20,000 | ) | ||||||||||||||||||||
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$ | 497,835 | $ | 472,729 | $ | 570,232 | |||||||||||||||||||
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At November 27, 2015,August 26, 2016, the balances outstanding on the term loan facility and revolving credit facility each bear interest at a rate of approximately 2.7% and 2.7%, respectively.3.0%. The revolving credit facility and accounts receivable facility provideprovides the Corporation with funding of up to $250 million andmillion. The Corporation is also a party to an accounts receivable facility that provides funding of up to $50 million, under which there were no borrowings outstanding as of August 26, 2016, February 29, 2016 and August 28, 2015, respectively. Outstanding letters of credit, which reduce the total credit available under the revolving credit and the accounts receivable facilities, totaled $26.5$25.9 million at NovemberAugust 26, 2016.
On July 27, 2015.2016, the Corporation amended its accounts receivable facility. The amendment modified the accounts receivable facility to, among other things: (i) extend the scheduled termination date to July 27, 2018 and (ii) revise the bases upon which fees are assessed under this facility.
In March 2015 the Corporation made a voluntary prepayment of $65.0 million on the term loan facility, thereby eliminating all future quarterly installment payments prior to this facility’sits August 9, 2019 maturity date. As a result of this prepayment,During the six months ended August 28, 2015, the Corporation expensed an additional $1.8 million of unamortized financing fees inas a result of the current year first quarter.prepayment.
The total fair value of the Corporation’s publicly traded debt, which was considered a Level 1 valuation as it was based on quoted market prices, was $234.7$235.5 million (at a carrying value of $225.2 million), $238.2$229.6 million (at a carrying value of $225.2 million) and $238.0$234.1 million (at a carrying value of $225.2 million) at November 27, 2015,August 26, 2016, February 29, 2016 and August 28, 2015, respectively.
In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” ASU 2015-03 requires that all costs incurred to issue debt be presented in the balance sheet as a direct deduction from the carrying value of the debt, similar to the presentation of debt discounts. The Corporation adopted ASU 2015-03 effective March 1, 2016, on a retrospective basis, and Novemberaccordingly, debt issuance costs of $3.3 million and $3.6 million were reclassified from “Other assets” to “Long-term debt” on the Consolidated Statements of Financial Position at February 29, 2016 and August 28, 2014,2015, respectively.
The total fair value of the Corporation’s non-publicly traded debt, which was considered a Level 2 valuation as it was based on comparable privately traded debt prices, was $275.9$200.0 million (at a principal carrying value of $276.8$200.0 million), $251.8$185.0 million (at a principal carrying value of $254.3$185.0 million), and $369.6$240.5 million (at a principal carrying value of $373.0$241.0 million) at November 27, 2015,August 26, 2016, February 29, 2016 and August 28, 2015, and November 28, 2014, respectively.
In the prior year third quarter, the Corporation amended the Credit Agreement which provides for the term loan facility and revolving credit facility. As a result of this amendment and certain changes in the syndicated lending group, the Corporation expensed $1.9 million of unamortized financing fees and capitalized $1.1 million of new fees in the quarter ended November 28, 2014.
At November 27, 2015,August 26, 2016, the Corporation was in compliance with the financial covenants under its borrowing agreements.
Note 13 – Retirement Benefits
The components of net periodic benefit cost for the Corporation’s defined benefit pension and postretirement benefits plans are as follows:
Defined Benefit Pension Plans | Defined Benefit Pension Plans | |||||||||||||||||||||||||||||||
Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
November 27, | November 28, | November 27, | November 28, | August 26, | August 28, | August 26, | August 28, | |||||||||||||||||||||||||
(In thousands) | 2015 | 2014 | 2015 | 2014 | 2016 | 2015 | 2016 | 2015 | ||||||||||||||||||||||||
Service cost | $ | 231 | $ | 144 | $ | 549 | $ | 433 | $ | 219 | $ | 159 | $ | 405 | $ | 318 | ||||||||||||||||
Interest cost | 1,542 | 1,833 | 4,650 | 5,516 | 1,588 | 1,550 | 3,181 | 3,108 | ||||||||||||||||||||||||
Expected return on plan assets | (1,622 | ) | (1,617 | ) | (4,949 | ) | (4,868 | ) | (1,500 | ) | (1,659 | ) | (3,028 | ) | (3,327 | ) | ||||||||||||||||
Amortization of prior service cost | 1 | 582 | 3 | 584 | 1 | 1 | 2 | 2 | ||||||||||||||||||||||||
Amortization of actuarial loss | 861 | 710 | 2,555 | 2,136 | 904 | 846 | 1,777 | 1,694 | ||||||||||||||||||||||||
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$ | 1,013 | $ | 1,652 | $ | 2,808 | $ | 3,801 | $ | 1,212 | $ | 897 | $ | 2,337 | $ | 1,795 | |||||||||||||||||
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Postretirement Benefits Plan | ||||||||||||||||||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
August 26, | August 28, | August 26, | August 28, | |||||||||||||||||||||||||||||
(In thousands) | 2016 | 2015 | 2016 | 2015 | ||||||||||||||||||||||||||||
Service cost | $ | 86 | $ | 125 | $ | 172 | $ | 250 | ||||||||||||||||||||||||
Interest cost | 527 | 525 | 1,055 | 1,050 | ||||||||||||||||||||||||||||
Expected return on plan assets | (582 | ) | (675 | ) | (1,164 | ) | (1,350 | ) | ||||||||||||||||||||||||
Amortization of prior service credit | (174 | ) | (175 | ) | (349 | ) | (350 | ) | ||||||||||||||||||||||||
Amortization of actuarial gain | (367 | ) | (300 | ) | (734 | ) | (600 | ) | ||||||||||||||||||||||||
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$ | (510 | ) | $ | (500 | ) | $ | (1,020 | ) | $ | (1,000 | ) | |||||||||||||||||||||
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Postretirement Benefits Plan | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
November 27, | November 28, | November 27, | November 28, | |||||||||||||
(In thousands) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Service cost | $ | 1 | $ | 76 | $ | 251 | $ | 276 | ||||||||
Interest cost | 471 | 559 | 1,521 | 1,909 | ||||||||||||
Expected return on plan assets | (665 | ) | (762 | ) | (2,015 | ) | (2,162 | ) | ||||||||
Amortization of prior service credit | (174 | ) | (328 | ) | (524 | ) | (978 | ) | ||||||||
Amortization of actuarial gain | (676 | ) | (626 | ) | (1,276 | ) | (1,076 | ) | ||||||||
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$ | (1,043 | ) | $ | (1,081 | ) | $ | (2,043 | ) | $ | (2,031 | ) | |||||
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TheAs reported in its Annual Report on Form 10-K for the year ended February 29, 2016, prior to January 1, 2016, the Corporation currently sponsorssponsored a discretionary profit-sharing plan with a contributory 401(k) provision covering most of its United States employees. The expense attributable toUnder this arrangement, the profit sharing and employer matching 401(k) contributions amounted to $3.0 million and $8.9 million for the three and nine month periods ended November 27, 2015 ($3.0 million and $11.1 million for the three and nine month periods ended November 28, 2014), respectively. The expense for theCorporation made separate discretionary profit-sharing and 401(k) matching contributions is an estimate as the actual contributions are determinedannually, after fiscal year-end. year-end, depending on its financial results.
Effective January 1, 2016, the existing profit sharingprofit-sharing and 401(k) retirement savings plan was replaced with a safe harbor 401(k) arrangement. UnderPursuant to the new arrangement, the Corporation will increase its matching contributions beginningbecame non-discretionary, were increased, and are now made throughout the year, rather than on an annual basis. The increased matching contributions effectively replace the effective date and discontinue theCorporation’s discretionary profit-sharing componentcontributions, which were discontinued for fiscal years ending after February 29, 2016.
At November 27, 2015, February The 401(k) matching contributions for the three and six month periods ended August 26, 2016 were $3.4 million and $8.5 million, respectively, as compared to the combined expense attributable to the profit-sharing and 401(k) matching contributions for the three and six month periods ended August 28, 2015 of $3.0 million and November$5.9 million, respectively.
At August 26, 2016, February 29, 2016 and August 28, 2014,2015, the liability for postretirement benefits other than pensions was $19.8$18.9 million, $17.5$17.8 million and $20.6$19.2 million, respectively, and is included in “Other liabilities” on the Consolidated Statement of Financial Position. At November 27, 2015,August 26, 2016, February 29, 2016 and August 28, 2015, and November 28, 2014, the long-term liability for pension benefits was $76.9$77.9 million, $81.9$80.2 million and $74.8$78.6 million, respectively, and is included in “Other liabilities” on the Consolidated Statement of Financial Position.
Note 14 – Fair Value Measurements
Assets and liabilities measured at fair value are classified using the fair value hierarchy based upon the transparency of inputs 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:
The following table summarizes the financial assets and liabilities measured at fair value as of November 27, 2015:August 26, 2016:
(In thousands) | November 27, 2015 | Level 1 | Level 2 | Level 3 | August 26, 2016 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
Assets measured on a recurring basis: | ||||||||||||||||||||||||||||||||
Deferred compensation plan assets | $ | 12,090 | $ | 10,814 | $ | 1,276 | $ | — | $ | 11,914 | $ | 10,683 | $ | 1,231 | $ | — | ||||||||||||||||
Investment in equity securities | 42,000 | 42,000 | — | — | 59,338 | 59,338 | — | — | ||||||||||||||||||||||||
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$ | 54,090 | $ | 52,814 | $ | 1,276 | $ | — | $ | 71,252 | $ | 70,021 | $ | 1,231 | $ | — | |||||||||||||||||
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Liabilities measured on a recurring basis: | ||||||||||||||||||||||||||||||||
Deferred compensation plan liabilities | $ | 13,045 | $ | 10,814 | $ | 2,231 | $ | — | $ | 12,935 | $ | 10,683 | $ | 2,252 | $ | — | ||||||||||||||||
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The following table summarizes the assets and liabilities measured at fair value as of February 28, 2015:29, 2016:
(In thousands) | February 28, 2015 | Level 1 | Level 2 | Level 3 | February 29, 2016 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
Assets measured on a recurring basis: | ||||||||||||||||||||||||||||||||
Deferred compensation plan assets | $ | 12,745 | $ | 10,997 | $ | 1,748 | $ | — | $ | 11,158 | $ | 9,936 | $ | 1,222 | $ | — | ||||||||||||||||
Investment in equity securities | 33,230 | 33,230 | — | — | ||||||||||||||||||||||||||||
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$ | 44,388 | $ | 43,166 | $ | 1,222 | $ | — | |||||||||||||||||||||||||
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Liabilities measured on a recurring basis: | ||||||||||||||||||||||||||||||||
Deferred compensation plan liabilities | $ | 13,412 | $ | 10,997 | $ | 2,415 | $ | — | $ | 12,064 | $ | 9,936 | $ | 2,128 | $ | — | ||||||||||||||||
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The following table summarizes the assets and liabilities measured at fair value as of NovemberAugust 28, 2014:2015:
(In thousands) | November 28, 2014 | Level 1 | Level 2 | Level 3 | August 28, 2015 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
Assets measured on a recurring basis: | ||||||||||||||||||||||||||||||||
Deferred compensation plan assets | $ | 12,840 | $ | 10,932 | $ | 1,908 | $ | — | $ | 11,514 | $ | 10,236 | $ | 1,278 | $ | — | ||||||||||||||||
Investment in equity securities | 56,482 | 56,482 | — | — | ||||||||||||||||||||||||||||
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$ | 67,996 | $ | 66,718 | $ | 1,278 | $ | — | |||||||||||||||||||||||||
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Liabilities measured on a recurring basis: | ||||||||||||||||||||||||||||||||
Deferred compensation plan liabilities | $ | 13,783 | $ | 10,932 | $ | 2,851 | $ | — | $ | 12,425 | $ | 10,236 | $ | 2,189 | $ | — | ||||||||||||||||
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The deferred compensation plan includes investments in mutual funds and a money market fund. Assets held in mutual funds are recorded at fair value, which is considered a Level 1 valuation as it is based on each fund’s quoted market value per share in an active market. The money market fund is classified as Level 2 as substantially all of the fund’s investments are determined using amortized cost. The fair value of the deferred compensation plan liabilities is based on the fair value of: (i) the plan’s assets for invested deferrals and (ii) hypothetical investments for unfunded deferrals.
The investment in equity securities is considered a Level 1 valuation as it is based onupon a quoted price in an active market.
Note 15 - Contingency
The Corporation is presently involved in various judicial, administrative, regulatory and arbitrationregulatory proceedings concerning matters arising in the ordinary course of business, including but not limited to, employment and commercial disputes and other contractual matters.disputes. These matters are inherently subject to many uncertainties regarding the possibility of a loss to the Corporation. These uncertainties will ultimately be resolved when one or more future events occur or fail to occur, confirming the incurrence of a liability or reduction of a liability. In accordance with ASC Topic 450, “Contingencies,” the Corporation accrues for these contingencies by a charge to income when it is both probable that one or more future events will occur confirming the fact of a loss and the amount of the loss can be reasonably estimated. This accrual is included in “Accrued liabilities” on the Consolidated Statement of Financial Position. Due to this uncertainty, the actual amount of any loss may ultimately prove to be larger or smaller than the amounts reflected in the Corporation’s Consolidated Financial Statements. Some of these proceedings are at preliminary stages and some of these casesproceedings seek an indeterminate amount of damages.
Al Smith et al. v. American Greetings Corporation. On June 4, 2014, Al Smith and Jeffrey Hourcade, former fixture installation crew members for special projects, individually and on behalf of those similarly situated, filed a putative class action lawsuit against American Greetings Corporation in the U.S. District Court for the Northern District of California, San Francisco Division. Plaintiffs claim that the Corporation violated certain rules under the Fair Labor Standards Act and California law, including the California Labor Code and Industrial Welfare Commission Wage Orders. For themselves and the proposed classes, plaintiffs seek an unspecified amount of general and special damages, including but not limited to minimum wages, agreed upon wages and overtime wages, statutory liquidated damages, statutory penalties (including penalties under the California Labor Code Private Attorney General Act of 2004 (“PAGA”), unpaid benefits, reasonable attorneys’ fees and costs, and interest). In addition, plaintiffs request disgorgement of all funds the Corporation acquired by means of any act or practice that constitutes unfair competition and restoration of such funds to the plaintiffs and the proposed classes. On November 6, 2014, plaintiffs filed a Second Amended Complaint to add claims for reimbursement of business expenses and failure to provide meal periods in violation of California Law and on December 12, 2014, amended their PAGA notice to include the newly added claims.
On January 20, 2015, the parties reached a settlement in principle that, if approved by the Court, will fully and finally resolve the claims brought by Smith and Hourcade, as well as the classes they seek to represent. The settlement was a product of extensive negotiations and a private mediation, which was finalized and memorialized in a Stipulation and Class Action Settlement Agreement signed March 30, 2015. On March 31, 2015, plaintiffs filed a Motion for Preliminary Approval of Class Action Settlement and on July 23, 2015, the Court entered its Order Granting Preliminary Approval of Class Action Settlement.
The proposed settlement establishes a settlement fund of $4.0 million to pay claims from current and former employees who worked at least one day for American Greetings Corporation and/or certain of its subsidiaries in any hourly non-exempt position in California between June 4, 2010 and July 23, 2015. On August 24, 2015, the claims administrator commenced mailing of notice and claim forms to class members and the claims closed October 24, 2015. On October 14, 2015,plaintiffs filed a motion for final approval of the class settlement, together with their motion for approval of incentive payments to the Named Plaintiffs and attorneys’ fees. The Court held a final approval hearing on December 17, 2015. If the settlement is finally approved, American Greetings will fund the settlement within twenty (20) days after passage of all appeal periods. Thereafter, the settlement funds will be disbursed as provided in the settlement agreement and the Court’s orders.
Michael Ackerman v. American Greetings Corporation, et al. On March 6, 2015, plaintiff Michael Ackerman, individually and on behalf of others similarly situated, filed a putative class action lawsuit in the United States District Court of New Jersey alleging violation of the Telephone Consumer Protection Act (“TCPA”) by American Greetings Corporation and its subsidiary, AG Interactive, Inc. The plaintiff claims that defendants (1) sent plaintiff an unsolicited text message notifying plaintiff that he had received an ecard; and (2) knowingly and/or willfully violated the TCPA, which prohibits unsolicited automated or prerecorded telephone calls, including faxes and text messages, sent to cellular telephones. Plaintiff seeks to certify a nationwide class based on unsolicited text messages sent by defendants during the period February 8, 2011 through February 8, 2015. The plaintiff seeks damages in the statutory amount of $500 for each and every violation of the TCPA and $1,500 for each and every willful violation of the TCPA. The Corporation believes the plaintiff’s allegations in this lawsuit are without merit and intends to defend the action vigorously.
With respect to theAckerman case, management is unable to estimate a range of reasonably possible losses as (i) the aggregate damages have not been specified, (ii) the proceeding is in the early stages, (iii) there is uncertainty as to the outcome of pending and anticipated motions, and/or (iv) there are significant factual issues to be resolved. However, management does not believe, based on currently available information, that the outcome of this proceeding will have a material adverse effect on the Corporation’s business, consolidated financial position or results of operations, although the outcome could be material to the Corporation’s operating results for any particular period, depending, in part, upon the operating results for such period.
Note 16 – Income Taxes
The Corporation’s provision for income taxes in interim periods is computed by applying its estimated annual effective tax rate against income before income tax expense for the period. In addition, non-recurring or discrete items are recorded during the period in which they occur. The magnitude of the impact that discrete items have on the Corporation’s quarterly effective tax rate is dependent on the level of income in the period. The effective tax rate was 31.5%32.5% and 32.6% for the three and six months ended August 26, 2016, respectively, and 21.0% and 31.7% for the three and ninesix months ended November 27,August 28, 2015, respectively, and 35.7% and 27.6%respectively. The lower than U.S. statutory rate for the three and nine monthssix month periods ended November 28, 2014, respectively.August 26, 2016 is primarily related to the domestic production activities deduction, tax treatment of corporate-owned life insurance and lower tax rates in foreign jurisdictions, partially offset by state income tax rates on U.S. income, net of federal benefit. The lower than statutory rate forin the current periods wasprior period is primarily related to the release of a $4.3 million unrecognized tax benefit due to the issuance of regulations that clarified the law and the expiration of a statute of limitations, as well as the impact of lower tax rates in foreign jurisdictions, the domestic production activities deduction and the tax treatment of corporate-owned life insurance and federal provision to return adjustments. The lower than statutory rateinsurance.
As reported in the prior nine month period was due primarily to the recording of a net $4.1 million federal tax refund and related interest, attributable to fiscal 2000 and the error corrections recorded in accordance with ASC Topic 250, Accounting Changes and Error Corrections. The net impact of the error corrections was a reduction to income tax expense of $4.1 million. During the first quarter of fiscal 2015, the Corporation identified and corrected errors in the accountingits Annual Report on Form 10-K for income taxes that related to the year ended February 28, 2014. These errors primarily related to the Corporation’s failure to consider all sources of available taxable income when assessing the need for29, 2016, a valuation allowance against certain deferred tax assets and the recognition ofpreviously nonmarketable investment established a liability for an uncertain tax position. These errors werereadily determinable fair value as the result of the significant complexity created as a result of the going private transaction in fiscal 2014.
As discussed in Note 7,investment’s successfully completed initial public offering. Therefore, the Corporation recorded an adjustmentbegan recording adjustments to mark to marketmark-to-market the value of one of its investments as of November 27, 2015. As a result,this investment. Consequently, a decrease in the Corporation’s deferred tax assets in the amount of $16.4$10.0 million and $22.0 million was recognized in other comprehensive income for the nine monthssix month periods ended August 26, 2016 and August 28, 2015, respectively.
In November 27, 2015.2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” which simplifies the presentation of deferred income taxes. This ASU requires that deferred tax assets and liabilities be classified as non-current in a statement of financial position. The Corporation early adopted ASU 2015-17 during the fourth quarter of 2016 on a prospective basis. Adoption of ASU 2015-17 resulted in a reclassification of the Corporation’s net current deferred tax asset to the net non-current deferred tax asset in the Corporation’s Consolidated Statement of Financial Position as of February 29, 2016. No prior periods were retrospectively adjusted.
At November 27, 2015,As of August 26, 2016, the Corporation had unrecognized tax benefits of $16.8$17.1 million that, if recognized, would have a favorable effect on the Corporation’s income tax expense of $15.2$15.4 million. It is reasonably possible that the Corporation’s unrecognized tax positions as of November 27, 2015August 26, 2016 could decrease $2.0$1.4 million during the next twelve months due to tax law changes (i.e. passagethe expiration of The Protecting Americans from Tax Hikes (PATH) Act, signed into law on December 18, 2015, which is also referred to as the “extenders package.”) and anticipated settlements and resulting cash payments related to tax years which are open to examination.statute of limitations.
The Corporation recognizes interest and penalties accrued on unrecognized tax benefits and refundable income taxes as a component of income tax expense. During the ninesix months ended November 27, 2015,August 26, 2016, the Corporation recognized a net benefitexpense of $1.2$0.2 million for interest and penalties on unrecognized tax benefits and refundable income taxes. As of November 27, 2015,August 26, 2016, the total amount of gross accrued interest and penalties related to unrecognized tax benefits less refundable income taxes was a net payable of $1.6$1.8 million.
TheWith few exceptions, the Corporation is subject to examination byin the Internal Revenue Service for tax years 2010 to the presentU.S. and various U.S. state and local jurisdictions for tax years 20012010 to the present. The Corporation is currently under examination by the Internal Revenue Service for the 2010 and 2011 tax years. The Corporation is also subject to tax examinationsexamination in various international tax jurisdictions including Canada, the United Kingdom, Australia, Italy, Mexico and New Zealand for tax years 20062011 to the present.
Note 17 – Related Party Information
World headquarters relocationHeadquarters Relocation
In May 2011, the Corporation announced that it will be relocating its world headquarters to a new location in the City of Westlake, Ohio, in a mixed-use development known as Crocker Park (the “Crocker Park Development”), which offers a vibrant urban setting, with retail stores and restaurants, offices and apartments. After putting the project on hold pending the outcome of the going private transaction, the Corporation announced plans in October 2013 to resume the project and, on March 26, 2014, the Corporation purchased from Crocker Park, LLC, the owner of the Crocker Park Development, 14.48 acres of land at the south end of the Crocker Park Development (the “Crocker Park Site”) on which the new world headquarters will be built. The purchase price for the land was $7.4 million (based on a per acre price of $510 thousand)$0.5 million). Morry Weiss, the Chairman of the boardBoard of the Corporation, Zev Weiss and Jeffrey Weiss, directors and the Co-Chief Executive Officers of the Corporation, and Gary and Elie Weiss, directors and non-executive officers of the Corporation, together with members of their family (collectively, the “Weiss Family”), indirectly own a minority stake in Crocker Park, LLC through their indirect ownership of approximately 37% of the membership interests in Crocker Park, LLC. In addition, Morry Weiss and other members of the Weiss Family have guaranteed certain of Crocker Park, LLC’s obligations, and are expected to guarantee additionalincluding obligations of Crocker Park, LLC, incurred in connection with the Crocker Park Development. The authority to conduct, manage and control the business of Crocker Park, LLC, including operating the Crocker Park Development and the decision whether to sell the Crocker Park Site to American Greetings,the Corporation, was reserved to the manager of Crocker Park, LLC. The manager of Crocker Park, LLC who is not an affiliate of the Weiss Family, and whobut is an affiliate of Stark Enterprises, Inc.
The Corporation is leasing a portion of the Crocker Park Site to H L & L, which is constructing the new world headquarters building on the Crocker Park Site, and when complete,beginning in the third quarter of fiscal 2017 will subleaselease the new world headquarters building back to the Corporation. In addition, to accommodate additional office needs, H L & L is constructing an additional approximately 60,000 square foot building (“Tech West” and, together with the world headquarters building, the “Creative Studios Buildings”) adjacent to the world headquarters building and a surface parking lot (“Surface Lot”) on land that it is leasing from the Corporation. The Corporation has also entered into an operating leaseslease to lease these buildingsthe Tech West building and Surface Lot from H L & L, which are anticipated to be available for occupancyalso beginning in calendar year 2016.the third quarter of fiscal 2017. The initial lease terms are fifteen years and will begin upon occupancy. The totalthe annual rent is expected to be approximately $10.6 million. See Note 11 for further information.
Although the majority of the costs to construct the new world headquarters is expected to bewas financed through H L & L, due to the inherent difficulty in estimating costs associated with projects of this scale and nature, the costs associated with this project may behave been higher than expected and the Corporation may have had to dedicate additional funds to the project, including providing additional funds to H L & L. As a result, effective as of December 1, 2014, the Corporation entered into a loan agreement with H L & L under which the Corporation may from time to time make revolving loans to H L & L. Loans made to H L & L under this agreement may only be used to fund construction costs associated with the world headquarters project and the maximum principal and market-rate interest that may be outstanding as of any given time under this loan agreement may not exceed $9$9.0 million. As of November 27, 2015, there was a balance of $1.3 millionThere were no amounts outstanding under this loan agreement. There were no borrowings outstandingagreement as of August 26, 2016, February 29, 2016 and August 28, 2015.
Transactions with Parent Companies and Other Affiliated Companies
From time to time employees of the Corporation may provide services to its parent companies as well as companies that are owned or controlled by members of the Weiss Family, in each case provided that such services do not interfere with the Corporation’s employees’ ability to perform services on its behalf. When providing such services, the affiliated companies reimburse the Corporation for such services, based on the costs of employing the individual (including salary and benefits) and the amount of time spent by such employee in providing services to the affiliated company.
The Corporation paid cash dividends in the aggregate amount of $20.7$13.9 million to Century Intermediate Holding Company (“Parent”), its parent and sole shareholder during the ninesix months ended November 27, 2015, $13.9 million of which
wasAugust 26, 2016, for the sole purpose of paying interest on the $285.0 million aggregate principal amount 9.75%9.750%/10.50%10.500% Senior PIK Toggle Notes due 2019, (the “PIK” notes) which were issued by Century Intermediate Holding Company 2, an indirect parent of American Greetings. During the prior year nine month period ended November 28, 2014 the Corporation paid cash dividends in the aggregate amount of $24.2 million, $14.3 million of which was for the purpose of paying interest on the PIK notes.Corporation.
The Corporation, its parent companiesParent and certain of their subsidiaries and affiliates, file a consolidated U.S. federal income tax return. The Corporation pays all taxes on behalf of the group included in this consolidated federal income tax return. Pursuant to this tax sharing arrangement, netthere was $0.3 million due from affiliates at August 26, 2016 and February 29, 2016 and no amounts due to or due from affiliates totaled $10.2 million as of November 27, 2015 and $1.9 million as of FebruaryAugust 28, 2015.
Note 18 – Business Segment Information
The Corporation hasoperates in five business segments: North American Social Expression Products, International Social Expression Products, Retail Operations, AG Interactive and Non-reportable segments.Non-reportable. The North American Social Expression Products segment primarily designs, manufactures and sells greeting cards and other related products through various channels of distribution with mass merchandising as the primary channel. The International Social Expression Products segment primarily designs and sells greeting cards and other related products through various channels of distribution and is located principally in the United Kingdom, Australia and New Zealand. At November 27, 2015,August 26, 2016, the Retail Operations segment operated 405393 card and gift retail stores in the United Kingdom. The stores sell products purchased from the International Social Expression Products segment as well as products purchased from other vendors. AG Interactive distributes social expression products, including electronic greetings and a broad range of graphics and digital services and products, through a variety of electronic channels, including Web sites, Internet portals and electronic mobile devices. The Corporation’s Non-reportable operating segment primarily includes licensing activities and, prior to the disposition of AGI In-Store on August 29, 2014, the design, manufacture and sale of display fixtures. See Note 4 for further information.activities.
Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
(In thousands) | November 27, 2015 | November 28, 2014 | November 27, 2015 | November 28, 2014 | August 26, 2016 | August 28, 2015 | August 26, 2016 | August 28, 2015 | ||||||||||||||||||||||||
Total Revenue: | ||||||||||||||||||||||||||||||||
North American Social Expression Products | $ | 348,394 | $ | 360,704 | $ | 969,554 | $ | 966,751 | $ | 270,769 | $ | 285,556 | $ | 593,229 | $ | 621,160 | ||||||||||||||||
International Social Expression Products | 83,906 | 96,424 | 211,932 | 239,914 | 48,296 | 65,858 | 98,882 | 128,026 | ||||||||||||||||||||||||
Intersegment items | (27,490 | ) | (28,234 | ) | (49,089 | ) | (49,533 | ) | (11,753 | ) | (11,286 | ) | (25,334 | ) | (21,599 | ) | ||||||||||||||||
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Net | 56,416 | 68,190 | 162,843 | 190,381 | 36,543 | 54,572 | 73,548 | 106,427 | ||||||||||||||||||||||||
Retail Operations | 62,279 | 64,398 | 199,590 | 213,303 | 55,149 | 65,503 | 120,561 | 137,311 | ||||||||||||||||||||||||
AG Interactive | 14,420 | 15,149 | 41,586 | 44,093 | 13,112 | 13,736 | 26,043 | 27,166 | ||||||||||||||||||||||||
Non-reportable segment | 2,522 | 5,617 | 4,929 | 35,539 | ||||||||||||||||||||||||||||
Non-reportable | 1,440 | 1,661 | 2,940 | 2,407 | ||||||||||||||||||||||||||||
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$ | 484,031 | $ | 514,058 | $ | 1,378,502 | $ | 1,450,067 | $ | 377,013 | $ | 421,028 | $ | 816,321 | $ | 894,471 | |||||||||||||||||
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Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
(In thousands) | November 27, 2015 | November 28, 2014 | November 27, 2015 | November 28, 2014 | August 26, 2016 | August 28, 2015 | August 26, 2016 | August 28, 2015 | ||||||||||||||||||||||||
Segment Earnings (Loss) Before Tax: | ||||||||||||||||||||||||||||||||
North American Social Expression Products | $ | 31,123 | $ | 37,613 | $ | 150,459 | $ | 134,807 | $ | 37,627 | $ | 46,209 | $ | 97,772 | $ | 119,336 | ||||||||||||||||
International Social Expression Products | 1,765 | 8,547 | (3,294 | ) | 12,303 | (1,394 | ) | (49 | ) | (2,505 | ) | (5,059 | ) | |||||||||||||||||||
Intersegment items | (3,012 | ) | (5,362 | ) | (1,382 | ) | (7,102 | ) | 148 | 879 | (526 | ) | 1,630 | |||||||||||||||||||
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Net | (1,247 | ) | 3,185 | (4,676 | ) | 5,201 | (1,246 | ) | 830 | (3,031 | ) | (3,429 | ) | |||||||||||||||||||
Retail Operations | (11,641 | ) | (16,578 | ) | (32,399 | ) | (35,181 | ) | (10,693 | ) | (12,615 | ) | (18,155 | ) | (20,758 | ) | ||||||||||||||||
AG Interactive | 5,198 | 6,131 | 15,345 | 17,507 | 3,926 | 5,276 | 8,134 | 10,147 | ||||||||||||||||||||||||
Non-reportable segment | 264 | 5,080 | 59,677 | 7,789 | ||||||||||||||||||||||||||||
Non-reportable | (438 | ) | (934 | ) | (374 | ) | 59,413 | |||||||||||||||||||||||||
Unallocated | ||||||||||||||||||||||||||||||||
Interest expense | (6,467 | ) | (9,533 | ) | (21,066 | ) | (27,782 | ) | (5,940 | ) | (6,486 | ) | (11,537 | ) | (14,599 | ) | ||||||||||||||||
Profit-sharing and 401(k) match expense | (3,000 | ) | (2,988 | ) | (8,931 | ) | (11,079 | ) | ||||||||||||||||||||||||
401(k) match and profit-sharing expense | (3,425 | ) | (3,020 | ) | (8,486 | ) | (5,931 | ) | ||||||||||||||||||||||||
Corporate overhead expense | (4,670 | ) | (5,388 | ) | (6,518 | ) | 16,203 | (4,537 | ) | 1,738 | (9,801 | ) | (1,848 | ) | ||||||||||||||||||
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(14,137 | ) | (17,909 | ) | (36,515 | ) | (22,658 | ) | (13,902 | ) | (7,768 | ) | (29,824 | ) | (22,378 | ) | |||||||||||||||||
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$ | 9,560 | $ | 17,522 | $ | 151,891 | $ | 107,465 | $ | 15,274 | $ | 30,998 | $ | 54,522 | $ | 142,331 | |||||||||||||||||
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“Corporate overhead expense” includes costs associated with corporate operations including, among other costs, senior management, corporate finance, legal, and insurance programs. For the three and six month periods ended August 26, 2016, this includes income recognized from state tax credits of $1.1 million and $2.1 million, respectively, as compared to $6.5 million for both the three and six month periods ended August 28, 2015. See Note 6 for further information.
For the ninesix months ended November 27,August 28, 2015, Non-reportable segment earnings includesincluded a net gain of $61.2$61.6 million from the sale of Strawberry Shortcake. See Note 4 for further information.
For both the three and nine month periods ended November 27, 2015, “Corporate overhead expense” includes income recognized from state tax credits of $1.0 million and $7.5 million, respectively. See Note 6 for further information.
For both the three and nine month periods ended November 28, 2014, “Corporate overhead expense” included interest income of $2.5 million related to the Clinton Cards liquidation. See Note 6 for further information.
For both the three and nine month periods ended November 27, 2015, “Corporate overhead expense” includes an adjustment to the net gain recognized on the prior year sale of AGI In-Store of ($1.1) million. For the nine months ended November 28, 2014, “Corporate overhead expense” included a net gain on sale of AGI In-Store of $38.7 million. See Note 4 for further information.
During the prior year second quarter, the Corporation sold its current world headquarters location and incurred a non-cash loss on disposal of $15.5 million, of which $13.3 million was recorded within the North American Social Expression Products segment and $2.2 million was recorded in “Corporate overhead expense”. See Note 4 for further information
Termination Benefits
Termination benefits are primarily considered part of an ongoing benefit arrangement, accounted for in accordance with ASC Topic 712, “Compensation – Nonretirement Postemployment Benefits,” and are recorded when payment of the benefits is probable and can be reasonably estimated.
The balance of the severance accrual was $3.1$2.6 million, $4.3$3.5 million and $4.5$2.1 million at November 27, 2015,August 26, 2016, February 29, 2016 and August 28, 2015, and November 28, 2014, respectively. The payments expected within the next twelve months are included in “Accrued liabilities” while the remaining payments beyond the next twelve months are included in “Other liabilities” on the Consolidated Statement of Financial Position.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, seestatements. 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
ThirdSecond Quarter Results of Operations
Total revenue for the current year thirdsecond quarter was $484.0$377.0 million, a decrease of $30.0$44.0 million, or 5.8%10.5%, compared to the prior year period. This decrease was primarily the result of lower greeting card and other ancillary productdecreased sales of $16 million,greeting cards, gift packaging and party goods, as well as an unfavorable foreign currency translation impact of approximately $13 million. Excluding the unfavorable impact of foreign currency translation, of approximately $12 millionthe lower revenue was primarily within the North American Social Expression Products and lower revenues for our Non-reportable segment due to the sale of our Strawberry Shortcake property (“Strawberry Shortcake”) at the beginning of the current year first quarter.International Social Expression Products segments.
ThirdSecond quarter operating income was $17.6$21.7 million, a decrease of $7.8$15.7 million compared to the same period in the prior year. The decrease is primarily duecurrent and prior year quarters include income of $1.1 million and $6.5 million, respectively, from tax credits received from the State of Ohio to maintain our world headquarters in Ohio. Net of the year-over-year impact of the lower revenues noted above and by higher product content and production expenses. All operating segments experienced lower operating income intax credits, the current year quarter compared to the prior year, except the Retail Operations segment, which decreased its loss as a result of lower operating expenses.
Recent Results
remaining earnings decrease was primarily within our North American Social Expression Products Segment
While Christmas seasonal cards sales within our third quarter results were down compared to the prior year, we are encouragedsegment driven by positive trends that we are seeing from preliminary point of sale (“POS”) data that we are receiving subsequent to quarter end from some of our North American customers related to Christmas seasonal cards. Based primarily on the preliminary POS data that we have received from customers representing approximately 89% of our North American greeting cards sales for Christmas as measured against prior year Christmas sales, we believe that our North American Christmas greeting card sales are trending favorably versus the prior Christmas season at about a 2% increase. While we are cautiously optimistic given this early information, these estimates of sales performance are based on preliminary POS data provided by our customers, which are not subject to accounting controls and are therefore subject to change based on our actual results for the 2015 Christmas seasonal card program.
International Social Expression Products Segment
For the month of December, based on preliminary results, total revenue within our International Social Expression Products segment, excluding the impact of eliminating intercompany sales to the Retail Operations segment and the impact of foreign currency exchange movements, decreased approximately 7% compared to the prior year month.
Retail Operations Segment
Subsequent to the end of the third quarter, based on preliminary results, net sales at stores open one year or more were up 0.4% compared to the same period in the prior year.lower sales.
Results of Operations
Three months ended November 27,August 26, 2016 and August 28, 2015 and November 28, 2014
Net income was $6.6$10.3 million in the thirdsecond quarter compared to $11.3$24.5 million in the prior year period.
Our results for the three months ended November 27,August 26, 2016 and August 28, 2015 and November 28, 2014 are summarized below:
(Dollars in thousands) | 2015 | % Total Revenue | 2014 | % Total Revenue | 2016 | % Total Revenue | 2015 | % Total Revenue | ||||||||||||||||||||||||
Net sales | $ | 480,700 | 99.3 | % | $ | 508,006 | 98.8 | % | $ | 374,748 | 99.4 | % | $ | 418,611 | 99.4 | % | ||||||||||||||||
Other revenue | 3,331 | 0.7 | % | 6,052 | 1.2 | % | 2,265 | 0.6 | % | 2,417 | 0.6 | % | ||||||||||||||||||||
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Total revenue | 484,031 | 100.0 | % | 514,058 | 100.0 | % | 377,013 | 100.0 | % | 421,028 | 100.0 | % | ||||||||||||||||||||
Material, labor and other production costs | 238,496 | 49.3 | % | 249,518 | 48.5 | % | 159,214 | 42.2 | % | 177,985 | 42.3 | % | ||||||||||||||||||||
Selling, distribution and marketing expenses | 169,001 | 34.9 | % | 175,039 | 34.1 | % | 142,061 | 37.7 | % | 153,641 | 36.5 | % | ||||||||||||||||||||
Administrative and general expenses | 59,443 | 12.3 | % | 64,829 | 12.6 | % | 55,797 | 14.8 | % | 59,365 | 14.1 | % | ||||||||||||||||||||
Other operating income – net | (481 | ) | (0.1 | %) | (699 | ) | (0.1 | %) | (1,741 | ) | (0.4 | %) | (7,309 | ) | (1.7 | %) | ||||||||||||||||
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Operating income | 17,572 | 3.6 | % | 25,371 | 4.9 | % | 21,682 | 5.7 | % | 37,346 | 8.8 | % | ||||||||||||||||||||
Interest expense | 6,467 | 1.3 | % | 9,533 | 1.8 | % | 5,940 | 1.6 | % | 6,486 | 1.5 | % | ||||||||||||||||||||
Interest income | (64 | ) | (0.0 | %) | (2,517 | ) | (0.5 | %) | (230 | ) | (0.1 | %) | (84 | ) | (0.0 | %) | ||||||||||||||||
Other non-operating expense – net | 1,609 | 0.3 | % | 833 | 0.2 | % | ||||||||||||||||||||||||||
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Other non-operating expense (income) – net | 698 | 0.2 | % | (54 | ) | (0.0 | %) | |||||||||||||||||||||||||
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Income before income tax expense | 9,560 | 2.0 | % | 17,522 | 3.4 | % | 15,274 | 4.0 | % | 30,998 | 7.3 | % | ||||||||||||||||||||
Income tax expense | 3,010 | 0.6 | % | 6,261 | 1.2 | % | 4,970 | 1.3 | % | 6,518 | 1.5 | % | ||||||||||||||||||||
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Net income | $ | 6,550 | 1.4 | % | $ | 11,261 | 2.2 | % | $ | 10,304 | 2.7 | % | $ | 24,480 | 5.8 | % | ||||||||||||||||
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For the three months ended November 27, 2015,August 26, 2016, consolidated net sales were $480.7$374.7 million, down from $508.0$418.6 million in the prior year thirdsecond quarter. This 5.4%10.5%, or $27.3$43.9 million, decrease was driven by lower sales of greetingsgreeting cards of approximately $13$23 million, the unfavorable impact of foreign currency translation of approximately $12$13 million, and lower sales of other ancillary products of $3 million, minimally offset by the favorable impact of fewer SBT implementationsgift packaging and party goods of approximately $1$9 million. The unfavorable impact of SBT implementations in the current year third quarter was $0.7 million.
Other revenue, primarily royalty revenue from our character properties, decreased $2.7 million during the three months ended November 27, 2015. In March 2015, we completed the sale of Strawberry Shortcake. As such, royalty revenueincludes a nominal impact related to Strawberry Shortcake forscan-based trading (“SBT”) implementations, which is favorable to the prior year three month period does not have a comparative amount in the current year.quarter by approximately $1.5 million.
Wholesale Unit and Pricing Analysis for Greeting Cards
Unit and pricing comparatives (on a sales less returns basis), excluding intercompany eliminations and the impact of foreign currency translation, for the three months ended November 27,August 26, 2016 and August 28, 2015 and November 28, 2014 are summarized below:
Increase (Decrease) From the Prior Year | Increase (Decrease) From the Prior Year | |||||||||||||||||||||||||||||||||||||||||||||||
Everyday Cards | Seasonal Cards | Total Greeting Cards | Everyday Cards | Seasonal Cards | Total Greeting Cards | |||||||||||||||||||||||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | 2015 | 2014 | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||||||||||||||||||
Unit volume | (4.3 | %) | 2.0 | % | (7.8 | %) | (4.3 | %) | (5.1 | %) | 0.5 | % | (7.2 | %) | (1.1 | %) | (10.5 | %) | 10.9 | % | (7.7 | %) | 1.2 | % | ||||||||||||||||||||||||
Selling prices | 1.5 | % | 4.8 | % | 4.8 | % | (2.6 | %) | 2.2 | % | 3.0 | % | 2.6 | % | 2.0 | % | 4.2 | % | (1.1 | %) | 2.9 | % | 1.4 | % | ||||||||||||||||||||||||
Overall increase / (decrease) | (2.9 | %) | 6.9 | % | (3.3 | %) | (6.8 | %) | (3.0 | %) | 3.6 | % | (4.8 | %) | 0.9 | % | (6.7 | %) | 9.6 | % | (5.1 | %) | 2.6 | % |
During the thirdsecond quarter, combined everyday and seasonal greeting card sales less returns decreased 3.0%5.1% compared to the prior year quarter, including a decrease in unit volume of 5.1%7.7%, partially offset by an increase in selling prices of 2.2%2.9%. The overall decrease inwas driven by decreased unit volume was experiencedvolumes in both everyday and seasonal greeting cards in both the North American Social Expression Products and International Social Expression Products segments. Likewise, the overall increase in selling price was experienced in both everyday and seasonal greeting cards in both the North American Social Expression Products and International Social Expression Products segments.
Everyday card sales less returns for the third quarter decreased 2.9% due to a decrease in unit volume of 4.3%, partially offset by an increase in selling prices of 1.5%. The selling price increase was driven by general price increases and favorable product mix within the product lines, which more than offset the impact of continued unfavorable shift to a higher proportion of value cards. The unit volume decline was primarily driven by soft retail productivity in both the North American Social Expression Products and International Social Expression Products segments during the quarter.
Seasonal card sales less returns decreased 3.3% during the third quarter, including a 7.8% decrease in unit volume and a 4.8% increase in selling price. Both the decrease in unit volume and the increase in selling price for the quarter were driven by our Christmas program in both our North American Social Expression Products and International Social ExpressionExpressions Products segments. Within the Christmas program, approximately 45% of the unit shortfall and a meaningful amount of thesegments, partially offset by an increase in average price sold are related to a customerselling prices in both the value channel that implemented SBT subsequent toeveryday and seasonal greeting cards in our International Social Expressions Products segment.
Everyday card sales less returns during the prior year third quarter, which impacts the timing of current year salesthree months ended August 26, 2016 decreased 4.8% compared to the prior year quarter. Relatedquarter primarily due to this customer, we expect this timing will reversedecreased unit volume experienced in the fourth quarter.International Social Expression Products segment that was partially offset by selling price increases. The lower unit volume in the International Social Expression Products segment was primarily the continuation of the reduced distribution to a significant customer.
Seasonal card sales less returns decreased 6.7% during the second quarter, including a 10.5% decrease in unit volume, offset by an increase in selling price of 4.2%. Due to the fact that the second quarter has the fewest holidays, the impact of changes in selling price and unit volume appear large on a percentage basis, compared to other quarters. The decrease in unit volume was primarily driven by the Father’s Day program in our International Social Expression Products segment, primarily due to the continuation of the reduced distribution to a significant customer, as well as the Father’s Day and Fall programs in our North American Social Expression Products segment. The selling price increase was primarily driven by the Father’s Day program in our International Social Expression Products segment and the Fall program in our North American Social Expression Products segment.
Expense Overview
Material, labor and other production costs (“MLOPC”) for the three months ended November 27, 2015August 26, 2016 were $238.5$159.2 million, compared to $249.5$178.0 million in the prior year three months. As a percentage of total revenue, these costs were 49.3%42.2% in the current period compared to 48.5%42.3% for the three months ended NovemberAugust 28, 2014.2015. The $11.0$18.8 million dollar decrease was primarily due to the impact of lower sales volume and favorable product mix in the wholesale card business of approximately $12 million, the favorable impact of foreign currency translation of approximately $6$7 million lower sales volume and favorable product mix, partially offset byproduction expenses of approximately $5 million. Partially offsetting these decreases were higher scrap expenses of approximately $3 million and higher product content and production expenses in the current year third quarter.costs of approximately $2 million.
Selling, distribution and marketing (“SDM”) expenses for the three months ended November 27, 2015August 26, 2016 were $169.0$142.1 million, decreasing $6.0$11.5 million from $175.0$153.6 million in the prior year thirdsecond quarter. As a percentage of total revenue, these costs were 34.9%37.7% in the current period compared to 34.1%36.5% for the prior year period. The dollar decrease in the current year thirdsecond quarter was driven by the favorable impact of foreign currency translation of approximately $6$7 million, lower expenses in our Retail Operations segment of approximately $3 million, and other cost savings of approximately $1 million.
Administrative and general expenses were $55.8 million for the three months ended August 26, 2016, a decrease of $3.6 million from $59.4 million for the three months ended November 27, 2015, a decrease of $5.4 million from $64.8 million for the three months ended NovemberAugust 28, 2014.2015. This decrease was driven primarily by lower retail expensestechnology costs, predominantly related to our information technology systems refresh project of approximately $3$2 million, the elimination of expenses related to the former stock compensation program,and the favorable impact of foreign currency translation and other general cost savings, all of which are each approximately $1 million, offset by higher ERP related expenses of approximately $1 million.
Other operating income – net was $0.5$1.7 million for the three months ended November 27, 2015August 26, 2016 compared to $0.7$7.3 million for the quarter ended November 28, 2014.prior year second quarter. The current year included an adjustment to the gain recorded on the sale of AGI In-storeperiod includes income of $1.1 million offset by income of $1.0compared to $6.5 million in the prior year period, from tax credits received from the State of Ohio under certain incentive programs made available to us in connection with our decision to maintain our world headquarters in the state of Ohio.
Interest income was $0.1 million for the three months ended November 27, 2015 compared to $2.5 million for the quarter ended November 28, 2014. During the third quarter of the prior year, as part of the Clinton Cards bankruptcy administration, we received a cash distribution as part of the liquidation process that included $2.5 million of interest on our senior secured debt of Clinton Cards that was previously not expected to be received.
The effective tax rate was 31.5%32.5% and 35.7%21.0% for the three months ended November 27,August 26, 2016 and August 28, 2015, and November 28, 2014, respectively. The lower than statutory rate for the current period is primarily related to provision to return adjustments, reducedthe domestic production activities deduction, tax treatment of corporate-owned life insurance and lower tax rates in foreign jurisdictions, partially offset by a changestate income tax rates on U.S. income, net of federal benefit. The lower than statutory rate in the prior period was primarily related to the mixrelease of estimated earnings between United Statesa $4.3 million unrecognized tax benefit due to the issuance of regulations that clarified the law and the expiration of a statute of limitations, as well as the impact of lower tax rates in foreign jurisdictions, resulting in higher state taxesdomestic production activities deduction and a lower foreign statutory rate benefit and an increase in the valuation allowance against foreign tax credit carryforwards.treatment of corporate-owned life insurance.
Results of Operations
NineSix months ended November 27,August 26, 2016 and August 28, 2015 and November 28, 2014
Net income was $103.8$36.8 million in the ninesix months ended November 27, 2015August 26, 2016 compared to $77.8$97.2 million in the prior year ninesix months.
Our results for the ninesix months ended November 27,August 26, 2016 and August 28, 2015 and November 28, 2014 are summarized below:
(Dollars in thousands) | 2015 | % Total Revenue | 2014 | % Total Revenue | 2016 | % Total Revenue | 2015 | % Total Revenue | ||||||||||||||||||||||||
Net sales | $ | 1,371,203 | 99.5 | % | $ | 1,432,370 | 98.8 | % | $ | 811,935 | 99.5 | % | $ | 890,503 | 99.6 | % | ||||||||||||||||
Other revenue | 7,299 | 0.5 | % | 17,697 | 1.2 | % | 4,386 | 0.5 | % | 3,968 | 0.4 | % | ||||||||||||||||||||
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Total revenue | 1,378,502 | 100.0 | % | 1,450,067 | 100.0 | % | 816,321 | 100.0 | % | 894,471 | 100.0 | % | ||||||||||||||||||||
Material, labor and other production costs | 611,955 | 44.4 | % | 630,413 | 43.5 | % | 338,114 | 41.4 | % | 373,459 | 41.8 | % | ||||||||||||||||||||
Selling, distribution and marketing expenses | 486,401 | 35.3 | % | 513,132 | 35.4 | % | 295,589 | 36.2 | % | 317,400 | 35.5 | % | ||||||||||||||||||||
Administrative and general expenses | 177,029 | 12.8 | % | 200,974 | 13.8 | % | 119,815 | 14.7 | % | 117,586 | 13.1 | % | ||||||||||||||||||||
Other operating income – net | (70,210 | ) | (5.1 | %) | (26,495 | ) | (1.8 | %) | (3,631 | ) | (0.5 | %) | (69,729 | ) | (7.8 | %) | ||||||||||||||||
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Operating income | 173,327 | 12.6 | % | 132,043 | 9.1 | % | 66,434 | 8.2 | % | 155,755 | 17.4 | % | ||||||||||||||||||||
Interest expense | 21,066 | 1.5 | % | 27,782 | 1.9 | % | 11,537 | 1.4 | % | 14,599 | 1.6 | % | ||||||||||||||||||||
Interest income | (247 | ) | (0.0 | %) | (2,658 | ) | (0.2 | %) | (335 | ) | (0.0 | %) | (183 | ) | (0.0 | %) | ||||||||||||||||
Other non-operating income – net | 617 | 0.1 | % | (546 | ) | (0.0 | %) | |||||||||||||||||||||||||
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Other non-operating expense (income) – net | 710 | 0.1 | % | (992 | ) | (0.1 | %) | |||||||||||||||||||||||||
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Income before income tax expense | 151,891 | 11.0 | % | 107,465 | 7.4 | % | 54,522 | 6.7 | % | 142,331 | 15.9 | % | ||||||||||||||||||||
Income tax expense | 48,097 | 3.5 | % | 29,625 | 2.0 | % | 17,748 | 2.2 | % | 45,087 | 5.0 | % | ||||||||||||||||||||
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Net income | $ | 103,794 | 7.5 | % | $ | 77,840 | 5.4 | % | $ | 36,774 | 4.5 | % | $ | 97,244 | 10.9 | % | ||||||||||||||||
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For the ninesix months ended November 27, 2015,August 26, 2016, consolidated net sales were $1.37 billion,$811.9 million, down from $1.43 billion$890.5 million in the prior year ninesix months. This 4.3%8.8%, or $61.2$78.6 million, decrease was driven by lower sales of greeting cards of approximately $47 million, the unfavorable impact of foreign currency of approximately $45 million, lower sales from our display fixtures business, which was sold in the prior year second quarter,translation of approximately $20 million, lower sales of greeting cardsour gift packaging and party goods of approximately $18$11 million, and decreased sales of other ancillary products of approximately $2 million,million. These decreases were partially offset by increased sales of gift packaging and party goods of approximately $20 million and the favorable impact of fewer SBT implementations of approximately $4$1 million. The current year nine months includes the unfavorable impact of approximately $2.5 million related to SBT implementations.
Other revenue, primarily royalty revenue from our character properties, decreased $10.4 million in the nine months ended November 27, 2015 compared to the same period in the prior year. In March 2015, we completed the sale of Strawberry Shortcake. As such, royalty revenue related to Strawberry Shortcake for the prior year nine month period does not have a comparative amountimplementations in the current year.year six months was a charge of approximately $1 million.
Wholesale Unit and Pricing Analysis for Greeting Cards
Unit and pricing comparatives (on a sales less returns basis), excluding intercompany eliminations and the impact of foreign currency translation, for the ninesix months ended November 27,August 26, 2016 and August 28, 2015 and November 28, 2014 are summarized below:
Increase (Decrease) From the Prior Year | Increase (Decrease) From the Prior Year | |||||||||||||||||||||||||||||||||||||||||||||||
Everyday Cards | Seasonal Cards | Total Greeting Cards | Everyday Cards | Seasonal Cards | Total Greeting Cards | |||||||||||||||||||||||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | 2015 | 2014 | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||||||||||||||||||
Unit volume | (2.2 | %) | (0.3 | %) | (2.3 | %) | 0.8 | % | (2.2 | %) | 0.0 | % | (7.4 | %) | (1.2 | %) | (7.6 | %) | (0.7 | %) | (7.5 | %) | (1.0 | %) | ||||||||||||||||||||||||
Selling prices | 1.8 | % | 4.9 | % | 1.3 | % | 1.9 | % | 1.7 | % | 4.1 | % | 2.4 | % | 2.0 | % | 3.0 | % | 0.3 | % | 2.6 | % | 1.5 | % | ||||||||||||||||||||||||
Overall increase / (decrease) | (0.4 | %) | 4.5 | % | (1.1 | %) | 2.7 | % | (0.6 | %) | 4.0 | % | (5.2 | %) | 0.8 | % | (4.9 | %) | (0.3 | %) | (5.1 | %) | 0.5 | % |
During the ninesix months ended November 27, 2015,August 26, 2016, combined everyday and seasonal greeting card sales less returns decreased 0.6%5.1% compared to the prior year ninesix months. The overall decrease was primarily driven by decreases indecreased unit volume, partially offset with increased selling prices from our everyday and seasonal greeting cards in our North American Social Expression Products and International Social Expression Products segments. The improvement in selling price was primarily due to everyday cards in our North American Social Expression Products segment and seasonal cards in our International Social Expression Products segment.
Everyday card sales less returns wereare down 0.4%5.2% compared to the prior year ninesix months, as a result of a 2.2% decrease indecreased unit volume of 7.4%, partially offset by an increase in selling prices of 1.8%2.4%. The unit volume decrease is primarily due to the continuation of the reduced distribution to a significant customer in our International Social Expression Products segment, as well as lower sales within our North American Social Expression Products segment. The increase in selling prices was driven by general price increases and favorable product mix within the product lines, which more than offset the continued unfavorable shift to a higher proportion of value cards. The unit volume decline was primarily driven by soft sales within our North AmericanInternational Social Expression Products segment.
Seasonal card sales less returns decreased 1.1%4.9%, with a unit volume decline of 2.3% partially7.6%, offset by a selling price increasesincrease of 1.3%3.0%. The decrease in unit volume was primarily attributable to our Easter, Mother’s Day, and Father’s Day programs in our International Social Expression Products segment, primarily due to the Christmascontinuation of the reduced distribution to a significant customer, as well as the Easter and Father’s Day programs in our North American Social Expression Products segment. The increase in selling prices was driven by our Mother’s Day and Easter programs withinin our International Social Expression Products segment, and our Father’s Day program in both our North American Social Expression Products and International Social Expression Products segments, partially offset by the Father’s Daya decrease in our Easter program within both our North American Social Expression Products and International Social Expression Products segments. The increase in selling prices was primarily attributable to the Christmas program within both our North American Social Expression Products and International Social Expression Products segments and the Easter and Graduation programs in our North American Social Expression Products segment. Within the Christmas program, approximately 45% of the unit shortfall, which accounts for approximately 30% of the seasonal unit shortfall for the nine month period, and a meaningful amount of the increase in average price sold are related to a customer in the value channel that implemented SBT subsequent to the prior year third quarter, which impacts the timing of current year sales compared to the prior year. Related to this customer, we expect this timing will reverse in the fourth quarter.
Expense Overview
MLOPC for the ninesix months ended November 27, 2015August 26, 2016 were $612.0$338.1 million, a decrease of $18.4$35.4 million from $630.4$373.5 million for the comparable period in the prior year. As a percentage of total revenue, these costs were 44.4%41.4% in the current period compared to 43.5%41.8% for the ninesix months ended NovemberAugust 28, 2014.2015. The $35.4 million dollar decrease was primarily due to the impact of lower sales volume and favorable product mix in the wholesale card business of approximately $20 million, the favorable impact of foreign currency translation of approximately $20$9 million, the eliminationfavorable production expenses of approximately $20$9 million, of costs related to the display fixtures business that was sold in the prior year second quarter and the positivefavorable impact of a smaller inventory build of intercompany supplied productslower sales in the Retail Operations segment in the current nine-month period compared to the prior year period, and thus less elimination of intercompany profit in inventory in the current nine months compared to the prior year period.approximately $1 million. Partially offsetting these decreases were higher product content costs of approximately $6$3 million production expensesand unfavorable scrap expense of approximately $17 million, the impact of higher sales in our wholesale card businesses and lower margins on higher sales volumes in our Retail segment.$1 million.
SDM expenses for the ninesix months ended November 27, 2015August 26, 2016 were $486.4$295.6 million, decreasing $26.7$21.8 million from $513.1$317.4 million for the comparable period in the prior year. As a percentage of total revenue, these costs were
35.3% 36.2% in the current period compared to 35.4%35.5% for the prior year period. The decrease was primarily driven by the favorable impact of foreign currency translation of approximately $22$11 million, lower expenses in the Retail Operations segment of approximately $4 million, decreased marketing and advertising costs of approximately $4 million, and lower supply chain costs of approximately $3 million, the elimination of approximately $2 million related to the display fixtures business that was sold in the prior year second quarter and other general cost savings of approximately $3 million, offset by unfavorable retail expenses of approximately $3 million.
Administrative and general expenses were $177.0$119.8 million for the ninesix months ended November 27, 2015, a decreaseAugust 26, 2016, an increase of $24.0$2.2 million from $201.0$117.6 million in the prior year period. This decreaseThe increase was driven primarily by higher technology costs, predominantly related to our information technology systems refresh project of approximately $2 million and higher combined 401(k) match and profit-sharing expense of approximately $2 million, offset by the favorable impact of foreign currency translation of approximately $4 million, the elimination of approximately $2 million related to the display fixtures business that was sold in the prior year second quarter, the elimination of expenses related to the former stock compensation program of approximately $4 million, approximately $8 million lower costsmillion. See “Segment Information – Unallocated Items” in this categoryQuarterly Report on Form 10-Q for more information related to our Retail segmentcombined
401(k) match and decreased profit sharing expense of $2 million, and other general cost savings of approximately $4 million.profit-sharing expense.
Other operating income – net was $70.2$3.6 million for the ninesix months ended November 27, 2015August 26, 2016 compared to $26.5$69.7 million for the prior year ninesix month period. The current year ninesix month period includes $2.1 million compared to $6.5 million in the gain on the sale of Strawberry Shortcake of $61.2 million and the income of $7.5 millionprior year period, from tax credits received from the State of Ohio under certain incentive programs made available to us in connection with our decision to maintain our world headquarters in the state of Ohio. TheAdditionally, the prior year nine month period includedincludes the net gain on the sale of AGI In-StoreStrawberry Shortcake of $38.7 million, the non-cash loss recorded upon sale of our current world headquarters location of $15.5 million and the recovery of $3.4 million related to the Clinton Cards bankruptcy administration, which, based on updated estimated recovery information provided we recorded an impairment recovery related to the senior secured debt of Clinton Cards that we acquired in May 2012 and subsequently impaired.
Interest income was $0.2 million for the nine months ended November 27, 2015 compared to $2.7 million for the nine months ended November 28, 2014. During the third quarter of the prior year, as part of the Clinton Cards bankruptcy administration, we received a cash distribution as part of the liquidation process that included $2.5 million of interest on our senior secured debt of Clinton Cards that was previously not expected to be received.$61.6 million.
The effective tax rate was 31.7%32.6% and 27.6%31.7% for the ninesix months ended November 27,August 26, 2016 and August 28, 2015, respectively. The lower than U.S. statutory rate for the six month period ended August 26, 2016 is primarily related to the domestic production activities deduction, tax treatment of corporate-owned life insurance and November 28, 2014, respectively.lower tax rates in foreign jurisdictions, partially offset by state income tax rates on U.S. income, net of federal benefit. The lower than statutory rate forin the nine months ended November 27, 2015prior period was primarily related to the release of a $4.3 million unrecognized tax benefit due to the issuance of regulations that clarified the law and the expiration of a statute of limitations, as well as the impact of lower tax rates in foreign jurisdictions, the domestic production activities deduction and the tax treatment of corporate-owned life insurance and federal provision to return adjustments. The lower than statutory rate in the prior period is due primarily to the recording of a net $4.1 million federal tax refund and related interest, attributable to fiscal 2000 and the error corrections recorded in accordance with ASC Topic 250, Accounting Changes and Error Corrections. The net impact of the error corrections was a reduction to income tax expense of $4.1 million. During the first quarter of fiscal 2015, the Corporation identified and corrected errors in the accounting for income taxes that related to the year ended February 28, 2014. These errors primarily related to the Corporation’s failure to consider all sources of available taxable income when assessing the need for a valuation allowance against certain deferred tax assets and the recognition of a liability for an uncertain tax position. These errors were the result of the significant complexity created as a result of the going private transaction in fiscal 2014.insurance.
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 segment primarily designs, manufactures and International Social Expression Products segments primarily design, manufacture and sellsells greeting cards and other related products through various channels of distribution with mass retailersmerchandising as the primary channel. The International Social Expression Products segment primarily designs and sells greeting cards and other related products through various channels of distribution and is located principally in the United Kingdom, Australia and New Zealand. As permitted under ASC Topic 280, (“ASC 280”), “Segment Reporting,” certain operating segments have been aggregated into the International Social Expression Products segment. The aggregated operating divisions have similar economic characteristics, products, productionsourcing processes, types of customers and distribution methods. At November 27, 2015,August 26, 2016 we operated 405393 card and gift retail stores in the United Kingdom (“UK”) through our Retail Operations segment. These stores sell products purchased from the International Social Expression Products segment as well as
products purchased from other vendors. The AG Interactive segment distributes social expression products, including electronic greetings, and a broad range of graphics and digital services and products, through a variety of electronic channels, including Web sites, Internet portals and electronic mobile devices. For the nine months ended November 27, 2015, theThe Non-reportable segment primarily includes licensing activities. The comparable period in the prior year also included six months of the design, manufacture and sales of display fixtures. The display fixtures business was sold on the last day of the prior year second quarter ended August 29, 2014. See Note 4, “Dispositions,” to the Consolidated Financial Statements for further information.
Segment results are reported using actual foreign exchange rates for the periods presented. Refer to Note 18, “Business Segment Information,” to the Consolidated Financial Statements for further information and a reconciliation of total segment revenue to consolidated “Total revenue” and total segment earnings (loss) before tax to consolidated “Income before income tax expense.”
North American Social Expression Products Segment
(Dollars in thousands) | Three Months Ended November | % Change | Nine Months Ended November | % Change | Three Months Ended August | % Change | Six Months Ended August | % Change | ||||||||||||||||||||||||||||||||||||||||
27, 2015 | 28, 2014 | 27, 2015 | 28, 2014 | 26, 2016 | 28, 2015 | 26, 2016 | 28, 2015 | |||||||||||||||||||||||||||||||||||||||||
Total revenue | $ | 348,394 | $ | 360,704 | (3.4 | %) | $ | 969,554 | $ | 966,751 | 0.3 | % | $ | 270,769 | $ | 285,556 | (5.2 | %) | $ | 593,229 | $ | 621,160 | (4.5 | %) | ||||||||||||||||||||||||
Segment earnings | 31,123 | 37,613 | (17.3 | %) | 150,459 | 134,807 | 11.6 | % | 37,627 | 46,209 | (18.6 | %) | 97,772 | 119,336 | (18.1 | %) |
Total revenue of our North American Social Expression Products segment decreased $12.3$14.8 million for the three months ended November 27, 2015August 26, 2016 and increased $2.8decreased $27.9 million for the ninesix months ended November 27, 2015August 26, 2016 compared to the prior year periods. The decrease during the current quarter was primarily driven by lower sales of gift packaging and party goods of approximately $9 million, greeting cards of approximately $7$6 million, and other ancillary products of approximately $1 million, partially offset by the favorable impact of fewer SBT implementations of approximately $1.5 million. The decrease in total revenue for the six months ended August 26, 2016 was primarily attributable to sales declines of greetings cards of approximately $16 million, gift packaging and party goods of approximately $10 million, other ancillary products of approximately $2 million, and the unfavorable impactsimpact of foreign currency translation of approximately $4 million, and lower sales of other ancillary products of $2 million, minimally$1 million. These decreases were partially offset by the favorable impact of fewer SBT implementations of approximately $1 million. The increase in total revenue for the nine months ended November 27, 2017 was primarily driven by higher sales of gift packaging and party goods of approximately $20 million and the favorable impact of fewer SBT implementations of approximately $4 million. These increases were partially offset by the unfavorable impacts of foreign currency translation of $11 million and lower sales of greeting cards of approximately $10 million.
Segment earnings decreased $6.5$8.6 million in the current three monthsquarter compared to the three months ended NovemberAugust 28, 2014.2015. The decline was driven primarily by the impact of lower revenues, higher costs in our supply chain of approximately $1 million, partially offset by lower technology costs of approximately $2 million.
Segment earnings decreased $21.6 million in the six month period ended August 26, 2016 compared to the prior year period. This decrease was driven primarily by the impact of lower revenue. In addition,revenues, higher technology costs of approximately $2 million and higher business taxes of approximately $1 million. These decreases were offset by lower costs in our supply chain costs, technology costsof approximately $1 million and the impactother general cost savings of foreign currency translation were each unfavorable approximately $1 million.
International Social Expression Products Segment earnings increased $15.7
(Dollars in thousands) | Three Months Ended August | % Change | Six Months Ended August | % Change | ||||||||||||||||||||
26, 2016 | 28, 2015 | 26, 2016 | 28, 2015 | |||||||||||||||||||||
Total revenue | $ | 36,543 | $ | 54,572 | (33.0 | %) | $ | 73,548 | $ | 106,427 | (30.9 | %) | ||||||||||||
Segment (loss) earnings | (1,246 | ) | 830 | (250.1 | %) | (3,031 | ) | (3,429 | ) | 11.6 | % |
Total revenue of our International Social Expression Products segment decreased $18.0 million infor the ninethree month period ended November 27, 2015August 26, 2016 compared to the prior year period. The increasedecrease was driven primarily by the prior year non-cash loss relateddue to the salelower sales of our current world headquarters locations, of which approximately $13 million of the total loss of $15.5 million was recorded within the North American Social Expression Products segment. In addition, the current year increase includes the impact of higher revenue, lower shrink and scrap expensegreeting cards of approximately $3 million, offset by higher production variances of approximately $6$14 million and the unfavorable impact of foreign currency translation of approximately $4 million.
International Social Expression Products Segment
(Dollars in thousands) | Three Months Ended November | % Change | Nine Months Ended November | % Change | ||||||||||||||||||||
27, 2015 | 28, 2014 | 27, 2015 | 28, 2014 | |||||||||||||||||||||
Total revenue | $ | 56,416 | $ | 68,190 | (17.3 | %) | $ | 162,843 | $ | 190,381 | (14.5 | %) | ||||||||||||
Segment (loss) earnings | (1,247 | ) | 3,185 | (139.2 | %) | (4,676 | ) | 5,201 | (189.9 | %) |
Total revenue of our International Social Expression Products segment decreased $11.8 million and $27.5$32.9 million for the three and nine monthssix month period ended November 27, 2015, respectively,August 26, 2016 compared to the prior year periods.period. The decrease during the current quarter was primarily due primarily to lower sales of greeting cards of approximately $7$27 million and the unfavorable impact of foreign currency translation of approximately $5$6 million. The lower sales of greetings cards in both the three and six month periods ended August 26, 2016 are, as expected, primarily the result of the continuation of the reduced distribution to a significant customer.
Segment earnings decreased $2.1 million in the three months ended August 26, 2016 compared to the same period in the prior year. The decrease is driven primarily by the impact on earnings from lower sales, offset by favorable supply chain costs of approximately $2 million and cost savings initiatives undertaken to offset the impact of lower sales of approximately $1 million.
Segment loss decreased $0.4 million in the six months ended August 26, 2016, compared to the six months ended August 28, 2015. The decrease in segment loss was primarily driven by favorable supply chain costs of approximately $6 million, lower production expenses of approximately $4 million, favorable scrap expense of approximately $2 million, and cost savings initiatives undertaken to offset the impact of lower sales of approximately $2 million, offset by the margin impact of lower sales of approximately $14 million.
Retail Operations Segment
(Dollars in thousands) | Three Months Ended August | % Change | Six Months Ended August | % Change | ||||||||||||||||||||
26, 2016 | 28, 2015 | 26, 2016 | 28, 2015 | |||||||||||||||||||||
Total revenue | $ | 55,149 | $ | 65,503 | (15.8 | %) | $ | 120,561 | $ | 137,311 | (12.2 | %) | ||||||||||||
Segment loss | (10,693 | ) | (12,615 | ) | 15.2 | % | (18,155 | ) | (20,758 | ) | 12.5 | % |
Total revenue of our Retail Operations segment decreased $10.4 million and $16.8 million for the currentthree and six months ended August 26, 2016, respectively, compared to the prior year nine month period was primarily due toperiods. The decreases were driven by the unfavorable impact of foreign currency translation of approximately $18$9 million and $12 million for the three and six month periods, respectively, as well as lower sales of greeting cards of approximately $9 million. The majority of the lower sales of greeting cards were due to reduced distribution to a significant customer that is expected to continue to decline during the remainder of the current fiscal year and into the next fiscal year.
Segment earnings decreased $4.4 million in the three months ended November 27, 2015 compared to the prior year period. The decreased earnings were primarily driven by the impact on earnings from decreased greeting card sales, unfavorable product costs of approximately $2 million, and approximately $1 million of severance costs, partially offset by lower supply chain costs of approximately $1 million. The severance costs were the result of actions taken to restructure portions of the business to reduce operating and overhead costs in an effort to partially offset the impact of reduced sales.
Segment earnings decreased $9.9 million in the nine months ended November 27, 2015, compared to the nine months ended November 28, 2014. The decreased earnings were primarily driven by the impact on earnings from lower sales, increased product and scrap costs, partially offset by slightly lower supply chain and general and administrative costs.
Retail Operations Segment
(Dollars in thousands) | Three Months Ended November | % Change | Nine Months Ended November | % Change | ||||||||||||||||||||
27, 2015 | 28, 2014 | 27, 2015 | 28, 2014 | |||||||||||||||||||||
Total revenue | $ | 62,279 | $ | 64,398 | (3.3 | %) | $ | 199,590 | $ | 213,303 | (6.4 | %) | ||||||||||||
Segment loss | (11,641 | ) | (16,578 | ) | 29.8 | % | (32,399 | ) | (35,181 | ) | 7.9 | % |
Total revenue of our Retail Operations segment decreased by $2.1 million and $13.7 million forboth the three and nine months ended November 27, 2015, respectively. The decreases are due to the unfavorable impact of foreign currency translation of approximately $3 million and $16 million for the three and ninesix month periods, respectively, partially offset by higher sales of greeting cards.periods. During the three and ninesix month periods ended November 27, 2015,August 26, 2016, net sales at stores open one year or more were updown approximately 2.0%0.1% and 1.2%0.6%, respectively, compared to the same periods in the prior year.
Segment loss decreased $4.9$1.9 million and $2.6 million in the three monthsand six month periods ended November 27, 2015August 26, 2016 compared to the prior year period.periods, respectively. The decrease wasimproved earnings in both the three and six months ended August 26, 2016 were primarily driven by lower retail store operating and overhead costs of approximately $3 million, the margin impact of increased net sales of approximately $1 million before the foreign exchange translation,expenses and the favorable net impact of foreign exchangecurrency translation on the loss, of about $1 million.
Segment loss decreased $2.8 million in the nine months ended November 27, 2015 compared to the prior year period. The decrease was driven by lower store operating and overhead costs of approximately $4 million, the margin impact of increased net sales of approximately $2 million before the foreign exchange translation, and the net favorable impact of foreign exchange translation on the loss of about $3 million, partially offset by higher shrink and scrap expense.lower margins resulting from the decrease in revenue.
AG Interactive Segment
(Dollars in thousands) | Three Months Ended November | % Change | Nine Months Ended November | % Change | Three Months Ended August | % Change | Six Months Ended August | % Change | ||||||||||||||||||||||||||||||||||||||||
27, 2015 | 28, 2014 | 27, 2015 | 28, 2014 | 26, 2016 | 28, 2015 | 26, 2016 | 28, 2015 | |||||||||||||||||||||||||||||||||||||||||
Total revenue | $ | 14,420 | $ | 15,149 | (4.8 | %) | $ | 41,586 | $ | 44,093 | (5.7 | %) | $ | 13,112 | $ | 13,736 | (4.5 | %) | $ | 26,043 | $ | 27,166 | (4.1 | %) | ||||||||||||||||||||||||
Segment earnings | 5,198 | 6,131 | (15.2 | %) | 15,345 | 17,507 | (12.3 | %) | 3,926 | 5,276 | (25.6 | %) | 8,134 | 10,147 | (19.8 | %) |
Total revenue of our AG Interactive segment decreased by $0.7$0.6 million and $2.5$1.1 million for the three and ninesix months ended November 27, 2015, respectively, compared to the prior periods. This decrease in revenue was driven primarily by lower subscription revenue compared to the prior year. At the end of the third quarter of fiscalAugust 26, 2016, AG Interactive had approximately 3.4 million online paid subscriptions compared to 3.5 million at the end of the same period in the prior year.
Segment earnings decreased $0.9 million and $2.2 million for the three and nine months ended November 27, 2015, respectively, primarily due to decreased revenue and higher marketing costs.
Non-reportable Segment
(Dollars in thousands) | Three Months Ended November | % Change | Nine Months Ended November | % Change | ||||||||||||||||||||
27, 2015 | 28, 2014 | 27, 2015 | 28, 2014 | |||||||||||||||||||||
Total revenue | $ | 2,522 | $ | 5,617 | (55.1 | %) | $ | 4,929 | $ | 35,539 | (86.1 | %) | ||||||||||||
Segment earnings | 264 | 5,080 | (94.8 | %) | 59,677 | 7,789 | 666.2 | % |
Total revenue from our Non-reportable segment decreased $3.1 million and $30.6 million for the three and nine months ended November 27, 2015, respectively, compared to the prior year periods. The decrease in revenue for the current year third quarter was due primarilythree months ended August 26, 2016 compared to the salesame period in the prior year was driven by the unfavorable impact of Strawberry Shortcake at the beginning of the current year first quarter.foreign currency translation. The decrease in revenue for the ninesix months ended November 27, 2015 was primarily dueAugust 26, 2016 compared to the salesame period in the prior year was driven primarily by lower subscription revenue as well as the unfavorable impact of the display fixtures business atforeign currency translation. At the end of the second quarter of 2017, AG Interactive had approximately 3.3 million online paid subscriptions compared to 3.4 million at the end of the same period in the prior year and the sale of Strawberry Shortcake noted above. Revenue of the display fixtures business was $20.2 million for the nine months November 28, 2014. The remaining decrease was due primarily to the sale of Strawberry Shortcake.year.
Segment earnings decreased $4.8$1.4 million and $2.0 million for the three and six months ended August 26, 2016 primarily due to the impact of lower revenue and higher operating expenses.
Non-reportable Segment
(Dollars in thousands) | Three Months Ended August | % Change | Six Months Ended August | % Change | ||||||||||||||||||||
26, 2016 | 28, 2015 | 26, 2016 | 28, 2015 | |||||||||||||||||||||
Total revenue | $ | 1,440 | $ | 1,661 | (13.3 | %) | $ | 2,940 | $ | 2,407 | 22.1 | % | ||||||||||||
Segment (loss) earnings | (438 | ) | (934 | ) | 53.1 | % | (374 | ) | 59,413 | (100.6 | %) |
Total revenue of our Non-reportable segment decreased $0.2 million for the three months ended November 27, 2015 mainly due to the impact of the Strawberry Shortcake sale. Segment earningsAugust 26, 2016 and increased by $51.9$0.5 million for the ninesix months ended November 27, 2015. This increaseAugust 26, 2016, compared to the prior year periods.
Segment loss decreased $0.5 million for the three months ended August 26, 2016 compared to the same period in the prior year due to lower film production costs. Segment earnings decreased $59.8 million for the six months ended August 26, 2016 compared to the prior year period, which was primarily due to the net gain of $61.2$61.6 million recorded in connection with the 2016 sale of Strawberry Shortcake, partially offset by lower film production costs in the operational impact of that sale.current year.
Unallocated Items
Centrally incurred and managed costs are not allocated back to the operating segments. The unallocated items include interest expense for centrally-incurred debt, and domestic profit-sharing and 401(k) match expense. Unallocated items also includedand profit-sharing expense, as well as costs associated with corporate operations such as the senior management, corporate finance, legal and insurance programs.
Three Months Ended November | Nine Months Ended November | Three Months Ended August | Six Months Ended August | |||||||||||||||||||||||||||||
(Dollars in thousands) | 27, 2015 | 28, 2014 | 27, 2015 | 28, 2014 | 26, 2016 | 28, 2015 | 26, 2016 | 28, 2015 | ||||||||||||||||||||||||
Interest expense | $ | (6,467 | ) | $ | (9,533 | ) | $ | (21,066 | ) | $ | (27,782 | ) | $ | (5,940 | ) | $ | (6,486 | ) | $ | (11,537 | ) | $ | (14,599 | ) | ||||||||
Profit-sharing and 401(k) match expense | (3,000 | ) | (2,988 | ) | (8,931 | ) | (11,079 | ) | ||||||||||||||||||||||||
401(k) match and profit-sharing expense | (3,425 | ) | (3,020 | ) | (8,486 | ) | (5,931 | ) | ||||||||||||||||||||||||
Corporate overhead expense | (4,670 | ) | (5,388 | ) | (6,518 | ) | 16,203 | (4,537 | ) | 1,738 | (9,801 | ) | (1,848 | ) | ||||||||||||||||||
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Total Unallocated | ($ | 14,137 | ) | $ | (17,909 | ) | $ | (36,515 | ) | $ | (22,658 | ) | $ | (13,902 | ) | $ | (7,768 | ) | $ | (29,824 | ) | $ | (22,378 | ) | ||||||||
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Interest expense wasis lower by $0.5 million in both the three and nine month periodsperiod ended November 27, 2015August 26, 2016 compared to the same periodsperiod in the prior year. Duringyear primarily due to the fourth quarterinterest capitalized in conjunction with our systems refresh project. Interest expense is lower by $3.1 million in the six month period ended August 26, 2016 compared to the same period in the prior year primarily due to the prior year write-off of 2015debt issuance costs of $1.9 million due to our voluntary prepayment of our Term Loan facility, and the first quartercontinued interest capitalized in conjunction with our systems refresh project of $1.1 million.
As reported in our Annual Report on Form 10-K for the current fiscal year ended February 29, 2016, prior to January 1, 2016, we sponsored a discretionary profit-sharing plan with a contributory 401(k) provision covering most of its United States employees. Under this arrangement, we made voluntary prepaymentsseparate discretionary profit-sharing and 401(k) matching contributions annually, after fiscal year-end, depending on our term loan facility of $140 million thus reducing interest expense.financial results.
OurEffective January 1, 2016, the existing profit-sharing and 401(k) retirement savings plan includeswas replaced with a safe harbor 401(k) arrangement. Pursuant to the new arrangement, the matching contributions became non-discretionary, were increased, and are now made throughout the year, rather than on an annual basis. The increased matching contributions effectively replace our discretionary profit-sharing component and a 401(k) component. Whilecontributions, which were discontinued for fiscal years ending after February 29, 2016. We expect that the current year three and nine monthquarterly expense maywill vary from the prior year expense pattern we expectand the full year 20162017 expense to be slightly higher than the combined profit-sharing and match components of the combined components to be consistent withprofit-sharing and 401(k) retirement savings plan in effect during the prior year. See Note 13, “Retirement Benefits,” to the Consolidated Financial Statements
“Corporate overhead expense” for further information.
For both the three and ninesix month periods ended November 27, 2015, “Corporate overhead expense” includeAugust 26, 2016, includes income of $1.0$1.1 million and $7.5$2.1 million, respectively, from tax credits received from the State of Ohio under certain incentive programs made available to us in connection with our decision to maintain our world headquarters in the state of Ohio. See Note 6, “Other IncomeThe three and Expense,” to the Consolidated Financial Statements for further information.
Duringsix month periods in the prior year second quarter, we sold our world headquarters location and incurred a non-cash loss on disposal of $15.5 million, of which $2.2 million was recorded within the Unallocated segment. See Note 4, “Dispositions,” to the Consolidated Financial Statements for further information.
For the nine months ended November 28, 2014, “Corporate overhead expense” included the gain on sale of AGI In-Store of $38.7 million. An adjustment of $1.1 million to reduce the gain was recorded in the current year third quarter, also in “Corporate overhead expense”. See Note 4, “Dispositions,” to the Consolidated Financial Statements for further information.
For both the three and nine months ended November 28, 2014, “Corporate overhead expense” included interest income of $2.5$6.5 million related to the Clinton Cards liquidation. See Note 6, “Other Income and Expense,” to the Consolidated Financial Statements for further information.
For the three and nine months ended November 28, 2014, “Corporate overhead expense” included expense of approximately $1 million and $4 million, respectively, related to our former stock compensation programs. There are no comparable expenses in the current year periods.these incentives.
Liquidity and Capital Resources
The seasonal nature of our business precludes a useful comparison of the current period and the fiscal year-end financial statements; therefore, a Consolidated Statement of Financial Position as of NovemberAugust 28, 2014,2015, has been included.
Operating Activities
Operating activities used $90.0$32.0 million of cash during the ninesix months ended November 27, 2015,August 26, 2016, compared to using $77.1$65.5 million in the prior year period.
Accounts receivable used $86.8provided $17.9 million of cash during the ninesix months ended November 27, 2015,August 26, 2016, compared to using $84.0a use of $3.4 million of cash during the prior year period. The year-over-year decreaseincrease in cash flow of $2.8approximately $21.3 million resulted from a decrease in cash flowoccurred mainly within our North American Social Expression Products segment of approximately $15 million, offset by an increase in our International Social Expression Products segment of approximately $13 million. These charges were bothprimarily due primarily to lower sales and the timing of collections from, or credits issued to, certain customers occurring in a different pattern in the current year period compared to the prior year period.period in both our North American Social Expression Products and International Social Expression Products segments.
Inventory used $34.3$65.5 million of cash during the ninesix months ended November 27, 2015,August 26, 2016, compared to using $57.8$49.9 million in the prior year ninesix months. Historically, the first nine monthshalf of our fiscal year is a period of inventory build, and thus a use of cash, in preparation for the fall and winter seasonal holidays. The year-over-year decrease in inventory build during the current nine-month period was driven by the Retail Operations segment due to a combination of a higher beginning inventory and managing to a lower total inventory level as of the end of the third quarter.
Net payable/receivable with related parties provided $8.3 million of cash during the nine months ended November 27, 2015, compared to providing $0.1 million during the prior year nine months. The variance between years is mainly related to the amounts owed to our parent companies and related entities generated by the tax sharing arrangement. See Note 17, “Related Party Information,” to the Consolidated Financial Statements for further detail of this tax sharing arrangement.
Deferred costs - net generally represents payments under agreements with retailers net of the related amortization of those payments. During the ninesix months ended November 27, 2015,August 26, 2016, amortization exceeded payments by $17.5 million. During the ninesix months ended NovemberAugust 28, 2014,2015, amortization exceeded payments exceeded amortization by $1.4$19.4 million. See Note 10, “Deferred Costs,” to the Consolidated Financial Statements for further detail of deferred costs related to customer agreements.
Accounts payable and other liabilities used $73.9$83.5 million of cash during the ninesix months ended November 27, 2015,August 26, 2016, compared to using $23.7$91.7 million in the prior year period. The year-over-year change in cash usage was attributable to higher variable compensation payments during the current year compared to the same period in the prior year mainly in our North American Social Expression Products and Unallocated segments and an increase in accounts payable payments due to normal year-over-year timing of business transactions, primarily in our North American Social Expression Products and International Social Expression Products segments.transactions.
Investing Activities
Investing activities provided $66.9used $45.2 million of cash during the ninesix months ended November 27, 2015,August 26, 2016, compared to $39.1a source of $91.4 million in the prior year period. The current year includes primarily capital expenditures of $46.0 million. The prior year included capital expenditures of $31.7 million, and cash payments of $2.8 million and $3.2 million for acquired character property rights and the final working capital adjustments made in connection with the sale of AGI In-Store, respectively. These cash uses were offset by proceeds of $105.0 received from the sale of Strawberry Shortcake and proceeds of $24.1 million received from the surrender of certain corporate-owned life insurance policies. These cash inflows were partially offset by cash paid for capital expenditures of $55.2 million, cash paid for acquired character property rights of $2.8 million, a payment of $3.2 million related to the final working capital adjustments made in connection with the sale of AGI In-Store, and net lendings on loans to related parties $1.3 million.
The prior year cash provided was driven by the proceeds of $73.7 million from the sale of AGI In-store and $13.5 million from the sale of our current world headquarters. In addition, the prior year includes proceeds received from H L & L Property Company, an indirect affiliate of American Greetings (“H L & L”) of $9.9 million related to the sale to H L & L by us of certain assets previously purchased by us related to the new world headquarters. The prior year also includes proceeds from the Clinton Cards administration of $11.9 million. Partially offsetting these cash inflows was cash paid for capital expenditures of $70.3 million during the prior year nine month period.
Financing Activities
Financing activities provided $1.8$1.1 million of cash during the current year ninesix months, compared to $7.1a use of $34.0 million in the prior year ninesix month period. During theThe current year this source of cash was primarily driven by additional borrowings, net of repayments, under our revolving credit facility and accounts receivable securitization facility of $87.5$15.0 million, partially offset by a cash dividend payment of $13.9 million. Partially offsetting theseThe prior year use of cash inflows werewas primarily driven by a voluntary prepayment made on our term loan of $65.0 million and cash dividend payments of $20.7 million.
The net source of cash in the prior year was primarily drivenmillion, partially offset by additional borrowings, net of repayments, under our revolving credit facility and accounts receivable securitization facility of $47.3 million. Partially offsetting these cash inflows were payments made on our term loan of $15.0 million and cash dividend payments of $24.2$51.7 million.
Credit Sources
Substantial credit sources are available to us. In total, we had available sources of credit of approximately $485 million at November 27, 2015,August 26, 2016, which included $185 million outstanding on our term loan facility, a $250 million revolving credit facility and a $50 million accounts receivable securitization facility, of which, $181.7$259.1 million, in the aggregate, was unused as of November 27, 2015.August 26, 2016. Borrowings under the accounts receivable securitization facility are limited based on our eligible receivables outstanding. At November 27, 2015,August 26, 2016, we had $91.8$15 million of borrowings outstanding under our revolving credit facility and we had no borrowings outstanding under our accounts receivable securitization facility. We had, in the aggregate, $26.5$25.9 million outstanding under letters of credit, which reduced the total credit availability thereunder as of November 27, 2015.August 26, 2016.
Please refer to the discussion of our borrowing arrangements as disclosed in the “Credit Sources” section under Part II, Item 7 of our Annual Report on Form 10-K for the year ended February 28, 201529, 2016 for further information.
At November 27, 2015,August 26, 2016, we were in compliance with our financial covenants under the borrowing agreements described above.
Capital Deployment and Investments
On February 10, 2014, Century Intermediate Holding Company 2 (“CIHC2”), an indirect parent company of American Greetings, Corporation, issued $285 million aggregate principal amount of 9.75%9.750%/10.50%10.500% Senior PIK Toggle Notes due 2019 (the “PIK Notes”). Excluding the first and last interest payment periods, which must be paid in cash, CIHC2 may elect to either accrue or pay cash interest on the PIK Notes. The PIK Notes carry a cash interest rate of 9.75%9.750%. Prior to the required semi-annual payment of interest by CIHC2, in August and February, it is expected that we will provide CIHC2 with the cash flow for CIHC2 to pay interest on the PIK Notes. Assuming interest is paid regularly in cash, rather than accrued, the annual cash required to pay the interest is expected to be approximately $27.8 million while the entire issuance of PIK Notes are outstanding. For further information, refer to the discussion of the PIK Notes as disclosed in “Transactions with Parent Companies and Other Affiliated Companies” in Note 18, “Related Party Information,” to the Consolidated Financial Statements under Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended February 28, 2015.29, 2016.
Throughout fiscal 20162017 and thereafter, we will continue to consider all options for capital deployment including growth opportunities, acquisitions and other investments in third parties, expanding customer relationships, expenditures or investments related to our current product leadership initiatives or other future strategic initiatives, capital expenditures, the information technology systems refresh project, paying down debt, paying dividends and, as appropriate, preserving cash. Our future operating cash flow and borrowing availability under our credit
agreement and our accounts receivable securitization facility are expected to meet these and other currently anticipated funding requirements. The seasonal nature of our business results in peak working capital requirements that may be financed through short-term borrowings when cash on hand is insufficient.
Over the next several years, we expect to allocate resources, including capital, to refresh our information technology systems by modernizing our systems, redesigning and deploying new processes, and evolving new organization structures, all of which are intended to drive efficiencies within the business and add new capabilities. Amounts that we spend could be material in any fiscal year and over the life of the project. The total amount spent through fiscal 2015 on this project was approximately $132 million. During the ninesix months ended November 27, 2015,August 26, 2016, we spent approximately $38$33 million, including capital of approximately $32$29 million and expense of approximately $6$4 million, on these information technology systems. Based on the current scope of the project, we presently expect to spend at least an additional approximately $155$162 million on these information technology systems, over the remaining life of the project, the majority of which we expect will be capital expenditures. We believe these investments are important to our business, help us drive further efficiencies and add new capabilities; however, there can be no assurance that we will not spend more or less than $155$162 million, over the remaining life of the project, or that we will achieve the anticipated efficiencies or any cost savings.
In May 2011, we announced plans to relocate our world headquarters to the Crocker Park mixed use development in Westlake, Ohio, which offers a vibrant urban setting, with retail stores and restaurants, offices and apartments. After putting the project on hold pending the outcome of the going private transaction, we announced plans in October 2013 to resume the project and on March 26, 2014, we purchased the land on which the new world headquarters will be built.built (the “Crocker Park Site”). We are leasing a portion of the Crocker Park Site to H L & L Property Company (“H L & L”), an indirect affiliate of American Greetings, which is constructing the new world headquarters building on the siteCrocker Park Site and, when complete,beginning in the third quarter of our fiscal 2017, will sublease the new world headquarters building back to us.the Corporation. In addition, to accommodate additional office needs, H L & L is constructing an additional approximately 60,000 square foot building (“Tech West”) adjacent to the world headquarters building and a surface parking lot (“Surface Lot”) on land that it is leasing from us. We havethe Corporation. The Corporation has also entered into an operating leaseslease to lease these buildingsthe Tech West building and Surface Lot from H L & L, which are anticipated to be available for occupancyalso beginning in calendar year 2016.third quarter of fiscal 2017. The initial lease terms are fifteen years and will begin upon occupancy. The totalthe annual rent is expected to be approximately $10.6 million. Further details of the relocation undertaking are provided in Note 18, “Related Party Information,” to the Consolidated Financial Statements under Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended February 28, 201529, 2016 and Note 17, “Related Party Information,” to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
During the nine monthsquarter ended November 27, 2015,August 26, 2016, we paid a cash dividendsdividend in the aggregate amount of $20.7$13.9 million to CIHC,Century Intermediate Holding Company, our parent and sole shareholder, $13.9 million of which was for the purpose of paying interest on the PIK Notes.
During the prior year nine months ended November 28, 2014, we paid cash dividends in the aggregate amount of $24.2 million to CIHC, our parent and sole shareholder, $14.3 million of which was for the purpose of paying interest on the PIK Notes. In addition, H L & L paid to us $9.9 million to acquire certain assets previously purchased by us related to the new world headquarters project.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Please refer to the discussion of our Critical Accounting Policies under Part II, Item 7 of our Annual Report on Form 10-K for the year ended February 28, 2015.29, 2016.
Factors That May Affect Future Results
Certain statements in this report may constitute forward-looking statements within the meaning of the Federal securities laws. These statements can be identified by the fact that they do not relate strictly to historic or current facts. They use such words as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. These forward-looking statements are based on currently available information, but are subject to a variety of uncertainties, unknown risks and other factors concerning our operations and business environment, which are difficult to predict and may be beyond our control. Important factors that could cause actual results to differ materially from those suggested by these forward-looking statements, and that could adversely affect our future financial performance, include, but are not limited to, the following:
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 included in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended February 28, 2015.29, 2016.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The majority of inventory purchases within our UK wholesale operations are denominated in U.S. Dollars. Subsequent to the Brexit event, we estimate that a hypothetical 10% strengthening of the U.S. Dollar against the UK Pound Sterling, compared to the average exchange rate during the year ended February 29, 2016, would negatively impact fiscal 2017 operating income in the International Social Expression Products segment by approximately $5 million.
For further information, refer to our Annual Report on Form 10-K for the year ended February 28, 2015. There were no material changes in market risk, specifically interest rate and foreign currency exposure, for us from February 28, 2015, the end of our preceding fiscal year, to November 27, 2015, the end of our most recent fiscal quarter.29, 2016.
Item 4. Controls and Procedures
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 Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Corporation’s management, including its Co-Chief Executive Officers 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 Co-Chief Executive Officers 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 Co-Chief Executive Officers 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.
Al Smith et al. v. American Greetings Corporation. On June 4, 2014, Al Smith and Jeffrey Hourcade, former fixture installation crew members for special projects, individually and on behalf of those similarly situated, filed a
putative class action lawsuit against American Greetings CorporationInformation regarding legal proceedings is described in the U.S. District Court for the Northern District of California, San Francisco Division. Plaintiffs claim that the Corporation violated certain rules under the Fair Labor Standards Act and California law, including the California Labor Code and Industrial Welfare Commission Wage Orders. For themselves and the proposed classes, plaintiffs seek an unspecified amount of general and special damages, including but not limited to minimum wages, agreed upon wages and overtime wages, statutory liquidated damages, statutory penalties (including penalties under the California Labor Code Private Attorney General Act of 2004 (“PAGA”), unpaid benefits, reasonable attorneys’ fees and costs, and interest). In addition, plaintiffs request disgorgement of all funds the Corporation acquired by means of any act or practice that constitutes unfair competition and restoration of such fundsNote 15 to the plaintiffs and the proposed classes. On November 6, 2014, plaintiffs filed a Second Amended Complaint to add claims for reimbursementConsolidated Financial Statements under Part I, Item 1 of business expenses and failure to provide meal periods in violation of California Law and on December 12, 2014, amended their PAGA notice to include the newly added claims.
On January 20, 2015, the parties reached a settlement in principle that, if approved by the Court, will fully and finally resolve the claims brought by Smith and Hourcade, as well as the classes they seek to represent. The settlement was a product of extensive negotiations and a private mediation, which was finalized and memorialized in a Stipulation and Class Action Settlement Agreement signed March 30, 2015. On March 31, 2015, plaintiffs filed a Motion for Preliminary Approval of Class Action Settlement and on July 23, 2015, the Court entered its Order Granting Preliminary Approval of Class Action Settlement.
The proposed settlement establishes a settlement fund of $4.0 million to pay claims from current and former employees who worked at least one day for American Greetings Corporation and/or certain of its subsidiaries in any hourly non-exempt position in California between June 4, 2010 and July 23, 2015. On August 24, 2015, the claims administrator commenced mailing of notice and claim forms to class members and the claims closed October 24, 2015. On October 14, 2015,plaintiffs filed a motion for final approval of the class settlement, together with their motion for approval of incentive payments to the Named Plaintiffs and attorneys’ fees. The Court held a final approval hearing on December 17, 2015. If the settlement is finally approved, American Greetings will fund the settlement within twenty (20) days after passage of all appeal periods. Thereafter, the settlement funds will be disbursed as provided in the settlement agreement and the Court’s orders.
Michael Ackerman v. American Greetings Corporation, et al. On March 6, 2015, plaintiff Michael Ackerman, individually and on behalf of others similarly situated, filed a putative class action lawsuit in the United States District Court of New Jersey alleging violation of the Telephone Consumer Protection Act (“TCPA”) by American Greetings Corporation and its subsidiary, AG Interactive, Inc. The plaintiff claims that defendants (1) sent plaintiff an unsolicited text message notifying plaintiff that he had received an ecard; and (2) knowingly and/or willfully violated the TCPA, which prohibits unsolicited automated or prerecorded telephone calls, including faxes and text messages, sent to cellular telephones. Plaintiff seeks to certify a nationwide class based on unsolicited text messages sent by defendants during the period February 8, 2011 through February 8, 2015. The plaintiff seeks damages in the statutory amount of $500 for each and every violation of the TCPA and $1,500 for each and every willful violation of the TCPA. We believe the plaintiff’s allegations in this lawsuit are without merit and intend to defend the action vigorously.Quarterly Report.
Management does not believe, based on currently available information, that the outcome of these proceedings will have a material adverse effect on the Corporation’s business, consolidated financial position or results of operations, although the outcomes could be material to the Corporation’s operating results for any particular period, depending, in part, upon the operating results for such period.
In addition to the foregoing, we are involved in various judicial, administrative, regulatory and arbitration proceedings concerning matters arising in the ordinary course of business operations, including, but not limited to, employment, commercial disputes and other contractual matters. We, however, do not believe that any of the other litigation in which we are currently engaged, either individually or in the aggregate, will have a material adverse effect on our business, consolidated financial position or results of operations.
Exhibits required by Item 601 of Regulation S-K
Exhibit | Description | |
31 (a) | Certification of Co-Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31 (b) | Certification of Co-Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31 (c) | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32 | Certification of Co-Chief Executive Officers and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101 | The following materials from the Corporation’s |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AMERICAN GREETINGS CORPORATION | ||
By: | /s/ Robert D. Tyler | |
Robert D. Tyler | ||
Corporate Controller and | ||
Chief Accounting Officer * |
January 8,October 7, 2016
* | (Signing on behalf of Registrant as a duly authorized officer of the Registrant and signing as the |
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