UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

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

Commission file number 1-13859

AMERICAN GREETINGS CORPORATION

(Exact name of registrant as specified in its charter)

Ohio		34-0065325
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
One American Road, Cleveland, Ohio		44144
(Address of principal executive offices)		(Zip Code)

(216) 252-7300

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ      No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ      No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o      No þ

As of October 3, 2011, the number of shares outstanding of each of the issuer’s classes of common stock was:

Class A Common       37,116,563

Class B Common       2,781,131

 

 

AMERICAN GREETINGS CORPORATION
INDEX

		Page
		Number
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3. Quantitative and Qualitative Disclosures About Market Risk			26
Item 4. Controls and Procedures			27
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			28
Item 6. Exhibits			29
SIGNATURES			30
EXHIBITS
EX-31.A
EX-31.B
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

AMERICAN GREETINGS CORPORATION
CONSOLIDATED STATEMENT OF INCOME

(Thousands of dollars except share and per share amounts)

						(Unaudited)
		Three Months Ended								Six Months Ended
		August 26,				August 27,				August 26,				August 27,
		2011				2010				2011				2010
Net sales		$	359,741			$	333,339			$	756,517			$	725,444
Other revenue			9,052				9,480				14,625				13,683
Total revenue			368,793				342,819				771,142				739,127
Material, labor and other production costs			158,198				145,713				316,127				303,726
Selling, distribution and marketing expenses			125,089				112,318				248,381				229,869
Administrative and general expenses			60,926				62,193				126,224				128,225
Other operating income — net			(5,122	)			(936	)			(6,045	)			(1,530	)
Operating income			29,702				23,531				86,455				78,837
Interest expense			5,763				6,718				11,887				12,920
Interest income			(310	)			(197	)			(631	)			(410	)
Other non-operating income — net			(704	)			(3	)			(544	)			(1,703	)
Income before income tax expense			24,953				17,013				75,743				68,030
Income tax expense			10,477				8,481				28,674				28,659
Net income		$	14,476			$	8,532			$	47,069			$	39,371
Earnings per share — basic		$	0.36			$	0.21			$	1.16			$	0.99
Earnings per share — assuming dilution		$	0.35			$	0.21			$	1.12			$	0.96
Average number of shares outstanding			40,696,961				40,026,649				40,598,659				39,832,609
Average number of shares outstanding — assuming dilution			41,688,787				40,875,329				41,842,760				40,861,761
Dividends declared per share		$	0.15			$	0.14			$	0.30			$	0.28

See notes to consolidated financial statements (unaudited).

AMERICAN GREETINGS CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Thousands of dollars)

		(Unaudited)				(Note 1)				(Unaudited)
		August 26, 2011				February 28, 2011				August 27, 2010
ASSETS
Current assets
Cash and cash equivalents		$	209,326			$	215,838			$	133,834
Trade accounts receivable, net			111,691				119,779				89,408
Inventories			248,805				179,730				189,366
Deferred and refundable income taxes			45,029				50,051				61,742
Assets held for sale			5,282				7,154				13,711
Prepaid expenses and other			110,598				128,372				113,112
Total current assets			730,731				700,924				601,173
Goodwill			29,044				28,903				29,929
Other assets			430,344				436,137				413,808
Deferred and refundable income taxes			129,594				124,789				153,775
Property, plant and equipment — at cost			872,455				849,552				845,497
Less accumulated depreciation			620,875				607,903				607,215
Property, plant and equipment — net			251,580				241,649				238,282
		$	1,571,293			$	1,532,402			$	1,436,967
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	118,162			$	87,105			$	88,668
Accrued liabilities			56,056				58,841				59,283
Accrued compensation and benefits			47,916				72,379				48,287
Income taxes payable			15,812				10,951				23,052
Other current liabilities			97,602				102,286				87,872
Total current liabilities			335,548				331,562				307,162
Long-term debt			233,970				232,688				231,525
Other liabilities			184,259				187,505				190,457
Deferred income taxes and noncurrent income taxes payable			32,740				31,736				32,194
Shareholders’ equity
Common shares — Class A			37,561				37,470				37,137
Common shares — Class B			2,781				2,937				2,923
Capital in excess of par value			507,256				492,048				482,035
Treasury stock			(962,747	)			(952,206	)			(951,682	)
Accumulated other comprehensive income (loss)			764				(2,346	)			(30,815	)
Retained earnings			1,199,161				1,171,008				1,136,031
Total shareholders’ equity			784,776				748,911				675,629
		$	1,571,293			$	1,532,402			$	1,436,967

See notes to consolidated financial statements (unaudited).

AMERICAN GREETINGS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of dollars)

		(Unaudited)
		Six Months Ended
		August 26, 2011				August 27, 2010
OPERATING ACTIVITIES:
Net income		$	47,069			$	39,371
Adjustments to reconcile net income to cash flows from operating activities:
Stock-based compensation			5,362				6,261
Net gain on dispositions			(4,500	)			(254	)
Net gain on disposal of fixed assets			(484	)			(1,268	)
Depreciation and intangible assets amortization			19,986				20,463
Deferred income taxes			4,039				10,618
Other non-cash charges			1,814				1,949
Changes in operating assets and liabilities, net of acquisitions:
Trade accounts receivable			12,829				44,279
Inventories			(64,515	)			(24,908	)
Other current assets			4,258				(2,169	)
Income taxes			2,785				15,125
Deferred costs — net			16,400				27,905
Accounts payable and other liabilities			(8,751	)			(54,639	)
Other — net			(63	)			5,814
Total Cash Flows From Operating Activities			36,229				88,547
INVESTING ACTIVITIES:
Property, plant and equipment additions			(26,951	)			(14,128	)
Cash payments for business acquisitions, net of cash acquired			(5,992	)			—
Proceeds from sale of fixed assets			2,567				2,997
Proceeds from escrow related to party goods transaction			—				25,151
Proceeds from sale of intellectual properties			4,500				—
Total Cash Flows From Investing Activities			(25,876	)			14,020
FINANCING ACTIVITIES:
Net decrease in long-term debt			—				(98,250	)
Net decrease in short-term debt			—				(1,000	)
Sale of stock under benefit plans			12,222				16,540
Excess tax benefits from share-based payment awards			2,370				2,485
Purchase of treasury shares			(20,791	)			(13,052	)
Dividends to shareholders			(12,176	)			(11,127	)
Debt issuance costs			—				(2,917	)
Total Cash Flows From Financing Activities			(18,375	)			(107,321	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH			1,510				639
DECREASE IN CASH AND CASH EQUIVALENTS			(6,512	)			(4,115	)
Cash and Cash Equivalents at Beginning of Year			215,838				137,949
Cash and Cash Equivalents at End of Period		$	209,326			$	133,834

See notes to consolidated financial statements (unaudited).

AMERICAN GREETINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Three and Six Months Ended August 26, 2011 and August 27, 2010

Note 1 — Basis of Presentation

The accompanying unaudited consolidated financial statements of American Greetings Corporation and its subsidiaries (the “Corporation”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary to fairly present financial position, results of operations and cash flows for the periods have been included.

The Corporation’s fiscal year ends on February 28 or 29. References to a particular year refer to the fiscal year ending in February of that year. For example, 2011 refers to the year ended February 28, 2011.

These interim financial statements should be read in conjunction with the Corporation’s financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended February 28, 2011, from which the Consolidated Statement of Financial Position at February 28, 2011, presented herein, has been derived. Certain amounts in the prior year financial statements have been reclassified to conform to the 2012 presentation. These reclassifications had no material impact on financial position, earnings or cash flows.

The Corporation’s investments in less than majority-owned companies in which it has the ability to exercise significant influence over the operation 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. 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 Accounting Standards Codification (“ASC”) topic 810, (“ASC 810”) “Consolidation.” Schurman owns and operates specialty card and gift retail stores in the United States and Canada. The stores are primarily located in malls and strip shopping centers. During the current period, the Corporation assessed the variable interests in Schurman and determined that a third party holder of variable interests has the controlling financial interest in the VIE and thus, the third party, not the Corporation, is the primary beneficiary. In completing this assessment, the Corporation identified the activities that it considers most significant to the future economic success of the VIE and determined that it does not have the power to direct those activities. As such, Schurman is not consolidated in the Corporation’s results. The Corporation’s maximum exposure to loss as it relates to Schurman as of August 26, 2011 includes:

•

the investment in the equity of Schurman of $1.9 million;

•

the Liquidity Guaranty of Schurman’s indebtedness of $12 million;

•

normal course of business trade accounts receivable due from Schurman of $12.6 million, 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 $28.5 million, $36.0 million and $43.3 million as of August 26, 2011, February 28, 2011 and August 27, 2010, respectively;

•

the subordinated credit facility (the “Subordinated Credit Facility”) that provides Schurman with up to $10 million of subordinated financing.

The Corporation provides Schurman limited credit support through the provision of a Liquidity Guaranty in favor of the lenders under Schurman’s senior revolving credit facility (the “Senior Credit Facility”). Pursuant to the terms of the Liquidity Guaranty, the Corporation has guaranteed the repayment of up to $12 million of Schurman’s borrowings under the Senior Credit Facility to help ensure that Schurman has sufficient borrowing availability under

this facility. The Liquidity Guaranty is required to be backed by a letter of credit for the term of the Liquidity Guaranty, which is currently anticipated to end in January 2014. The Corporation’s obligations under the Liquidity Guaranty generally may not be triggered unless Schurman’s lenders under its Senior Credit Facility have substantially completed the liquidation of the collateral under Schurman’s Senior Credit Facility, or 91 days after the liquidation is started, whichever is earlier, and will be limited to the deficiency, if any, between the amount owed and the amount collected in connection with the liquidation. There was no triggering event or liquidation of collateral as of August 26, 2011 requiring the use of the guaranty.

The Subordinated Credit Facility that the Corporation provides to Schurman had an initial term of nineteen months expiring on November 17, 2010, however, unless either party provides the appropriate written notice prior to the expiration of the applicable term, the facility automatically renews for periods of one year, except in the case of the last renewal, in which case the facility can only renew for the partial year ending on the facility’s expiration date of June 25, 2013. 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 non-financial covenants and events of default customary for such financings. As of August 26, 2011, the facility was in its first annual renewal and Schurman had not borrowed under the Subordinated Credit Facility.

The April 2009 transaction with Schurman also included a $12 million limited Bridge Guaranty in favor of the lenders under the Senior Credit Facility, which remained in effect until Schurman was able to include inventory and other assets of the retail stores it acquired from the Corporation in its borrowing base. As previously disclosed in the Corporation’s Annual Report on Form 10-K for the year ended February 28, 2011, on April 1, 2011, the Bridge Guaranty was terminated.

In addition to the investment in the equity of Schurman, as previously disclosed in the Corporation’s Annual Report on Form 10-K for the year ended February 28, 2011, the Corporation holds an investment in the common stock of AAH Holdings Corporation, Amscan’s ultimate parent corporation. These two investments, totaling approximately $12.5 million, are accounted for under the cost method. The Corporation is not aware of any events or changes in circumstances that had occurred during the six months ended August 26, 2011 that the Corporation believes are reasonably likely to have had a significant adverse effect on the carrying amount of these investments.

Note 2 — Seasonal Nature of Business

A significant portion of the Corporation’s business is seasonal in nature. Therefore, the results of operations for interim periods are not necessarily indicative of the results for the fiscal year taken as a whole.

Note 3 — Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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 become effective for interim and annual periods beginning after December 15, 2010. The Corporation’s adoption of this standard did not have a material effect on its financial statements.

In May 2011, the FASB issued ASU No. 2011-04 (“ASU 2011-04”), “Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 improves comparability of fair value measurements presented and disclosed in financial statements prepared with U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement

requirements including (1) the application of the highest and best use and valuation premise concepts, (2) measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity, and (3) quantitative information required for fair value measurements categorized within Level 3. ASU 2011-04 also provides guidance on measuring the fair value of financial instruments managed within a portfolio, and application of premiums and discounts in a fair value measurement. In addition, ASU 2011-04 requires additional disclosure for Level 3 measurements regarding the sensitivity of fair value to changes in unobservable inputs and any interrelationships between those inputs. The amendments in this guidance are to be applied prospectively, and are effective for interim and annual periods beginning after December 15, 2011. The Corporation does not expect that the adoption of this standard will have a material effect on its financial statements.

In June 2011, the FASB issued ASU No. 2011-05 (“ASU 2011-05”), “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity, and requires the presentation of components of net income and other comprehensive income either in a single continuous statement or in two separate but consecutive statements. ASU 2011-05 is effective, on a retrospective basis, for interim and annual periods beginning after December 15, 2011. The Corporation does not expect the adoption of this standard will have a material impact on its results of operations and financial condition, but it will affect how the Corporation presents its other comprehensive income.

Note 4 — Acquisitions

Continuing the strategy of focusing on growing its core greeting card business, on March 1, 2011, the Corporation’s European subsidiary, UK Greetings Ltd., acquired Watermark Publishing Limited and its wholly owned subsidiary Watermark Packaging Limited (“Watermark”). Watermark is a privately held company located in Corby, England, and is considered a leader in the United Kingdom in the innovation and design of greeting cards. Under the terms of the transaction, the Corporation acquired 100% of the equity interests of Watermark for approximately $17.1 million in cash. Cash paid for Watermark, net of cash acquired, was approximately $6.0 million and is reflected in investing activities in the Consolidated Statement of Cash Flows.

The total cost of the acquisition has been allocated to the assets acquired and the liabilities assumed based upon their estimated fair values at the date of the acquisition. The estimated purchase price allocation is preliminary and subject to revision as valuation work is still being conducted. The following represents the preliminary purchase price allocation:

Purchase price (in millions):
Cash paid		$	17.1
Cash acquired			(11.1	)
		$	6.0
Allocation (in millions):
Current assets		$	8.7
Property, plant and equipment			0.4
Intangible assets			2.7
Goodwill			1.4
Liabilities assumed			(7.2	)
		$	6.0

The financial results of this acquisition are included in the Corporation’s 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. The Watermark business is included in the Corporation’s International Social Expression Products segment.

Note 5 — Expenses Associated with Royalty Revenue

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, which is recorded in “Other revenue.” These license agreements may include the receipt of upfront advances, which are recorded as deferred revenue and earned during the period of the agreement. Expenses associated with the servicing of these agreements, primarily relating to the licensing activities included in non-reportable segments, are summarized as follows:

		Three Months Ended								Six Months Ended
(In thousands)		August 26, 2011				August 27, 2010				August 26, 2011				August 27, 2010
Material, labor and other production costs		$	2,566			$	3,083			$	4,992			$	5,148
Selling, distribution and marketing expenses			3,379				4,295				4,724				5,724
Administrative and general expenses			472				422				861				855
		$	6,417			$	7,800			$	10,577			$	11,727

Note 6 — Other Income and Expense

		Three Months Ended								Six Months Ended
(In thousands)		August 26, 2011				August 27, 2010				August 26, 2011				August 27, 2010
Gain on sale of intellectual properties		$	(4,500	)		$	—			$	(4,500	)		$	—
Miscellaneous			(622	)			(936	)			(1,545	)			(1,530	)
Other operating income — net		$	(5,122	)		$	(936	)		$	(6,045	)		$	(1,530	)

In June 2011, the Corporation sold certain minor character properties and recognized a gain of $4.5 million. The proceeds of $4.5 million were included in “Proceeds from sale of intellectual properties” on the Consolidated Statement of Cash Flows.

		Three Months Ended								Six Months Ended
(In thousands)		August 26, 2011				August 27, 2010				August 26, 2011				August 27, 2010
Foreign exchange loss		$	152			$	1,441			$	869			$	388
Rental income			(268	)			(235	)			(739	)			(761	)
Gain on asset disposal			(570	)			(1,117	)			(484	)			(1,268	)
Miscellaneous			(18	)			(92	)			(190	)			(62	)
Other non-operating income — net		$	(704	)		$	(3	)		$	(544	)		$	(1,703	)

“Miscellaneous” includes, among other things, income/loss from equity securities.

In June 2011, the Corporation sold the land, building and certain equipment associated with a distribution facility in the International Social Expression Products segment that were previously included in “Assets held for sale” on the Consolidated Statement of Financial Position and recorded a gain of approximately $0.5 million. The cash proceeds of approximately $2.4 million received from the sale of the assets are included in “Proceeds from sale of fixed assets” on the Consolidated Statement of Cash Flows.

In August 2010, the Corporation sold the land and building associated with its Mexican operations that were previously included in “Assets held for sale” on the Consolidated Statement of Financial Position and recorded a gain of approximately $1.0 million. The cash proceeds of $2.0 million received from the sale of the Mexican assets are included in “Proceeds from sale of fixed assets” on the Consolidated Statement of Cash Flows.

Note 7 — Earnings Per Share

The following table sets forth the computation of earnings per share and earnings per share - assuming dilution:

		Three Months Ended								Six Months Ended
		August 26,				August 27,				August 26,				August 27,
		2011				2010				2011				2010
Numerator (in thousands):
Net income		$	14,476			$	8,532			$	47,069			$	39,371
Denominator (in thousands):
Weighted average shares outstanding			40,697				40,027				40,599				39,833
Effect of dilutive securities:
Stock options and awards			992				848				1,244				1,029
Weighted average shares outstanding — assuming dilution			41,689				40,875				41,843				40,862
Earnings per share		$	0.36			$	0.21			$	1.16			$	0.99
Earnings per share — assuming dilution		$	0.35			$	0.21			$	1.12			$	0.96

Certain stock options 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. The stock options excluded from the computation of earnings per share-assuming dilution were approximately 2.5 million and 2.2 million in the three and six month periods ended August 26, 2011, respectively (3.7 million and 3.2 million in the three and six month periods ended August 27, 2010, respectively).

The Corporation issued approximately 0.2 million Class A common shares upon exercise of employee stock options and vesting of equity awards during the three months ended August 26, 2011 (0.1 million Class A common shares in the three months ended August 27, 2010). The Corporation issued approximately 0.7 million and 0.3 million Class A and Class B common shares, respectively, upon exercise of employee stock options and vesting of equity awards during the six months ended August 26, 2011 (0.9 million and 0.2 million Class A and Class B common shares, respectively, in the six months ended August 27, 2010).

Note 8 — Comprehensive Income

The Corporation’s total comprehensive income is as follows:

		Three Months Ended								Six Months Ended
		August 26,				August 27,				August 26,				August 27,
(In thousands)		2011				2010				2011				2010
Net income		$	14,476			$	8,532			$	47,069			$	39,371
Other comprehensive (loss) income:
Foreign currency translation adjustments			(1,444	)			10,082				3,038				1,084
Pension and postretirement benefit adjustments, net of tax			87				(639	)			71				(2,084	)
Unrealized (loss) gain on securities, net of tax			—				(1	)			1				—
Total comprehensive income		$	13,119			$	17,974			$	50,179			$	38,371

Note 9 — Customer Allowances and Discounts

Trade accounts receivable is reported net of certain allowances and discounts. The most significant of these are as follows:

(In thousands)		August 26, 2011				February 28, 2011				August 27, 2010
Allowance for seasonal sales returns		$	25,015			$	34,058			$	21,450
Allowance for outdated products			13,405				8,264				10,249
Allowance for doubtful accounts			7,579				5,374				3,336
Allowance for cooperative advertising and marketing funds			31,477				25,631				25,259
Allowance for rebates			29,537				24,920				20,573
		$	107,013			$	98,247			$	80,867

Certain customer allowances and discounts are settled in cash. These accounts, primarily rebates, which are classified as “Accrued liabilities” on the Consolidated Statement of Financial Position, totaled $13.1 million, $11.9 million and $12.8 million as of August 26, 2011, February 28, 2011 and August 27, 2010, respectively.

Note 10 — Inventories

(In thousands)		August 26, 2011				February 28, 2011				August 27, 2010
Raw materials		$	23,906			$	21,248			$	17,651
Work in process			12,875				6,476				10,982
Finished products			272,948				212,056				219,265
			309,729				239,780				247,898
Less LIFO reserve			80,356				78,358				75,781
			229,373				161,422				172,117
Display materials and factory supplies			19,432				18,308				17,249
		$	248,805			$	179,730			$	189,366

The valuation of inventory under the Last-In, First-Out (“LIFO”) method is made at the end of each fiscal year based on inventory levels and costs at that time. Accordingly, interim LIFO calculations, by necessity, are based on estimates of expected fiscal year-end inventory levels and costs, and are subject to final fiscal year-end LIFO inventory calculations.

Inventory held on location for retailers with scan-based trading arrangements, which is included in finished products, totaled $51.3 million, $42.1 million and $36.7 million as of August 26, 2011, February 28, 2011 and August 27, 2010, respectively.

Note 11 — Deferred Costs

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

(In thousands)		August 26, 2011				February 28, 2011				August 27, 2010
Prepaid expenses and other		$	75,016			$	88,352			$	73,624
Other assets			316,099				327,311				295,902
Deferred cost assets			391,115				415,663				369,526
Other current liabilities			(63,846	)			(64,116	)			(53,802	)
Other liabilities			(68,323	)			(76,301	)			(55,405	)
Deferred cost liabilities			(132,169	)			(140,417	)			(109,207	)
Net deferred costs		$	258,946			$	275,246			$	260,319

The Corporation maintains an allowance for deferred costs related to supply agreements of $10.3 million, $10.7 million and $11.6 million at August 26, 2011, February 28, 2011 and August 27, 2010, respectively. This allowance is included in “Other assets” in the Consolidated Statement of Financial Position.

Note 12 — Deferred Revenue

Deferred revenue, included in “Other current liabilities” and “Other liabilities” on the Consolidated Statement of Financial Position, totaled $33.6 million, $39.4 million and $34.0 million at August 26, 2011, February 28, 2011 and August 27, 2010, respectively. The amounts relate primarily to subscription revenue in the Corporation’s AG Interactive segment and the licensing activities included in non-reportable segments.

Note 13 — Debt

As of August 26, 2011, the Corporation was party to an amended and restated $350 million secured credit agreement and to an amended and restated receivables purchase agreement that has available financing of up to $80 million. On September 21, 2011, the amended and restated receivables purchase agreement was further amended to decrease the amount of available financing under the agreement from $80 million to $70 million. Also, on September 21, 2011, the liquidity commitments under the receivables purchase agreement were renewed for an additional 364-day period. There were no balances outstanding under the Corporation’s credit facility or receivables purchase agreement at August 26, 2011, February 28, 2011 and August 27, 2010. The Corporation had, in the aggregate, $31.8 million outstanding under letters of credit under these borrowing agreements, which reduces the total credit available to the Corporation thereunder.

There was no debt due within one year as of August 26, 2011, February 28, 2011 and August 27, 2010.

Long-term debt and their related calendar year due dates, net of unamortized discounts which totaled $20.9 million, $22.2 million and $23.3 million as of August 26, 2011, February 28, 2011 and August 27, 2010, respectively, were as follows:

(In thousands)		August 26, 2011				February 28, 2011				August 27, 2010
7.375% senior notes, due 2016		$	213,593			$	213,077			$	212,609
7.375% notes, due 2016			20,196				19,430				18,735
6.10% senior notes, due 2028			181				181				181
		$	233,970			$	232,688			$	231,525

The total fair value of the Corporation’s publicly traded debt, based on quoted market prices, was $237.8 million (at a carrying value of $234.0 million), $237.5 million (at a carrying value of $232.7 million) and $231.3 million (at a carrying value of $231.5 million) at August 26, 2011, February 28, 2011 and August 27, 2010, respectively.

At August 26, 2011, the Corporation was in compliance with the financial covenants under its borrowing agreements.

Note 14 — Retirement Benefits

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

		Defined Benefit Pension
		Three Months Ended								Six Months Ended
		August 26,				August 27,				August 26,				August 27,
(In thousands)		2011				2010				2011				2010
Service cost		$	211			$	250			$	415			$	501
Interest cost			2,145				2,206				4,291				4,418
Expected return on plan assets			(1,671	)			(1,654	)			(3,343	)			(3,314	)
Amortization of prior service cost			64				44				123				88
Amortization of actuarial loss			558				524				1,127				1,050
		$	1,307			$	1,370			$	2,613			$	2,743

		Postretirement Benefit
		Three Months Ended								Six Months Ended
		August 26,				August 27,				August 26,				August 27,
(In thousands)		2011				2010				2011				2010
Service cost		$	362			$	575			$	725			$	1,150
Interest cost			1,210				1,550				2,420				3,100
Expected return on plan assets			(1,097	)			(1,125	)			(2,195	)			(2,250	)
Amortization of prior service credit			(637	)			(1,850	)			(1,275	)			(3,700	)
Amortization of actuarial loss			—				250				—				500
		$	(162	)		$	(600	)		$	(325	)		$	(1,200	)

The Corporation has a discretionary profit-sharing plan with a 401(k) provision covering most of its United States employees. The profit-sharing plan expense for the six months ended August 26, 2011 was $5.2 million, compared to $4.5 million in the prior year period. The Corporation also matches a portion of 401(k) employee contributions. The expenses recognized for the three and six month periods ended August 26, 2011 were $1.2 million and $2.6 million ($1.0 million and $2.1 million for the three and six month periods ended August 27, 2010), respectively. The profit-sharing plan and 401(k) matching expenses for the six month periods are estimates as actual contributions are determined after fiscal year-end.

At August 26, 2011, February 28, 2011 and August 27, 2010, the liability for postretirement benefits other than pensions was $27.9 million, $24.1 million and $49.2 million, respectively, and is included in “Other liabilities” on the Consolidated Statement of Financial Position. At August 26, 2011, February 28, 2011 and August 27, 2010, the long-term liability for pension benefits was $60.0 million, $60.1 million and $58.9 million, respectively, and is included in “Other liabilities” on the Consolidated Statement of Financial Position.

Note 15 — 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.

The following table shows the Corporation’s assets and liabilities measured at fair value as of August 26, 2011:

		August 26, 2011				Level 1				Level 2				Level 3
Assets measured on a recurring basis:
Active employees’ medical plan trust assets		$	3,296			$	3,296			$	—			$	—
Deferred compensation plan assets (1)			8,251				8,251				—				—
Total		$	11,547			$	11,547			$	—			$	—
Assets measured on a nonrecurring basis:
Assets held for sale		$	5,282			$	—			$	5,282			$	—
Total		$	5,282			$	—			$	5,282			$	—

The following table shows the Corporation’s assets and liabilities measured at fair value as of February 28, 2011:

		February 28, 2011				Level 1				Level 2				Level 3
Assets measured on a recurring basis:
Active employees’ medical plan trust assets		$	3,223			$	3,223			$	—			$	—
Deferred compensation plan assets (1)			6,871				6,871				—				—
Total		$	10,094			$	10,094			$	—			$	—
Assets measured on a nonrecurring basis:
Assets held for sale		$	5,282			$	—			$	5,282			$	—
Total		$	5,282			$	—			$	5,282			$	—

The following table shows the Corporation’s assets and liabilities measured at fair value as of August 27, 2010:

		August 27, 2010				Level 1				Level 2				Level 3
Assets measured on a recurring basis:
Active employees’ medical plan trust assets		$	4,118			$	4,118			$	—			$	—
Deferred compensation plan assets (1)			5,662				5,662				—				—
Total		$	9,780			$	9,780			$	—			$	—
Assets measured on a nonrecurring basis:
Assets held for sale		$	5,557			$	—			$	5,557			$	—
Total		$	5,557			$	—			$	5,557			$	—

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 includes mutual fund assets. Assets held in mutual funds were recorded at fair value, which was considered a Level 1 valuation as it is based on each fund’s quoted market value per share in an active market. Although the Corporation is under no obligation to fund employees’ non-qualified accounts, the fair value of the related non-qualified deferred compensation liability is based on the fair value of the mutual fund.

Certain assets are measured at fair value on a nonrecurring basis and are subject to fair value adjustments only in certain circumstances. During the fourth quarter of 2010, assets held for sale relating to the Corporation’s party goods product lines, including land and buildings, were written down to fair value of $5.9 million, less cost to sell of $0.3 million, or $5.6 million. During the fourth quarter of 2011, these assets were subsequently re-measured and an additional impairment charge of $0.3 million was recorded. Re-assessment in the current period indicated no change to the fair value of these assets. 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. The assets included in “Assets held for sale” are expected to sell within one year.

Note 16 — Income Taxes

The Corporation’s provision for income taxes in interim periods is computed by applying its estimated annual effective tax rate against income before income tax expense for the period. In addition, non-recurring or discrete items are recorded during the period in which they occur. The magnitude of the impact that discrete items have on the Corporation’s quarterly effective tax rate is dependent on the level of income in the period. The effective tax rate was 42.0% and 37.9% for the three and six months ended August 26, 2011, respectively, and 49.9% and 42.1% for the three and six months ended August 27, 2010, respectively. The higher than statutory rate in the current period is due to an increase in estimated accruals and settlements associated with anticipated settlements related to open years which are currently under Internal Revenue Service examination. In the prior year, the higher than statutory rate was due primarily to the impact of unfavorable settlements of audits in foreign jurisdictions, the release of insurance reserves that generated taxable income and the recognition of the deferred tax effects of the reduced deductibility of the postretirements prescription drug coverage due to the enacted U.S. Patient Protection and Affordability Care Act.

At February 28, 2011, the Corporation had unrecognized tax benefits of $43.3 million that, if recognized, would have a favorable effect on the Corporation’s income tax expense of $32.8 million. There were no significant changes to this amount during the six months ended August 26, 2011. It is reasonably possible that the Corporation’s unrecognized tax positions as of February 28, 2011 could decrease approximately $9.5 million during 2012 due to anticipated settlements and resulting cash payments related to open years after 1996, which are currently under examination.

The Corporation recognizes interest and penalties accrued on unrecognized tax benefits and refundable income taxes as a component of income tax expense. During the six months ended August 26, 2011, the Corporation recognized net expense of $3.1 million for interest and penalties on unrecognized tax benefits and refundable income taxes. As of August 26, 2011, the total amount of gross accrued interest and penalties related to unrecognized tax benefits less refundable income taxes was a net payable of $20.0 million.

The Corporation is subject to examination by the U.S. Internal Revenue Service and various U.S. state and local jurisdictions for tax years 1996 to the present. The Corporation is also subject to tax examination in various international tax jurisdictions, including Canada, the United Kingdom, Australia, France, Italy, Mexico and New Zealand for tax years 2006 to the present.

Note 17 — Business Segment Information

The Corporation has North American Social Expression Products, International Social Expression Products, AG Interactive and non-reportable segments. 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. AG Interactive distributes social expression products, including electronic greetings and a broad range of graphics and digital services and products, through a variety of electronic channels, including Web sites, Internet portals, instant messaging services and electronic mobile devices. The Corporation’s non-reportable operating segments primarily include licensing activities and the design, manufacture and sale of display fixtures.

During the current year, certain items that were previously considered corporate expenses are now included in the calculation of segment earnings for the North American Social Expression Products segment. This change is the

result of modifications to organizational structures, and is intended to better align the segment financial results with the responsibilities of segment management and the way management evaluates the Corporation’s operations. In addition, segment results are now reported using actual foreign exchange rates for the periods presented. Previously, segment results were reported at constant exchange rates to eliminate the impact of foreign currency fluctuations. Prior year segment results have been presented to be consistent with the current methodologies.

		Three Months Ended								Six Months Ended
(In thousands)		August 26, 2011				August 27, 2010				August 26, 2011				August 27, 2010
Total Revenue:
North American Social Expression Products		$	262,944			$	252,158			$	566,280			$	560,467
International Social Expression Products			75,891				54,736				146,096				112,309
AG Interactive			16,177				18,167				32,786				36,721
Non-reportable segments			13,781				17,758				25,980				29,630
		$	368,793			$	342,819			$	771,142			$	739,127
Segment Earnings (Loss):
North American Social Expression Products		$	25,699			$	28,627			$	84,993			$	92,690
International Social Expression Products			2,468				1,325				5,771				4,159
AG Interactive			4,597				2,886				7,233				5,258
Non-reportable segments			10,493				3,317				15,099				5,469
Unallocated
Interest expense			(5,748	)			(6,700	)			(11,855	)			(12,888	)
Profit sharing expense			(1,543	)			(921	)			(5,230	)			(4,451	)
Stock-based compensation expense			(2,700	)			(3,611	)			(5,362	)			(6,261	)
Corporate overhead expense			(8,313	)			(7,910	)			(14,906	)			(15,946	)
			(18,304	)			(19,142	)			(37,353	)			(39,546	)
		$	24,953			$	17,013			$	75,743			$	68,030

“Corporate overhead expense” includes costs associated with corporate operations including, among other costs, senior management, corporate finance, legal and insurance programs.

Termination Benefits

Termination benefits are primarily considered part of an ongoing benefit arrangement, accounted for in accordance with ASC Topic 712, “Compensation — Nonretirement Postemployment Benefits,” and are recorded when payment of the benefits is probable and can be reasonably estimated.

The balance of the severance accrual was $4.2 million, $8.0 million and $9.0 million at August 26, 2011, February 28, 2011 and August 27, 2010, respectively. The payments expected within the next twelve months are included in “Accrued liabilities” while the remaining payments beyond the next twelve months are included in “Other liabilities” on the Consolidated Statement of Financial Position.

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited consolidated financial statements. This discussion and analysis, and other statements made in this Report, contain forward-looking statements, see “Factors That May Affect Future Results” at the end of this discussion and analysis for a description of the uncertainties, risks and assumptions associated with these statements. Unless otherwise indicated or the context otherwise requires, the “Corporation,” “we,” “our,” “us” and “American Greetings” are used in this Report to refer to the businesses of American Greetings Corporation and its consolidated subsidiaries.

Overview

We reported diluted earnings per share of $0.35 for the second quarter, on an increase to revenues of $26.0 million, or 7.6%, and an increase to operating income of $6.2 million, or 26.2%, compared to the prior year period. The higher revenues were driven by higher net sales of greeting cards and the impact of favorable foreign currency translation. The increase in greeting card net sales was driven by additional distribution with existing customers in the International Social Expression Products segment and North American Social Expression Products segment, as well as the acquisition of Watermark Publishing Limited (“Watermark”) during the current year first quarter. Partially offsetting these favorable items were lower revenues from our fixtures business and on-line advertising.

Operating income in the current year quarter benefited from a $4.5 million gain on the sale of certain minor characters in our intellectual property portfolio. In addition, the prior year second quarter included approximately $5 million of expenses related to the integration of Papyrus-Recycled Greetings, Inc. (“PRG”) that did not recur in the current year period. Compared to the prior year quarter, operating income was favorably impacted by the increased revenue, but unfavorably impacted by costs associated with the rollout of additional distribution in both our North American Social Expression Products segment and our International Social Expression Products segment.

Results of Operations

Three months ended August 26, 2011 and August 27, 2010

Net income was $14.5 million, or $0.35 per share, in the second quarter compared to net income of $8.5 million, or $0.21 per share, in the prior year second quarter (all per-share amounts assume dilution).

Our results for the three months ended August 26, 2011 and August 27, 2010 are summarized below:

						%Total								%Total
(Dollars in thousands)		2011				Revenue				2010				Revenue
Net sales		$	359,741				97.5	%		$	333,339				97.2	%
Other revenue			9,052				2.5	%			9,480				2.8	%
Total revenue			368,793				100.0	%			342,819				100.0	%
Material, labor and other production costs			158,198				42.9	%			145,713				42.5	%
Selling, distribution and marketing expenses			125,089				33.9	%			112,318				32.8	%
Administrative and general expenses			60,926				16.5	%			62,193				18.1	%
Other operating income — net			(5,122	)			(1.4	%)			(936	)			(0.3	%)
Operating income			29,702				8.1	%			23,531				6.9	%
Interest expense			5,763				1.6	%			6,718				2.0	%
Interest income			(310	)			(0.0	%)			(197	)			(0.1	%)
Other non-operating income — net			(704	)			(0.2	%)			(3	)			(0.0	%)
Income before income tax expense			24,953				6.7	%			17,013				5.0	%
Income tax expense			10,477				2.8	%			8,481				2.5	%
Net income		$	14,476				3.9	%		$	8,532				2.5	%

For the three months ended August 26, 2011, consolidated net sales were $359.7 million, an increase of $26.4 million, or 7.9%, from $333.3 million in the prior year second quarter. The increase was primarily due to an approximate $25 million increase in net sales of greeting cards, particularly everyday cards in both our International Social Expression Products segment and our North American Social Expression Products segment, and the impact of approximately $9 million of favorable foreign currency translation. The increase in card sales was driven by additional distribution with existing customers within both of our segments. Also, the Watermark acquisition favorably impacted net sales by approximately $7 million in our International Social Expression Products segment. Partially offsetting these increases were decreased sales in our fixtures business of approximately $4 million, lower net sales in our AG Interactive segment of approximately $2 million due to lower advertising revenue and the impact of winding down the Photoworks website, and decreased sales of other ancillary products of approximately $2 million.

Wholesale Unit and Pricing Analysis for Greeting Cards

Unit and pricing comparatives (on a sales less returns basis) for the three months ended August 26, 2011 and August 27, 2010 are summarized below:

		Increase (Decrease) From the Prior Year
		Everyday Cards								Seasonal Cards								Total Greeting Cards
		2011				2010				2011				2010				2011				2010
Unit volume			10.1	%			(1.9	%)			24.6	%			14.2	%			12.7	%			0.7	%
Selling prices			(3.0	%)			(2.1	%)			(10.4	%)			(6.2	%)			(4.5	%)			(2.8	%)
Overall increase / (decrease)			6.8	%			(4.0	%)			11.6	%			7.1	%			7.7	%			(2.1	%)

During the second quarter, combined everyday and seasonal greeting card sales less returns increased 7.7% compared to the prior year quarter, including an increase in unit volume of 12.7% which was partially offset by a decrease in selling prices of 4.5%. The overall increase was driven by unit growth in both our North American Social Expression Products segment and International Social Expression Products segment.

Everyday card sales less returns for the second quarter increased 6.8% with improvements in unit volume of 10.1%. Both of our greeting card segments contributed to the unit volume increases during the second quarter as a result of additional distribution with existing customers. The unit volume improvements within our International Social Expression Products segment were also driven by the Watermark acquisition. Partially offsetting the strong unit performance are decreases in selling prices of 3.0% as a result of the continued shift to a higher mix of our value line cards.

Seasonal card sales less returns improved 11.6% during the second quarter including 24.6% unit growth partially offset by a 10.4% decline in selling prices. The increase in unit volume during the current year quarter was primarily driven by our Fall, Father’s Day and Graduation programs. In addition, since the second quarter has the fewest holidays, the change in unit volume during the quarter appears large on a percentage basis. The decrease in selling prices was driven by the continued shift to a higher mix of value line cards in the period.

Expense Overview

Material, labor and other production costs (“MLOPC”) for the three months ended August 26, 2011 were $158.2 million, compared to $145.7 million in the prior year three months. As a percentage of total revenue, these costs were 42.9% in the current period compared to 42.5% for the three months ended August 27, 2010. The approximate $13 million increase in expense was driven by the impact of higher sales volume of approximately $4 million, increased inventory scrap expense of approximately $3 million, and higher product related display costs of approximately $2.0 million. Also, foreign currency translation unfavorably impacted MLOPC by approximately $4 million.

Selling, distribution and marketing (“SDM”) expenses for the three months ended August 26, 2011 were $125.1 million, increasing approximately $13 million from the prior year second quarter. The increase was driven by a combination of increased supply chain expenses and unfavorable foreign currency translation of approximately $10 million and $3 million, respectively. The increased supply chain costs of approximately $10 million, specifically merchandiser, field sales, freight, and distribution costs, were primarily the result of both higher sales volume and initial store setup activities.

Administrative and general expenses were $60.9 million for the three months ended August 26, 2011, a decrease of $1.3 million from $62.2 million for the three months ended August 27, 2010. Driving the slight overall improvement was approximately $5 million of PRG integration costs in the prior year which did not recur and savings of approximately $1 million achieved through the completion of the PRG integration. These benefits were partially offset by increases in bad debt expense, additional operating costs as a result of the Watermark acquisition, and unfavorable foreign currency translation impacts.

Other operating income — net was $5.1 million for the three months ended August 26, 2011 compared to $0.9 million for the prior year second quarter. The current year period included a $4.5 million gain on the sale of certain minor characters in our intellectual property portfolio.

The effective tax rate was 42.0% and 49.9% for the three months ended August 26, 2011 and August 27, 2010, respectively. The higher than statutory rate in the current period is due to an increase in estimated accruals and settlements associated with anticipated settlements related to open years which are currently under Internal Revenue Service examination. The higher than statutory rate in the prior year period was due primarily to the impact of unfavorable settlements of audits in a foreign jurisdiction and the release of insurance reserves that generated taxable income.

Results of Operations

Six months ended August 26, 2011 and August 27, 2010

Net income was $47.1 million, or $1.12 per share, in the six months ended August 26, 2011 compared to net income of $39.4 million, or $0.96 per share, in the prior year six months.

Our results for the six months ended August 26, 2011 and August 27, 2010 are summarized below:

						%Total								%Total
(Dollars in thousands)		2011				Revenue				2010				Revenue
Net sales		$	756,517				98.1	%		$	725,444				98.1	%
Other revenue			14,625				1.9	%			13,683				1.9	%
Total revenue			771,142				100.0	%			739,127				100.0	%
Material, labor and other production costs			316,127				41.0	%			303,726				41.1	%
Selling, distribution and marketing expenses			248,381				32.2	%			229,869				31.1	%
Administrative and general expenses			126,224				16.4	%			128,225				17.3	%
Other operating income — net			(6,045	)			(0.8	%)			(1,530	)			(0.2	)%
Operating income			86,455				11.2	%			78,837				10.7	%
Interest expense			11,887				1.6	%			12,920				1.7	%
Interest income			(631	)			(0.1	%)			(410	)			(0.0	%)
Other non-operating income — net			(544	)			(0.1	%)			(1,703	)			(0.2	%)
Income before income tax expense			75,743				9.8	%			68,030				9.2	%
Income tax expense			28,674				3.7	%			28,659				3.9	%
Net income		$	47,069				6.1	%		$	39,371				5.3	%

For the six months ended August 26, 2011, consolidated net sales were $756.5 million, up from $725.4 million in the prior year six months. This 4.3%, or $31.1 million, increase was primarily due to an approximate $34 million increase in net sales of greeting cards, particularly everyday cards in both our International Social Expression Products segment and our North American Social Expression Products segment, and the impact of approximately $17 million of favorable foreign currency translation. The increase in card sales was driven by additional distribution with existing customers within both our segments. Also, the Watermark acquisition favorably impacted net sales by approximately $14 million in our International Social Expression Products segment. Partially offsetting these increases were decreased sales in our fixtures business of approximately $5 million, lower net sales of combined gift packaging products and party goods of approximately $4 million, and lower sales of other ancillary products of approximately $5 million. Net sales in our AG Interactive segment declined by approximately $4 million due to lower advertising revenue and the impact of winding down the Photoworks website. In addition, scan-based trading (“SBT”) implementations unfavorably impacted net sales by approximately $2 million.

Wholesale Unit and Pricing Analysis for Greeting Cards

Unit and pricing comparatives (on a sales less returns basis) for the six months ended August 26, 2011 and August 27, 2010 are summarized below:

		Increase (Decrease) From the Prior Year
		Everyday Cards								Seasonal Cards								Total Greeting Cards
		2011				2010				2011				2010				2011				2010
Unit volume			6.4	%			(1.7	%)			5.2	%			0.2	%			6.1	%			(1.2	%)
Selling prices			(1.9	%)			(0.3	%)			(1.3	%)			0.0	%			(1.7	%)			(0.2	%)
Overall increase / (decrease)			4.4	%			(2.0	%)			3.8	%			0.1	%			4.2	%			(1.4	%)

During the six months ended August 26, 2011, combined everyday and seasonal greeting card sales less returns increased 4.2% compared to the prior year six months, driven by an increase in unit volume from both our everyday and seasonal cards of 6.1%.

Everyday card sales less returns were up 4.4% compared to the prior year six months, as a result of improved unit volume of 6.4% partially offset by a decline in selling prices of 1.9%. Both of our greeting card segments contributed to the unit volume increases during the current year six months as a result of additional distribution with existing customers. The unit volume improvements within our International Social Expression Products segment were also driven by the Watermark acquisition. The selling price decline is a result of the continued shift to a higher mix of our value line cards.

Seasonal card sales less returns increased 3.8%, with unit volume improving 5.2% and selling prices declining 1.3%. The increase in unit volume was due to our Fall, Graduation and Easter programs. The decrease in selling prices was driven by the continued shift to a higher mix of value line cards in the period.

Expense Overview

MLOPC for the six months ended August 26, 2011 were $316.1 million, an increase of $12.4 million from $303.7 million for the comparable period in the prior year. As a percentage of total revenue, these costs were 41.0% in the current period compared to 41.1% for the six months ended August 27, 2010. The main drivers of this increase were unfavorable foreign currency translation impacts of approximately $7 million and the impact of higher sales volume of approximately $3 million. The remaining increased expense of $2 million was due to higher product related display costs and inventory scrap expenses, which were partially offset by the benefits of our ongoing cost savings initiatives.

SDM expenses for the six months ended August 26, 2011 were $248.4 million, increasing from $229.9 million for the comparable period in the prior year. The increase of approximately $19 million was driven by a combination of increased expenses and unfavorable foreign currency translation of approximately $13 million and $6 million, respectively. The increased supply chain costs of approximately $13 million, specifically merchandiser, freight, and

distribution costs, were primarily the result of higher sales volume and initial store setup activities. Also contributing to the increase was higher marketing and product management expenses of approximately $1 million.

Administrative and general expenses were $126.2 million for the six months ended August 26, 2011, a decrease from $128.2 million for the six months ended August 27, 2010. The decrease of approximately $2 million is primarily related to approximately $9 million of PRG integration costs in the prior year which did not recur and savings of approximately $2 million achieved through the completion of the PRG integration. These benefits were substantially offset by increases in bad debt expense of approximately $3 million, additional operating costs as a result of the Watermark acquisition of approximately $3 million, and unfavorable foreign currency translation impacts of $2 million.

Other operating income — net was $6.0 million for the six months ended August 26, 2011 compared to $1.5 million in the prior period. The current year six months included a gain of $4.5 million on the sale of certain minor characters in our intellectual property portfolio.

The effective tax rate was 37.9% and 42.1% for the six months ended August 26, 2011 and August 27, 2010, respectively. The higher than statutory rate in the prior period was due primarily to the impact of unfavorable settlements of audits in a foreign jurisdiction, the release of insurance reserves that generated taxable income as well as the recognition of the deferred tax effects of the reduced deductibility of the postretirement prescription drug coverage under the Medicare Part D program.

Segment Information

Our operations are organized and managed according to a number of factors, including product categories, geographic locations and channels of distribution. Our North American Social Expression Products and our International Social Expression Products segments primarily design, manufacture and sell greeting cards and other related products through various channels of distribution, with mass retailers as the primary channel. As permitted under Accounting Standards Codification Topic 280, “Segment Reporting,” certain operating divisions have been aggregated into the International Social Expression Products segment. The aggregated operating divisions have similar economic characteristics, products, production processes, types of customers and distribution methods. The AG Interactive segment distributes social expression products, including electronic greetings, and a broad range of graphics and digital services and products, through a variety of electronic channels, including Web sites, Internet portals, instant messaging services and electronic mobile devices.

Segment results are currently reported using actual foreign exchange rates for the periods presented. In the prior year, segment results were reported at constant exchange rates to eliminate the impact of foreign currency fluctuations. Prior year segment results have been presented to be consistent with the current methodologies. Refer to Note 17, “Business Segment Information,” to the Consolidated Financial Statements for further information and a reconciliation of total segment revenue to consolidated “Total revenue” and total segment earnings (loss) to consolidated “Income before income tax expense.”

North American Social Expression Products Segment

		Three Months Ended August								%				Six Months Ended August								%
(Dollars in thousands)		26, 2011				27, 2010				Change				26, 2011				27, 2010				Change
Total revenue		$	262,944			$	252,158				4.3	%		$	566,280			$	560,467				1.0	%
Segment earnings			25,699				28,627				(10.2	%)			84,993				92,690				(8.3	%)

Total revenue of our North American Social Expression Products segment increased $10.8 million and $5.8 million for the three and six months ended August 26, 2011, respectively, compared to the prior year periods. The increase in both periods was primarily driven by approximately $10 million of higher sales of greeting cards, primarily everyday cards, for each of the three and six month periods. Partially offsetting these improvements were decreases in gift packaging and party goods of approximately $2 million and $7 million for the current year three and six months, respectively. In addition, the six month period included unfavorable impacts of SBT implementations of

approximately $2 million. Foreign currency translation favorably impacted total revenue by approximately $2 million and $4 million for the three and six months ended August 26, 2011, respectively.

Segment earnings decreased $2.9 million in the current year three months compared to the prior year quarter. The decrease was driven by higher supply chain costs of approximately $7 million and increased inventory scrap expense of approximately $3 million. The higher supply chain costs were primarily due to both the increased sales volume and continued store set up activities, which resulted in higher merchandiser, field sales, freight, and distribution costs. Increased expenses associated with product related displays of approximately $2 million, bad debt of approximately $2 million, and marketing and product management of approximately $1 million also contributed to the decreased earnings for the quarter. Partially offsetting these unfavorable variances was the favorable impact of higher sales of approximately $7 million, prior year PRG integration costs of approximately $5 million which did not recur in the current period, as well as the benefits of PRG integration and other cost savings initiatives of approximately $1 million.

Segment earnings decreased $7.7 million in the current year six months compared to the prior year period. The decrease was driven by the higher supply chain costs of approximately $8 million primarily due to the increase in sales volume and continued store set up activities, which resulted in higher merchandiser, freight and distribution costs. Increased expenses, specifically product related display costs of approximately $3 million, bad debt expense of approximately $3 million, marketing and product management costs of approximately $2 million, and inventory scrap expense of approximately $1 million also contributed to the decrease in earnings. Partially offsetting these unfavorable variances were prior year PRG integration costs of approximately $9 million which did not recur in the current period. In addition, the benefits of PRG integration and other cost savings initiatives favorably impacted earnings by approximately $2 million.

International Social Expression Products Segment

		Three Months Ended August								%				Six Months Ended August								%
(Dollars in thousands)		26, 2011				27, 2010				Change				26, 2011				27, 2010				Change
Total revenue		$	75,891			$	54,736				38.6	%		$	146,096			$	112,309				30.1	%
Segment earnings			2,468				1,325				86.3	%			5,771				4,159				38.8	%