Merrill Lynch makes "Neutral" recommendation on American Greetings

St. Louis, Nov. 7 - Merrill Lynch & Co. put Lynch issued a "Neutral" recommendation on American Greetings' bonds, saying the company executed its fiscal 2002 restructuring program successfully and as a result is performing ahead of expectations for fiscal 2003.

"Given the improving trends, the bonds have risen pushing the yield on the 6.10% senior secured notes down to the 7.5% (yield to put) level," Merrill Lynch analyst David Maura said.

The improving trends cited in the report include the implementation of American Greetings' restructuring initiatives within the targeted time frame, with better than expected normalized results, lower than expected debt levels, and significantly better than expected liquidity.

American Greetings reported improved profitability in fiscal second quarter 2003, despite flat sales versus the year-ago period: $396.9 million, compared to the $395.1 million of sales booked in the period a year ago, despite the loss of the Winn-Dixie account and the closure of Kmart stores.

EBITDA of $10.3 million in the second quarter was significantly better than the normalized EBITDA loss of $4.4 million in the period a year ago, Merrill Lynch noted.

"Liquidity was strong at quarter-end, with $174 million in cash and what we estimate is $185 million available between the company's two credit revolvers, which total $195 million," the Thursday report stated.

Positive factors that Merrill Lynch cited included American Greetings' dominant market share position (second only to Hallmark Cards), predictable sales base (approximately 85% of net sales derive from long-term contractual relationships with retailers), a diversifying revenue base, and restructuring initiatives which resulted in a total of $314.4 million in pre-tax special charges during the year.

Key issues faced by American Greetings, according to Merrill Lynch, include the company's corporate-owned life insurance program. "For some time now, there has been a lingering concern regarding the company's corporate-owned life insurance program," the report stated. "During fiscal 2001, a charge of $143.6 million was taken into income tax expense for potential tax exposure for the fiscal years ended 1992 through 1999 relating to the plan."

Another key issue, Merrill Lynch said, is the negative press surrounding the company's practice of deferred costs. "This practice has to do with advancing upfront money (slotting fees) to retailers, in return for the right to sell the company's cards through the various retailers for an initial term of usually five to six years or for however long it takes to sell a specified dollar amount of product. The issue most recently raised is whether or not the company is accurately accounting for its deferred costs given the low to no sales growth the company is experiencing."

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