7.5 7.5 Develop a pro forma modified cash flow analysis for American Greetings for fiscal years 2012 through 2015 based on the two sets of ratios in case Exhibit 8. 1. Bullish Scenario 2. Bearish Scenario Based on the discounted cash flows associated with the fiscal years 2012 through 2015 forecast developed for Question 7; what is: 1. The implied enterprise value of American Greetings 2. The corresponding share price? 5 5 2 Exhibit 9 AMERICAN GREETINGS Capital Market Data 3 4 5 Yield 6 30-Day Treasury Bill 0.1% 7 10-Year Treasury Bond 2.8% 8 9 10-Year Corporate Bonds of Industrial Companies 10 AAA 2.8% 11 AA 2.9% 12 A+ 3.2% 13 A 3.3% 14 A- 3.5% 15 BBB+ 3.8% 16 BBB 4.1% 17 BBB- 4.6% 18 BB+ 5.8% 19 BB 6.5% 20 BB- 6.5% 21 B+ 6.8% 22 B 8.4% 23 B- 9.0% 24 25 Historical Market Risk Premium 26 Equity Market Index Less Government D 5.5% 27 28 5-Year Forecast 29 U.S. Real GDP Annual Growth Rate 3.3% 30 U.S. GDP Annual Deflator Rate 1.8% 31 Consumer Price Index Annual Rate 2.2% 32 33 Data source: Bloomberg. Value Line Investment Survey, and case writer estimates. A B D E G 2 Exhibit 8 AMERICAN GREETINGS Financial Forecast Assumptions m IT in S Actual 2011 *********** Forecast *********** 2012 2013 2014 2015 5.3% 9.4% 5.02 1.95 1.0% 9.0% 6.00 1.95 1.5% 9.0% 6.50 1.95 2.0% 9.0% 7.00 1.95 2.5% 9.0% 7.50 1.95 B Bullish Scenario Revenue Growth o Operating Margin 1 Net Working Capital Turnove 2 Fixed Asset Turnover 3 4 Bearish Scenario 5 Revenue Growth 6 Operating Margin 7 Net Working Capital Turnove 8 Fixed Asset Turnover 5.3% 9.4% 5.02 1.95 0.0% 8.0% 6.00 1.95 0.0% 7.0% 6.50 1.95 0.0% 6.0% 7.00 1.95 0.0% 5.0% 7.50 1.95 9 1 Note: The ratios are defined in the following manner: Revenue Growth is the annual percentage change in total revenue 2 Operating Margin is operating income divided by total revenue Net Working Capital Turnover is total revenue divided by net working capital where net working capital is current assets less current liabilities Fixed Asset Turnover is total revenue divided by net PP&E and other assets 3 -4 -5 7 Data source: Case writer estimates. 1 2 Exhibit 7 AMERICAN GREETINGS American Greetings Operating Performance 3 4 5 6 Revenue Growth 7 Operating Margin 2005 0% 8% 2006 -7% 2% 2007 -1% 5% 2008 -5% -1% 2009 -3% 6% 2010 -2% 9% 2011 7% 9% 8 10% 9 10 8% 11 12 6% 13 14 15 2% 16 17 18 19 0% 20 21 22 23 24 25 26 27 -8% 2005 2006 2007 2008 2009 2010 2011 28 -Revenue Growth Operating Margin 29 1 2 Exhibit 6 AMERICAN GREETINGS Comparable Firms, End of 2011 (in millions of dollars except share price) 3 -4 9.7 Shares EBITDA Share Outstandin Total Enterpris Revenu EBITD Multiple 5 Price S Total Cash Debt e Value A 5 7 American Greetings 12.51 38.3 86 235 714 1,660 204 3.5 8 Blyth 56.80 8.2 182 101 568 984 48 11.7 9 Consolidated Graphics 48.28 10.2 7 197 692 1,050 122 5.6 10 CSS Industries 19.92 10 0 194 453 30 6.5 11 Deluxe 22.76 50.9 31 742 1,901 1,420 359 5.3 2 Hallmark NA NA NA NA NA 4,100 NA NA 13 Lancaster Colony 69.34 27.3 162 0 1,890 1,090 156 12.2 14 Meredith 32.65 44.8 26 250 1,712 1,350 240 7.1 15 Scholastic 29.97 31.1 114 215 1,145 1,950 189 6.0 16 Bond 17 ROA ROE Beta Rating** 18 19 American Greetings 7% 11% 1.63 BB+ 20 Blyth 4% 9% 1.60 B 21 Consolidated Graphics 5% 10% 1.45 BB 2 CSS Industries 4% 2% 1.36 23 Deluxe 13% 55% 1.85 B 24 Hallmark NA NA NA 25 Lancaster Colony 14% 19% 0.42 26 Meredith 7% 15% 1.75 27 Scholastic 8% 1.04 BB- 28 29 EBITDA miltiple is defined as Enterprise Value divided by EBITDA 30 ** The ratings for Cons. Graphics and Meredith are estimated by case writer. 31 BB Exhibit 5 AMERICAN GREETINGS Feelings About e-Cards: Usage Change among 2,000 Respondents, October 2010 By Age Category 35-44 45-54 All 18-24 25-34 55-64 65+ 22% 17% 26% 20% 22% 21% 24% In the last year, I have sent more e-cards than I used to. In the last year, I have sent fewer e-cards than I used to because I send greetings over social networking sites such as Facebook 20% 26% 27% 21% 19% 15% 13% Data source: Mintel. Exhibit 4 AMERICAN GREETINGS Total U.S. Greeting Cards Sales (Actual and Forecast) in 0 1 Sales at current nrics in millions of dollars % annual change 2005 6,537 2006 6,420 -1.8 2007 6,285 -2.1 2008 6,266 -0.3 2009 6,149 -1.9 2 2010 5,935 -3.5 2011 (est.) 5,838 -1.6 2012 (est.) 5,711 -2.2 5 2013 (est.) 5,596 -2.0 6 2014 (est.) 5,478 -2.1 7 2015 (est.) 5,359 -2.2 8 9 Data source: Mintel, based on U.S. Census Bureau, Economic Census. 0 4 2 3 Exhibit 3 AMERICAN GREETINGS American Greetings Balance Sheet (in millions of dollars) TT in S 138 180 148 2009 2010 2011E (Feb 2010) (Feb 2011) (Feb 2012) Cash and Cash Equivalents 216 172 Trade Accounts Receivable 136 120 130 o Inventories 164 190 1 Prepaid Expenses 128 131 2 Other Current Assets 94 72 54 3 Total Current Assets 679 716 677 4 5 Net Property, Plant, and Equipment and Other Assets 850 832 859 6 Total Assets 1,529 1,547 1,536 7 8 Debt Due within One Year 0 0 9 Accounts Payable 95 87 87 0 Other Current Liabilities 272 245 255 1 Current Liabilities 369 332 343 2 -3 Long-Term Debt 329 233 235 -4 Other Liabilities 196 219 206 -s Shareholders' Equity 636 763 752 6 Total Liabilities and Shareholders' Equity 1,529 1,547 1,536 7 8 Note: Fiscal year ends February of subsequent year. 9 Data source: Company accounts; management and case writer estimates. Exhibit 2 AMERICAN GREETINGS American Greetings Income Statement, December 2011 (in millions of dollars) 2008 2009 2010 2011E (Feb 2009) (Feb 2010) (Feb 2011) (Feb 2012) Total American Greetings Figures Total Revenue 1,691 1,636 1,593 1,677 Material, Labor, and Other Pruduction Cost: 810 713 682 743 Selling, Distribution, and Marketing Expens 619 508 478 526 Administrative and General Expenses 226 276 261 258 Goodwill and Other Intangible Asset Impair 290 0 0 0 Other Operating Expenses 1 0 3 Operating Income (253) 139 175 157 Net Interest and Other Nonoperating Expen: 22 18 19 28 Income Before Income Tax Expense (275) 121 156 129 Income Tax Expense (47) 39 69 47 Net Income (228) 82 87 82 Earnings Per Share (Basic) Dividends per Share (4.89) 0.60 2.07 0.36 2.18 0.56 2.22 0.60 By Business Unit Operating Segment Net Sales North American Social Expression Products International Social Expression Products Retail Operations AG Interactive 1,191 262 1,215 344 1,095 271 179 83 1,235 254 12 80 78 68 Operating Segment Earnings North American Social Expression Products International Social Expression Products Retail Operations AG Interactive 218 20 148 20 70 (78) (19) (162) 236 17 (35) 11 14 14 Total Revenue by Product Category - Everyday Greeting Cards Seasonal Greeting Cards Gift Packaging Other Revenue All Other Products 704 357 240 44 345 764 369 221 38 244 753 377 223 32 207 823 408 239 32 176 2 Note: Fiscal year ends February of subsequent year. Source: Company accounts; management and case writer estimates 7.5 7.5 Develop a pro forma modified cash flow analysis for American Greetings for fiscal years 2012 through 2015 based on the two sets of ratios in case Exhibit 8. 1. Bullish Scenario 2. Bearish Scenario Based on the discounted cash flows associated with the fiscal years 2012 through 2015 forecast developed for Question 7; what is: 1. The implied enterprise value of American Greetings 2. The corresponding share price? 5 5 2 Exhibit 9 AMERICAN GREETINGS Capital Market Data 3 4 5 Yield 6 30-Day Treasury Bill 0.1% 7 10-Year Treasury Bond 2.8% 8 9 10-Year Corporate Bonds of Industrial Companies 10 AAA 2.8% 11 AA 2.9% 12 A+ 3.2% 13 A 3.3% 14 A- 3.5% 15 BBB+ 3.8% 16 BBB 4.1% 17 BBB- 4.6% 18 BB+ 5.8% 19 BB 6.5% 20 BB- 6.5% 21 B+ 6.8% 22 B 8.4% 23 B- 9.0% 24 25 Historical Market Risk Premium 26 Equity Market Index Less Government D 5.5% 27 28 5-Year Forecast 29 U.S. Real GDP Annual Growth Rate 3.3% 30 U.S. GDP Annual Deflator Rate 1.8% 31 Consumer Price Index Annual Rate 2.2% 32 33 Data source: Bloomberg. Value Line Investment Survey, and case writer estimates. A B D E G 2 Exhibit 8 AMERICAN GREETINGS Financial Forecast Assumptions m IT in S Actual 2011 *********** Forecast *********** 2012 2013 2014 2015 5.3% 9.4% 5.02 1.95 1.0% 9.0% 6.00 1.95 1.5% 9.0% 6.50 1.95 2.0% 9.0% 7.00 1.95 2.5% 9.0% 7.50 1.95 B Bullish Scenario Revenue Growth o Operating Margin 1 Net Working Capital Turnove 2 Fixed Asset Turnover 3 4 Bearish Scenario 5 Revenue Growth 6 Operating Margin 7 Net Working Capital Turnove 8 Fixed Asset Turnover 5.3% 9.4% 5.02 1.95 0.0% 8.0% 6.00 1.95 0.0% 7.0% 6.50 1.95 0.0% 6.0% 7.00 1.95 0.0% 5.0% 7.50 1.95 9 1 Note: The ratios are defined in the following manner: Revenue Growth is the annual percentage change in total revenue 2 Operating Margin is operating income divided by total revenue Net Working Capital Turnover is total revenue divided by net working capital where net working capital is current assets less current liabilities Fixed Asset Turnover is total revenue divided by net PP&E and other assets 3 -4 -5 7 Data source: Case writer estimates. 1 2 Exhibit 7 AMERICAN GREETINGS American Greetings Operating Performance 3 4 5 6 Revenue Growth 7 Operating Margin 2005 0% 8% 2006 -7% 2% 2007 -1% 5% 2008 -5% -1% 2009 -3% 6% 2010 -2% 9% 2011 7% 9% 8 10% 9 10 8% 11 12 6% 13 14 15 2% 16 17 18 19 0% 20 21 22 23 24 25 26 27 -8% 2005 2006 2007 2008 2009 2010 2011 28 -Revenue Growth Operating Margin 29 1 2 Exhibit 6 AMERICAN GREETINGS Comparable Firms, End of 2011 (in millions of dollars except share price) 3 -4 9.7 Shares EBITDA Share Outstandin Total Enterpris Revenu EBITD Multiple 5 Price S Total Cash Debt e Value A 5 7 American Greetings 12.51 38.3 86 235 714 1,660 204 3.5 8 Blyth 56.80 8.2 182 101 568 984 48 11.7 9 Consolidated Graphics 48.28 10.2 7 197 692 1,050 122 5.6 10 CSS Industries 19.92 10 0 194 453 30 6.5 11 Deluxe 22.76 50.9 31 742 1,901 1,420 359 5.3 2 Hallmark NA NA NA NA NA 4,100 NA NA 13 Lancaster Colony 69.34 27.3 162 0 1,890 1,090 156 12.2 14 Meredith 32.65 44.8 26 250 1,712 1,350 240 7.1 15 Scholastic 29.97 31.1 114 215 1,145 1,950 189 6.0 16 Bond 17 ROA ROE Beta Rating** 18 19 American Greetings 7% 11% 1.63 BB+ 20 Blyth 4% 9% 1.60 B 21 Consolidated Graphics 5% 10% 1.45 BB 2 CSS Industries 4% 2% 1.36 23 Deluxe 13% 55% 1.85 B 24 Hallmark NA NA NA 25 Lancaster Colony 14% 19% 0.42 26 Meredith 7% 15% 1.75 27 Scholastic 8% 1.04 BB- 28 29 EBITDA miltiple is defined as Enterprise Value divided by EBITDA 30 ** The ratings for Cons. Graphics and Meredith are estimated by case writer. 31 BB Exhibit 5 AMERICAN GREETINGS Feelings About e-Cards: Usage Change among 2,000 Respondents, October 2010 By Age Category 35-44 45-54 All 18-24 25-34 55-64 65+ 22% 17% 26% 20% 22% 21% 24% In the last year, I have sent more e-cards than I used to. In the last year, I have sent fewer e-cards than I used to because I send greetings over social networking sites such as Facebook 20% 26% 27% 21% 19% 15% 13% Data source: Mintel. Exhibit 4 AMERICAN GREETINGS Total U.S. Greeting Cards Sales (Actual and Forecast) in 0 1 Sales at current nrics in millions of dollars % annual change 2005 6,537 2006 6,420 -1.8 2007 6,285 -2.1 2008 6,266 -0.3 2009 6,149 -1.9 2 2010 5,935 -3.5 2011 (est.) 5,838 -1.6 2012 (est.) 5,711 -2.2 5 2013 (est.) 5,596 -2.0 6 2014 (est.) 5,478 -2.1 7 2015 (est.) 5,359 -2.2 8 9 Data source: Mintel, based on U.S. Census Bureau, Economic Census. 0 4 2 3 Exhibit 3 AMERICAN GREETINGS American Greetings Balance Sheet (in millions of dollars) TT in S 138 180 148 2009 2010 2011E (Feb 2010) (Feb 2011) (Feb 2012) Cash and Cash Equivalents 216 172 Trade Accounts Receivable 136 120 130 o Inventories 164 190 1 Prepaid Expenses 128 131 2 Other Current Assets 94 72 54 3 Total Current Assets 679 716 677 4 5 Net Property, Plant, and Equipment and Other Assets 850 832 859 6 Total Assets 1,529 1,547 1,536 7 8 Debt Due within One Year 0 0 9 Accounts Payable 95 87 87 0 Other Current Liabilities 272 245 255 1 Current Liabilities 369 332 343 2 -3 Long-Term Debt 329 233 235 -4 Other Liabilities 196 219 206 -s Shareholders' Equity 636 763 752 6 Total Liabilities and Shareholders' Equity 1,529 1,547 1,536 7 8 Note: Fiscal year ends February of subsequent year. 9 Data source: Company accounts; management and case writer estimates. Exhibit 2 AMERICAN GREETINGS American Greetings Income Statement, December 2011 (in millions of dollars) 2008 2009 2010 2011E (Feb 2009) (Feb 2010) (Feb 2011) (Feb 2012) Total American Greetings Figures Total Revenue 1,691 1,636 1,593 1,677 Material, Labor, and Other Pruduction Cost: 810 713 682 743 Selling, Distribution, and Marketing Expens 619 508 478 526 Administrative and General Expenses 226 276 261 258 Goodwill and Other Intangible Asset Impair 290 0 0 0 Other Operating Expenses 1 0 3 Operating Income (253) 139 175 157 Net Interest and Other Nonoperating Expen: 22 18 19 28 Income Before Income Tax Expense (275) 121 156 129 Income Tax Expense (47) 39 69 47 Net Income (228) 82 87 82 Earnings Per Share (Basic) Dividends per Share (4.89) 0.60 2.07 0.36 2.18 0.56 2.22 0.60 By Business Unit Operating Segment Net Sales North American Social Expression Products International Social Expression Products Retail Operations AG Interactive 1,191 262 1,215 344 1,095 271 179 83 1,235 254 12 80 78 68 Operating Segment Earnings North American Social Expression Products International Social Expression Products Retail Operations AG Interactive 218 20 148 20 70 (78) (19) (162) 236 17 (35) 11 14 14 Total Revenue by Product Category - Everyday Greeting Cards Seasonal Greeting Cards Gift Packaging Other Revenue All Other Products 704 357 240 44 345 764 369 221 38 244 753 377 223 32 207 823 408 239 32 176 2 Note: Fiscal year ends February of subsequent year. Source: Company accounts; management and case writer estimates