Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 28, 2015

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 Road, Cleveland, Ohio   44144
(Address of principal executive offices)   (Zip Code)

(216) 252-7300

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) 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   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

All of the outstanding capital stock of the registrant is held by Century Intermediate Holding Company. As of October 9, 2015, 100 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.

 

 

 


Table of Contents

AMERICAN GREETINGS CORPORATION

INDEX

 

     Page
Number
 
  

PART I - FINANCIAL INFORMATION

  

Item 1. Financial Statements

     3   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     23   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     35   

Item 4. Controls and Procedures

     35   

PART II - OTHER INFORMATION

  

Item 1. Legal Proceedings

     36   

Item 6. Exhibits

     37   

SIGNATURES

     38   

EXHIBITS

  


Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

AMERICAN GREETINGS CORPORATION

CONSOLIDATED STATEMENT OF INCOME

(Thousands of dollars)

 

     (Unaudited)  
     Three Months Ended     Six Months Ended  
     August 28,
2015
    August 29,
2014
    August 28,
2015
    August 29,
2014
 

Net sales

   $ 418,611      $ 427,090      $ 890,503      $ 924,364   

Other revenue

     2,417        5,335        3,968        11,645   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     421,028        432,425        894,471        936,009   

Material, labor and other production costs

     177,985        180,109        373,459        380,895   

Selling, distribution and marketing expenses

     153,641        165,834        317,400        338,093   

Administrative and general expenses

     59,365        66,850        117,586        136,145   

Other operating income – net

     (7,309     (23,828     (69,729     (25,796
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     37,346        43,460        155,755        106,672   

Interest expense

     6,486        9,255        14,599        18,249   

Interest income

     (84     (30     (183     (141

Other non-operating income – net

     (54     (272     (992     (1,379
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

     30,998        34,507        142,331        89,943   

Income tax expense

     6,518        11,667        45,087        23,364   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 24,480      $ 22,840      $ 97,244      $ 66,579   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements (unaudited).

 

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AMERICAN GREETINGS CORPORATION

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Thousands of dollars)

 

     (Unaudited)  
     Three Months Ended     Six Months Ended  
     August 28,
2015
    August 29,
2014
    August 28,
2015
    August 29,
2014
 

Net income

   $ 24,480      $ 22,840      $ 97,244      $ 66,579   

Other comprehensive income (loss), net of tax:

        

Foreign currency translation adjustments

     (2,351     (2,121     (4,379     (255

Pension and postretirement benefit adjustments

     505        137        721        114   

Unrealized (loss) gain on equity securities

     (10,133     —          34,477        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income, net of tax

     (11,979     (1,984     30,819        (141
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 12,501      $ 20,856      $ 128,063      $ 66,438   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements (unaudited).

 

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AMERICAN GREETINGS CORPORATION

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

(Thousands of dollars except share and per share amounts)

 

     (Unaudited)      (Note 1)     (Unaudited)  
     August 28, 2015      February 28, 2015     August 29, 2014  

ASSETS

       

Current assets

       

Cash and cash equivalents

   $ 33,501       $ 43,327      $ 45,107   

Trade accounts receivable, net

     104,690         102,339        93,460   

Inventories

     297,338         248,577        312,300   

Deferred and refundable income taxes

     45,082         45,976        45,170   

Assets held for sale

     —           35,529        —     

Prepaid expenses and other

     131,635         157,669        141,800   
  

 

 

    

 

 

   

 

 

 

Total current assets

     612,246         633,417        637,837   

Other assets

     539,033         431,838        517,783   

Deferred and refundable income taxes

     60,897         90,143        82,526   

Property, plant and equipment – at cost

     878,035         828,028        798,634   

Less accumulated depreciation

     467,304         447,731        437,435   
  

 

 

    

 

 

   

 

 

 

Property, plant and equipment – net

     410,731         380,297        361,199   
  

 

 

    

 

 

   

 

 

 
   $ 1,622,907       $ 1,535,695      $ 1,599,345   
  

 

 

    

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDER’S EQUITY

       

Current liabilities

       

Debt due within one year

   $ —         $ —        $ 20,000   

Accounts payable

     116,450         133,135        124,282   

Accrued liabilities

     69,196         75,992        58,947   

Accrued compensation and benefits

     63,301         95,193        52,761   

Income taxes payable

     14,398         22,512        16,063   

Liabilities held for sale

     —           1,712        —     

Deferred revenue

     23,044         27,200        25,649   

Other current liabilities

     67,850         63,199        83,910   
  

 

 

    

 

 

   

 

 

 

Total current liabilities

     354,239         418,943        381,612   

Long-term debt

     461,752         472,729        525,590   

Other liabilities

     359,427         303,231        309,652   

Deferred income taxes and noncurrent income taxes payable

     10,824         11,466        12,760   

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   

Accumulated other comprehensive income (loss)

     6,416         (24,403     611   

Retained earnings

     190,249         113,729        129,120   
  

 

 

    

 

 

   

 

 

 

Total shareholder’s equity

     436,665         329,326        369,731   
  

 

 

    

 

 

   

 

 

 
   $ 1,622,907       $ 1,535,695      $ 1,599,345   
  

 

 

    

 

 

   

 

 

 

See notes to consolidated financial statements (unaudited).

 

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AMERICAN GREETINGS CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(Thousands of dollars)

 

     (Unaudited)
Six Months Ended
 
     August 28, 2015     August 29, 2014  

OPERATING ACTIVITIES:

    

Net income

   $ 97,244      $ 66,579   

Adjustments to reconcile net income to cash flows from operating activities:

    

Gain on sale of Strawberry Shortcake

     (61,625     —     

Net gain on sale of AGI In-Store

     —          (38,803

Net loss on disposal of fixed assets

     66        15,733   

Depreciation and intangible assets amortization

     28,114        30,499   

Clinton Cards secured debt recovery

     —          (3,390

Provision for doubtful accounts

     367        351   

Deferred income taxes

     8,076        (9,795

Other non-cash charges

     3,614        2,125   

Changes in operating assets and liabilities, net of acquisitions and dispositions:

    

Trade accounts receivable

     (3,431     119   

Inventories

     (49,866     (76,582

Other current assets

     (7,193     (2,354

Net payable/receivable with related parties

     (1,698     (438

Income taxes

     (7,554     2,322   

Deferred costs – net

     19,377        22,005   

Accounts payable and other liabilities

     (91,698     (39,363

Other – net

     680        2,715   
  

 

 

   

 

 

 

Total Cash Flows From Operating Activities

     (65,527     (28,277

INVESTING ACTIVITIES:

    

Property, plant and equipment additions

     (31,735     (50,242

Cash paid for acquired character property rights

     (2,800     —     

Proceeds from sale of fixed assets

     55        23,741   

(Adjustment to proceeds)/proceeds from sale of AGI In-Store

     (3,200     73,659   

Proceeds from sale of Strawberry Shortcake

     105,000        —     

Proceeds from surrender of corporate-owned life insurance policies

     24,068        —     

Proceeds from Clinton Cards administration

     —          604   
  

 

 

   

 

 

 

Total Cash Flows From Investing Activities

     91,388        47,762   

FINANCING ACTIVITIES:

    

Proceeds from revolving line of credit

     191,200        261,000   

Repayments on revolving line of credit

     (139,500     (265,500

Repayments on term loan

     (65,000     (10,000

Dividends to shareholder

     (20,724     (24,154
  

 

 

   

 

 

 

Total Cash Flows From Financing Activities

     (34,024     (38,654

EFFECT OF EXCHANGE RATE CHANGES ON CASH

     (1,663     313   
  

 

 

   

 

 

 

DECREASE IN CASH AND CASH EQUIVALENTS

     (9,826     (18,856

Cash and Cash Equivalents at Beginning of Year

     43,327        63,963   
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   $ 33,501      $ 45,107   
  

 

 

   

 

 

 

See notes to consolidated financial statements (unaudited).

 

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AMERICAN GREETINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Three and Six Months Ended August 28, 2015 and August 29, 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, 2015 refers to the year ended February 28, 2015. The Corporation’s subsidiary, AG Retail Cards Limited is consolidated on a one-month lag corresponding with its fiscal year-end of January 30 for 2016.

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, from which the Consolidated Statement of Financial Position at February 28, 2015, presented herein, has been derived.

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 August 28, 2015 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 August 28, 2015 includes:

 

    Liquidity Guaranty of Schurman’s indebtedness of $10.0 million;

 

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    normal course of business trade and other receivables due from Schurman of $29.4 million, the balance of which fluctuates throughout the year due to the seasonal nature of the business; and

 

    the retail store operating leases currently subleased to Schurman, the aggregate lease payments for the remaining life of which was $3.0 million as of August 28, 2015.

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:

 

    In evaluating the financial and operational performance, the Corporation’s shareholder and debt holders focus on performance metrics such as earnings before interest, taxes, depreciation and amortization (“EBITDA”), operating income and cash flows from operations, none of which were impacted by the correction of the errors,

 

    The numeric impact of the error on the Corporation’s results of operations, including the net dollar impact, the impact as a percentage of period earnings, the impact on financial trends, and the impact on non-GAAP measures such as adjusted operating income the Corporation presents in quarterly public debt holder conference calls, which were deemed immaterial, particularly in light of the Corporation’s stakeholders’ focus on EBITDA, operating income and cash flows from operations, and

 

    The absence of any impact on the Corporation’s compliance with its debt covenants, management compensation or segment reporting.

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 July 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2015-11 (“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 requires 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 August 28, 2015, approximately 48% 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.

 

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In April 2015, the FASB issued ASU No. 2015-03 (“ASU 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. ASU 2015-03 is effective for public business entities for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years, with early adoption permitted. The Corporation does not expect that the adoption of this standards update will have a material impact 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”. 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”. The objective of ASU 2014-09 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 2014-09 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 applying 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; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all 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, public business entities should apply the guidance in ASU 2014-09 to annual reporting periods (including interim periods within those periods) beginning after December 15, 2017. Early adoption is permitted but not before annual periods beginning after December 15, 2016. Entities have the option of using either a full retrospective or modified approach to adopt ASU 2014-09. The Corporation is currently evaluating the new guidance and has not determined the impact this standard may have on its financial statements nor decided upon the 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, 2015, the Corporation entered into an agreement to sell 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 $105.0 million in cash which is included in “Proceeds from sale of Strawberry Shortcake” within “Investing Activities” on the Consolidated Statement of Cash Flows. During the six months ended August 28, 2015, the Corporation recognized a net gain of $61.6 million from the sale of Strawberry Shortcake.

Character Property Rights Acquisition

As reported in its Annual Report on Form 10-K for the year ended February 28, 2015, in order to secure complete control and ownership over the rights in certain character properties, including the Strawberry Shortcake property, that the Corporation previously granted to 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

 

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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. This payment is included in “Cash paid for acquired character property rights” within “Investing Activities” on the Consolidated Statement of Cash Flows.

Sale of AGI In-Store

On August 29, 2014, the Corporation completed the sale of its wholly-owned display fixtures business, AGI In-Store, for $73.7 million in cash, subject to closing date working capital adjustments. A gain of $38.8 million was recognized from the sale in the prior year second fiscal quarter and was included in “Other operating income – net” on the Consolidated Statement of Income. In March 2015, the working capital adjustments were finalized and a payment of $3.2 million was made to the buyer. This payment and the prior year cash proceeds from the sale are included in “(Adjustment to proceeds)/proceeds from sale of AGI In-Store” within “Investing Activities” on the Consolidated Statement of Cash Flows. Subsequent to the prior year second quarter, post-closing date adjustments, including the final working capital adjustment, reduced the overall gain by $0.1 million and $3.7 million in the prior year third and fourth quarters, respectively.

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, 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 surrender of those policies, the Corporation received proceeds of $24.1 million. These proceeds are included in “Proceeds from surrender of corporate-owned life insurance policies” within “Investing Activities” on the Consolidated Statement of Cash Flows.

 

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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      Six Months Ended  
(In thousands)    August 28,
2015
     August 29,
2014
     August 28,
2015
     August 29,
2014
 

Royalty revenue

   $ 1,975       $ 4,923       $ 3,104       $ 10,861   
  

 

 

    

 

 

    

 

 

    

 

 

 

Royalty expenses:

           

Material, labor and other production costs

   $ 1,241       $ 1,491       $ 2,175       $ 3,035   

Selling, distribution and marketing expenses

     988         1,699         1,691         3,275   

Administrative and general expenses

     344         309         711         781   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,573       $ 3,499       $ 4,577       $ 7,091   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 six month periods do not have comparative amounts in the current year.

Note 6 – Other Income and Expense

Other Operating Income – Net

 

     Three Months Ended      Six Months Ended  
(In thousands)    August 28,
2015
     August 29,
2014
     August 28,
2015
     August 29,
2014
 

Gain adjustment (gain) on sale of Strawberry Shortcake

   $ 41       $ —         $ (61,625    $ —     

Gain on sale of AGI In-Store

     —           (38,803      —           (38,803

Clinton Cards secured debt recovery

     —           —           —           (3,390

State tax credits

     (6,541      —           (6,541      —     

Loss on asset disposal

     57         15,710         66         15,733   

Miscellaneous

     (866      (735      (1,629      664   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other operating income – net

   $ (7,309    $ (23,828    $ (69,729    $ (25,796
  

 

 

    

 

 

    

 

 

    

 

 

 

During the six months ended August 28, 2015, the Corporation recognized a net gain of $61.6 million from the sale of Strawberry Shortcake, which included a first quarter gain of $61.7 million and an adjustment to the gain in the second quarter of approximately $0.1 million. See Note 4 for further information.

During the quarter ended August 28, 2015, the Corporation recognized income of $6.5 million 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.

During the quarter ended August 29, 2014, the Corporation recognized a gain on the sale of AGI In-Store of $38.8 million. See Note 4 for further information.

“Loss on asset disposal” during the three and six month periods ended August 29, 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.

 

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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.

Other Non-Operating Income – Net

 

     Three Months Ended      Six Months Ended  
(In thousands)    August 28,
2015
     August 29,
2014
     August 28,
2015
     August 29,
2014
 

Foreign exchange loss (gain)

   $ 111       $ (63    $ (673    $ (523

Rental income

     (129      (216      (281      (755

Miscellaneous

     (36      7         (38      (101
  

 

 

    

 

 

    

 

 

    

 

 

 

Other non-operating income – net

   $ (54    $ (272    $ (992    $ (1,379
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 7 – Accumulated Other Comprehensive Income (Loss)

The changes in accumulated other comprehensive 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

     (4,379      245         34,477         30,343   

Amounts reclassified from accumulated other comprehensive income (loss)

     —           476         —           476   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net current period other comprehensive income (loss)

     (4,379      721         34,477         30,819   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at August 28, 2015

   $ (2,543    $ (25,518    $ 34,477       $ 6,416   
  

 

 

    

 

 

    

 

 

    

 

 

 

The reclassifications out of accumulated other comprehensive income (loss) are as follows:

 

(In thousands)    Six Months Ended
August 28, 2015
     Consolidated Statement of Income
Classification

Pensions and Postretirement Benefits:

     

Amortization of pensions and other postretirement benefits items

     

Actuarial losses, net

   $ (1,094    Administrative and general expenses

Prior service credit, net

     348       Administrative and general expenses
  

 

 

    
     (746   

Tax benefit

     270       Income tax expense
  

 

 

    

Total, net of tax

     (476   
  

 

 

    

Total reclassifications

   $ (476   
  

 

 

    

As reported in its Annual Report 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

 

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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 second quarter, an unrealized gain, net of tax, of $34.5 million was recognized in other comprehensive income during the six months ended August 28, 2015.

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)    August 28, 2015      February 28, 2015      August 29, 2014  

Allowance for seasonal sales returns

   $ 16,437       $ 18,895       $ 18,147   

Allowance for outdated products

     10,109         11,074         10,863   

Allowance for doubtful accounts

     1,814         1,730         1,612   

Allowance for marketing funds

     23,495         26,841         28,836   

Allowance for rebates

     21,465         34,214         27,425   
  

 

 

    

 

 

    

 

 

 
   $ 73,320       $ 92,754       $ 86,883   
  

 

 

    

 

 

    

 

 

 

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 $13.9 million, $17.0 million and $12.5 million as of August 28, 2015, February 28, 2015 and August 29, 2014, respectively.

Note 9 – Inventories

 

(In thousands)    August 28, 2015      February 28, 2015      August 29, 2014  

Raw materials

   $ 19,861       $ 14,809       $ 15,304   

Work in process

     12,869         7,578         11,892   

Finished products

     337,344         297,899         359,219   
  

 

 

    

 

 

    

 

 

 
     370,074         320,286         386,415   

Less LIFO reserve

     81,659         80,755         83,493   
  

 

 

    

 

 

    

 

 

 
     288,415         239,531         302,922   

Display materials and factory supplies

     8,923         9,046         9,378   
  

 

 

    

 

 

    

 

 

 
   $ 297,338       $ 248,577       $ 312,300   
  

 

 

    

 

 

    

 

 

 

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 $64.2 million, $63.3 million and $68.0 million as of August 28, 2015, February 28, 2015 and August 29, 2014, respectively.

 

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Note 10 – Deferred Costs

Deferred costs and future payment commitments for retail supply agreements are included in the following financial statement captions:

 

(In thousands)    August 28, 2015      February 28, 2015      August 29, 2014  

Prepaid expenses and other

   $ 89,305       $ 98,061       $ 90,496   

Other assets

     411,909         364,311         403,920   
  

 

 

    

 

 

    

 

 

 

Deferred cost assets

     501,214         462,372         494,416   

Other current liabilities

     (64,117      (59,018      (82,422

Other liabilities

     (160,558      (104,127      (141,102
  

 

 

    

 

 

    

 

 

 

Deferred cost liabilities

     (224,675      (163,145      (223,524
  

 

 

    

 

 

    

 

 

 

Net deferred costs

   $ 276,539       $ 299,227       $ 270,892   
  

 

 

    

 

 

    

 

 

 

The Corporation maintains an allowance for deferred costs related to supply agreements of $3.5 million, $2.3 million and $3.1 million at August 28, 2015, February 28, 2015 and August 29, 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 building is currently being constructed and expected to be available for occupancy in calendar year 2016.

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 $57.4 million, $31.7 million and $14.8 million as of August 28, 2015, February 28, 2015 and August 29, 2014, respectively. See Note 17 for further information.

 

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Note 12 – Debt

There was no debt due within one year as of August 28, 2015 and February 28, 2015. Debt due within one year totaled $20,000 as of August 29, 2014, which represented the current maturity of the term loan.

Long-term debt and their related calendar year due dates as of August 28, 2015, February 28, 2015 and August 29, 2014, respectively, were as follows:

 

(In thousands)    August 28, 2015      February 28, 2015      August 29, 2014  

Term loan, due 2019

   $ 185,000       $ 250,000       $ 330,000   

7.375% senior notes, due 2021

     225,000         225,000         225,000   

Revolving credit facility, due 2018

     56,000         4,300         —     

6.10% senior notes, due 2028

     181         181         181   

Unamortized financing fees

     (4,429      (6,752      (9,591
  

 

 

    

 

 

    

 

 

 
     461,752         472,729         545,590   

Current portion of term loan

     —           —           (20,000
  

 

 

    

 

 

    

 

 

 
   $ 461,752       $ 472,729       $ 525,590   
  

 

 

    

 

 

    

 

 

 

At August 28, 2015, the balances outstanding on the term loan facility and revolving credit facility bear interest at a rate of approximately 2.7% and 2.7%, respectively. The revolving credit facility provides the Corporation with funding of up to $250 million. 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 28, 2015, February 28, 2015 and August 29, 2014, respectively. Outstanding letters of credit, which reduce the total credit available under the revolving credit and the accounts receivable facilities, totaled $26.4 million at August 28, 2015.

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’s August 9, 2019 maturity date. During the six months ended August 28, 2015, the Corporation expensed an additional $1.8 million of unamortized financing fees as a result of the 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 $234.1 million (at a carrying value of $225.2 million), $238.2 million (at a carrying value of $225.2 million) and $240.3 million (at a carrying value of $225.2 million) at August 28, 2015, February 28, 2015 and August 29, 2014, 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 $240.5 million (at a principal carrying value of $241.0 million), $251.8 million (at a principal carrying value of $254.3 million), and $330.0 million (at a principal carrying value of $330.0 million) at August 28, 2015, February 28, 2015 and August 29, 2014, respectively.

At August 28, 2015, the Corporation was in compliance with the financial covenants under its borrowing agreements.

 

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Note 13 – Retirement Benefits

The components of periodic benefit cost for the Corporation’s defined benefit pension and postretirement benefits plans are as follows:

 

     Defined Benefit Pension Plans  
     Three Months Ended      Six Months Ended  
(In thousands)    August 28,
2015
     August 29,
2014
     August 28,
2015
     August 29,
2014
 

Service cost

   $ 159       $ 145       $ 318       $ 289   

Interest cost

     1,550         1,846         3,108         3,683   

Expected return on plan assets

     (1,659      (1,628      (3,327      (3,251

Amortization of prior service cost

     1         1         2         2   

Amortization of actuarial loss

     846         720         1,694         1,426   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 897       $ 1,084       $ 1,795       $ 2,149   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Postretirement Benefits Plan  
     Three Months Ended      Six Months Ended  
(In thousands)    August 28,
2015
     August 29,
2014
     August 28,
2015
     August 29,
2014
 

Service cost

   $ 125       $ 100       $ 250       $ 200   

Interest cost

     525         675         1,050         1,350   

Expected return on plan assets

     (675      (700      (1,350      (1,400

Amortization of prior service credit

     (175      (325      (350      (650

Amortization of actuarial gain

     (300      (225      (600      (450
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ (500    $ (475    $ (1,000    $ (950
  

 

 

    

 

 

    

 

 

    

 

 

 

The Corporation has a discretionary profit-sharing plan with a 401(k) provision covering most of its United States employees. The profit-sharing plan expense for the six months ended August 28, 2015 was $3.4 million, compared to $5.5 million in the prior year period. The Corporation also matches a portion of 401(k) employee contributions. The expenses recognized for the three and six month periods ended August 28, 2015 were $1.3 million and $2.6 million ($1.3 million and $2.6 million for the three and six month periods ended August 29, 2014), respectively. The profit-sharing plan and 401(k) matching expenses for the six month periods are estimates as actual contributions are determined after fiscal year-end.

At August 28, 2015, February 28, 2015 and August 29, 2014, the liability for postretirement benefits other than pensions was $19.2 million, $17.5 million and $19.7 million, respectively, and is included in “Other liabilities” on the Consolidated Statement of Financial Position. At August 28, 2015, February 28, 2015 and August 29, 2014, the long-term liability for pension benefits was $78.6 million, $81.9 million and $74.5 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:

 

    Level 1 – Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

    Level 2 – Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

    Level 3 – Valuation is based upon unobservable inputs that are significant to the fair value measurement.

 

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The following table summarizes the financial assets and liabilities measured at fair value as of August 28, 2015:

 

(In thousands)      August 28, 2015        Level 1      Level 2      Level 3  

Assets measured on a recurring basis:

           

Deferred compensation plan assets

   $ 11,514       $ 10,236       $ 1,278       $ —     

Investment in equity securities

     56,482         56,482         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 67,996       $ 66,718       $ 1,278       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities measured on a recurring basis:

           

Deferred compensation plan liabilities

   $ 12,425       $ 10,236       $ 2,189       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes the assets and liabilities measured at fair value as of February 28, 2015:

 

(In thousands)    February 28, 2015      Level 1      Level 2      Level 3  

Assets measured on a recurring basis:

        

Deferred compensation plan assets

   $ 12,745       $ 10,997       $ 1,748       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities measured on a recurring basis:

        

Deferred compensation plan liabilities

   $ 13,412       $ 10,997       $ 2,415       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes the assets and liabilities measured at fair value as of August 29, 2014:

 

(In thousands)      August 29, 2014        Level 1      Level 2      Level 3  

Assets measured on a recurring basis:

           

Deferred compensation plan assets

   $ 12,516       $ 10,599       $ 1,917       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities measured on a recurring basis:

           

Deferred compensation plan liabilities

   $ 13,429       $ 10,599       $ 2,830       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

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 on a quoted price in an active market.

Note 15 - Contingency

The Corporation is presently involved in various judicial, administrative, regulatory and arbitration proceedings concerning matters arising in the ordinary course of business, including but not limited to, employment, commercial disputes and other contractual matters. 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 cases seek an indeterminate amount of damages.

 

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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. The Court’s Order Granting Preliminary Approval of Class Action Settlement ordered plaintiffs to file their motion for final approval of the settlement, together with applications for attorney’s fees, costs and service awards, no later than October 16, 2015 and set the final approval hearing for 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 the Ackerman 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.

 

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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 21.0% and 31.7% for the three and six months ended August 28, 2015, respectively, and 33.8% and 26.0% for the three and six months ended August 29, 2014, respectively. The lower than statutory rate for the three and six month periods are 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, domestic production activities deduction and the tax treatment of corporate-owned life insurance. The lower than statutory rate in the prior period was due primarily to the recording of a net $3.1 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.

As discussed in Note 7, the Corporation recorded an adjustment to mark to market the value of one of its investments as of August 28, 2015. As a result, a decrease in the Corporation’s deferred tax assets in the amount of $22.0 million was recognized in other comprehensive income for the six months ended August 28, 2015.

At August 28, 2015, the Corporation had unrecognized tax benefits of $16.9 million that, if recognized, would have a favorable effect on the Corporation’s income tax expense of $15.3 million.

The Corporation recognizes interest and penalties accrued on unrecognized tax benefits and refundable income taxes as a component of income tax expense. During the six months ended August 28, 2015, the Corporation recognized a net benefit of $1.2 million for interest and penalties on unrecognized tax benefits and refundable income taxes. As of August 28, 2015, 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 million.

The Corporation is subject to examination by the Internal Revenue Service for tax years 2010 to the present and various U.S. state and local jurisdictions for tax years 2001 to the present. The Corporation is also subject to tax examination in various international tax jurisdictions, including Canada, the United Kingdom, Australia, Italy, Mexico and New Zealand for tax years 2006 to the present.

Note 17 – Related Party Information

World headquarters 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

 

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“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). Morry Weiss, the Chairman of the board 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 additional 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, was reserved to the manager of Crocker Park, LLC, who is not an affiliate of the Weiss Family and who 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, will sublease 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 adjacent to the world headquarters building and a surface parking lot on land that it is leasing from the Corporation. The Corporation has entered into operating leases to lease these buildings from H L & L, which are anticipated to be available for occupancy in calendar year 2016. The initial lease terms are fifteen years and will begin upon occupancy. The total 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 be 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 be higher than expected and the Corporation may have 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 million. No loans to HL&L were outstanding as of August 28, 2015 and February 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, its parent 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, amounts due to affiliates totaled $1.9 million as of February 28, 2015. No amounts were due to or due from affiliates under this arrangement as of August 28, 2015.

Note 18 – Business Segment Information

The Corporation has North American Social Expression Products, International Social Expression Products, Retail Operations, AG Interactive and Non-reportable segments. 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 August 28, 2015, the Retail Operations segment operated 405 card and gift retail stores in the United Kingdom.

 

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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. For the three and six months ended August 28, 2015, the Corporation’s Non-reportable segment primarily includes licensing activities. For the three and six months ended August 29, 2014, the Non-reportable segment also included the design, manufacture and sale of display fixtures. The display fixtures business was sold on the last day of the quarter ended August 29, 2014. See Note 4 for further information.

 

     Three Months Ended      Six Months Ended  
(In thousands)    August 28,
2015
     August 29,
2014
     August 28,
2015
     August 29,
2014
 

Total Revenue:

           

North American Social Expression Products

   $ 285,556       $ 276,990       $ 621,160       $ 606,047   

International Social Expression Products

     65,858         68,451         128,026         143,490   

Intersegment items

     (11,286      (11,234      (21,599      (21,299
  

 

 

    

 

 

    

 

 

    

 

 

 

Net

     54,572         57,217         106,427         122,191   

Retail Operations

     65,503         69,741         137,311         148,905   

AG Interactive

     13,736         14,445         27,166         28,944   

Non-reportable segment

     1,661         14,032         2,407         29,922   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 421,028       $ 432,425       $ 894,471       $ 936,009   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Three Months Ended      Six Months Ended  
(In thousands)    August 28,
2015
     August 29,
2014
     August 28,
2015
     August 29,
2014
 

Segment Earnings (Loss) Before Tax:

        

North American Social Expression Products

   $ 46,209       $ 27,830       $ 119,336       $ 97,194   

International Social Expression Products

     (49      (6      (5,059      3,756   

Intersegment items

     879         570         1,630         (1,740
  

 

 

    

 

 

    

 

 

    

 

 

 

Net

     830         564         (3,429      2,016   

Retail Operations

     (12,615      (14,563      (20,758      (18,603

AG Interactive

     5,276         5,964         10,147         11,376   

Non-reportable segment

     (934      (1,306      59,413         2,709   

Unallocated

        

Interest expense

     (6,486      (9,255      (14,599      (18,249

Profit-sharing plan expense

     (1,675      (1,389      (3,350      (5,468

Corporate overhead expense

     393         26,662         (4,429      18,968   
  

 

 

    

 

 

    

 

 

    

 

 

 
     (7,768      16,018         (22,378      (4,749
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 30,998       $ 34,507       $ 142,331       $ 89,943   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 six months ended August 28, 2015, Non-reportable segment earnings includes a gain of $61.6 million from the sale of Strawberry Shortcake. See Note 4 for further information.

For both the three and six month periods ended August 28, 2015, “Corporate overhead expense” includes income recognized from state tax credits of $6.5 million. See Note 6 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

For both the three and six month periods ended August 29, 2014, “Corporate overhead expense” included the gain on sale of AGI In-Store of $38.8 million. 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 $2.1 million, $4.3 million and $3.5 million at August 28, 2015, February 28, 2015 and August 29, 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.

 

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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. 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

Second Quarter Results of Operations

Total revenue for the current year second quarter was $421.0 million, a decrease of $11.4 million or 2.6% compared to the prior year period. This decrease was primarily the result of foreign currency translation, which had an unfavorable impact of approximately $16 million, as well as lower revenues for our Non-reportable segment due to the sale of our display fixtures business at the end of the prior year second quarter and the sale of our Strawberry Shortcake property and related intangible assets and licensing agreements (“Strawberry Shortcake”) at the beginning of the current year first quarter. These impacts were partially offset by higher sales of gift packaging, party goods and greeting cards.

Second quarter operating income was $37.4 million, a decrease of $6.1 million compared to the same period in the prior year. The decline was driven by prior year transactions that included the gain of $38.8 million in connection with the sale of A.G. Industries, Inc. (dba AGI In-Store “AGI In-Store”), partially offset by the non-cash loss on disposal of $15.5 million related to the sale of the current world headquarters location. The current quarter includes income of $6.5 million 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. Net of the above items, operating income increased due to improved earnings in our North American Social Expression Products and Retail Operations segment in addition to lower Corporate overhead costs.

 

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Results of Operations

Three months ended August 28, 2015 and August 29, 2014

Net income was $24.5 million in the second quarter compared to $22.8 million in the prior year period.

Our results for the three months ended August 28, 2015 and August 29, 2014 are summarized below:

 

(Dollars in thousands)    2015      % Total
Revenue
    2014      % Total
Revenue
 

Net sales

   $ 418,611         99.4   $ 427,090         98.8

Other revenue

     2,417         0.6     5,335         1.2
  

 

 

      

 

 

    

Total revenue

     421,028         100.0     432,425         100.0

Material, labor and other production costs

     177,985         42.3     180,109         41.7

Selling, distribution and marketing expenses

     153,641         36.5     165,834         38.3

Administrative and general expenses

     59,365         14.1     66,850         15.5

Other operating income – net

     (7,309      (1.7 %)      (23,828      (5.5 %) 
  

 

 

      

 

 

    

Operating income

     37,346         8.8     43,460         10.0

Interest expense

     6,486         1.5     9,255         2.1

Interest income

     (84      (0.0 %)      (30      (0.0 %) 

Other non-operating income – net

     (54      (0.0 %)      (272      (0.1 %) 
  

 

 

      

 

 

    

Income before income tax expense

     30,998         7.3     34,507         8.0

Income tax expense

     6,518         1.5     11,667         2.7
  

 

 

      

 

 

    

Net income

   $ 24,480         5.8   $ 22,840         5.3
  

 

 

      

 

 

    

For the three months ended August 28, 2015, consolidated net sales were $418.6 million, down from $427.1 million in the prior year second quarter. This 2.0%, or $8.5 million, decrease was driven by the unfavorable impact of foreign currency of approximately $16 million and lower sales in our fixtures business of approximately $9 million due to the sale of that business at the end of the prior year second quarter. These decreases were partially offset by increased sales of gift packaging and party goods of approximately $12 million and higher sales of greeting cards of approximately $5 million. The current year quarter includes an unfavorable impact of approximately $1.5 million related to SBT implementations, which is flat to the prior year quarter.

Other revenue, primarily royalty revenue from our character properties, decreased $2.9 million during the three months ended August 28, 2015. In March 2015, we completed the sale of Strawberry Shortcake. As such, royalty revenue related to Strawberry Shortcake for the prior year three month period does not have a comparative amount in the current year.

Wholesale Unit and Pricing Analysis for Greeting Cards

Unit and pricing comparatives (on a sales less returns basis), excluding intercompany eliminations, for the three months ended August 28, 2015 and August 29, 2014 are summarized below:

 

     Increase (Decrease) From the Prior Year  
     Everyday Cards     Seasonal Cards     Total Greeting Cards  
     2015     2014     2015     2014     2015     2014  

Unit volume

     (1.1 %)      1.1     10.9     (3.8 %)      1.2     0.1

Selling prices

     2.0     4.2     (1.1 %)      13.0     1.4     5.9

Overall increase / (decrease)

     0.9     5.3     9.6     8.7     2.6     6.0

 

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During the second quarter, combined everyday and seasonal greeting card sales less returns increased 2.6% compared to the prior year quarter, including increases in selling prices of 1.4% and unit volume of 1.2%. The overall increase was driven by increased selling prices of everyday greeting cards in our North American Social Expression Products segment and increased seasonal units in our North American Social Expressions Products and International Social Expressions Products segments.

Everyday card sales less returns for the second quarter increased 0.9% due to increases in selling prices of 2.0%, offset by a decrease in unit volume of 1.1%. The selling price increase was driven by general price increases within the core product line, which more than offset the continued unfavorable shift to a higher proportion of value cards. The unit volume decline was primarily due to lower sales in our North American Social Expression Products segment.

Seasonal card sales less returns increased 9.6% during the second quarter, including a 10.9% increase in unit volume offset by a decrease in selling price of 1.1%. Since the second quarter has the fewest holidays, the change in selling prices and unit volume appear large on a percentage basis compared to other quarters. The increase in unit volume was driven by the Father’s Day programs in our North American Social Expression Products and International Social Expression Products segments and the Graduation program in our North American Social Expression Products segment, partially offset by a decrease in the Fall program in our North American Social Expression Products segment. The selling price decrease was primarily driven by the Father’s Day program in our International Social Expression Products segment, partially offset by an increase in 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 August 28, 2015 were $178.0 million, compared to $180.1 million in the prior year three months. As a percentage of total revenue, these costs were 42.3% in the current period compared to 41.7% for the three months ended August 29, 2014. The $2.1 million dollar decrease was primarily due to the favorable impact of foreign currency translation of approximately $7 million and the elimination of costs related to the display fixtures business that was sold in the prior year second quarter. Partially offsetting these decreases were higher product content and production expenses, unfavorable product mix and the impact of higher sales volume in the wholesale card businesses and lower margins on slightly higher volumes in the Retail Operations segment.

Selling, distribution and marketing (“SDM”) expenses for the three months ended August 28, 2015 were $153.6 million, decreasing $12.2 million from $165.8 million in the prior year second quarter. As a percentage of total revenue, these costs were 36.5% in the current period compared to 38.3% for the prior year period. The dollar decrease in the current year second quarter was driven by lower supply chain costs of approximately $2 million, lower marketing and product management costs of approximately $1 million, the elimination of approximately $1 million of costs related to the fixture business that was sold in the prior year second quarter and the favorable impact of foreign currency translation of approximately $8 million.

Administrative and general expenses were $59.4 million for the three months ended August 28, 2015, a decrease of $7.5 million from $66.9 million for the three months ended August 29, 2014. This decrease was driven primarily by lower retail expenses of approximately $3 million, the elimination of approximately $1 million of costs related to the display fixture business that was sold in the prior year second quarter, the favorable impact of foreign currency translation of approximately $2 million and other costs savings of approximately $1 million.

Other operating income – net was $7.3 million for the three months ended August 28, 2015 compared to $23.8 million for the prior year second quarter. The current year period includes income of $6.5 million 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. The prior year period included the gain on the sale of AGI In-Store of $38.8 million which was partially offset by a non-cash loss recorded upon the sale of our current world headquarters location of $15.5 million.

 

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Other non-operating income – net for the three months ended August 28, 2015 was $0.1 million, decreasing $0.2 million from $0.3 million in the prior year second quarter.

The effective tax rate was 21.0% and 33.8% for the three months ended August 28, 2015 and August 29, 2014, respectively. The lower than statutory rate for the current 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, domestic production activities deduction and the tax treatment of certain corporate-owned life insurance policies. The lower than statutory rate in the prior period was due primarily to the favorable settlement of state audits.

Results of Operations

Six months ended August 28, 2015 and August 29, 2014

Net income was $97.2 million in the six months ended August 28, 2015 compared to $66.6 million in the prior year six months.

Our results for the six months ended August 28, 2015 and August 29, 2014 are summarized below:

 

(Dollars in thousands)    2015      % Total
Revenue
    2014      % Total
Revenue
 

Net sales

   $ 890,503         99.6   $ 924,364         98.8

Other revenue

     3,968         0.4     11,645         1.2
  

 

 

      

 

 

    

Total revenue

     894,471         100.0     936,009         100.0

Material, labor and other production costs

     373,459         41.8     380,895         40.7

Selling, distribution and marketing expenses

     317,400         35.5     338,093         36.1

Administrative and general expenses

     117,586         13.1     136,145         14.5

Other operating income – net

     (69,729      (7.8 %)      (25,796      (2.7 %) 
  

 

 

      

 

 

    

Operating income

     155,755         17.4     106,672         11.4

Interest expense

     14,599         1.6     18,249         1.9

Interest income

     (183      (0.0 %)      (141      (0.0 %) 

Other non-operating income – net

     (992      (0.1 %)      (1,379      (0.1 %) 
  

 

 

      

 

 

    

Income before income tax expense

     142,331         15.9     89,943         9.6

Income tax expense

     45,087         5.0     23,364         2.5
  

 

 

      

 

 

    

Net income

   $ 97,244         10.9   $ 66,579         7.1
  

 

 

      

 

 

    

For the six months ended August 28, 2015, consolidated net sales were $890.5 million, down from $924.4 million in the prior year six months. This 3.7%, or $33.9 million, decrease was driven by the unfavorable impact of foreign currency translation of approximately $33 million, lower sales from our display fixture business of approximately $20 million due to the sale of that business at the end of the prior year second quarter, and lower card sales of approximately $5 million. These decreases were partially offset by increased sales of gift packaging and party goods of approximately $21 million and the favorable impact of fewer SBT implementations of approximately $3 million. The impact of SBT implementations in the current year six months was a charge of approximately $2 million.

Other revenue, primarily royalty revenue from certain character properties, decreased $7.7 million in the six months ended August 28, 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 six month period does not have a comparative amount in the current year.

 

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Wholesale Unit and Pricing Analysis for Greeting Cards

Unit and pricing comparatives (on a sales less returns basis), excluding intercompany eliminations, for the six months ended August 28, 2015 and August 29, 2014 are summarized below:

 

     Increase (Decrease) From the Prior Year  
     Everyday Cards     Seasonal Cards     Total Greeting Cards  
     2015     2014     2015     2014     2015     2014  

Unit volume

     (1.2 %)      (1.4 %)      (0.7 %)      4.2     (1.0 %)      0.1

Selling prices

     2.0     4.9     0.3     2.0     1.5     4.1

Overall increase / (decrease)

     0.8     3.4     (0.3 %)      6.3     0.5     4.2

During the six months ended August 28, 2015, combined everyday and seasonal greeting card sales less returns increased 0.5% compared to the prior year six months. The overall increase was primarily driven by increases in selling prices from our everyday greeting cards in our North American Social Expression Products.

Everyday card sales less returns were up 0.8 % compared to the prior year six months, as a result of increases in selling prices of 2.0%, partially offset by a decline in unit volume of 1.2%. The increase in selling prices was driven by general price increases within the core product line, which more than offset the continued unfavorable shift to a higher proportion of value cards. The unit volume decline was primarily driven by lower sales within our North American Social Expression Products segment.

Seasonal card sales less returns decreased 0.3%, with a unit volume decline of 0.7% and a selling price increase of 0.3%. The decrease in unit volume was attributable to the Fall program in our North American Social Expression Products segment, Easter program in both our North American Social Expression Products and International Social Expression Products segments and Mother’s Day program in our International Social Expression Products segment, partially offset by increases in the Father’s Day program in our International Social Expression Products segment and Graduation program in our North American Social Expression Products segment. The increase in selling prices was driven by the Fall and Graduation programs in our North American Social Expression Products segment.

Expense Overview

MLOPC for the six months ended August 28, 2015 were $373.5 million, a decrease of $7.4 million from $380.9 million for the comparable period in the prior year. As a percentage of total revenue, these costs were 41.8% in the current period compared to 40.7% for the six months ended August 29, 2014. The $7.4 million dollar decrease was primarily due to the favorable impact of foreign currency translation of approximately $14 million and the elimination of costs related to the display fixtures business that was sold in the prior year second quarter. Partially offsetting these decreases were higher product content and production expenses, and the impact of higher sales volume in the wholesale card businesses and lower margins on slightly higher sales volumes in the Retail segment.

SDM expenses for the six months ended August 28, 2015 were $317.4 million, decreasing $20.7 million from $338.1 million for the comparable period in the prior year. As a percentage of total revenue, these costs were 35.5% in the current period compared to 36.1% for the prior year period. The decrease was primarily driven by the favorable impact of foreign currency translation of approximately $16 million, lower supply chain costs of approximately $3 million, lower expenses from our display fixture business of approximately $2 million due to the sale of that business in the prior year second quarter and other cost savings of approximately $2 million, offset by higher expenses in the Retail Operations segment of $3 million.

Administrative and general expenses were $117.6 million for the six months ended August 28, 2015, a decrease of $18.5 million from $136.1 million in the prior year period. This decrease was driven primarily by the favorable impact of foreign currency translation of approximately $3 million, lower expenses from our display fixture business of approximately $2 million due to the sale of that business in the prior year second quarter, lower expenses in our Retail Operations segment of approximately $4 million, elimination of expenses related to the former stock compensation program of approximately $3 million, decreased profit sharing expense of approximately $2 million and other general cost savings of approximately $4 million.

 

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Other operating income – net was $69.7 million for the six months ended August 28, 2015 compared to $25.8 million for the prior year six month period. The current year six month period includes the gain on the sale of Strawberry Shortcake of $61.6 million and the income of $6.5 million 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. The prior year six month period included the gain on the sale of AGI In-Store of $38.8 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 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.

The effective tax rate was 31.7% and 26.0% for the six months ended August 28, 2015 and August 29, 2014, respectively. The lower than statutory rate for the six months ended August 28, 2015 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, domestic production activities deduction and the tax treatment of corporate-owned life insurance. The lower than statutory rate in the prior period is due primarily to the recording of a net $3.1 million federal tax refund and related interest attributable to fiscal 2000 and the error corrections recorded in accordance with Accounting Standards Codification (“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 six months ended August 29, 2014, we identified and corrected errors in the accounting for income taxes that related to the year ended February 28, 2014. These errors primarily related to our failure to consider all sources of available 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 that was completed in fiscal 2014.

Segment Information

Our operations are organized and managed according to a number of factors, including product categories, geographic locations and channels of distribution. 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. 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, production processes, types of customers and distribution methods. At August 28, 2015, we operated 405 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 six months ended August 28, 2015, the Non-reportable segment primarily includes licensing activities. For the six months ended August 29, 2014, the Non-reportable segment also included the design, manufacture and sales of display fixtures. The display fixtures business was sold on the last day of the 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.”

 

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North American Social Expression Products Segment

 

(Dollars in thousands)    Three Months Ended August      %
Change
    Six Months Ended August      %
Change
 
       28, 2015              29, 2014                28, 2015              29, 2014         

Total revenue

   $ 285,556       $ 276,990         3.1   $ 621,160       $ 606,047         2.5

Segment earnings

     46,209         27,830         66.0     119,336         97,194         22.8

Total revenue of our North American Social Expression Products segment increased $8.6 million for the three months ended August 28, 2015 and increased $15.1 million for the six months ended August 28, 2015 compared to the prior year periods. The increase during the current quarter was primarily driven by higher gift packaging and party goods sales of approximately $12 million. These increases for the current quarter were partially offset the unfavorable impacts of foreign currency translation of approximately $4 million. The increase in total revenue for the six months ended August 28, 2015 was primarily driven by higher sales of gift packaging, party goods and other ancillary products of approximately $22 million and the favorable impact of fewer SBT Implementations of approximately $3 million, offset by lower sales of greeting cards of approximately $3 million and the unfavorable impact of foreign currency translation of approximately $7 million.

Segment earnings increased $18.4 million in the current three months compared to the three months ended August 29, 2014. The improvement was driven primarily by the prior year non-cash loss related to the sale of our current world headquarters location, 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 includes the favorable impact of higher revenues, lower marketing and product management costs of approximately $1 million and lower supply chain costs of approximately $1 million, partially offset by higher technology costs of approximately $1 million.

Segment earnings increased $22.1 million in the six month period ended August 28, 2015 compared to the prior year period. The increase was driven primarily by the prior year non-cash loss related to the sale of our current world headquarters location, 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 includes the favorable impact of higher revenues and lower supply chain costs of approximately $2 million, partially offset by higher technology costs of approximately $1 million.

International Social Expression Products Segment

 

(Dollars in thousands)    Three Months Ended August      %
Change
    Six Months Ended August      %
Change
 
       28, 2015              29, 2014                28, 2015             29, 2014         

Total revenue

   $ 54,572       $ 57,217         (4.6 %)    $ 106,427      $ 122,191         (12.9 %) 

Segment earnings

     830         564         47.2     (3,429     2,016         —     

Total revenue of our International Social Expression Products segment decreased $2.6 million for the three month period ended August 28, 2015 compared to the prior year comparable period. The decrease was primarily due to the unfavorable impact of foreign currency translation of approximately $7 million offset by higher sales of greeting cards of approximately $4 million. Total revenue of our International Social Expression Products segment decreased $15.8 million for the six month period end August 28, 2015 compared to the prior year comparable period. The decrease was primarily due to the unfavorable impact of foreign currency translation of approximately $13 million and lower sales of greeting cards of approximately $2 million.

Segment earnings remained flat year-over-year for the three months ended August 28, 2015 and August 29, 2014. The impact on earnings from increased greeting card sales and favorable supply chain expenses was offset by increases in product costs.

 

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Segment earnings decreased $5.5 million in the six months ended August 28, 2015, compared to the six months ended August 29, 2014. The decreased earnings were primarily driven by lower sales and increased product and scrap costs, partially offset by lower supply chain costs of approximately $2 million.

Retail Operations Segment

 

(Dollars in thousands)    Three Months Ended August     %
Change
    Six Months Ended August     %
Change
 
       28, 2015             29, 2014               28, 2015             29, 2014        

Total revenue

   $ 65,503      $ 69,741        (6.1 %)    $ 137,311      $ 148,905        (7.8 %) 

Segment loss

     (12,615     (14,563     13.4     (20,758     (18,603     (11.6 %) 

Total revenue of our Retail Operations segment decreased $4.2 million and $11.6 million for the three and six months ended August 28, 2015, respectively, compared to the prior year periods. The decreases were driven by the impact of unfavorable foreign exchange translation of approximately $6 million and $13 million for the three and six month periods, respectively, partially offset by increases in greeting card and gift packaging sales. During the three and six month periods ended August 28, 2015, net sales at stores open one year or more were up approximately 2.2% and 0.8%, respectively, compared to the same periods in the prior year.

Segment earnings increased $1.9 million in the three month period ended August 28, 2015 and decreased $2.2 million in six months ended August 28, 2015 compared to the prior year periods. The improved earnings in the second quarter were about half due to the favorable impact of foreign exchange translation on the loss and about half due to lower operating expenses. The lower segment earnings in the six month period were the result of lower gross margins resulting from promotional pricing activities and increased inventory shrink and scrap expense, partially offset by the favorable impact of foreign exchange translation on the loss.

AG Interactive Segment

 

(Dollars in thousands)    Three Months Ended August      %
Change
    Six Months Ended August      %
Change
 
       28, 2015              29, 2014                28, 2015              29, 2014         

Total revenue

   $ 13,736       $ 14,445         (4.9 %)    $ 27,166       $ 28,944         (6.1 %) 

Segment earnings

     5,276         5,964         (11.5 %)      10,147         11,376         (10.8 %) 

Total revenue of AG Interactive decreased $0.7 million and $1.8 million for the three and six months ended August 28, 2015, respectively, compared to the prior year periods. These decreases in revenue were driven primarily by lower subscription revenue compared to the respective prior year periods as well as the unfavorable impact of foreign exchange translation. At the end of the second quarter of fiscal 2016, AG Interactive had approximately 3.4 million online paid subscriptions compared to 3.6 million at the end of the same period in the prior year.

Segment earnings decreased $0.7 million and $1.2 million for the three and six months ended August 28, 2015 primarily due to the impact of lower revenue.

Non-reportable Segment

 

(Dollars in thousands)    Three Months Ended August     %
Change
    Six Months Ended August      %
Change
 
       28, 2015             29, 2014               28, 2015              29, 2014         

Total revenue

   $ 1,661      $ 14,032        (88.2 %)    $ 2,407       $ 29,922         (92.0 %) 

Segment (loss) earnings

     (934     (1,306     28.5     59,413         2,709         2093.2

Total revenue from our Non-reportable segment decreased $12.4 million and $27.5 million for the three and six months ended August 28, 2015, respectively, compared to the prior year periods. The decrease in revenue for the current year periods was due to the sale of our display fixture business at the end of the prior year second quarter

 

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and the sale of Strawberry Shortcake at the beginning of the current year first quarter. Revenue of the display fixture business was $9.7 million for the three months ended August 29, 2014 and $20.2 million for the six months ended August 29, 2014. The remaining decrease in revenue was due primarily to the sale of Strawberry Shortcake.

Segment earnings increased $0.4 million and $56.7 million for the three and six months ended August 28, 2015 compared to the prior year periods. The increase for the six month period ended August 28, 2015 was primarily due to the gain of $61.6 million recorded in the first quarter of the current year in connection with the sale of Strawberry Shortcake. This increase was partially offset by the operational impact to earnings from the sale of our display fixtures business and Strawberry Shortcake as noted above.

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, domestic 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 August     Six Months Ended August  
(Dollars in thousands)        28, 2015             29, 2014             28, 2015             29, 2014      

Interest expense

   $ (6,486   $ (9,255   $ (14,599   $ (18,249

Profit-sharing expense

     (1,675     (1,389     (3,350     (5,468

Corporate overhead expense

     393        26,662        (4,429     18,968   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Unallocated

   $ (7,768   $ 16,018      $ (22,378   $ (4,749
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense is lower in both the three and six month periods ended August 28, 2015 compared to the same periods in the prior year. During the fourth quarter of 2015 and the first quarter of the current fiscal year, we made voluntary prepayments on our term loan facility of $140 million thus reducing interest expense.

Our profit-sharing plan includes a profit-sharing component and a 401(k) component. The 401(k) component is included in corporate overhead expense. While the current year three and six month expense will vary from the prior year expense pattern, we expect the full year 2016 expense of the combined components to be consistent with the prior year.

For both the three and six month periods ended August 28, 2015, “Corporate overhead expense” includes income of $6.5 million 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 Income and Expense,” to the Consolidated Financial Statements for further information.

During 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 both the three and six month periods ended August 29, 2014, “Corporate overhead expense” included the gain on sale of AGI In-Store of $38.8 million. See Note 4, “Dispositions,” to the Consolidated Financial Statements for further information.

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 August 29, 2014, has been included.

 

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Operating Activities

Operating activities used $65.5 million of cash during the six months ended August 28, 2015, compared to using $28.3 million in the prior year period.

Accounts receivable used $3.4 million of cash during the six months ended August 28, 2015, compared to providing $0.1 million of cash during the prior year period. The year-over-year decrease in cash flow of approximately $3 million occurred mainly within our North American Social Expression Products and International Social Expression Products segments due primarily to 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.

Inventory used $49.9 million of cash during the six months ended August 28, 2015, compared to $76.6 million in the prior year six months. Historically, the first half 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. In the prior year, in addition to the normal seasonal inventory build, the inventory increase related to a new party goods product launch and inventory growth in our Retail Operations segment to align inventory to more normalized levels, which was achieved and, as such, did not recur in the current year.

Deferred costs – net generally represents payments under agreements with retailers net of the related amortization of those payments. During the six months ended August 28, 2015, amortization exceeded payments by $19.4 million. During the six months ended August 29, 2014, amortization exceeded payments by $22.0 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 $91.7 million of cash during the six months ended August 28, 2015, compared to using $39.4 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 and an increase in accounts payable payments due to normal year-over-year timing of business transactions, both of which were mainly in our North American Social Expression Products and Unallocated segments.

Investing Activities

Investing activities provided $91.4 million of cash during the six months ended August 28, 2015, compared to providing $47.8 million in the prior year period. The current year includes 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 $31.7 million, cash paid for acquired character property rights of $2.8 million and a payment of $3.2 million related to the final working capital adjustments made in connection with the sale of AGI In-Store.

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. Partially offsetting these cash inflows was cash paid for capital expenditures of $50.2 million during the prior year six month period.

Financing Activities

Financing activities used $34.0 million of cash during the current year six months, compared to $38.7 million in the prior year six month period. During the current year, this use of cash was primarily driven by a voluntary prepayment made on our term loan of $65 million and cash dividend payments of $20.7 million, partially offset by the additional borrowings, net of repayments, under our revolving credit facility of $51.7 million.

In the prior year this use of cash was primarily driven by cash dividend payments of $24.2 million. In addition, we made payments in the aggregate of $10.0 million on our term loan and made repayments, net of borrowings, under our revolving credit facility of $4.5 million.

 

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Credit Sources

Substantial credit sources are available to us. In total, we had available sources of credit of approximately $485 million at August 28, 2015, 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 $217.6 million in the aggregate was unused as of August 28, 2015. Borrowings under the accounts receivable securitization facility are limited based on our eligible receivables outstanding. At August 28, 2015, we had $56 million borrowings outstanding under our revolving credit facility and we had no borrowings outstanding under our accounts receivable securitization facility. We had, in the aggregate, $26.4 million outstanding under letters of credit, which reduced the total credit availability thereunder as of August 28, 2015.

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, 2015 for further information.

At August 28, 2015, 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%/10.50% 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%. 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.

Throughout fiscal 2016 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 six months ended August 28, 2015, we spent approximately $22 million, including capital of approximately $18 million and expense of approximately $4 million, on these information technology systems. Based on the current scope of the project, we currently expect to spend approximately $170 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 $170 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

 

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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. We are leasing a portion of the Crocker Park Site to H L & L, which is constructing the new world headquarters building on the site and, when complete, will sublease the new world headquarters building back to us. In addition, to accommodate additional office needs, H L & L is constructing an additional approximately 60,000 square foot building adjacent to the world headquarters building and a surface parking lot on land that it is leasing from us. We have entered into operating leases to lease these buildings from H L & L, which are anticipated to be available for occupancy in calendar year 2016. The initial lease terms are fifteen years and will begin upon occupancy. The total 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, 2015 and Note 17, “Related Party Information,” to the Consolidated Financial Statements of this Form 10-Q.

During the quarter ended August 28, 2015, we paid cash dividends in the aggregate amount of $20.7 million to CIHC, 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 quarter ended August 29, 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.

Factors That May Affect Future Results

Certain statements in this report may constitute forward-looking statements within the meaning of the Federal securities laws. These statements can be identified by the fact that they do not relate strictly to historic or current facts. They use such words as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. These forward-looking statements are based on currently available information, but are subject to a variety of uncertainties, unknown risks and other factors concerning our operations and business environment, which are difficult to predict and may be beyond our control. Important factors that could cause actual results to differ materially from those suggested by these forward-looking statements, and that could adversely affect our future financial performance, include, but are not limited to, the following:

 

    a weak retail environment and general economic conditions;

 

    the loss of one or more retail customers and/or retail consolidations, acquisitions and bankruptcies, including the possibility of resulting adverse changes to retail contract terms;

 

    competitive terms of sale offered to customers, including costs and other terms associated with customer relationships;

 

    risks associated with leasing substantial amounts of space for our retail stores;

 

    the timing and impact of expenses incurred and investments made to support new retail or product strategies, as well as new product introductions and achieving the desired benefits from those investments;

 

    unanticipated expenses we may be required to incur relating to our world headquarters project;

 

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    our ability to qualify for, and stay qualified for, state and local incentives offered to assist us in the development of a new world headquarters;

 

    the timing of investments in, together with the ability to successfully implement or achieve the desired benefits and cost savings associated with, any information systems refresh we may implement;

 

    the timing and impact of converting customers to a scan-based trading model;

 

    Schurman Fine Paper’s ability to successfully operate its retail operations and satisfy its obligations to us;

 

    consumer demand for social expression products generally, shifts in consumer shopping behavior, and consumer acceptance of products as priced and marketed, including the success of advertising and marketing efforts;

 

    the impact and availability of technology, including social media, on product sales;

 

    escalation in the cost of providing employee health care;

 

    the ability to comply with our debt covenants;

 

    our ability to adequately maintain the security of our electronic and other confidential information;

 

    fluctuations in the value of currencies in major areas where we operate, including the U.S. Dollar, Euro, UK Pound Sterling and Canadian Dollar; and

 

    the outcome of any legal claims, known or unknown.

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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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 August 28, 2015, the end of our most recent fiscal quarter.

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.

 

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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.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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. The Court’s Order Granting Preliminary Approval of Class Action Settlement ordered plaintiffs to file their motion for final approval of the settlement, together with applications for attorney’s fees, costs and service awards, no later than October 16, 2015 and set the final approval hearing for 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.

 

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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.

Item 6. Exhibits

Exhibits required by Item 601 of Regulation S-K

 

Exhibit
Number

 

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 quarterly report on Form 10-Q for the quarter ended August 28, 2015, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statement of Income for the quarters ended August 28, 2015, and August 29, 2014, (ii) Consolidated Statement of Comprehensive Income (Loss) for the quarters ended August 28, 2015, and August 29, 2014, (iii) Consolidated Statement of Financial Position at August 28, 2015, February 28, 2015 and August 29, 2014, (iv) Consolidated Statement of Cash Flows for the six months ended August 28, 2015 and August 29, 2014 and (v) Notes to the Consolidated Financial Statements for the quarter ended August 28, 2015.

 

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SIGNATURES

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 *

October 9, 2015

 

* (Signing on behalf of Registrant as a duly authorized officer of the Registrant and signing as the chief accounting officer of the Registrant.)

 

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