UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended February 28, 2011
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 No. 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) |
Registrants telephone number, including area code: (216) 252-7300
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
Name of Each Exchange on Which Registered | |
Class A Common Shares, Par Value $1.00 | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
Class B Common Shares, Par Value $1.00
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES þ NO ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO ¨
Indicate by a check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer ¨ | |||
Non-accelerated filer ¨ | (Do not check if a smaller reporting company) | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) YES ¨ NO þ
State the aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business day of the registrants most recently completed second fiscal quarter, August 27, 2010 $729,061,401 (affiliates, for this purpose, have been deemed to be directors, executive officers and certain significant shareholders).
Number of shares outstanding as of April 27, 2011: CLASS A COMMON 37,482,554 CLASS B COMMON 2,937,927
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the American Greetings Corporation Definitive Proxy Statement for the Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days after the close of the registrants fiscal year (incorporated into Part III).
EXPLANATORY NOTE
This Amendment No. 1 amends the Annual Report on Form 10-K for the fiscal year ended February 28, 2011 (this Form 10-K/A) of American Greetings Corporation (the Corporation). The Consolidated Financial Statements of the Corporation previously reported on Form 10-K for the fiscal year ended February 28, 2011, have been amended and restated in order to reflect certain adjustments to the Corporations financial statements for each of the fiscal years ended February 28, 2011, 2010 and 2009, with respect to the impact of an understatement of a deferred tax asset that occurred in the fiscal year ended February 29, 2004. The impact of the restatement is more fully described in Note 1A to the Consolidated Financial Statements contained in this Amendment No. 1. The restatements to the affected financial statements were non-cash in nature. All referenced amounts in this Form 10-K/A for prior periods and prior-period comparisons reflect the balances and amounts on a restated basis, as applicable.
This Form 10-K/A amends and restates in their entirety Items 6, 8 and 9A of Part II and Item 15 of Part IV of the original Form 10-K filed with the SEC on April 29, 2011, and no other information included in the original Form 10-K is amended hereby. This Amendment No. 1 continues to speak as of the date of the filing of the original Form 10-K, and the Corporation has not updated the disclosures contained herein to reflect any events that occurred at a later date.
Item 6. | Selected Financial Data |
Thousands of dollars except share and per share amounts (Restated)
2011 | 2010(1) | 2009 | 2008 | 2007(2) | ||||||||||||||||
Summary of Operations |
||||||||||||||||||||
Net sales |
$ | 1,560,213 | $ | 1,598,292 | $ | 1,646,399 | $ | 1,730,784 | $ | 1,744,798 | ||||||||||
Total revenue |
1,592,568 | 1,635,858 | 1,690,738 | 1,776,451 | 1,794,290 | |||||||||||||||
Goodwill and other intangible asset impairments |
- | - | 290,166 | - | 2,196 | |||||||||||||||
Interest expense |
25,389 | 26,311 | 22,854 | 20,006 | 34,986 | |||||||||||||||
Income (loss) from continuing operations |
87,018 | 81,574 | (227,759 | ) | 83,320 | 39,938 | ||||||||||||||
(Loss) income from discontinued operations, net of tax |
- | - | - | (317 | ) | 2,440 | ||||||||||||||
Net income (loss) |
87,018 | 81,574 | (227,759 | ) | 83,003 | 42,378 | ||||||||||||||
Earnings (loss) per share: |
||||||||||||||||||||
Income (loss) from continuing operations |
2.18 | 2.07 | (4.89 | ) | 1.54 | 0.69 | ||||||||||||||
(Loss) income from discontinued operations, net of tax |
- | - | - | (0.01 | ) | 0.04 | ||||||||||||||
Earnings (loss) per share |
2.18 | 2.07 | (4.89 | ) | 1.53 | 0.73 | ||||||||||||||
Earnings (loss) per share assuming dilution |
2.11 | 2.03 | (4.89 | ) | 1.52 | 0.71 | ||||||||||||||
Cash dividends declared per share |
0.56 | 0.36 | 0.60 | 0.40 | 0.32 | |||||||||||||||
Fiscal year end market price per share |
21.65 | 19.07 | 3.73 | 18.82 | 23.38 | |||||||||||||||
Average number of shares outstanding |
39,982,784 | 39,467,811 | 46,543,780 | 54,236,961 | 57,951,952 | |||||||||||||||
Financial Position |
||||||||||||||||||||
Inventories |
179,730 | 163,956 | 194,945 | 207,629 | 174,426 | |||||||||||||||
Working capital |
373,226 | 325,551 | 244,663 | 260,500 | 448,888 | |||||||||||||||
Total assets |
1,547,249 | 1,544,498 | 1,462,895 | 1,823,979 | 1,799,595 | |||||||||||||||
Property, plant and equipment additions |
36,346 | 26,550 | 55,733 | 56,623 | 41,716 | |||||||||||||||
Long-term debt |
232,688 | 328,723 | 389,473 | 220,618 | 223,915 | |||||||||||||||
Shareholders equity(3) |
763,758 | 650,911 | 544,035 | 958,257 | 1,027,421 | |||||||||||||||
Shareholders equity per share |
18.90 | 16.49 | 13.42 | 19.65 | 18.64 | |||||||||||||||
Net return on average shareholders equity from continuing operations |
12.3 | % | 13.7 | % | (30.3 | )% | 8.4 | % | 3.5 | % |
(1) | During 2010, the Corporation incurred a loss of $29.3 million on the disposition of the Retail Operations segment. The Corporation also recorded a gain of $34.2 million related to the party goods transaction and a charge of approximately $15.8 million for asset impairments and severance associated with a facility closure. Also in 2010, the Corporation recognized a cost of $18.2 million in connection with the shutdown of its distribution operations in Mexico. See Notes 2 and 3 to the Corporations 2011 financial statements. |
(2) | During 2007, as a result of retailer consolidation, wherein multiple long-term supply agreements were terminated and a new agreement was negotiated with a new legal entity with substantially different terms and sales commitments, a gain of $20.0 million was recorded. Also, in 2007, the Corporation sold substantially all of the assets associated with its candle product lines and recorded a loss of approximately $16.0 million. |
(3) | The Corporation adopted accounting guidance for convertible debt instruments in 2010. This guidance requires an issuer of certain convertible instruments that may be settled in cash or other assets on conversion to separately account for the liability and equity components of the instrument in a manner that reflects the issuers nonconvertible debt borrowing rate. The impact on shareholders equity of retrospectively applying this guidance related to the Corporations 7.00% convertible subordinated notes issued in 2002 and settled in 2007 would have been $35 million for 2007. The convertible subordinated notes were not outstanding in the four years ended February 28, 2011. |
1
Item 8. | Financial Statements and Supplementary Data |
Page | ||||
Index to Consolidated Financial Statements and Supplementary Financial Data |
Number | |||
3 | ||||
Consolidated Statement of Operations Years ended February 28, 2011, 2010 and 2009 |
4 | |||
Consolidated Statement of Financial Position February 28, 2011 and 2010 |
5 | |||
Consolidated Statement of Cash Flows Years ended February 28, 2011, 2010 and 2009 |
6 | |||
Consolidated Statement of Shareholders Equity Years ended February 28, 2011, 2010 and 2009 |
7 | |||
Notes to Consolidated Financial Statements Years ended February 28, 2011, 2010 and 2009 |
8 | |||
Supplementary Financial Data: |
||||
47 |
2
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
of American Greetings Corporation
We have audited the accompanying consolidated statement of financial position of American Greetings Corporation as of February 28, 2011 and February 28, 2010, and the related consolidated statements of operations, shareholders equity, and cash flows for each of the three years in the period ended February 28, 2011. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Corporations management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Greetings Corporation at February 28, 2011 and February 28, 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended February 28, 2011, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 1A to the consolidated financial statements each of the three years in the period ended February 28, 2011 have been restated to correct for an error in accounting for income taxes.
As discussed in Note 1 to the consolidated financial statements, in 2010 the Corporation changed its method of accounting for business combinations.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), American Greetings Corporations internal control over financial reporting as of February 28, 2011, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 29, 2011, except for the effects of the material weakness described in the sixth paragraph as to which the date is November 14, 2011, expressed an adverse opinion thereon.
/s/ Ernst & Young LLP
April 29, 2011, except for Note 1A, as to which the date is November 14, 2011.
3
CONSOLIDATED STATEMENT OF OPERATIONS
Years ended February 28, 2011, 2010 and 2009
Thousands of dollars except share and per share amounts
2011 | 2010 | 2009 | ||||||||||
Net sales |
$ | 1,560,213 | $ | 1,598,292 | $ | 1,646,399 | ||||||
Other revenue |
32,355 | 37,566 | 44,339 | |||||||||
|
|
|
|
|
|
|||||||
Total revenue |
1,592,568 | 1,635,858 | 1,690,738 | |||||||||
Material, labor and other production costs |
682,368 | 713,075 | 809,956 | |||||||||
Selling, distribution and marketing expenses |
478,227 | 507,960 | 618,899 | |||||||||
Administrative and general expenses |
260,476 | 276,031 | 226,317 | |||||||||
Goodwill and other intangible asset impairments |
| | 290,166 | |||||||||
Other operating income net |
(3,205 | ) | (310 | ) | (1,396 | ) | ||||||
|
|
|
|
|
|
|||||||
Operating income (loss) |
174,702 | 139,102 | (253,204 | ) | ||||||||
Interest expense |
25,389 | 26,311 | 22,854 | |||||||||
Interest income |
(853 | ) | (1,676 | ) | (3,282 | ) | ||||||
Other non-operating (income) expense- net |
(5,841 | ) | (6,487 | ) | 2,157 | |||||||
|
|
|
|
|
|
|||||||
Income (loss) before income tax expense (benefit) |
156,007 | 120,954 | (274,933 | ) | ||||||||
Income tax expense (benefit) |
68,989 | 39,380 | (47,174 | ) | ||||||||
|
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|
|
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Net income (loss) |
$ | 87,018 | $ | 81,574 | $ | (227,759 | ) | |||||
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|
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Earnings (loss) per share basic |
$ | 2.18 | $ | 2.07 | $ | (4.89 | ) | |||||
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Earnings (loss) per share assuming dilution |
$ | 2.11 | $ | 2.03 | $ | (4.89 | ) | |||||
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|
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Average number of shares outstanding |
39,982,784 | 39,467,811 | 46,543,780 | |||||||||
|
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|
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|
|||||||
Average number of shares outstanding assuming dilution |
41,244,903 | 40,159,651 | 46,543,780 | |||||||||
|
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|
|
|
|
|||||||
Dividends declared per share |
$ | 0.56 | $ | 0.36 | $ | 0.60 | ||||||
|
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|
|
|
|
See notes to consolidated financial statements.
4
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
February 28, 2011 and 2010
Thousands of dollars except share and per share amounts
2011 | 2010 | |||||||||
(Restated) | ||||||||||
ASSETS |
|
|||||||||
CURRENT ASSETS |
||||||||||
Cash and cash equivalents |
$ | 215,838 | $ | 137,949 | ||||||
Trade accounts receivable, net |
119,779 | 135,758 | ||||||||
Inventories |
179,730 | 163,956 | ||||||||
Deferred and refundable income taxes |
64,898 | 93,280 | ||||||||
Assets held for sale |
7,154 | 15,147 | ||||||||
Prepaid expenses and other |
128,372 | 148,048 | ||||||||
|
|
|
| |||||||
Total current assets |
715,771 | 694,138 | ||||||||
GOODWILL |
28,903 | 31,106 | ||||||||
OTHER ASSETS |
436,137 | 428,161 | ||||||||
DEFERRED AND REFUNDABLE INCOME TAXES |
124,789 | 148,210 | ||||||||
PROPERTY, PLANT AND EQUIPMENT NET |
241,649 | 242,883 | ||||||||
|
|
|
| |||||||
$ | 1,547,249 | $ | 1,544,498 | |||||||
|
|
|
| |||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||||
CURRENT LIABILITIES |
||||||||||
Debt due within one year |
$ | | $ | 1,000 | ||||||
Accounts payable |
87,105 | 95,434 | ||||||||
Accrued liabilities |
69,824 | 78,245 | ||||||||
Accrued compensation and benefits |
72,379 | 85,092 | ||||||||
Income taxes payable |
10,951 | 13,901 | ||||||||
Other current liabilities |
102,286 | 94,915 | ||||||||
|
|
|
| |||||||
Total current liabilities |
342,545 | 368,587 | ||||||||
LONG-TERM DEBT |
232,688 | 328,723 | ||||||||
OTHER LIABILITIES |
176,522 | 168,098 | ||||||||
DEFERRED INCOME TAXES AND NONCURRENT INCOME TAXES PAYABLE |
31,736 | 28,179 | ||||||||
SHAREHOLDERS EQUITY |
||||||||||
Common shares par value $1 per share: |
||||||||||
Class A 82,181,659 shares issued less 44,711,736 treasury shares in |
37,470 | 36,257 | ||||||||
Class B 6,066,092 shares issued less 3,128,841 treasury shares in 2011 and 6,066,092 shares issued less 2,843,069 treasury shares in 2010 |
2,937 | 3,223 | ||||||||
Capital in excess of par value |
492,048 | 461,076 | ||||||||
Treasury stock |
(952,206) | (946,724) | ||||||||
Accumulated other comprehensive loss |
(2,346) | (29,815) | ||||||||
Retained earnings |
1,185,855 | 1,126,894 | ||||||||
|
|
|
| |||||||
Total shareholders equity |
763,758 | 650,911 | ||||||||
|
|
|
| |||||||
$ | 1,547,249 | $ | 1,544,498 | |||||||
|
|
|
|
See notes to consolidated financial statements.
5
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended February 28, 2011, 2010 and 2009
Thousands of dollars
2011 | 2010 | 2009 | ||||||||||||||||
OPERATING ACTIVITIES: |
||||||||||||||||||
Net income (loss) |
$ | 87,018 | $ | 81,574 | $ | (227,759 | ) | |||||||||||
Adjustments to reconcile net income (loss) to cash flows from operating activities: |
||||||||||||||||||
Goodwill and other intangible asset impairments |
| | 290,166 | |||||||||||||||
Stock-based compensation |
13,017 | 5,870 | 4,506 | |||||||||||||||
Net gain on dispositions |
(254 | ) | (6,507 | ) | | |||||||||||||
Net (gain) loss on disposal of fixed assets |
(3,463 | ) | 59 | 1,215 | ||||||||||||||
Depreciation and intangible assets amortization |
41,048 | 45,165 | 50,016 | |||||||||||||||
Deferred income taxes |
28,642 | 25,268 | (29,438 | ) | ||||||||||||||
Fixed asset impairments |
119 | 13,005 | 5,465 | |||||||||||||||
Other non-cash charges |
3,663 | 12,419 | 3,764 | |||||||||||||||
Changes in operating assets and liabilities, net of acquisitions and dispositions: |
||||||||||||||||||
Trade accounts receivable |
15,296 | (56,105 | ) | (6,504 | ) | |||||||||||||
Inventories |
(13,097 | ) | 14,923 | 2,877 | ||||||||||||||
Other current assets |
(1,922 | ) | 16,936 | 17,309 | ||||||||||||||
Income taxes |
19,947 | 18,863 | (5,934 | ) | ||||||||||||||
Deferred costs net |
14,262 | 18,405 | 27,596 | |||||||||||||||
Accounts payable and other liabilities |
(31,015 | ) | (633 | ) | (68,154 | ) | ||||||||||||
Other net |
6,538 | 8,248 | 7,915 | |||||||||||||||
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| |||||||||||||
Total Cash Flows From Operating Activities |
179,799 | 197,490 | 73,040 | |||||||||||||||
INVESTING ACTIVITIES: |
||||||||||||||||||
Property, plant and equipment additions |
(36,346 | ) | (26,550 | ) | (55,733 | ) | ||||||||||||
Cash payments for business acquisitions, net of cash acquired |
(500 | ) | (19,300 | ) | (37,882 | ) | ||||||||||||
Proceeds from sale of fixed assets |
14,242 | 1,124 | 433 | |||||||||||||||
Proceeds from escrow related to party goods transaction |
25,151 | | | |||||||||||||||
Other net |
5,663 | 4,713 | (44,153 | ) | ||||||||||||||
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|
| |||||||||||||
Total Cash Flows From Investing Activities |
8,210 | (40,013 | ) | (137,335 | ) | |||||||||||||
FINANCING ACTIVITIES: |
||||||||||||||||||
Net (decrease) increase in long-term debt |
(98,250 | ) | (62,350 | ) | 118,991 | |||||||||||||
Net decrease in short-term debt |
(1,000 | ) | | | ||||||||||||||
Sale of stock under benefit plans |
16,620 | 6,557 | 525 | |||||||||||||||
Excess tax benefit from share-based payment awards |
4,512 | 148 | | |||||||||||||||
Purchase of treasury shares |
(13,521 | ) | (11,848 | ) | (73,983 | ) | ||||||||||||
Dividends to shareholders |
(22,354 | ) | (19,049 | ) | (22,566 | ) | ||||||||||||
Debt issuance costs |
(3,199 | ) | | | ||||||||||||||
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| |||||||||||||
Total Cash Flows From Financing Activities |
(117,192 | ) | (86,542 | ) | 22,967 | |||||||||||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH |
7,072 | 6,798 | (21,956 | ) | ||||||||||||||
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
77,889 | 77,733 | (63,284 | ) | ||||||||||||||
Cash and Cash Equivalents at Beginning of Year |
137,949 | 60,216 | 123,500 | |||||||||||||||
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Cash and Cash Equivalents at End of Year |
$ | 215,838 | $ | 137,949 | $ | 60,216 | ||||||||||||
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|
See notes to consolidated financial statements.
6
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
Years ended February 28, 2011, 2010 and 2009
Thousands of dollars except per share amounts
Common Shares | Capital in Excess of |
Treasury | Accumulated Other Comprehensive |
Retained | ||||||||||||||||||||||||||||||||||||||||
Class A |
|
Class B |
|
Par Value |
|
Stock |
|
Income (Loss) |
|
Earnings |
|
Total |
| |||||||||||||||||||||||||||||||
BALANCE MARCH 1, 2008 (Restated) |
$ | 45,324 | $ | 3,434 | $ | 445,696 | $ | (872,949 | ) | $ | 21,244 | $ | 1,315,508 | $ | 958,257 | |||||||||||||||||||||||||||||
Net loss |
| | | | | (227,759 | ) | (227,759 | ) | |||||||||||||||||||||||||||||||||||
Other comprehensive loss: |
||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment |
| | | | (80,845 | ) | | (80,845 | ) | |||||||||||||||||||||||||||||||||||
Pension and postretirement adjustments recognized in accordance with ASC 715 (net of tax of $6,839) |
| | | | (7,674 | ) | | (7,674 | ) | |||||||||||||||||||||||||||||||||||
Unrealized loss on available-for-sale securities (net of tax of $0) |
| | | | (3 | ) | | (3 | ) | |||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||
Comprehensive loss |
(316,281 | ) | ||||||||||||||||||||||||||||||||||||||||||
Cash dividends $0.60 per share |
| | | | | (27,491 | ) | (27,491 | ) | |||||||||||||||||||||||||||||||||||
Sale of shares under benefit plans, including tax benefits |
26 | | 384 | | | | 410 | |||||||||||||||||||||||||||||||||||||
Purchase of treasury shares |
(8,311 | ) | (10 | ) | | (67,158 | ) | | | (75,479 | ) | |||||||||||||||||||||||||||||||||
Stock compensation expense |
| | 4,369 | | | | 4,369 | |||||||||||||||||||||||||||||||||||||
Stock grants and other |
4 | 75 | (1,364 | ) | 2,021 | | (486 | ) | 250 | |||||||||||||||||||||||||||||||||||
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BALANCE FEBRUARY 28, 2009 (Restated) |
37,043 | 3,499 | 449,085 | (938,086 | ) | (67,278 | ) | 1,059,772 | 544,035 | |||||||||||||||||||||||||||||||||||
Net income |
| | | | | 81,574 | 81,574 | |||||||||||||||||||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment |
| | | | 22,467 | | 22,467 | |||||||||||||||||||||||||||||||||||||
Reclassification of currency translation adjustment for amounts recognized in income (net of tax of $0) |
| | | | 8,627 | | 8,627 | |||||||||||||||||||||||||||||||||||||
Pension and postretirement adjustments recognized in accordance with ASC 715 (net of tax of $5,837) |
| | | | 6,366 | | 6,366 | |||||||||||||||||||||||||||||||||||||
Unrealized gain on available-for-sale securities (net of tax of $0) |
| | | | 3 | | 3 | |||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||
Comprehensive income |
119,037 | |||||||||||||||||||||||||||||||||||||||||||
Cash dividends $0.36 per share |
| | | | | (14,124 | ) | (14,124 | ) | |||||||||||||||||||||||||||||||||||
Sale of shares under benefit plans, including tax benefits |
336 | | 6,172 | | | | 6,508 | |||||||||||||||||||||||||||||||||||||
Purchase of treasury shares |
(1,125 | ) | (292 | ) | | (9,111 | ) | | | (10,528 | ) | |||||||||||||||||||||||||||||||||
Stock compensation expense |
| | 5,819 | | | | 5,819 | |||||||||||||||||||||||||||||||||||||
Stock grants and other |
3 | 16 | | 473 | | (328 | ) | 164 | ||||||||||||||||||||||||||||||||||||
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BALANCE FEBRUARY 28, 2010 (Restated) |
36,257 | 3,223 | 461,076 | (946,724 | ) | (29,815 | ) | 1,126,894 | 650,911 | |||||||||||||||||||||||||||||||||||
Net income |
| | | | | 87,018 | 87,018 | |||||||||||||||||||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment |
| | | | 15,165 | | 15,165 | |||||||||||||||||||||||||||||||||||||
Pension and postretirement adjustments recognized in accordance with ASC 715 (net of tax of $8,083) |
| | | | 12,303 | | 12,303 | |||||||||||||||||||||||||||||||||||||
Unrealized gain on available-for-sale securities (net of tax of $0) |
| | | | 1 | | 1 | |||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||
Comprehensive income |
114,487 | |||||||||||||||||||||||||||||||||||||||||||
Cash dividends $0.56 per share |
| | | | | (22,354 | ) | (22,354 | ) | |||||||||||||||||||||||||||||||||||
Sale of shares under benefit plans, including tax benefits |
1,213 | 257 | 17,951 | 7,366 | | (5,652 | ) | 21,135 | ||||||||||||||||||||||||||||||||||||
Purchase of treasury shares |
| (547 | ) | | (12,974 | ) | | | (13,521 | ) | ||||||||||||||||||||||||||||||||||
Stock compensation expense |
| | 13,017 | | | | 13,017 | |||||||||||||||||||||||||||||||||||||
Stock grants and other |
| 4 | 4 | 126 | | (51 | ) | 83 | ||||||||||||||||||||||||||||||||||||
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BALANCE FEBRUARY 28, 2011 (Restated) |
$ | 37,470 | $ | 2,937 | $ | 492,048 | $ | (952,206 | ) | $ | (2,346 | ) | $ | 1,185,855 | $ | 763,758 | ||||||||||||||||||||||||||||
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See notes to consolidated financial statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended February 28, 2011, 2010 and 2009
Thousands of dollars except per share amounts
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
Consolidation: The consolidated financial statements include the accounts of American Greetings Corporation and its subsidiaries (American Greetings or the Corporation). All significant intercompany accounts and transactions are eliminated. The Corporations fiscal year ends on February 28 or 29. References to a particular year refer to the fiscal year ending in February of that year. For example, 2011 refers to the year ended February 28, 2011.
The Corporations investments in less than majority-owned companies in which it has the ability to exercise significant influence over operating and financial policies are accounted for using the equity method except when they qualify as variable interest entities (VIE) and the Corporation is the primary beneficiary, in which case the investments are consolidated in accordance with Accounting Standards Codification (ASC) Topic 810, Consolidation. Investments that do not meet the above criteria are accounted for under the cost method.
The Corporation holds an approximately 15% equity interest in Schurman Fine Papers (Schurman), which is a VIE as defined in ASC Topic 810, Consolidation. Schurman owns and operates approximately 430 specialty card and gift retail stores in the United States and Canada. The stores are primarily located in malls and strip shopping centers. During the current period, the Corporation assessed the variable interests in Schurman and determined that a third party holder of variable interests has the controlling financial interest in the VIE and thus, the third party, not the Corporation, is the primary beneficiary. In completing this assessment, the Corporation identified the activities that it considers most significant to the future economic success of the VIE and determined that it does not have the power to direct those activities. As such, Schurman is not consolidated in the Corporations results. The Corporations maximum exposure to loss as it relates to Schurman as of February 28, 2011 includes:
| the investment in the equity of Schurman of $1,935; |
| the Liquidity Guaranty of Schurmans indebtedness of $12,000 and the Bridge Guaranty of Schurmans indebtedness of $12,000, see Note 11 for further information; |
| normal course of business trade accounts receivable due from Schurman, the balance of which fluctuates throughout the year due to the seasonal nature of the business; |
| the operating leases currently subleased to Schurman, the aggregate lease payments for the remaining life of which was $35,985 and $50,854 as of February 28, 2011 and 2010, respectively. |
The Corporation and Schurman are also party to a Subordinated Credit Facility that provides Schurman with up to $10,000 of subordinated financing for an initial term of nineteen months, subject to up to three automatic one-year renewal periods (or partial-year, in the case of the last renewal), unless either party provides the appropriate written notice prior to the expiration of the applicable term. Schurman can only borrow under the facility if it does not have other sources of financing available, and borrowings under the Subordinated Credit Facility may only be used for specified purposes. Borrowings under the Subordinated Credit Facility are subordinate to borrowings under the Senior Credit Facility, and the Subordinated Credit Facility includes affirmative and negative covenants and events of default customary for such financings. In addition, availability under the Subordinated Credit Facility is limited as long as the Bridge Guaranty is in place to the difference between $10,000 and the current maximum amount of the Bridge Guaranty. Because the Bridge Guaranty remained at $12,000 as of February 28, 2011, there were no loans outstanding, or available under the Subordinated Credit Facility, as of February 28, 2011.
In accordance with its terms, on April 1, 2011, the Bridge Guaranty was terminated. As a result of the termination of the Bridge Guaranty, beginning on April 2, 2011, Schurman may now borrow up to $10,000 under the Subordinated Credit Facility. Because the Liquidity Guaranty described above remains in place but Schurman
8
is now able to borrow under the Subordinated Credit Facility, the Corporations net exposure under guaranties and available financing to Schurman decreased by $2,000 due to the termination of the Bridge Guaranty.
In addition to the investment in the equity of Schurman, the Corporation holds an investment in the common stock of AAH Holdings Corporation (AAH). These two investments, totaling $12,546, are accounted for under the cost method. The Corporation is not aware of any events or changes in circumstances that had occurred during 2011 that the Corporation believes are reasonably likely to have had a significant adverse effect on the carrying amount of these investments. See Note 2 for further information.
Reclassifications: Certain amounts in the prior year financial statements have been reclassified to conform to the 2011 presentation.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. On an ongoing basis, management reviews its estimates, including those related to sales returns, allowance for doubtful accounts, customer allowances and discounts, recoverability of intangibles and other long-lived assets, deferred tax asset valuation allowances, deferred costs and various other allowances and accruals, based on currently available information. Changes in facts and circumstances may alter such estimates and affect the results of operations and the financial position in future periods.
Cash Equivalents: The Corporation considers all highly liquid instruments purchased with an original maturity of less than three months to be cash equivalents.
Allowance for Doubtful Accounts: The Corporation evaluates the collectibility of its accounts receivable based on a combination of factors. In circumstances where the Corporation is aware of a customers inability to meet its financial obligations, a specific allowance for bad debts against amounts due is recorded to reduce the receivable to the amount the Corporation reasonably expects will be collected. In addition, the Corporation recognizes allowances for bad debts based on estimates developed by using standard quantitative measures incorporating historical write-offs. See Note 6 for further information.
Customer Allowances and Discounts: The Corporation offers certain of its customers allowances and discounts including cooperative advertising, rebates, marketing allowances and various other allowances and discounts. These amounts are recorded as reductions of gross accounts receivable or included in accrued liabilities and are recognized as reductions of net sales when earned. These amounts are earned by the customer as product is purchased from the Corporation and are recorded based on the terms of individual customer contracts. See Note 6 for further information.
Concentration of Credit Risks: The Corporation sells primarily to customers in the retail trade, including those in the mass merchandise, drug store, discount retailer, supermarket and other channels of distribution. These customers are located throughout the United States, Canada, the United Kingdom, Australia, New Zealand and Mexico. Net sales to the Corporations five largest customers accounted for approximately 42%, 39% and 36% of total revenue in 2011, 2010 and 2009, respectively. Net sales to Wal-Mart Stores, Inc. and its subsidiaries accounted for approximately 15%, 14% and 15% of total revenue in 2011, 2010 and 2009, respectively. Net sales to Target Corporation accounted for approximately 14% and 13% of total revenue in 2011 and 2010, respectively, and less than 10% in 2009.
The Corporation conducts business based on periodic evaluations of its customers financial condition and generally does not require collateral to secure their obligation to the Corporation. While the competitiveness of the retail industry presents an inherent uncertainty, the Corporation does not believe a significant risk of loss exists from a concentration of credit.
Inventories: Finished products, work in process and raw materials inventories are carried at the lower of cost or market. The last-in, first-out (LIFO) cost method is used for certain domestic inventories, which approximate 80% of the total pre-LIFO consolidated inventories at February 28, 2011 and 2010, respectively. International inventories and the remaining domestic inventories principally use the first-in, first-out (FIFO) method except for display material and factory supplies which are carried at average cost. The Corporation allocates fixed
9
production overhead to inventory based on the normal capacity of the production facilities. Abnormal amounts of idle facility expense, freight, handling costs and wasted material are treated as a current period expense. See Note 7 for further information.
Deferred Costs: In the normal course of its business, the Corporation enters into agreements with certain customers for the supply of greeting cards and related products. The Corporation classifies the total contractual amount of the incentive consideration committed to the customer but not yet earned as a deferred cost asset at the inception of an agreement, or any future amendments. Deferred costs estimated to be earned by the customer and charged to operations during the next twelve months are classified as Prepaid expenses and other on the Consolidated Statement of Financial Position and the remaining amounts to be charged beyond the next twelve months are classified as Other assets. Such costs are capitalized as assets reflecting the probable future economic benefits obtained as a result of the transactions. Future economic benefit is further defined as cash inflow to the Corporation. The Corporation, by incurring these costs, is ensuring the probability of future cash flows through sales to customers. The amortization of such deferred costs over the stated term of the agreement or the minimum purchase volume commitment properly matches the cost of obtaining business over the periods to be benefited. The Corporation maintains an allowance for deferred costs based on estimates developed using standard quantitative measures incorporating historical write-offs. In instances where the Corporation is aware of a particular customers inability to meet its performance obligation, a specific allowance is recorded to reduce the deferred cost asset to an estimate of its future value based upon expected recoverability. See Note 10 for further discussion.
Deferred Film Production Costs: The Corporation is engaged in the production of film-based entertainment, which is generally exploited in the DVD, theatrical release or broadcast format. This entertainment is related to Strawberry Shortcake, Care Bears and other properties developed by the Corporation and is used to support the Corporations merchandise licensing strategy.
Film production costs are accounted for pursuant to ASC Topic 926 (ASC 926), Entertainment Films, and are stated at the lower of cost or net realizable value based on anticipated total revenue (ultimate revenue). Film production costs are generally capitalized. These costs are then recognized ratably based on the ratio of the current periods revenue to estimated remaining ultimate revenues. Ultimate revenues are calculated in accordance with ASC 926 and require estimates and the exercise of judgment. Accordingly, these estimates are periodically updated to include the actual results achieved or new information as to anticipated revenue performance of each title.
Production expense totaled $4,736 and $4,360 in 2011 and 2010, respectively, with no significant amounts related to changes in ultimate revenue estimates. These production costs are included in Material, labor and other production costs on the Consolidated Statement of Operations. Amortization of production costs totaling $3,380, $2,209 and $10,513 in 2011, 2010 and 2009, respectively, are included in Other net on the Consolidated Statement of Cash Flows. The balance of deferred film production costs was $9,246 and $11,479 at February 28, 2011 and 2010, respectively, and are included in Other assets on the Consolidated Statement of Financial Position. The Corporation expects to recognize amortization of approximately $2,000 of production costs during the next twelve months.
Investment in Life Insurance: The Corporations investment in corporate-owned life insurance policies is recorded in Other assets net of policy loans and related interest payable on the Consolidated Statement of Financial Position. The net balance was $21,760 and $18,330 as of February 28, 2011 and 2010, respectively. The net life insurance expense, including interest expense, is included in Administrative and general expenses on the Consolidated Statement of Operations. The related interest expense, which approximates amounts paid, was $12,122, $12,207 and $11,101 in 2011, 2010 and 2009, respectively.
Goodwill and Other Intangible Assets: Goodwill represents the excess of purchase price over the estimated fair value of net assets acquired in business combinations and is not amortized in accordance with ASC Topic 350 (ASC 350), Intangibles Goodwill and Other. This topic addresses the amortization of intangible assets with defined lives and the impairment testing and recognition for goodwill and indefinite-lived intangible assets. The Corporation is required to evaluate the carrying value of its goodwill and indefinite-lived intangible assets for potential impairment on an annual basis or more frequently if indicators arise.
10
While the Corporation may use a variety of methods to estimate fair value for impairment testing, its primary methods are discounted cash flows and a market based analysis. The required annual impairment tests are completed during the fourth quarter. Intangible assets with defined lives are amortized over their estimated lives. See Note 9 for further discussion.
Property and Depreciation: Property, plant and equipment are carried at cost. Depreciation and amortization of buildings, equipment and fixtures are computed principally by the straight-line method over the useful lives of the various assets. The cost of buildings is depreciated over 40 years; computer hardware and software over 3 to 7 years; machinery and equipment over 3 to 15 years; and furniture and fixtures over 8 to 20 years. Leasehold improvements are amortized over the lesser of the lease term or the estimated life of the leasehold improvement. Property, plant and equipment are reviewed for impairment in accordance with ASC Topic 360 (ASC 360), Property, Plant and Equipment. ASC 360 also provides a single accounting model for the disposal of long-lived assets. In accordance with ASC 360, assets held for sale are stated at the lower of their fair values less cost to sell or carrying amounts and depreciation is no longer recognized. See Note 8 for further information.
Operating Leases: Rent expense for operating leases, which may have escalating rentals over the term of the lease, is recorded on a straight-line basis over the initial lease term. The initial lease term includes the build-out period of leases, where no rent payments are typically due under the terms of the lease. The difference between rent expense and rent paid is recorded as deferred rent. Construction allowances received from landlords are recorded as a deferred rent credit and amortized to rent expense over the initial term of the lease. The Corporation records lease rent expense net of any related sublease income. See Note 13 for further information.
Pension and Other Postretirement Benefits: The Corporation has several defined benefit pension plans and a defined benefit health care plan that provides postretirement medical benefits to full-time United States employees who meet certain requirements. In accordance with ASC Topic 715 (ASC 715), Compensation-Retirement Benefits, the Corporation recognizes the plans funded status in its statement of financial position, measures the plans assets and obligations as of the end of its fiscal year and recognizes the changes in a defined benefit postretirement plans funded status in comprehensive income in the year in which the changes occur. See Note 12 for further information.
Revenue Recognition: Sales are recognized when title and the risk of loss have been transferred to the customer.
Seasonal cards and certain other seasonal products are generally sold with the right of return on unsold merchandise. The Corporation provides for estimated returns of these products when those sales are recognized. These estimates are based on historical sales returns, the amount of current year sales and other known factors. Accrual rates utilized for establishing estimated returns reserves have approximated actual returns experience.
Products sold without a right of return may be subject to sales credit issued at the Corporations discretion for damaged, obsolete and outdated products. The Corporation maintains an estimated reserve for these sales credits based on historical information.
For retailers with a scan-based trading (SBT) arrangement, the Corporation owns the product delivered to its retail customers until the product is sold by the retailer to the ultimate consumer, at which time the Corporation recognizes revenue for both everyday and seasonal products. When a SBT arrangement with a retailer is finalized, the Corporation reverses previous sales transactions based on retailer inventory turn rates and the estimated timing of the store conversions. Legal ownership of the inventory at the retailers stores reverts back to the Corporation at the time of the conversion and the amount of sales reversal is finalized based on the actual inventory at the time of conversion.
Prior to April 17, 2009, sales at the Corporation owned retail locations were recognized upon the sale of product to the consumer.
Subscription revenue, primarily for the AG Interactive segment, represents fees paid by customers for access to particular services for the term of the subscription. Subscription revenue is generally billed in advance and is recognized ratably over the subscription periods.
11
The Corporation has agreements for licensing the Care Bears and Strawberry Shortcake characters and other intellectual property. These license agreements provide for royalty revenue to the Corporation based on a percentage of net sales and are subject to certain guaranteed minimum royalties. These license agreements may include the receipt of upfront advances, which are recorded as deferred revenue and earned during the period of the agreement. Certain of these agreements are managed by outside agents. All payments flow through the agents prior to being remitted to the Corporation. Typically, the Corporation receives quarterly payments from the agents. Royalty revenue is generally recognized upon receipt and recorded in Other revenue. Expenses associated with the servicing of these agreements are summarized as follows:
2011 | 2010 | 2009 | ||||||||||
Material, labor and other production costs |
$ | 11,806 | $ | 9,410 | $ | 24,615 | ||||||
Selling, distribution and marketing expenses |
14,046 | 17,970 | 29,146 | |||||||||
Administrative and general expenses |
1,697 | 2,050 | 2,421 | |||||||||
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$ | 27,549 | $ | 29,430 | $ | 56,182 | |||||||
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Deferred revenue, included in Other current liabilities and Other liabilities on the Consolidated Statement of Financial Position, totaled $39,396 and $40,156 at February 28, 2011 and 2010, respectively. The amounts relate primarily to subscription revenue in the Corporations AG Interactive segment and the licensing activities included in non-reportable segments.
Sales Taxes: Sales taxes are not included in net sales as the Corporation is a conduit for collecting and remitting taxes to the appropriate taxing authorities.
Translation of Foreign Currencies: Asset and liability accounts are translated into United States dollars using exchange rates in effect at the date of the Consolidated Statement of Financial Position; revenue and expense accounts are translated at average exchange rates during the related period. Translation adjustments are reflected as a component of shareholders equity within other comprehensive income. Upon sale, or upon complete or substantially complete liquidation of an investment in a foreign entity, that component of shareholders equity is reclassified as part of the gain or loss on sale or liquidation of the investment. Gains and losses resulting from foreign currency transactions, including intercompany transactions that are not considered permanent investments, are included in other non-operating expense (income) as incurred.
Shipping and Handling Fees: The Corporation classifies shipping and handling fees as part of Selling, distribution and marketing expenses. Shipping and handling costs were $119,391, $119,989 and $130,271 in 2011, 2010 and 2009, respectively.
Advertising Expenses: Advertising costs are expensed as incurred. Advertising expenses were $17,434, $16,985 and $19,784 in 2011, 2010 and 2009, respectively.
Income Taxes: Income tax expense includes both current and deferred taxes. Current tax expense represents the amount of income taxes paid or payable (or refundable) for the year, including interest and penalties. Deferred income taxes, net of appropriate valuation allowances, are recognized for the estimated future tax effects attributable to tax carryforwards and the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts realized for income tax purposes. The effect of a change to the deferred tax assets or liabilities as a result of new tax law, including tax rate changes, is recognized in the period that the tax law is enacted. Valuation allowances are recorded against deferred tax assets when it is more likely than not that such assets will not be realized. When an uncertain tax position meets the more likely than not recognition threshold, the position is measured to determine the amount of benefit to recognize in the financial statements. See Note 17 for further discussion.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update (ASU) No. 2009-17 (ASU 2009-17), (Consolidations Topic 810), Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. ASU 2009-17 requires an ongoing reassessment of
12
determining whether a variable interest gives a company a controlling financial interest in a VIE. It also requires an entity to qualitatively, rather than quantitatively, determine whether a company is the primary beneficiary of a VIE. Under the new standard, the primary beneficiary of a VIE is a party that has the controlling financial interest in the VIE and has both the power to direct the activities that most significantly impact the VIEs economic success and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. ASU 2009-17 is effective for interim and annual reporting periods beginning after November 15, 2009. The Corporations adoption of this standard on March 1, 2010 did not have a material effect on its financial statements. See Note 2 for further information.
In January 2010, the FASB issued ASU No. 2010-06 (ASU 2010-06), Improving Disclosures about Fair Value Measurements. ASU 2010-06 provides amendments to ASC Topic 820, Fair Value Measurements and Disclosures, that require separate disclosure of significant transfers in and out of Level 1 and Level 2 fair value measurements in addition to the presentation of purchases, sales, issuances, and settlements for Level 3 fair value measurements. ASU 2010-06 also provides amendments to subtopic 820-10 that clarify existing disclosures about the level of disaggregation, and inputs and valuation techniques. The new disclosure requirements are effective for interim and annual periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements of Level 3 fair value measurements, which becomes effective for interim and annual periods beginning after December 15, 2010. On March 1, 2010, the Corporation adopted this standard, except for the requirement to separately disclose purchases, sales, issuances, and settlements in the Level 3 rollforward, which becomes effective in 2012. The Corporations adoption of this standard did not have a material effect on its financial statements. Also, the Corporation does not expect that the adoption of the enhanced disclosures for Level 3 fair value measurements will have a material effect on its financial statements. See Note 14 for further information.
NOTE 1A RESTATEMENT
The Corporation is restating its previously issued consolidated financial statements for the fiscal years ended February 28, 2011, 2010 and 2009 to correct an error in its accounting for income taxes that arose in the fiscal year ended February 29, 2004.
The Corporation identified an understatement of a deferred tax asset in connection with a review of certain calculations used in determining the tax basis of its inventory. During this review, it was discovered that the deferred tax asset related to this matter as reflected on the Corporations consolidated statement of financial position did not appropriately reflect certain differences between the basis of the Corporations inventory used for financial reporting purposes and the basis of the Corporations inventory used for tax purposes. The amount of the understatement of the deferred tax asset was $14.8 million. The Corporation determined that the difference occurred as a result of an adjustment to the deferred tax asset in the fiscal year ended February 29, 2004, which resulted in the understatement of net income, deferred and refundable income taxes, current assets, total assets and total shareholders equity by $14.8 million for the fiscal year ended February 29, 2004. The effect of the restatement had no impact on reported cash flows or any results of operations in the subsequent periods.
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To correct the understatement of the deferred tax asset described above, the Corporation has recorded an increase in a deferred tax asset of $14.8 million with a corresponding increase to retained earnings as of March 1, 2008. The correction of the error also has the effect of increasing current assets, total assets, retained earnings and total shareholders equity. Accordingly, the restatement corrects the following line items in the Corporations consolidated financial statements as reported:
Date |
As Previously Reported |
As Restated | ||||||
(Thousands of dollars) | ||||||||
As of February 28, 2011 |
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Deferred and refundable income taxes |
$ | 50,051 | $ | 64,898 | ||||
Total current assets |
700,924 | 715,771 | ||||||
Total assets |
1,532,402 | 1,547,249 | ||||||
Retained earnings |
1,171,008 | 1,185,855 | ||||||
Total shareholders equity |
748,911 | 763,758 | ||||||
As of February 28, 2010 |
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Deferred and refundable income taxes |
$ | 78,433 | $ | 93,280 | ||||
Total current assets |
679,291 | 694,138 | ||||||
Total assets |
1,529,651 | 1,544,498 | ||||||
Retained earnings |
1,112,047 | 1,126,894 | ||||||
Total shareholders equity |
636,064 | 650,911 | ||||||
As of February 28, 2009 |
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Retained earnings |
$ | 1,044,926 | $ | 1,059,772 | ||||
Total shareholders equity |
529,189 | 544,035 | ||||||
As of March 1, 2008 |
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Retained earnings |
$ | 1,300,662 | $ | 1,315,508 | ||||
Total shareholders equity |
943,411 | 958,257 |
NOTE 2 ACQUISITIONS AND DISPOSITIONS
Papyrus Brand & Wholesale Business Acquisition / Retail Operations Disposition
Continuing the strategy of focusing on growing its core greeting card business, on April 17, 2009, the Corporation sold all rights, title and interest in certain of the assets of the Corporations Retail Operations segment to Schurman for $6,000 in cash and Schurmans assumption of certain liabilities related to the Retail Operations segment. The Corporation sold all 341 of its card and gift retail store assets to Schurman, which operates stores under the American Greetings, Carlton Cards and Papyrus brands. Under the terms of the transaction, the Corporation remains subject to certain of its store leases on a contingent basis by subleasing the stores to Schurman. See Note 13 for further information. Pursuant to the terms of the agreement, the Corporation also purchased from Schurman its Papyrus trademark and its wholesale business division, which supplies Papyrus brand greeting cards primarily to leading specialty, mass merchandise, grocery and drug store channels, in exchange for $18,065 in cash and the Corporations assumption of certain liabilities related to Schurmans wholesale business. In addition, the Corporation agreed to provide Schurman limited credit support through the provision of a limited guaranty (Liquidity Guaranty) and a limited bridge guaranty (Bridge Guaranty) in favor of the lenders under Schurmans senior revolving credit facility (the Senior Credit Facility). See Note 11 for further information. The Corporation also purchased shares representing approximately 15% of the issued and outstanding equity interests in Schurman for $1,935, which is included in Other assets on the Consolidated Statement of Financial Position. The net cash paid of $14,000 related to this transaction, which has been accounted for in accordance with ASC 805, is included in Cash payments for business acquisitions, net of cash acquired on the Consolidated Statement of Cash Flows.
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The purchase accounting for this acquisition was completed during the fourth quarter of 2010. The fair value of the consideration given has been allocated to the assets acquired and the liabilities assumed based upon their fair values at the date of acquisition. The following represents the final purchase price allocation:
Purchase price (in millions): |
||
Cash paid |
$20.0 | |
Fair value of Retail Operations |
6.0 | |
Cash acquired |
(6.0) | |
| ||
$20.0 | ||
| ||
Allocation (in millions): |
||
Current assets |
$9.9 | |
Property, plant and equipment |
0.1 | |
Other assets |
5.4 | |
Intangible assets |
4.7 | |
Goodwill |
0.8 | |
Liabilities assumed |
(0.9) | |
| ||
$20.0 | ||
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The financial results of this acquisition are included in the Corporations consolidated results from the date of acquisition. Pro forma results of operations have not been presented because the effect of this acquisition was not deemed material.
Recycled Paper Greetings Acquisition
During the second quarter of 2009, the Corporation paid $44,153 to acquire, at a substantial discount, the first lien debt securities of Recycled Paper Greetings, Inc., now known as Papyrus-Recycled Greetings, Inc. The principal amount of the securities was $67,100. The cash paid for this investment is included in Other-net investing activities on the Consolidated Statement of Cash Flows. This investment was written down to fair market value during the fourth quarter of 2009. A loss of $2,740 was recorded as a result.
During the fourth quarter of 2009, the Corporation acquired all of the issued and outstanding capital stock of RPG Holdings, Inc. and its subsidiary, Recycled Paper Greetings, Inc. (together RPG). RPG is a Chicago-based creator and designer of humorous and alternative greeting cards. RPGs cards are distributed primarily through mass merchandise retailers, drug stores and specialty retail stores. The acquisition was completed pursuant to a petition and pre-packaged plan of reorganization filed on January 2, 2009, by RPG under the U.S. Bankruptcy Code and an agreement dated December 30, 2008, between the Corporation and RPG.
On February 24, 2009, the Corporation acquired all of the issued and outstanding capital stock of RPG in exchange for: (a) approximately $17,700 in cash, which includes $4,500 of U.S. Bankruptcy Court approved professional fees and other amounts owed by RPG that were paid by the Corporation; (b) the $67,100 in principal amount of first lien debt securities held by American Greetings; (c) approximately $22,000 in aggregate principal amount of American Greetings 7.375% senior notes due June 1, 2016, issued under American Greetings existing senior notes indenture; and (d) approximately $32,700 in aggregate principal amount of American Greetings 7.375% notes due June 1, 2016, issued under American Greetings new indenture. Also in connection with the acquisition, approximately $6,500 of debtor-in-possession financing (the DIP) owed by RPG to American Greetings under the debtor-in-possession credit agreement put in place in the fourth quarter of 2009 was extinguished. The Corporation also incurred approximately $4,000 in transaction costs associated with this acquisition.
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The purchase accounting for the RPG acquisition was completed during the third quarter of 2010. The fair value of the consideration given has been allocated to the assets acquired and the liabilities assumed based upon their fair values at the date of the acquisition. The following represents the final purchase price allocation:
Purchase price (in millions): |
||||
Cash paid in 2009 |
$ | 22.9 | ||
Cash paid in 2010 |
5.3 | |||
Fair market value of first lien debt securities |
41.4 | |||
Fair market value of long-term debt issued |
28.4 | |||
Cash acquired |
(0.6 | ) | ||
|
|
|||
$ | 97.4 | |||
|
|
|||
Allocation (in millions): |
||||
Current assets |
$ | 17.6 | ||
Property, plant and equipment |
1.5 | |||
Other assets (including deferred tax assets) |
24.2 | |||
Intangible assets |
36.4 | |||
Goodwill |
28.2 | |||
Liabilities assumed |
(10.5 | ) | ||
|
|
|||
$ | 97.4 | |||
|
|
Included in the liabilities assumed in the table above is $4,258 of accrued severance based on a management-approved detailed integration plan including the shutdown of RPGs manufacturing and distribution facility as well as the elimination of certain redundant back office operations. The financial results of this acquisition are included in the Corporations consolidated results from the date of acquisition.
At the date of acquisition, there were two components of tax-deductible goodwill specifically related to the operations of RPG. The first component of tax-deductible goodwill of approximately $28,170 is related to goodwill for financial reporting purposes, and this asset will generate deferred income taxes in the future as the asset is amortized for income tax purposes. The second component of tax-deductible goodwill of approximately $89,806 is the amount of tax deductible goodwill in excess of goodwill for financial reporting purposes. In accordance with ASC 740, the tax benefits associated with this excess will be applied to first reduce the amount of goodwill, and then other intangible assets for financial reporting purposes in the future, if and when such tax benefits are realized for income tax purposes. See Note 9 for additional information.
Card Connection Acquisition
In March 2008, the Corporation acquired a card publisher and franchised distributor of greeting cards in the United Kingdom (U.K.). Cash paid, net of cash acquired, was approximately $15,600 and is reflected in investing activities on the Consolidated Statement of Cash Flows. In connection with this acquisition, intangible assets and goodwill of $5,800 and $6,100, respectively, were recorded. Approximately $8,400 of current assets and fixed assets were recorded and liabilities of approximately $4,700 were assumed. The purchase agreement provided for a contingent payment of up to 2 million U.K. Pounds Sterling to be paid based on the companys operating results over an accumulated three-year period from the date of acquisition. The right to receive the contingent payment has subsequently been terminated with no additional payment required by the Corporation. The financial results of this acquisition are included in the Corporations consolidated results from the date of acquisition. Pro forma results of operations have not been presented because the effect of this acquisition was not deemed material.
Carlton Mexico Shutdown
On September 3, 2009, the Corporation made the determination to wind down the operations of Carlton México, S.A. de C.V. (Carlton Mexico), its subsidiary that distributes and merchandises greeting cards, gift wrap and
16
related products for retail customers throughout Mexico. Going forward, the Corporation will continue to make products available to its Mexican customers by selling to a third party distributor. The wind down resulted in the closure of Carlton Mexicos facility in Mexico City, Mexico, and the elimination of approximately 170 positions.
In connection with the closure of this facility, the North American Social Expression Products segment recorded charges of $6,935, including asset impairments, severance charges and other shut-down costs. Additionally, during 2010, in accordance with ASC 830, Foreign Currency Matters, the Corporation recognized foreign currency translation adjustments totaling $11,300 in Other operating income net on the Consolidated Statement of Operations. This amount represents foreign currency adjustments attributable to Carlton Mexico that, prior to the liquidation, had been accumulated in the foreign currency translation adjustment component of equity.
Party Goods Transaction
On December 21, 2009, the Corporation entered into an Asset Purchase Agreement under which it sold certain assets, equipment and processes used in the manufacture and distribution of party goods to Amscan Holdings, Inc. (Amscan) for a purchase price of $24,880 (the Party Goods Transaction). Amscan is a leading designer, manufacturer and distributor of party goods, and owns or franchises party good stores throughout the United States. Amscan and certain of its subsidiaries have historically purchased party goods, greeting cards and other social expression products from the Corporation. Under the terms of the Party Goods Transaction, the Corporation will no longer manufacture party goods, but will purchase party goods from Amscan. As a result of the Party Goods Transaction, on December 22, 2009, the Corporation announced its intention to wind down and close its party goods manufacturing and distribution facility in Kalamazoo, Michigan (Kalamazoo facility). The phase-out of manufacturing at the Kalamazoo facility, which commenced in early March 2010, was completed by May 2010 and the distribution activities at the Kalamazoo facility concluded as of December 2010.
In connection with the Party Goods Transaction, the Corporation also entered into various other agreements with Amscan and/or its affiliates, including a supply and distribution agreement dated December 21, 2009, with a purchase commitment of $22,500 equally spread over five years. During 2011, the Corporation purchased party goods of $6,435 under this agreement. As a result of entering into the supply and distribution agreement and agreeing that Amscan will no longer be required to purchase party goods from the Corporation, the Corporation also received a warrant valued at $16,274 to purchase 740.74 shares of the common stock of AAH, Amscans ultimate parent corporation at one cent per share. On December 2, 2010, the Corporation received a cash distribution from AAH totaling $6,963, which was in part a return of capital that reduced the investment by $5,663 to $10,611. On February 10, 2011, the Corporation exercised the warrant and now owns 740.74 shares of AAH. The investment in AAH is included in Other assets on the Consolidated Statement of Financial Position.
Through this relationship, each company will sell both DesignWare and Amscan branded party goods. The Corporation will purchase its party goods products from Amscan and will continue to distribute party goods to various channels, including to its mass merchandise, drug, grocery and specialty retail customers. Amscan will have exclusive rights to manufacture and distribute party goods into various channels, including the party store channel.
During the fourth quarter of 2010, the Corporation recorded a gain on the Party Goods Transaction of $34,178, which is included in Other operating income net on the Consolidated Statement of Operations. See Note 3 for further information. In addition, the Corporation recorded $13,005 of asset impairment charges related to the Kalamazoo facility closure and incurred $2,798 in employee termination costs.
17
During 2010, the above transactions and activities generated significant gains, losses and expenses and are reflected on the Consolidated Statement of Operations as follows:
(In millions) | Party Goods Transaction |
Mexico Shutdown |
Retail Disposition |
Total | ||||||||||||
Net sales |
$ | | $ | 0.7 | $ | | $ | 0.7 | ||||||||
Material, labor and other production costs |
15.6 | 4.4 | 1.0 | 21.0 | ||||||||||||
Selling, distribution and marketing expenses |
0.2 | 1.0 | | 1.2 | ||||||||||||
Administrative and general expenses |
| 0.6 | | 0.6 | ||||||||||||
Other operating (income) expense net |
(34.2 | ) | 11.5 | 28.2 | 5.5 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | (18.4 | ) | $ | 18.2 | $ | 29.2 | $ | 29.0 | ||||||||
|
|
|
|
|
|
|
|
These gains, losses and expenses are reflected in the Corporations reportable segments as follows:
(In millions) | ||||
North American Social Expression Products |
$ | (0.2 | ) | |
Retail Operations |
29.2 | |||
|
|
|||
$ | 29.0 | |||
|
|
NOTE 3 OTHER INCOME AND EXPENSE
2011 | 2010 | 2009 | ||||||||||
Loss on disposition of retail stores |
$ | | $ | 28,333 | $ | | ||||||
Gain on disposition of calendar product lines |
| (547 | ) | | ||||||||
Gain on disposition of candy product lines |
| (115 | ) | | ||||||||
Gain on disposition of party goods product lines |
(254 | ) | (34,178 | ) | | |||||||
Loss on recognition of foreign currency translation adjustments |
| 8,627 | | |||||||||
Miscellaneous |
(2,951 | ) | (2,430 | ) | (1,396 | ) | ||||||
|
|
|
|
|
|
|||||||
Other operating income net |
$ | (3,205 | ) | $ | (310 | ) | $ | (1,396 | ) | |||
|
|
|
|
|
|
In April 2009, the Corporation sold the rights, title and interest in certain of the assets of its retail store operations to Schurman and recognized a loss on disposition of $28,333. See Note 2 for further information.
The Corporation sold its calendar product lines in July 2009 and its candy product lines in October 2009, which resulted in gains totaling $547 and $115, respectively. Proceeds received from the sales of the calendar and candy product lines of $3,063 and $1,650, respectively, are included in Other-net investing activities on the Consolidated Statement of Cash Flows.
Pursuant to the Party Goods Transaction, in December 2009, the Corporation sold certain assets, equipment and processes of the party goods product lines and recorded a gain of $34,178. An additional gain of $254 was recorded in 2011 as amounts previously estimated were finalized. Cash proceeds of $24,880, which were held in escrow and recorded as a receivable at February 28, 2010, were received in 2011 and are included in Proceeds from escrow related to party goods transaction on the Consolidated Statement of Cash Flows. See Note 2 for further information.
During the fourth quarter of 2010, it was determined that the wind down of Carlton Mexico was substantially complete. In accordance with ASC 830, the currency translation adjustments were removed from the foreign currency translation adjustment component of equity and a loss was recognized totaling $11,300. The Corporation also recorded a loss totaling $601 and a gain of $3,274 for foreign currency translation adjustments realized in relation to two other entities determined to be liquidated in accordance with ASC 830.
18
2011 | 2010 | 2009 | ||||||||||
Foreign exchange loss (gain) |
$ | 224 | $ | (4,746 | ) | $ | 483 | |||||
Rental income |
(1,232 | ) | (1,194 | ) | (1,432 | ) | ||||||
(Gain) loss on asset disposal |
(3,463 | ) | 59 | 1,215 | ||||||||
Miscellaneous |
(1,370 | ) | (606 | ) | 1,891 | |||||||
|
|
|
|
|
|
|||||||
Other non-operating (income) expense net |
$ | (5,841 | ) | $ | (6,487 | ) | $ | 2,157 | ||||
|
|
|
|
|
|
The Corporation sold the land and building associated with its Mexican operation within the North American Social Expression Products segment in August 2010 and a manufacturing facility within the International Social Expression Products segment in January 2011, and recorded gains upon disposal of approximately $1,000 and $2,819, respectively. Both assets were previously included in Assets held for sale at net book values on the Consolidated Statement of Financial Position as of February 28, 2010. The cash proceeds received from the sale of the Mexican assets and the manufacturing facility of $2,000 and $9,952, respectively, are included in Proceeds from sale of fixed assets on the Consolidated Statement of Cash Flows.
Miscellaneous includes, among other things, income/loss from debt and equity securities. In 2011, miscellaneous included $1,300 of dividend income related to the Corporations investment in AAH. In 2009, miscellaneous included a loss of $2,740 related to the Corporations investment in the first lien debt securities of RPG prior to the acquisition of the capital stock of RPG in February 2009. See Note 2 for further information.
NOTE 4 EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of earnings (loss) per share and earnings (loss) per share-assuming dilution:
2011 | 2010 | 2009 | ||||||||||
Numerator (thousands): |
||||||||||||
Net income (loss) |
$ | 87,018 | $ | 81,574 | $ | (227,759 | ) | |||||
|
|
|
|
|
|
|||||||
Denominator (thousands): |
||||||||||||
Weighted average shares outstanding |
39,983 | 39,468 | 46,544 | |||||||||
Effect of dilutive securities: |
||||||||||||
Stock options and other |
1,262 | 692 | | |||||||||
|
|
|
|
|
|
|||||||
Weighted average shares outstanding assuming dilution |
41,245 | 40,160 | 46,544 | |||||||||
|
|
|
|
|
|
|||||||
Earnings (loss) per share |
$ | 2.18 | $ | 2.07 | $ | (4.89 | ) | |||||
|
|
|
|
|
|
|||||||
Earnings (loss) per share assuming dilution |
$ | 2.11 | $ | 2.03 | $ | (4.89 | ) | |||||
|
|
|
|
|
|
Approximately 3.1 million and 5.7 million stock options, in 2011 and 2010, respectively, were excluded from the computation of earnings per share-assuming dilution because the options exercise prices were greater than the average market price of the common shares during the respective years. For 2009, all options outstanding (totaling approximately 6.7 million) were excluded from the computation of earnings per share-assuming dilution, as the effect would have been antidilutive due to the net loss in the period. Had the Corporation reported income for the year, approximately 6.0 million stock options outstanding during the period would have been excluded from the computation of earnings per share-assuming dilution because the options exercise prices were greater than the average market price of the common shares during the year.
19
NOTE 5 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The balance of accumulated other comprehensive income consisted of the following components:
February 28, 2011 | February 28, 2010 | |||||||
Foreign currency translation adjustments |
$ | 26,021 | $ | 10,856 | ||||
Pension and postretirement benefits adjustments, net of tax (See Note 12) |
(28,369 | ) | (40,672 | ) | ||||
Unrealized investment gain, net of tax |
2 | 1 | ||||||
|
|
|
|
|||||
$ | (2,346 | ) | $ | (29,815 | ) | |||
|
|
|
|
NOTE 6 CUSTOMER ALLOWANCES AND DISCOUNTS
Trade accounts receivable are reported net of certain allowances and discounts. The most significant of these are as follows:
February 28, 2011 | February 28, 2010 | |||||||
Allowance for seasonal sales returns |
$ | 34,058 | $ | 36,443 | ||||
Allowance for outdated products |
8,264 | 10,438 | ||||||
Allowance for doubtful accounts |
5,374 | 2,963 | ||||||
Allowance for cooperative advertising and marketing funds |
25,631 | 24,061 | ||||||
Allowance for rebates |
24,920 | 29,338 | ||||||
|
|
|
|
|||||
$ | 98,247 | $ | 103,243 | |||||
|
|
|
|
Certain customer allowances and discounts are settled in cash. These accounts, primarily rebates, which are classified as Accrued liabilities on the Consolidated Statement of Financial Position, totaled $11,913 and $15,326 as of February 28, 2011 and 2010, respectively.
NOTE 7 INVENTORIES
February 28, 2011 | February 28, 2010 | |||||||
Raw materials |
$ | 21,248 | $ | 18,609 | ||||
Work in process |
6,476 | 6,622 | ||||||
Finished products |
212,056 | 194,283 | ||||||
|
|
|
|
|||||
239,780 | 219,514 | |||||||
Less LIFO reserve |
78,358 | 75,491 | ||||||
|
|
|
|
|||||
161,422 | 144,023 | |||||||
Display material and factory supplies |
18,308 | 19,933 | ||||||
|
|
|
|
|||||
$ | 179,730 | $ | 163,956 | |||||
|
|
|
|
There were no material LIFO liquidations in 2011 and 2009. During 2010, inventory quantities declined resulting in the liquidation of LIFO inventory layers carried at lower costs compared with current year purchases. The income statement effect of such liquidation on material, labor and other production costs was approximately $13,000. Inventory held on location for retailers with SBT arrangements, which is included in finished products, totaled approximately $42,000 and $38,000 as of February 28, 2011 and 2010, respectively.
20
NOTE 8 PROPERTY, PLANT AND EQUIPMENT
February 28, 2011 | February 28, 2010 | |||||||
Land |
$ | 10,552 | $ | 10,147 | ||||
Buildings |
176,879 | 175,086 | ||||||
Equipment and fixtures |
662,121 | 651,012 | ||||||
|
|
|
|
|||||
849,552 | 836,245 | |||||||
Less accumulated depreciation |
607,903 | 593,362 | ||||||
|
|
|
|
|||||
$ | 241,649 | $ | 242,883 | |||||
|
|
|
|
During 2011, the Corporation disposed of approximately $27,000 of property, plant and equipment that included accumulated depreciation of approximately $24,000. During 2010, the Corporation disposed of approximately $118,000 with accumulated depreciation of approximately $102,000, including the fixed assets that were part of the Retail Operations segment and the party goods product lines, which were sold during 2010.
During the fourth quarter of 2010, primarily due to the sale of the party goods product lines, impairment charges of $12,206 were recorded in Material, labor and other production costs on the Consolidated Statement of Operations.
Depreciation expense totaled $36,465, $39,640 and $42,843 in 2011, 2010 and 2009, respectively.
NOTE 9 GOODWILL AND OTHER INTANGIBLE ASSETS
In accordance with ASC 350, the Corporation is required to evaluate the carrying value of its goodwill for potential impairment on an annual basis or an interim basis if there are indicators of potential impairment. During 2011 and 2010, the Corporation completed the required annual impairment test of goodwill in the fourth quarter and based on the results of the testing, no impairment charges were recorded.
During the third quarter of 2009, indicators emerged within the AG Interactive segment and one reporting unit located in the United Kingdom within the International Social Expression Products segment (the UK Reporting Unit) that led the Corporations management to conclude that a goodwill impairment test was required to be performed during the third quarter. Within the AG Interactive segment, there were three primary indicators: (1) a substantial decline in advertising revenues; (2) the e-commerce businesses not growing as anticipated; and (3) the Corporations belief that the segments current long-term cash flow forecasts may be unattainable based on the lengthening and deepening economic deterioration. The following three primary indicators emerged within the UK Reporting Unit: (1) the recent bankruptcy of a major customer; (2) a major customer implementing buying freezes, including on the Corporations everyday products; and (3) the Corporations belief that current long-term cash flow forecasts may be unattainable based on the lengthening and deepening economic deterioration.
Under ASC 350, the test for, and measurement of, impairment of goodwill consists of two steps. In the first step, the initial test for potential impairment, the Corporation compares the fair value of each reporting unit to its carrying amount. Fair values were determined using a combination of an income approach and a market based approach which were validated by a market capitalization reconciliation. Based on this evaluation, it was determined that the fair values of the AG Interactive segment and UK Reporting Unit were less than their carrying values, thus indicating potential impairment. In the second step, the measurement of the impairment, the Corporation hypothetically applies purchase accounting to the reporting units using the fair values from the first step. As a result, the Corporation recorded goodwill charges of $150,208, which included all the goodwill for the AG Interactive segment, and $82,110, which included all of the goodwill for the UK Reporting Unit. The amounts recorded in the third quarter were estimates. The AG Interactive segment impairment was adjusted down by $655 in the fourth quarter due to final purchase accounting adjustments for a final impairment total of $149,553. The required annual impairment test of goodwill was completed as of the beginning of the fourth quarter of 2009 and based on the results of the testing, no additional impairment charges were recorded.
However, based on the continued significant deterioration of the global economic environment during the fourth quarter of 2009 and the closing share price of the Corporations Class A common shares at February 28, 2009,
21
that resulted in the Corporations fair value of equity being below the carrying value of equity, an additional interim impairment analysis was performed at the end of the fourth quarter following the same steps as described above. Based on this analysis, it was determined that the fair values of the North American Greeting Card Division (NAGCD) and the Corporations fixtures business, which are both also the reporting units for ASC 350 purposes, were less than their carrying values. As a result, the Corporation recorded goodwill impairment charges of $47,850, which included all the goodwill for NAGCD, and $82, which included all the goodwill for the Corporations fixtures business. NAGCD is included in the North American Social Expression Products segment and the fixtures business is included in non-reportable segments.
A summary of the changes in the carrying amount of the Corporations goodwill during the years ended February 28, 2011 and 2010 by segment, is as follows:
North American Social Expression Products |
International Social Expression Products |
Total | ||||||||||
Balance at February 28, 2009 |
$ | 22,465 | $ | 4,406 | $ | 26,871 | ||||||
Acquisition related |
6,510 | | 6,510 | |||||||||
Adjustment related to income taxes |
(2,501 | ) | | (2,501 | ) | |||||||
Currency translation |
| 226 | 226 | |||||||||
|
|
|
|
|
|
|||||||
Balance at February 28, 2010 |
26,474 | 4,632 | 31,106 | |||||||||
Adjustment related to income taxes |
(2,509 | ) | | (2,509 | ) | |||||||
Currency translation |
| 306 | 306 | |||||||||
|
|
|
|
|
|
|||||||
Balance at February 28, 2011 |
$ | 23,965 | $ | 4,938 | $ | 28,903 | ||||||
|
|
|
|
|
|
The above adjustment related to income taxes for 2011 is a $2,509 reduction related to second component goodwill, as defined by ASC 740, which results in a reduction of goodwill for financial reporting purposes when amortized for tax purposes. See Note 2 for further discussion.
At February 28, 2011 and 2010, intangible assets, net of accumulated amortization, were $43,049 and $45,828, respectively. The following table presents information about these intangible assets, which are included in Other assets on the Consolidated Statement of Financial Position:
February 28, 2011 | February 28, 2010 | |||||||||||||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
|||||||||||||||||||
Intangible assets with indefinite useful |
||||||||||||||||||||||||
Tradenames |
$ | 6,200 | $ | | $ | 6,200 | $ | 6,200 | $ | | $ | 6,200 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Subtotal |
6,200 | | 6,200 | 6,200 | | 6,200 | ||||||||||||||||||
Intangible assets with |
||||||||||||||||||||||||
Patents |
4,616 | (3,558 | ) | 1,058 | 4,194 | (3,417 | ) | 777 | ||||||||||||||||
Trademarks |
10,901 | (9,097 | ) | 1,804 | 10,071 | (8,496 | ) | 1,575 | ||||||||||||||||
Artist relationships |
19,230 | (3,201 | ) | 16,029 | 19,180 | (1,598 | ) | 17,582 | ||||||||||||||||
Customer relationships |
24,886 | (11,672 | ) | 13,214 | 24,669 | (10,544 | ) | 14,125 | ||||||||||||||||
Other |
18,586 | (13,842 | ) | 4,744 | 17,633 | (12,064 | ) | 5,569 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Subtotal |
78,219 | (41,370 | ) | 36,849 | 75,747 | (36,119 | ) | 39,628 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 84,419 | $ | (41,370 | ) | $ | 43,049 | $ | 81,947 | $ | (36,119 | ) | $ | 45,828 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
22
The Corporation completed the required annual impairment test of indefinite-lived intangible assets in the fourth quarter of 2011 and 2010 and based on the results of the testing, no impairment charges were recorded for continuing operations.
In conjunction with the goodwill impairment analysis performed in the third quarter of 2009 for the AG Interactive segment and the UK Reporting Unit discussed above, intangible assets were also tested for impairment in accordance with ASC 360. Based on this testing, the Corporation recorded an impairment charge of $10,571 in the AG Interactive segment. The impairment charge was determined using a discounted cash flows analysis and related primarily to customer relationships, developed technology and trademarks.
Amortization expense for intangible assets totaled $4,583, $5,533 and $7,173 in 2011, 2010 and 2009, respectively. Estimated annual amortization expense for the next five years will approximate $4,748 in 2012, $4,681 in 2013, $4,007 in 2014, $3,121 in 2015 and $2,845 in 2016.
NOTE 10 DEFERRED COSTS
In the normal course of its business, the Corporation enters into agreements with certain customers for the supply of greeting cards and related products. Under these agreements, the customer may receive from the Corporation a combination of cash payments, credits, discounts, allowances and other incentive considerations to be earned by the customer as product is purchased from the Corporation over the stated term of the agreement or the minimum purchase volume commitment. In the event an agreement is not completed because a minimum purchase volume commitment is not met, in most instances, the Corporation has a claim for unearned advances under the agreement. The agreements may or may not specify the Corporation as the sole supplier of social expression products to the customer.
A portion of the total consideration may not be paid by the Corporation at the time the agreement is consummated. All future payment commitments are classified as liabilities at inception until paid. The payments that are expected to be made in the next twelve months are classified as Other current liabilities on the Consolidated Statement of Financial Position and the remaining payment commitments beyond the next twelve months are classified as Other liabilities. The Corporation maintains an allowance for deferred costs related to supply agreements of $10,700 and $12,400 at February 28, 2011 and 2010, respectively. This allowance is included in Other assets on the Consolidated Statement of Financial Position.
Deferred costs and future payment commitments were as follows:
February 28, 2011 | February 28, 2010 | |||||||
Prepaid expenses and other |
$ | 88,352 | $ | 82,914 | ||||
Other assets |
327,311 | 310,555 | ||||||
|
|
|
|
|||||
Deferred cost assets |
415,663 | 393,469 | ||||||
Other current liabilities |
(64,116 | ) | (53,701 | ) | ||||
Other liabilities |
(76,301 | ) | (51,803 | ) | ||||
|
|
|
|
|||||
Deferred cost liabilities |
(140,417 | ) | (105,504 | ) | ||||
|
|
|
|
|||||
Net deferred costs |
$ | 275,246 | $ | 287,965 | ||||
|
|
|
|
23
A summary of the changes in the carrying amount of the Corporations net deferred costs during the years ended February 28, 2011, 2010 and 2009 is as follows:
Balance at February 29, 2008 |
$ | 338,124 | ||
Payments |
105,952 | |||
Amortization |
(133,548 | ) | ||
Currency translation and other |
(7,521 | ) | ||
|
|
|||
Balance at February 28, 2009 |
303,007 | |||
Payments |
84,345 | |||
Amortization |
(102,750 | ) | ||
Currency translation and other |
3,363 | |||
|
|
|||
Balance at February 28, 2010 |
287,965 | |||
Payments |
83,919 | |||
Amortization |
(98,181 | ) | ||
Currency translation and other |
1,543 | |||
|
|
|||
Balance at February 28, 2011 |
$ | 275,246 | ||
|
|
NOTE 11 LONG AND SHORT-TERM DEBT
7.375% Notes
On May 24, 2006, the Corporation issued $200,000 of 7.375% senior unsecured notes, due on June 1, 2016 (the Original Senior Notes). The proceeds from this issuance were used to repurchase a portion of the Corporations 6.10% senior notes, due on August 1, 2028, of which $277,310 were tendered in the Corporations tender offer and consent solicitation, that was completed on May 25, 2006.
On February 24, 2009, the Corporation issued $22,000 of additional 7.375% senior unsecured notes described above (Additional Senior Notes) and $32,686 of new 7.375% unsecured notes due on June 1, 2016 (New Notes, together with the Original Senior Notes, and the Additional Senior Notes, the Notes) in conjunction with the acquisition of RPG. The original issue discount from the issuance of these notes of $26,249 was recorded as a reduction of the underlying debt issuances and is being amortized over the life of the debt using the effective interest method. Including the original issue discount, the New Notes and the Additional Senior Notes have an effective annualized interest rate of approximately 20.3%. See Note 2 for further information on the acquisition of RPG. Except as described below, the terms of the New Notes and the Additional Senior Notes are the same.
The Notes will mature on June 1, 2016 and bear interest at a fixed rate of 7.375% per annum, commencing June 1, 2009. The Notes constitute general, unsecured obligations of the Corporation. The Notes rank equally with the Corporations other senior unsecured indebtedness and senior in right of payment to all of the Corporations obligations that are, by their terms, expressly subordinated in right of payment to the Notes, as applicable. The Original Senior Notes and the Additional Senior Notes are effectively subordinated to all of the Corporations secured indebtedness, including borrowings under its revolving credit facility described below, to the extent of the value of the assets securing such indebtedness. The New Notes are contractually subordinated to amounts outstanding under the credit agreement, and are effectively subordinated to any other secured indebtedness that the Corporation may issue from time to time to the extent of the value of the assets securing such indebtedness.
The Notes generally contain comparable covenants as described below for the Corporations credit agreement. The New Notes, however, also provide that if the Corporation incurs more than an additional $10,000 of indebtedness (other than indebtedness under the revolving credit facility described below or certain other permitted indebtedness), such indebtedness must be (a) pari passu in right of payment to the New Notes and expressly subordinated in right of payment to the credit agreement at least to the same extent as the New Notes, or (b) expressly subordinated in right of payment to the New Notes. Alternatively, the Corporation can redeem the New Notes in whole, but not in part, at a purchase price equal to 100% of the principal amount thereof plus accrued but unpaid interest, if any, or have the subordination provisions removed from the New Notes.
24
The total fair value of the Corporations publicly traded debt, based on quoted market prices, was $237,453 (at a carrying value of $232,688) and $224,709 (at a carrying value of $230,468) at February 28, 2011 and 2010, respectively.
Credit Facility
On April 4, 2006, the Corporation entered into a $650,000 secured credit agreement (the Original Credit Agreement). The credit agreement included a $350,000 revolving credit facility and a $300,000 delay draw term loan. The Corporation could request one or more term loans until April 4, 2007. The revolving credit facility was scheduled to mature on April 4, 2011 and any outstanding term loans were scheduled to mature on April 4, 2013. Each term loan was to amortize in equal quarterly installments equal to 0.25% of the amount of such term loan, beginning on April 4, 2007, with the balance payable on April 4, 2013.
On February 26, 2007, the credit agreement dated April 4, 2006 was amended. The amendment decreased the size of the term loan facility to $100,000 and extended the period during which the Corporation may borrow on the term loan.
On February 23, 2009, the Corporation drew down $100,000 in principal amount under the term loan.
On June 11, 2010, the Corporation further amended and restated its Original Credit Agreement by entering into an Amended and Restated Credit Agreement (the Amended and Restated Credit Agreement). Pursuant to the terms of the Amended and Restated Credit Agreement, the Corporation may continue to borrow, repay and re-borrow up to $350,000 under the revolving credit facility, with the ability to increase the size of the facility to up to $400,000, subject to customary conditions. The Amended and Restated Credit Agreement also continues to provide for a $25,000 sub-limit for the issuance of swing line loans and a $100,000 sub-limit for the issuance of letters of credit. The proceeds of the borrowings under the Amended and Restated Credit Agreement may be used to provide working capital and for other general corporate purposes.
The obligations under the Amended and Restated Credit Agreement are guaranteed by the Corporations material domestic subsidiaries and are secured by substantially all of the personal property of the Corporation and each of its material domestic subsidiaries, including a pledge of all of the capital stock in substantially all of the Corporations domestic subsidiaries and 65% of the capital stock of the Corporations material first tier international subsidiaries. The Amended and Restated Credit Agreement, including revolving loans thereunder, will mature on June 11, 2015. In connection with the Amended and Restated Credit Agreement, the term loan was terminated and the Corporation repaid the full $99,000 outstanding under the term loan using cash on hand.
Revolving loans that are denominated in U.S. dollars will bear interest at either the U.S. base rate or the London Inter-Bank Offer Rate (LIBOR), at the Corporations election, plus a margin determined according to the Corporations leverage ratio. Swing line loans will bear interest at a quoted rate agreed upon by the Corporation and the swing line lender. In addition to interest, the Corporation is required to pay commitment fees on the unused portion of the revolving credit facility. The commitment fee rate is initially 0.50% per annum and is subject to adjustment thereafter based on the Corporations leverage ratio.
The Amended and Restated Credit Agreement contains certain restrictive covenants that are customary for similar credit arrangements, including covenants relating to limitations on liens, dispositions, issuance of debt, investments, payment of dividends, repurchases of capital stock, acquisitions and transactions with affiliates. There are also financial performance covenants that require the Corporation to maintain a maximum leverage ratio and a minimum interest coverage ratio. The credit agreement also requires the Corporation to make certain mandatory prepayments of outstanding indebtedness using the net cash proceeds received from certain dispositions, events of loss and additional indebtedness that the Corporation may incur from time to time.
Receivables Purchase Agreement
The Corporation is also party to an amended and restated receivables purchase agreement that originally had available financing of up to $150,000. The agreement was set to expire on October 23, 2009. Under the amended and restated receivables purchase agreement, the Corporation and certain of its subsidiaries sell accounts receivable to AGC Funding, which in turn sells undivided interests in eligible accounts receivable to third party
25
financial institutions as part of a process that provides funding to the Corporation similar to a revolving credit facility. Funding under the facility may be used for working capital, general corporate purposes and the issuance of letters of credit. This arrangement is accounted for as a financing transaction.
On March 28, 2008, the amended and restated receivables purchase agreement was amended to decrease the amount of available financing from $150,000 to $90,000.
On September 23, 2009, the amended and restated receivables purchase agreement was further amended. The amendment decreased the amount of available financing under the agreement from $90,000 to $80,000 and allows certain receivables to be excluded from the program in connection with the exercise of rights under insurance and other products that may be obtained from time to time by the Corporation or other originators that are designed to mitigate credit risks associated with the collection of accounts receivable. The amendment also extended the maturity date to September 21, 2012; provided, however, that in addition to customary termination provisions, the receivables purchase agreement will terminate upon termination of the liquidity commitments obtained by the purchaser groups from third party liquidity providers. Such commitments may be made available to the purchaser groups for 364-day periods only (initial 364-day period began on September 23, 2009), and there can be no assurances that the third party liquidity providers will renew or extend their commitments under the receivables purchase agreement. If that is the case, the receivables purchase agreement will terminate and the Corporation will not receive the benefit of the entire three-year term of the agreement. On September 22, 2010, the liquidity commitments were renewed for an additional 364-day period.
The interest rate under the accounts receivable securitization facility is based on (i) commercial paper interest rates, (ii) LIBOR rates plus an applicable margin or (iii) a rate that is the higher of the prime rate as announced by the applicable purchaser financial institution or the federal funds rate plus 0.50%. AGC Funding pays an annual commitment fee of 60 basis points on the unfunded portion of the accounts receivable securitization facility, together with customary administrative fees on outstanding letters of credit that have been issued and on outstanding amounts funded under the facility.
The amended and restated receivables purchase agreement contains representations, warranties, covenants and indemnities customary for facilities of this type, including the obligation of the Corporation to maintain the same consolidated leverage ratio as it is required to maintain under its secured credit facility.
There were no balances outstanding under the amended and restated receivables purchase agreement as of February 28, 2011 or 2010.
At February 28, 2011, the Corporation was in compliance with its financial covenants under the borrowing agreements described above.
As of February 28, 2011, there were no balances outstanding under the Corporations revolving credit facility or receivables purchase agreement, neither of which is publicly traded debt. The total fair value of the Corporations non-publicly traded debt, term loan and revolving credit facility, based on comparable publicly traded debt prices, was $99,250 (at a carrying value of $99,250) at February 28, 2010.
There was no debt due within one year as of February 28, 2011. Debt due within one year as of February 28, 2010 was $1,000.
Long-term debt and their related calendar year due dates, net of unamortized discounts, were as follows:
February 28, 2011 | February 28, 2010 | |||||||||
7.375% senior notes, due 2016 |
$ | 213,077 | $ | 212,184 | ||||||
7.375% notes, due 2016 |
19,430 | 18,103 | ||||||||
Term loan facility |
- | 98,250 | ||||||||
6.10% senior notes, due 2028 |
181 | 181 | ||||||||
Other |
- | 5 | ||||||||
|
|
|
|
|
||||||
$ | 232,688 | $ | 328,723 | |||||||
|
|
|
|
|
26
The Corporation also provides financing for certain transactions with some of its vendors, which includes a combination of various guaranties and letters of credit. At February 28, 2011, the Corporation had credit arrangements to support the letters of credit in the amount of $134,014 with $44,730 of credit outstanding.
Aggregate maturities of long-term debt, by fiscal year, are as follows:
2012 |
$ | - | ||
2013 |
- | |||
2014 |
- | |||
2015 |
- | |||
2016 |
- | |||
Thereafter |
254,867 | |||
|
|
|||
$ | 254,867 | |||
|
|
Interest paid in cash on short-term and long-term debt was $21,637 in 2011, $23,294 in 2010 and $21,721 in 2009.
Guaranties
In April 2009, the Corporation sold certain of the assets of its Retail Operations segment to Schurman and purchased from Schurman its Papyrus trademark and its Papyrus wholesale business division. As part of the transaction, the Corporation agreed to provide Schurman limited credit support through the provision of a Liquidity Guaranty and a Bridge Guaranty in favor of the lenders under Schurmans Senior Credit Facility.
Pursuant to the terms of the Liquidity Guaranty, the Corporation has guaranteed the repayment of up to $12,000 of Schurmans borrowings under the Senior Credit Facility to help ensure that Schurman has sufficient borrowing availability under this facility. The Liquidity Guaranty is required to be backed by a letter of credit for the term of the Liquidity Guaranty, which is currently anticipated to end in January 2014. Pursuant to the terms of the Bridge Guaranty, the Corporation has guaranteed the repayment of up to $12,000 of Schurmans borrowings under the Senior Credit Facility until Schurman is able to include the inventory and other assets of the acquired retail stores in its borrowing base. The Bridge Guaranty is required to be backed by a letter of credit. The letters of credit required to back both guaranties are included within the $44,730 outstanding letters of credit mentioned above. The Bridge Guaranty is scheduled to expire in January 2014; however, upon the Corporations request, the Bridge Guaranty may be reduced as Schurman is able to include such inventory and other assets in its borrowing base. Pursuant to such a request, on April 1, 2011, the Bridge Guaranty was terminated and the associated letter of credit was released. See Note 1 for further information. The Corporations obligations under the Liquidity Guaranty and the Bridge Guaranty generally may not be triggered unless Schurmans lenders under its Senior Credit Facility have substantially completed the liquidation of the collateral under Schurmans Senior Credit Facility, or 91 days after the liquidation is started, whichever is earlier, and will be limited to the deficiency, if any, between the amount owed and the amount collected in connection with the liquidation. There was no triggering event or liquidation of collateral as of February 28, 2011 requiring the use of the guaranties.
NOTE 12 RETIREMENT AND POSTRETIREMENT BENEFIT PLANS
The Corporation has a discretionary profit-sharing plan with a contributory 401(k) provision covering most of its United States employees. Corporate contributions to the profit-sharing plan were $9,759 and $9,338 for 2011 and 2010, respectively. In addition, the Corporation matches a portion of 401(k) employee contributions. The Corporations matching contributions were $4,875 and $4,787 for 2011 and 2010, respectively. Based on the 2009 operating results, the Corporation elected not to make profit-sharing or 401(k) matching contributions for 2009.
The Corporation also participates in a multi-employer pension plan covering certain domestic employees who are part of a collective bargaining agreement. Total pension expense for the multi-employer plan, representing contributions to the plan, was $467, $417 and $511 in 2011, 2010 and 2009, respectively.
The Corporation has nonqualified deferred compensation plans that provide certain officers and directors with the opportunity to defer receipt of compensation and director fees, respectively, including compensation received
27
in the form of the Corporations common shares. The Corporation funds these deferred compensation liabilities by making contributions to a rabbi trust. In accordance with ASC Topic 710-10-25, Compensation Recognition Deferred Compensation Rabbi Trust, both the trust assets and the related obligation associated with deferrals of the Corporations common shares are recorded in equity at cost and offset each other. There were approximately 0.2 million common shares in the trust at February 28, 2011 with a cost of $3,368 compared to approximately 0.2 million common shares with a cost of $2,856 at February 28, 2010.
In 2001, in connection with its acquisition of Gibson Greetings, Inc. (Gibson), the Corporation assumed the obligations and assets of Gibsons defined benefit pension plan (the Gibson Retirement Plan) that covered substantially all Gibson employees who met certain eligibility requirements. Benefits earned under the Gibson Retirement Plan have been frozen and participants no longer accrue benefits after December 31, 2000. The Gibson Retirement Plan has a measurement date of February 28 or 29. No contributions were made to the plan in either 2011 or 2010. The Gibson Retirement Plan was under-funded at February 28, 2011 and 2010.
The Corporation also has an unfunded nonqualified defined benefit pension plan (the Supplemental Executive Retirement Plan) covering certain management employees. The Supplemental Executive Retirement Plan has a measurement date of February 28 or 29.
The Corporation also has several defined benefit pension plans at its Canadian subsidiary. These include a defined benefit pension plan covering most Canadian salaried employees, which was closed to new participants effective January 1, 2006, but eligible members continue to accrue benefits and an hourly plan in which benefits earned have been frozen and participants no longer accrue benefits after March 1, 2000. There are also two unfunded plans, one that covers a supplemental executive retirement pension relating to an employment agreement and one that pays supplemental pensions to certain former hourly employees pursuant to a prior collective bargaining agreement. All plans have a measurement date of February 28 or 29. During 2010, the Corporation settled a portion of its obligation under the Canadian hourly plan. The Corporation made a contribution to the plan, which was used to purchase annuities for the affected participants. As a result, a settlement expense of $126 was recorded.
The Corporation sponsors a defined benefit health care plan that provides postretirement medical benefits to full-time United States employees who meet certain age, service and other requirements. The plan is contributory, with retiree contributions adjusted periodically, and contains other cost-sharing features such as deductibles and coinsurance. The Corporation maintains a trust for the payment of retiree health care benefits. This trust is funded at the discretion of management. The plan has a measurement date of February 28 or 29. The Corporation made changes to its postretirement health care plan in the current year by reducing the employer subsidy by the Corporation for certain groups as well as removing the death coverage for the spouses of active employees and removing the disability coverage for disabled employees unless the employee was already eligible for retiree medical coverage at the time of death or disability, respectively.
28
The following table sets forth summarized information on the defined benefit pension plans and postretirement benefits plan:
Pension Plans | Postretirement Benefits | |||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||||||||
Change in benefit obligation: |
||||||||||||||||||||||
Benefit obligation at beginning of year |
$ | 162,845 | $ | 140,116 | $ | 110,921 | $ | 120,113 | ||||||||||||||
Service cost |
957 | 730 | 2,290 | 2,365 | ||||||||||||||||||
Interest cost |
8,757 | 9,279 | 6,014 | 7,359 | ||||||||||||||||||
Participant contributions |
28 | 32 | 4,165 | 4,591 | ||||||||||||||||||
Retiree drug subsidy payments |
- | - | 1,670 | - | ||||||||||||||||||
Plan amendments |
198 | 53 | (7,263 | ) | - | |||||||||||||||||
Actuarial loss (gain) |
5,825 | 22,034 | (18,639 | ) | (14,649 | ) | ||||||||||||||||
Benefit payments |
(10,567 | ) | (10,080 | ) | (8,123 | ) | (8,858 | ) | ||||||||||||||
Settlements |
52 | (3,512 | ) | - | - | |||||||||||||||||
Currency exchange rate changes |
2,065 | 4,193 | - | - | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Benefit obligation at end of year |
170,160 | 162,845 | 91,035 | 110,921 | ||||||||||||||||||
Change in plan assets: |
||||||||||||||||||||||
Fair value of plan assets at beginning of year |
102,092 | 86,489 | 66,928 | 61,898 | ||||||||||||||||||
Actual return on plan assets |
11,311 | 21,691 | 7,130 | 11,180 | ||||||||||||||||||
Employer contributions |
3,187 | 4,001 | (3,165 | ) | (1,883 | ) | ||||||||||||||||
Participant contributions |
28 | 32 | 4,165 | 4,591 | ||||||||||||||||||
Benefit payments |
(10,567 | ) | (10,080 | ) | (8,123 | ) | (8,858 | ) | ||||||||||||||
Settlements |
52 | (3,512 | ) | - | - | |||||||||||||||||
Currency exchange rate changes |
1,778 | 3,471 | - | - | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Fair value of plan assets at end of year |
107,881 | 102,092 | 66,935 | 66,928 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Funded status at end of year |
$ | (62,279 | ) | $ | (60,753 | ) | $ | (24,100 | ) | $ | (43,993 | ) | ||||||||||
|
|
|
|
|
|
|
|
Amounts recognized on the Consolidated Statement of Financial Position consist of the following:
Pension Plans | Postretirement Benefits | |||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||||||||
Accrued compensation and benefits |
$ | (2,347 | ) | $ | (2,335 | ) | $ | - | $ | - | ||||||||||||
Other liabilities |
(59,932 | ) | (58,418 | ) | (24,101 | ) | (43,993 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Net amount recognized |
$ | (62,279 | ) | $ | (60,753 | ) | $ | (24,101 | ) | $ | (43,993 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Amounts recognized in accumulated |
||||||||||||||||||||||
Net actuarial loss |
$ | 56,938 | $ | 55,275 | $ | 1,268 | $ | 23,611 | ||||||||||||||
Net prior service cost (credit) |
847 | 828 | (11,316 | ) | (11,766 | ) | ||||||||||||||||
Net transition obligation |
43 | 46 | - | - | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Accumulated other comprehensive |
$ | 57,828 | $ | 56,149 | $ | (10,048 | ) | $ | 11,845 | |||||||||||||
|
|
|
|
|
|
|
|
For the defined benefit pension plans, the estimated net loss, prior service cost and transition obligation that will be amortized from accumulated other comprehensive income into periodic benefit cost over the next fiscal year are approximately $2,392, $180 and $6, respectively. For the postretirement benefit plan, the estimated net loss and prior service credit that will be amortized from accumulated other comprehensive income into periodic benefit cost over the next fiscal year are approximately $0 and ($2,500), respectively.
29
The following table presents significant weighted-average assumptions to determine benefit obligations and net periodic benefit cost:
Pension Plans | Postretirement Benefits | |||||||
2011 | 2010 | 2011 | 2010 | |||||
Weighted average discount rate used to determine: |
||||||||
Benefit obligations at measurement date |
||||||||
US |
5.25% | 5.50-5.75% | 5.50% | 5.75% | ||||
International |
5.15% | 5.50% | N/A | N/A | ||||
Net periodic benefit cost |
||||||||
US |
5.50-5.75% | 6.75% | 5.75% | 6.75% | ||||
International |
5.50% | 7.50% | N/A | N/A | ||||
Expected long-term return on plan assets: |
||||||||
US |
7.00% | 7.00% | 7.00% | 7.00% | ||||
International |
5.50% | 6.00% | N/A | N/A | ||||
Rate of compensation increase: |
||||||||
US |
Up to 6.50% | Up to 6.50% | N/A | N/A | ||||
International |
Up to 3.00% | Up to 3.50% | N/A | N/A | ||||
Health care cost trend rates: |
||||||||
For year ending February 28 or 29 |
N/A | N/A | 8.50% | 9.00% | ||||
For year following February 28 or 29 |
N/A | N/A | 10.00% | 8.50% | ||||
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) |
N/A | N/A | 5.00% | 5.00% | ||||
Year the rate reaches the ultimate trend rate |
N/A | N/A | 2021 | 2017 |
For 2011, the net periodic pension cost for the pension plans was based on long-term asset rates of return as noted above. In developing these expected long-term rate of return assumptions, consideration was given to expected returns based on the current investment policy and historical return for the asset classes.
For 2011, the Corporation assumed a long-term asset rate of return of 7% to calculate the expected return for the postretirement benefit plan. In developing the 7% expected long-term rate of return assumption, consideration was given to various factors, including a review of asset class return expectations based on historical compounded returns for such asset classes.
2011 | 2010 | |||||||
Effect of a 1% increase in health care cost trend rate on: |
||||||||
Service cost plus interest cost |
$ | 915 | $ | 1,036 | ||||
Accumulated postretirement benefit obligation |
7,571 | 10,262 | ||||||
Effect of a 1% decrease in health care cost trend rate on: |
||||||||
Service cost plus interest cost |
(739 | ) | (841 | ) | ||||
Accumulated postretirement benefit obligation |
(6,030 | ) | (8,373 | ) |
The following table presents selected pension plan information:
2011 | 2010 | |||||||
For all pension plans: |
||||||||
Accumulated benefit obligation |
$ | 164,823 | $ | 158,351 | ||||
For pension plans that are not fully funded: |
||||||||
Projected benefit obligation |
170,160 | 162,845 | ||||||
Accumulated benefit obligation |
164,823 | 158,351 | ||||||
Fair value of plan assets |
107,881 | 102,092 |
30
A summary of the components of net periodic benefit cost for the pension plans is as follows:
2011 | 2010 | 2009 | ||||||||||
Components of net periodic benefit cost: |
||||||||||||
Service cost |
$ | 957 | $ | 730 | $ | 954 | ||||||
Interest cost |
8,757 | 9,279 | 9,128 | |||||||||
Expected return on plan assets |
(6,588 | ) | (5,637 | ) | (8,049 | ) | ||||||
Amortization of transition obligation |
6 | 6 | 6 | |||||||||
Amortization of prior service cost |
178 | 261 | 260 | |||||||||
Amortization of actuarial loss |
133 | 1,942 | 459 | |||||||||
Settlements |
(3 | ) | 126 | - | ||||||||
|
|
|
|
|
|
|||||||
Net periodic benefit cost |
3,440 | 6,707 | 2,758 | |||||||||
Other changes in plan assets and benefit obligations recognized in other comprehensive income: |
||||||||||||
Actuarial loss |
1,175 | 6,069 | 27,681 | |||||||||
Prior service cost |
198 | 53 | - | |||||||||
Amortization of prior service cost |
(178 | ) | (261 | ) | (260 | ) | ||||||
Amortization of actuarial loss |
(133 | ) | (1,942 | ) | (459 | ) | ||||||
Amortization of transition obligation |
(6 | ) | (6 | ) | (6 | ) | ||||||
Settlements |
3 | (126 | ) | - | ||||||||
|
|
|
|
|
|
|||||||
Total recognized in net periodic benefit cost and other comprehensive income |
$ | 4,499 | $ | 10,494 | $ | 29,714 | ||||||
|
|
|
|
|
|
A summary of the components of net periodic benefit cost for the postretirement benefit plan is as follows:
2011 |
|
2010 |
|
2009 | ||||||||||||
Components of net periodic benefit cost: |
||||||||||||||||
Service cost |
$ | 2,290 | $ | 2,365 | $ | 3,495 | ||||||||||
Interest cost |
6,014 | 7,359 | 8,682 | |||||||||||||
Expected return on plan assets |
(4,503 | ) | (4,107 | ) | (5,100 | ) | ||||||||||
Amortization of prior service credit |
(7,712 | ) | (7,418 | ) | (7,418 | ) | ||||||||||
Amortization of actuarial loss |
1,078 | 2,386 | 4,224 | |||||||||||||
|
|
|
|
|
|
|
||||||||||
Net periodic benefit cost |
(2,833 | ) | 585 | 3,883 | ||||||||||||
Other changes in plan assets and benefit obligations recognized in other comprehensive income: |
||||||||||||||||
Actuarial gain |
(21,265 | ) | (21,723 | ) | (14,739 | ) | ||||||||||
Prior service credit added during the year |
(7,263 | ) | - | - | ||||||||||||
Amortization of actuarial loss |
(1,078 | ) | (2,386 | ) | (4,224 | ) | ||||||||||
Amortization of prior service credit |
7,712 | 7,418 | 7,418 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total recognized in net periodic benefit cost and other comprehensive income |
$ | (24,727 | ) | $ | (16,106 | ) | $ | (7,662 | ) | |||||||
|
|
|
|
|
|
|
|
31
At February 28, 2011 and 2010, the assets of the plans are held in trust and allocated as follows:
Pension Plans | Postretirement Benefits | |||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | Target Allocation | ||||||||||||||||||
Equity securities: |
||||||||||||||||||||||
US |
51% | 46% | 43% | 37% | 15% - 35% | |||||||||||||||||
International |
31% | 31% | N/A | N/A | N/A | |||||||||||||||||
Debt securities: |
||||||||||||||||||||||
US |
48% | 53% | 54% | 59% | 55% - 75% | |||||||||||||||||
International |
67% | 67% | N/A | N/A | N/A | |||||||||||||||||
Cash and cash equivalents: |
||||||||||||||||||||||
US |
1% | 1% | 3% | 4% | 0% - 20% | |||||||||||||||||
International |
2% | 2% | N/A | N/A | N/A |
As of February 28, 2011, the investment policy for the U.S. pension plans targets an approximately even distribution between equity securities and debt securities with a minimal level of cash maintained in order to meet obligations as they come due. The investment policy for the international pension plans targets an approximately 30/60/10 distribution between equity securities, debt securities and cash and cash equivalents.
The investment policy for the postretirement benefit plan targets a distribution among equity securities, debt securities and cash and cash equivalents as noted above. All investments are actively managed, with debt securities averaging 2.5 years to maturity with a credit rating of A or better. This policy is subject to review and change.
The following table summarizes the fair value of the defined benefit pension plan assets at February 28, 2011:
Fair value at February 28, 2011 |
Quoted prices in active markets for identical assets (Level 1) |
Significant other observable inputs (Level 2) |
||||||||||||||
U.S. plans: |
||||||||||||||||
Short-term investments |
$ | 689 | $ | 689 | $ | - | ||||||||||
Equity securities |
42,776 | - | 42,776 | |||||||||||||
Fixed-income funds |
40,717 | - | 40,717 | |||||||||||||
International plans: |
||||||||||||||||
Short-term investments |
639 | 639 | - | |||||||||||||
Equity securities |
7,191 | - | 7,191 | |||||||||||||
Fixed-income funds |
15,869 | - | 15,869 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total: |
$ | 107,881 | $ | 1,328 | $ | 106,553 | ||||||||||
|
|
|
|
|
|
|
|
The following table summarizes the fair value of the defined benefit pension plan assets at February 28, 2010:
Fair value at February 28, 2010 |
Quoted prices in active markets for identical assets (Level 1) |
Significant other observable inputs (Level 2) |
||||||||||||||
U.S. plans: |
||||||||||||||||
Short-term investments |
$ | 683 | $ | 683 | $ | - | ||||||||||
Equity securities |
38,079 | - | 38,079 | |||||||||||||
Fixed-income funds |
43,073 | - | 43,073 | |||||||||||||
International plans: |
||||||||||||||||
Short-term investments |
241 | 241 | - | |||||||||||||
Equity securities |
6,487 | - | 6,487 | |||||||||||||
Fixed-income funds |
13,529 | - | 13,529 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total: |
$ | 102,092 | $ | 924 | $ | 101,168 | ||||||||||
|
|
|
|
|
|
|
|
32
The following table summarizes the fair value of the postretirement benefit plan assets at February 28, 2011:
Fair value at February 28, 2011 |
Quoted prices in active markets for identical assets (Level 1) |
Significant other observable inputs (Level 2) |
||||||||||||||
Short-term investments |
$ | 1,176 | $ | 1,176 | $ | - | ||||||||||
Equity securities |
29,229 | 29,229 | - | |||||||||||||
Fixed-income funds |
36,530 | - | 36,530 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total: |
$ | 66,935 | $ | 30,405 | $ | 36,530 | ||||||||||
|
|
|
|
|
|
|
|
The following table summarizes the fair value of the postretirement benefit plan assets at February 28, 2010:
Fair value at February 28, 2010 |
Quoted prices in active markets for identical assets (Level 1) |
Significant other observable inputs (Level 2) |
||||||||||||||
Short-term investments |
$ | 2,565 | $ | 2,565 | $ | - | ||||||||||
Equity securities |
25,035 | 25,035 | - | |||||||||||||
Fixed-income funds |
39,328 | - | 39,328 | |||||||||||||
|
|
|
|
|
|
|||||||||||
Total: |
$ | 66,928 | $ | 27,600 | $ | 39,328 | ||||||||||
|
|
|
|
|
|
Short-term investments: Short-term investments are valued at the closing price on the active market based on exchange rate to the United States dollar.
Equity securities: The fair value of common / collective trust funds are determined based on the quoted prices of the underlying investments. Common stock is valued at the closing price reported on the active market on which the individual securities are traded.
Fixed-income funds: The fair value of common / collective trust funds are determined based on the quoted prices of the underlying investments. Fixed income funds, which primarily consist of corporate and government bonds, are valued using evaluated prices, such as dealer quotes, available trade information, spreads, bids and offers, prepayment speeds, U.S. Treasury curves and interest rate movements, provided by a pricing vendor.
Although the Corporation does not anticipate that contributions to the Gibson Retirement Plan will be required in 2012, it may make contributions in excess of the legally required minimum contribution level. Any voluntary contributions by the Corporation are not expected to exceed deductible limits in accordance with Internal Revenue Service (IRS) regulations.
Based on historic patterns and currently scheduled benefit payments, the Corporation expects to contribute $2,196 to the Supplemental Executive Retirement Plan in 2012. The plan is a nonqualified and unfunded plan, and annual contributions, which are equal to benefit payments, are made from the Corporations general funds.
In addition, the Corporation does not anticipate contributing to the postretirement benefit plan in 2012.
The benefits expected to be paid out are as follows:
Postretirement Benefits | ||||||||||||||||
Pension Plans |
Excluding Effect of Medicare Part D Subsidy |
Including Effect of Medicare Part D Subsidy |
||||||||||||||
2012 |
$ | 11,131 | $ | 5,289 | $ | 4,529 | ||||||||||
2013 |
11,334 | 5,609 | 4,792 | |||||||||||||
2014 |
11,392 | 5,826 | 4,874 | |||||||||||||
2015 |
11,317 | 6,085 | 5,030 | |||||||||||||
2016 |
11,784 | 6,305 | 6,059 | |||||||||||||
2017 2021 |
57,969 | 33,717 | 32,433 |
33
NOTE 13 LONG-TERM LEASES AND COMMITMENTS
The Corporation is committed under noncancelable operating leases for commercial properties (certain of which have been subleased) and equipment, terms of which are generally less than 10 years. Rental expense under operating leases for the years ended February 28, 2011, 2010 and 2009 is as follows:
2011 | 2010 | 2009 | ||||||||||||||
Gross rentals |
$ | 33,452 | $ | 47,473 | $ | 48,332 | ||||||||||
Sublease rentals |
(16,387 | ) | (24,891 | ) | (460 | ) | ||||||||||
|
|
|
|
|
|
|||||||||||
Net rental expense |
$ | 17,065 | $ | 22,582 | $ | 47,872 | ||||||||||
|
|
|
|
|
|
At February 28, 2011, future minimum rental payments for noncancelable operating leases, net of aggregate future minimum noncancelable sublease rentals, are as follows:
Gross rentals: |
||||
2012 |
$ | 16,195 | ||
2013 |
11,599 | |||
2014 |
8,075 | |||
2015 |
6,143 | |||
2016 |
4,831 | |||
Later years |
10,525 | |||
|
|
|||
57,368 | ||||
Sublease rentals |
(36,052 | ) | ||
|
|
|||
Net rentals |
$ | 21,316 | ||
|
|
The majority of the sublease rentals in the table above are being paid by Schurman. These amounts relate to retail stores acquired by Schurman that are being subleased to Schurman. See Note 2 for additional information. The failure of Schurman to operate the retail stores successfully could have a material adverse effect on the Corporation, because if Schurman is not able to comply with its obligations under the subleases, the Corporation remains contractually obligated, as primary lessee, under those leases.
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. |
34
The following table summarizes the financial assets measured at fair value as of the measurement date, February 28, 2011, and the basis for that measurement, by level within the fair value hierarchy:
Balance as of February 28, 2011 |
Quoted prices in active markets for identical assets and liabilities (Level 1) |
Quoted prices in active markets for similar assets and liabilities (Level 2) |
Significant unobservable inputs (Level 3) |
|||||||||||||||||||
Assets measured on a recurring basis: |
||||||||||||||||||||||
Active employees medical plan trust |
$ | 3,223 | $ | 3,223 | $ | - | $ | - | ||||||||||||||
Deferred compensation plan assets(1) |
6,871 | 6,871 | - | - | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 10,094 | $ | 10,094 | $ | - | $ | - | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Assets measured on a non-recurring |
||||||||||||||||||||||
Assets held for sale |
$ | 5,282 | $ | - | $ | 5,282 | $ | - | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Total |
$ | 5,282 | $ | - | $ | 5,282 | $ | - | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the financial assets measured at fair value as of the measurement date, February 28, 2010, and the basis for that measurement, by level within the fair value hierarchy:
Balance as of February 28, 2010 |
|
Quoted prices in active markets for identical assets and liabilities (Level 1) |
|
Quoted prices in active markets for similar assets and liabilities (Level 2) |
|
Significant unobservable inputs (Level 3) |
||||||||||||||||
Assets measured on a recurring basis: |
||||||||||||||||||||||
Active employees medical plan trust |
$ | 4,087 | $ | 4,087 | $ | - | $ | - | ||||||||||||||
Deferred compensation plan assets(1) |
4,785 | 4,785 | - | - | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Total |
$ | 8,872 | $ | 8,872 | $ | - | $ | - | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Assets measured on a non-recurring |
||||||||||||||||||||||
Assets held for sale |
$ | 5,557 | $ | - | $ | 5,557 | $ | - | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Total |
$ | 5,557 | $ | - | $ | 5,557 | $ | - | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
(1) | There is an offsetting liability for the obligation to its employees on the Corporations books. |
The fair value of the investments in the active employees medical plan trust was considered a Level 1 valuation as it is based on the quoted market value per share of each individual security investment in an active market.
The deferred compensation plan is comprised of mutual fund assets and the Corporations common shares. The fair value of the mutual fund assets was considered a Level 1 valuation as it is based on each funds quoted market value per share in an active market. The fair value of the Corporations common shares was considered a Level 1 valuation as it is based on the quoted market value per share of the Class A common shares in an active market. Although the Corporation is under no obligation to fund employees nonqualified accounts, the fair value of the related non-qualified deferred compensation liability is based on the fair value of the mutual fund assets and the Corporations common shares.
Certain assets are measured at fair value on a nonrecurring basis and are subject to fair value adjustments only in certain circumstances. In accordance with ASC 360, during the fourth quarter of 2010, assets held for sale relating to the Corporations party goods product lines with a carrying value of $13,936 were written down to
35
fair value of $5,875, less cost to sell of $318, or $5,557. This resulted in an impairment charge of $8,379, which was recorded in Material, labor and other production costs on the Consolidated Statement of Operations. The assets held for sale included land and buildings related to the Kalamazoo facility within the North American Social Expression Products segment. During the fourth quarter of 2011, these assets were subsequently re-measured, at fair value less cost to sell, and an additional impairment charge of $275 was recorded. The fair value of the assets held for sale was considered a Level 2 valuation as it was based on observable selling prices for similar assets that were sold within the past twelve to eighteen months. In addition, land, buildings and certain equipment associated with a distribution facility in the International Social Expression Products segment have been reclassified to Assets held for sale on the Consolidated Statement of Financial Position, for all periods presented, as the location met the criteria to be classified as such during 2011. Bids from third parties for the purchase of these assets exceed current book value, therefore no adjustments to the carrying values were required in 2011. The assets included in Assets held for sale are expected to sell within one year.
NOTE 15 COMMON SHARES AND STOCK BASED COMPENSATION
At February 28, 2011 and 2010, common shares authorized consisted of 187,600,000 Class A and 15,832,968 Class B common shares.
Class A common shares have one vote per share and Class B common shares have ten votes per share. There is no public market for the Class B common shares of the Corporation. Pursuant to the Corporations Amended and Restated Articles of Incorporation, a holder of Class B common shares may not transfer such Class B common shares (except to permitted transferees, a group that generally includes members of the holders extended family, family trusts and charities) unless such holder first offers such shares to the Corporation for purchase at the most recent closing price for the Corporations Class A common shares. While it is the Corporations general policy to repurchase Class B common shares whenever they are offered by a holder, if the Corporation does not purchase such Class B common shares, the holder must convert such shares, on a share for share basis, into Class A common shares prior to any transfer, other than to a permitted transferee.
Total stock-based compensation expense, recognized in Administrative and general expenses on the Consolidated Statement of Operations, was $13,017 ($10,204 net of tax), which reduced earnings per share and earnings per share assuming dilution by $0.26 and $0.25 per share, respectively, during the year ended February 28, 2011. During 2010, total stock-based compensation expense was $5,819 ($3,648 net of tax), which reduced both earnings per share and earnings per share assuming dilution by $0.09 per share. During 2009, total stock-based compensation expense was $4,369 ($2,738 net of tax), which reduced both earnings per share and earnings per share assuming dilution by $0.06 per share.
Under the Corporations stock option plans, options to purchase common shares are granted to directors, officers and other key employees at the then-current market price. In general, subject to continuing service, options become exercisable commencing twelve months after the date of grant in annual installments and expire over a period of not more than ten years from the date of grant. The Corporation generally issues new shares when options to purchase Class A common shares are exercised and treasury shares when options to purchase Class B common shares are exercised.
Stock option transactions and prices are summarized as follows:
Number of Class A Options |
|
Weighted- Average Exercise Price |
|
Weighted-Average Remaining Contractual Term (in years) |
|
Aggregate Intrinsic Value (in thousands) |
||||||||||||||||
Outstanding at February 28, 2010 |
5,305,132 | $ | 19.00 | |||||||||||||||||||
Granted |
587,394 | 24.52 | ||||||||||||||||||||
Exercised |
(1,010,493 | ) | 23.92 | |||||||||||||||||||
Cancelled |
(348,102 | ) | 21.70 | |||||||||||||||||||
|
|
|
||||||||||||||||||||
Outstanding at February 28, 2011 |
4,533,931 | $ | 16.01 | 6.0 | $ | 14,260 | ||||||||||||||||
|
|
|
||||||||||||||||||||
Exercisable at February 28, 2011 |
3,557,127 | $ | 20.96 | 5.5 | $ | 8,291 |
36
Number of Class B Options |
Weighted- Average Exercise Price |
|
Weighted-Average Remaining Contractual Term (in years) |
|
Aggregate Intrinsic Value (in thousands) |
|||||||||||||||||
Outstanding at February 28, 2010 |
1,210,520 | $ | 20.19 | |||||||||||||||||||
Granted |
118,375 | 24.69 | ||||||||||||||||||||
Exercised |
(162,500 | ) | 24.91 | |||||||||||||||||||
|
|
|
||||||||||||||||||||
Outstanding at February 28, 2011 |
1,166,395 | $ | 19.96 | 5.7 | $ | 2,578 | ||||||||||||||||
|
|
|
|
|
||||||||||||||||||
Exercisable at February 28, 2011 |
865,187 | $ | 22.96 | 5.2 | $ | 639 |
The fair value of the options granted is estimated using the Black-Scholes option-pricing model with the following assumptions:
2011 |
|
2010 |
|
2009 | ||||||||||||
Risk-free interest rate |
1.4 | % | 1.3 | % | 2.5 | % | ||||||||||
Dividend yield |
2.3 | % | 6.0 | % | 2.7 | % | ||||||||||
Expected stock volatility |
0.81 | 0.71 | 0.31 | |||||||||||||
Expected life in years |
2.3 | 2.4 | 2.4 |
The weighted average fair value per share of options granted during 2011, 2010 and 2009 was $10.43, $2.83 and $3.13, respectively. The total intrinsic value of options exercised was $9,377, $1,985 and $116 in 2011, 2010 and 2009, respectively.
During 2009, approximately 60,000 performance shares were awarded to certain executive officers under the American Greetings 2007 Omnibus Incentive Compensation Plan (the Plan). The performance shares represent the right to receive Class B common shares, at no cost to the officer, upon achievement of management objectives over a performance period of up to two years. The number of performance shares actually earned is based on the percentage of the officers target incentive award, if any, that the officer achieves during the performance period under the Corporations Key Management Annual Incentive Plan. The Corporation recognizes compensation expense related to performance shares ratably over the estimated period during which the shares could be earned. During 2009, the target incentive awards were not earned as operating targets were not reached and thus, no compensation expense related to the performance shares was recognized. During 2010, the management objectives were met and the executives earned all 59,864 performance shares.
In 2010, the shareholders approved an amendment to the Plan reserving an additional 1,600,000 Class A common shares and 400,000 Class B common shares for issuance under the Plan. In connection with this amendment, in April 2009, performance shares were awarded to certain of the Corporations employees, including executive officers under the Plan. The performance shares represent the right to receive Class A common shares or Class B common shares, at no cost to the employee, upon achievement of management objectives over up to three annual performance periods and the satisfaction of a service-based vesting period.
The number of performance shares actually credited to a participant is based on achieving a corporate consolidated earnings before interest and taxes (EBIT) goal at the end of each of the three annual performance periods. Each of the three annual performance periods are subject to the same EBIT goals, which were established as of the date of grant. At the end of each performance period, provided that the performance objectives are met, the shares are then subject to a vesting requirement of two years of continuing service. The Corporation recognizes compensation expense related to performance shares ratably over the estimated combined performance and vesting period. During 2010, the required performance objectives for the first year performance period were satisfied and 709,000 performance shares were credited to participants. During 2011, the required performance objectives for the second year performance period were satisfied and 742,000 performance shares were credited to participants.
37
The following table summarizes the activity related to performance shares during 2011:
Number of Class A Performance Shares |
Weighted-Average Remaining Contractual Term (in years) |
Aggregate Intrinsic Value (in thousands) |
||||||||||||||
Unvested at February 28, 2010 |
615,000 | |||||||||||||||
Credited |
648,000 | |||||||||||||||
Vested |
(286,483 | ) | ||||||||||||||
Forfeited |
(227,017 | ) | ||||||||||||||
|
|
|
||||||||||||||
Unvested at February 28, 2011 |
749,500 | 1.3 | $ | 16,227 | ||||||||||||
|
|
|
||||||||||||||
Number of Class B Performance Shares |
||||||||||||||||
Unvested at February 28, 2010 |
153,864 | |||||||||||||||
Credited |
94,000 | |||||||||||||||
Vested |
(106,864 | ) | ||||||||||||||
Forfeited |
- | |||||||||||||||
|
|
|
||||||||||||||
Unvested at February 28, 2011 |
141,000 | 1.3 | $ | 3,053 | ||||||||||||
|
|
|
The fair value of the performance shares is estimated using the Black-Scholes option-pricing model with the following assumptions:
2011 | 2010 | |||||||||
Risk-free interest rate |
1.62 | % | 1.54 | % | ||||||
Dividend yield |
4.38 | % | 4.48 | % | ||||||
Expected stock volatility |
0.76 | 0.78 | ||||||||
Expected life in years |
2.5 | 2.3 |
The fair value per share of the performance shares in 2011 and 2010 was $10.20 and $9.67, respectively.
During 2011, the Company awarded restricted share units to officers and other key employees. The restricted share units represent the right to receive Class A common shares or Class B common shares, at no cost to the employee, upon the satisfaction of a two-year continuous service-based vesting period. The Corporation recognizes compensation expense related to restricted share units ratably over the vesting period.
38
The following table summarizes the activity related to restricted stock units during 2011:
Number of Class A Restricted Stock Units |
Weighted-Average Remaining Contractual Term (in years) |
Aggregate Intrinsic Value (in thousands) |
||||||||||
Unvested at February 28, 2010 |
- | |||||||||||
Granted |
124,920 | |||||||||||
Vested |
- | |||||||||||
Forfeited |
(13,921 | ) | ||||||||||
|
|
|||||||||||
Unvested at February 28, 2011 |
110,999 | 0.7 | $ | 2,403 | ||||||||
|
|
|||||||||||
Number of Class B Restricted Stock Units |
||||||||||||
Unvested at February 28, 2010 |
- | |||||||||||
Granted |
29,675 | |||||||||||
Vested |
- | |||||||||||
Forfeited |
- | |||||||||||
|
|
|||||||||||
Unvested at February 28, 2011 |
29,675 | 1.1 | $ | 642 | ||||||||
|
|
The fair value of the restricted stock units is estimated using the Black-Scholes option-pricing model with the following assumptions:
2011 | ||||
Risk-free interest rate |
1.09 | % | ||
Dividend yield |
2.3 | % | ||
Expected stock volatility |
0.90 | |||
Expected life in years |
1.6 |
The fair value per share of the restricted share units in 2011 was $23.65 at the date of the grant.
The risk-free interest rate was based upon the U.S. Treasury yield curve at the time of the grant. Dividend yield was estimated using the Corporations annual dividend in the year when the award was granted. Historical information was the primary basis for the estimates of expected stock volatility and expected life of the award.
As of February 28, 2011, the Corporation had unrecognized compensation expense of approximately $3,157, $4,659, and $1,326 before taxes, related to stock options, performance shares and restricted stock units, respectively.
The unrecognized compensation expense is expected to be recognized over an average period of approximately one year. Cash received from stock options exercised for the years ended February 28, 2011, 2010 and 2009, was $18,842, $5,834, and $366, respectively. The actual tax benefit realized from the exercise of share-based payment arrangements totaled $6,510, $762, and $45 for the years ended February 28, 2011, 2010 and 2009, respectively.
The number of shares available for future grant at February 28, 2011 is 924,164 Class A common shares and 134,054 Class B common shares.
39
NOTE 16 BUSINESS SEGMENT INFORMATION
The Corporation is organized and managed according to a number of factors, including product categories, geographic locations and channels of distribution.
The North American Social Expression Products and International Social Expression Products segments primarily design, manufacture and sell greeting cards and other related products through various channels of distribution with mass merchandise retailers as the primary channel. As permitted under ASC Topic 280, Segment Reporting, certain operating divisions have been aggregated into both the North American Social Expression Products and International Social Expression Products segments. The aggregated operating divisions have similar economic characteristics, products, production processes, types of customers and distribution methods. Approximately 54%, 51% and 54% of the North American Social Expression Products segments revenue in 2011, 2010 and 2009, respectively, is attributable to its top five customers. Approximately 44%, 45% and 39% of the International Social Expression Products segments revenue in 2011, 2010 and 2009, respectively, is attributable to its top three customers.
At February 28, 2009, the Corporation owned and operated 341 card and gift retail stores in the United States and Canada through its Retail Operations segment. The stores were primarily located in malls and strip shopping centers. The stores sold products purchased from the North American Social Expression Products segment as well as products purchased from other vendors. During the first quarter of 2010, the Corporation sold all of its card and gift retail store assets to Schurman, which operates stores under the American Greetings, Carlton Cards and Papyrus brands. See Note 2 for further information.
AG Interactive distributes social expression products, including electronic greetings, personalized printable greeting cards and a broad range of graphics and digital services and products, through a variety of electronic channels, including Web sites, Internet portals, instant messaging services and electronic mobile devices.
The Corporations non-reportable operating segments primarily include licensing activities and the design, manufacture and sale of display fixtures.
The Corporations senior management evaluates segment performance based on earnings before foreign currency exchange gains or losses, interest income, interest expense, centrally-managed costs and income taxes. The accounting policies of the reportable segments are the same as those described in Note 1 Significant Accounting Policies, except those that are related to LIFO or applicable to only corporate items.
Prior to the sale of the Retail Operations segment, intersegment sales from the North American Social Expression Products segment to the Retail Operations segment were recorded at estimated arms-length prices. Intersegment sales and profits were eliminated in consolidation. All inventories resulting from intersegment sales were carried at cost. Accordingly, the Retail Operations segment recorded full profit upon its sales to consumers.
The reporting and evaluation of segment assets include net accounts receivable, inventory on a FIFO basis, display materials and factory supplies, prepaid expenses, other assets and net property, plant and equipment. Unallocated and intersegment items include primarily cash, taxes and LIFO.
Segment results are internally reported and evaluated at consistent exchange rates between years to eliminate the impact of foreign currency fluctuations. An exchange rate adjustment is included in the reconciliation of the segment results to the consolidated results; this adjustment represents the impact on the segment results of the difference between the exchange rates used for segment reporting and evaluation and the actual exchange rates for the periods presented.
Centrally incurred and managed costs are not allocated back to the operating segments. The unallocated items include interest expense on centrally-incurred debt, domestic profit-sharing expense, settlement charges and stock-based compensation expense. In addition, the costs associated with corporate operations including the senior management, corporate finance, legal and human resource functions, among other costs, are included in the unallocated items. In 2010, unallocated items included the negotiated settlement of a lawsuit totaling $24,000, all of which was paid as of February 28, 2010.
40
Operating Segment Information
Total Revenue | Segment Earnings (Loss) | |||||||||||||||||||||||||||||||||
2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |||||||||||||||||||||||||||||
North American Social Expression Products |
$ | 1,173,599 | $ | 1,231,624 | $ | 1,139,203 | $ | 210,154 | $ | 236,125 | $ | 106,311 | ||||||||||||||||||||||
Intersegment items |
| (5,104 | ) | (52,805 | ) | | (3,511 | ) | (38,899 | ) | ||||||||||||||||||||||||
Exchange rate adjustment |
17,884 | 8,659 | 9,050 | 8,170 | 3,800 | 2,539 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Net |
1,191,483 | 1,235,179 | 1,095,448 | 218,324 | 236,414 | 69,951 | ||||||||||||||||||||||||||||
International Social Expression Products |
256,507 | 250,026 | 245,331 | 19,536 | 16,693 | (68,545 | ) | |||||||||||||||||||||||||||
Exchange rate adjustment |
5,205 | 4,006 | 25,396 | 36 | 153 | (9,124 | ) | |||||||||||||||||||||||||||
|
|
|
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Net |
261,712 | 254,032 | 270,727 | 19,572 | 16,846 | (77,669 | ) | |||||||||||||||||||||||||||
Retail Operations |
| 11,727 | 170,066 | | (34,830 | ) | (19,727 | ) | ||||||||||||||||||||||||||
Exchange rate adjustment |
| 112 | 8,746 | | (285 | ) | 496 | |||||||||||||||||||||||||||
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Net |
| 11,839 | 178,812 | | (35,115 | ) | (19,231 | ) | ||||||||||||||||||||||||||
AG Interactive |
78,407 | 80,320 | 82,623 |