Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note 1
– Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by 1-800-FLOWERS.COM, Inc. and subsidiaries (the “
Company”) in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended April 2, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending July 2, 2017. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended July 3, 2016.
The Company
’s quarterly results may experience seasonal fluctuations. Due to the seasonal nature of the Company’s business, and its continued expansion into non-floral products, the Thanksgiving through Christmas holiday season, which falls within the Company’s second fiscal quarter, is expected to generate nearly 50% of the Company’s annual revenues, and all of its earnings. Additionally, due to the number of major floral gifting occasions, including Mother's Day, Valentine’s Day and Administrative Professionals Week, revenues also rise during the Company’s fiscal third and fourth quarters in comparison to its fiscal first quarter. In fiscal 2016, the Easter Holiday was on March 27th, and as a result, all revenue and EBITDA associated with this holiday was within the Company’s fiscal third quarter. In fiscal 2017, Easter falls on April 16th, which will result in the shift of associated revenue and EBITDA from the Company’s third quarter to its fourth quarter.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanyin
g notes. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, “
Revenue from Contracts with Customers.” This amended guidance will enhance the comparability of revenue recognition practices and will be applied to all contracts with customers. Expanded disclosures related to the nature, amount, timing, and uncertainty of revenue that is recognized are requirements under the amended guidance. This guidance will be effective for the Company’s fiscal year ending June 30, 2019 and may be applied retrospectively. The Company is currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, “
Simplifying the Presentation of Debt Issuance Costs,” which amends ASC 835-30, “Interest – Imputation of Interest.” In order to simplify the presentation of debt issuance costs, ASU No. 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, and not recorded as a separate asset. The Company adopted this standard effective July 4, 2016 and applied it retrospectively to all periods presented. The impact of the adoption of the new guidance was to reclassify $3.6 million of deferred financing costs previously included within “Other Assets” to “Long-term debt” in the consolidated balance sheets as of July 3, 2016.
In July 2015, the FASB issued ASU No. 2015-11, “
Inventory (Topic 330).” The pronouncement was issued to simplify the measurement of inventory and changes the measurement from lower of cost or market to lower of cost and net realizable value. ASU 2015-11 is effective for the Company’s fiscal year ending July 1, 2018. The adoption of ASU 2015-11 is not expected to have a significant impact on the Company’s consolidated financial position or results of operations.
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments
– Overall: Recognition and Measurement of Financial Assets and Financial Liabilities." The pronouncement requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. These changes become effective for the Company's fiscal year ending June 30, 2019. The adoption is not expected to have a significant impact on the Company’s consolidated financial statements.
In February 201
6, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Under this guidance, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. This guidance offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for the Company’s fiscal year ending June 28, 2020. The Company is currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” ASU No. 2016-09 affects all entities that issue share-based payment awards to their employees. ASU No. 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company has elected to early adopt the amendments in ASU 2016-09, beginning in the second quarter of fiscal year 2017. As a result, stock-based compensation excess tax benefits are reflected in the Consolidated Statements of Income as a component of the provision for income taxes, whereas they were previously recognized in equity. This change resulted in the recognition of excess tax benefits against income tax expenses, rather than additional paid-in capital, of $0.1 million and $0.9 million
for the three and nine months ended April 2, 2017. There was no impact on earnings per share since approximately 700,000 tax benefit shares for the nine months ended April 2, 2017, previously associated with the APIC pool calculation, are no longer considered in the diluted share computation. Additionally, our Consolidated Statements of Cash Flows now present excess tax benefits as an operating activity. This change has been applied prospectively in accordance with the ASU and prior periods have not been adjusted. Further, the Company has elected to account for forfeitures as they occur, rather than estimate expected forfeitures. The cumulative effect of this change, which was recorded as compensation expense in fiscal 2017, was not material to the financial statements. In addition, this ASU allows entities to withhold an amount up to an employees’ maximum individual statutory tax rate in the relevant jurisdiction, up from the minimum statutory requirement, without resulting in liability classification of the award. We adopted this change on a modified retrospective basis, with no impact to our consolidated financial statements. Finally, this ASU clarified that the cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity. This change does not have an impact on the Company’s consolidated financials as it conforms with its current practice.
In June 2016, the FASB issued ASU No. 2016-13, “
Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 introduces a new forward-looking “expected loss” approach, to estimate credit losses on most financial assets and certain other instruments, including trade receivables. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. This ASU also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses. ASU 2016-13 is effective for the Company’s fiscal year ending July 4, 2021, and the guidance is to be applied using the modified-retrospective approach. The Company is currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01)," which revises the definition of a business and provides new guidance in evaluating when a set of transferred assets and activities is a business. ASU 2017-01 is effective for
the Company's fiscal year ending June 30, 2019,
with early adoption permitted,
and should be applied
prospectively, We do not expect the standard to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04)," which eliminates step two from the goodwill impairment test. Under ASU 2017-
04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value up to the amount of goodwill allocated to that reporting unit. This guidance is effective for the Company’s fiscal year ending July 4, 2021, with early adoption permitted, and should be applied prospectively.
We do not expect the standard to have a material impact on our consolidated financial statements.
Reclassifications
Certain balances in the prior fiscal years have been reclassified to conform to the presentation in the current fiscal year. See “
Recent Accounting Pronouncements” above regarding the impact of our adoption of ASU No. 2015-03 and ASU No. 2015-17.
Note 2
– Net Income Per Common Share
The following table sets forth the computation of basic and diluted net income per common share:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
April 2, 2017
|
|
|
March 27, 2016
|
|
|
April 2, 2017
|
|
|
March 27, 2016
|
|
|
|
(in thousands, except per share data,
unaudited)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(11,130
|
)
|
|
$
|
(9,126
|
)
|
|
$
|
36,028
|
|
|
$
|
46,922
|
|
Less: Net loss attributable to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
(1,007
|
)
|
Income attributable to 1-800-FLOWERS.COM, Inc.
|
|
$
|
(11,130
|
)
|
|
$
|
(9,126
|
)
|
|
$
|
36,028
|
|
|
$
|
47,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
65,199
|
|
|
|
64,687
|
|
|
|
65,169
|
|
|
|
64,724
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee s
tock options (1)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,511
|
|
|
|
1,428
|
|
Employee restricted stock awards
|
|
|
-
|
|
|
|
-
|
|
|
|
1,067
|
|
|
|
901
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,578
|
|
|
|
2,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted-average shares and assumed conversions
|
|
|
65,199
|
|
|
|
64,687
|
|
|
|
67,747
|
|
|
|
67,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share attributable to 1-800-FLOWERS.COM, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.17
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
0.55
|
|
|
$
|
0.74
|
|
Diluted
|
|
$
|
(0.17
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
0.53
|
|
|
$
|
0.71
|
|
Note (1): The effect of options to purchase 0.0 and 0.1 million shares for the three and nine months ended
April 2
, 2017 and 0.1 million shares for both the three and nine months ended March 27, 2016, respectively, were excluded from the calculation of
net income per share on a diluted basis as their effect is anti-dilutive.
Note (2): As a result of the net loss from continuing operations attributable to 1-800-FLOWERS.COM, Inc. for the three months ended April 2, 2017 and March 27, 2016, there is no dilutive impact to the net loss per share calculation for the respective periods.
Note 3
– Stock-Based Compensation
The Company has a Long Term Incentive and Share Award Plan, which is more fully described in Note 12 and Note 13 to the consolidated financial statements included in the Company
’s Annual Report on Form 10-K for the fiscal year ended July 3, 2016, that provides for the grant to eligible employees, consultants and directors of stock options, restricted shares, and other stock-based awards.
The amounts of stock-based compensation expense recognized in the periods presented are as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
April 2,
2017
|
|
|
March 27,
2016
|
|
|
April 2,
2017
|
|
|
March 27,
2016
|
|
|
|
|
|
|
|
(in thousands, unaudited)
|
|
|
|
|
|
Stock options
|
|
$
|
110
|
|
|
$
|
112
|
|
|
$
|
337
|
|
|
$
|
314
|
|
Restricted stock
|
|
|
1,176
|
|
|
|
1,538
|
|
|
|
4,447
|
|
|
|
4,517
|
|
Total
|
|
|
1,286
|
|
|
|
1,650
|
|
|
|
4,784
|
|
|
|
4,831
|
|
Deferred income tax benefit
|
|
|
387
|
|
|
|
491
|
|
|
|
1,528
|
|
|
|
1,533
|
|
Stock-based compensation expense, net
|
|
$
|
899
|
|
|
$
|
1,159
|
|
|
$
|
3,256
|
|
|
$
|
3,298
|
|
Stock-based compensation is recorded within the following line items of operating expenses:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
April 2,
2017
|
|
|
March 27,
2016
|
|
|
April 2,
2017
|
|
|
March 27,
2016
|
|
|
|
|
|
|
|
(in thousands,
unaudited)
|
|
|
|
|
|
Marketing and sales
|
|
$
|
342
|
|
|
$
|
586
|
|
|
$
|
1,384
|
|
|
$
|
1,781
|
|
Technology and development
|
|
|
71
|
|
|
|
91
|
|
|
|
267
|
|
|
|
411
|
|
General and administrative
|
|
|
873
|
|
|
|
973
|
|
|
|
3,133
|
|
|
|
2,639
|
|
Total
|
|
$
|
1,286
|
|
|
$
|
1,650
|
|
|
$
|
4,784
|
|
|
$
|
4,831
|
|
The following table summarizes stock option activity during the nine
months ended April 2, 2017
(unaudited)
:
|
|
Options
|
|
|
Weighted Average
Exercise Price
|
|
Weighted Average Remaining Contractual Term (years)
|
|
Aggregate Intrinsic Value (000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 3, 2016
|
|
|
2,182,234
|
|
|
$
|
2.49
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
Exercised
|
|
|
(51,500
|
)
|
|
$
|
5.20
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
Outstanding at April 2, 2017
|
|
|
2,130,734
|
|
|
$
|
2.43
|
|
|
|
$
|
16,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested or expected to vest at April 2, 2017
|
|
|
2,130,734
|
|
|
$
|
2.43
|
|
|
|
$
|
16,566
|
|
Exercisable at April 2, 2017
|
|
|
1,471,734
|
|
|
$
|
2.37
|
|
|
|
$
|
11,530
|
|
As of
April 2, 2017, the total future compensation cost related to non-vested options, not yet recognized in the statement of income, was $1.0 million and the weighted average period over which these awards are expected to be recognized was 2.2 years.
The Company grants shares of Common Stock to its employees that are subject to r
estrictions on transfer and risk of forfeiture until fulfillment of applicable service and performance conditions and, in certain cases, holding periods (Restricted Stock). The following table summarizes the activity of non-vested restricted stock awards during the nine months ended April 2, 2017
(unaudited)
:
|
|
Shares
|
|
|
Weighted Average Grant Date Fair Value
|
|
|
|
|
|
|
|
|
|
|
Non-vested at July 3, 2016
|
|
|
2,017,069
|
|
|
$
|
6.78
|
|
Granted
|
|
|
814,406
|
|
|
$
|
9.88
|
|
Vested
|
|
|
(885,502
|
)
|
|
$
|
6.83
|
|
Forfeited
|
|
|
(473,494
|
)
|
|
$
|
9.77
|
|
Non-vested at April 2, 2017
|
|
|
1,472,479
|
|
|
$
|
7.50
|
|
The fair value of non-vested shares is determined based on the closing stock price on the grant date. As of
April 2, 2017, there was $6.9 million of total unrecognized compensation cost related to non-vested restricted stock-based compensation to be recognized over the weighted-average remaining period of 2.2 years.
Note 4 - Dispositions
Pending disposition of Fannie May
On March 15, 2017, the Company
and Ferrero International S.A., a Luxembourg corporation (“Ferrero”), entered into a Stock Purchase Agreement (the “Purchase Agreement”) pursuant to which Ferrero will purchase from the Company all of the outstanding equity of Fannie May Confections Brands, Inc., including its subsidiaries, Fannie May Confections, Inc. and Harry London Candies, Inc. (“Fannie May”) (the “Acquisition”). The aggregate consideration payable to the Company in exchange for all of the outstanding equity of Fannie May is $115.0 million in cash (subject to adjustment for seasonal working capital).
The Purchase Agreement contains customary representations, warranties and covenants by the Company and F
errero. The closing of the Acquisition is expected to be on May 30, 2017 and is subject to customary closing conditions, including applicable regulatory approvals, covenants to enter into a transition services agreement whereby the Company will provide certain post-closing services to Ferrero and Fannie May related to the business of Fannie May and a commercial agreement with respect to the distribution of certain Ferrero and Fannie May products.
The Company determined that the Fannie May business (disposal group) met the held for sale criteria, as prescribed by FASB ASC 360-10-45-9, but did not meet the criteria to qualify as a discontinued operation.
Further, per
ASC 360-10-35-43, a disposal group classified as held for sale is initially measured at the lower of its carrying amount or fair value less cost to sell
. The Company compared Fannie May's carrying amount to its fair value less estimated costs to sell, and determined that the disposal group should be measured at its carrying amount as of April 2, 2017.
The assets and liabilities of Fannie May are presented as "Assets held for sale" and "Liabilities held for sale" in the Company's condensed consolidated balance sheets as of April 2, 2017.
The following table presents the aggregate carrying amounts of the major classes of assets and liabilities related to the Fannie May business to be disposed of as of April 2, 2017:
|
|
Fannie May - Held for sale assets and liabilities
|
|
|
|
|
(in thousands, unaudited)
|
|
Assets:
|
|
|
|
|
Trade receivables, net
|
|
|
9,325
|
|
Inventories
|
|
|
38,724
|
|
Prepaid and other
|
|
|
1,024
|
|
Property, plant and equipment, net
|
|
|
11,087
|
|
Goodwill (Note 1)
|
|
|
14,900
|
|
Other intangibles, net
|
|
|
16,572
|
|
Other assets
|
|
|
190
|
|
Total assets held for sale
|
|
$
|
91,822
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
1,387
|
|
Accrued expenses
|
|
|
1,264
|
|
Other liabilities
|
|
|
1,777
|
|
Total liabilities held for sale
|
|
$
|
4,428
|
|
Note (1) - Per FASB ASC 350-20-40, when a portion of reporting unit that constitutes a business is to be disposed of, goodwill associated with that business shall be included in the carrying amount of the business in determining the gain or loss on disposal. The amount of goodwill to be included in that carrying amount shall be based on the relative fair values of the business to be disposed of and the portion of the reporting unit that will be retained. Fannie May represents a business as defined by FASB and is included in the Company's Gourmet Food & Gift Baskets reporting unit. As a result, we allocated goodwill of $14.9 million to the Fannie May business based on the relative fair value of Fannie May to the remaining Gourmet Food & Gift Baskets reporting unit. The Company estimated the fair value of the Gourmet Food & Gift Baskets reporting unit in a manner consistent with its significant accounting policy for goodwill, described in Item 15, Note 1 of the
Company’s annual report on Form 10-K for the fiscal year ended July 3, 2016.
Disposition of Colonial Gifts Limited ("iFlorist")
During the quarter ended September 27, 2015, the Company
’s management committed to a plan to sell its iFlorist business in order to focus its internal resources and capital on integrating and achieving synergy savings with respect to its acquisition of Harry & David, which was completed on September 30, 2014. As a result, the Company determined that the iFlorist business (disposal group) met the held for sale criteria, as prescribed by FASB ASC 360-10-45-9, as of September 27, 2015. As such, the Company compared iFlorist’s carrying amount ($3.4 million) to its fair value less cost to sell ($1.5 million), and recorded an impairment charge of $1.9 million during the period ended September 27, 2015. The Company recorded this impairment charge within “Other (income) expense, net” in the condensed consolidated statements of operations. During October 2015, the Company completed the sale of substantially all of the assets of iFlorist to Euroflorist AB (“Euroflorist”), a pan-European floral and gifting company headquartered in Malmo, Sweden. As consideration for the assets sold, the Company received an investment in Euroflorist with a fair value on the date of sale of approximately $1.5 million. (The Company will account for this investment using the cost method as it does not possess the ability to exercise significant influence over Euroflorist.) Upon completion of the sale of iFlorist during the quarter ended December 27, 2015, the Company recorded an additional loss on sale of $0.2 million.
Note 5
– Inventory
The Company
’s inventory, stated at cost, which is not in excess of market, includes purchased and manufactured finished goods for sale, packaging supplies, crops, raw material ingredients for manufactured products and associated manufacturing labor and is classified as follows:
|
|
April 2, 201
7
|
|
|
July 3, 2016
|
|
|
|
(in thousands)
|
|
Finished goods
|
|
$
|
30,602
|
|
|
$
|
44,264
|
|
Work-in-process
|
|
|
26,800
|
|
|
|
24,573
|
|
Raw materials
|
|
|
6,311
|
|
|
|
34,491
|
|
Total inventory
|
|
$
|
63,713
|
|
|
$
|
103,328
|
|
Inventories to be disposed of as a result of the Fannie May disposition were included in "Assets held for sale" on the condensed consolidated balance sheet as of April 2, 2017, and accordingly, are not included in this table (see
Note 4
).
Note 6
– Goodwill and Intangible Assets
The following table presents goodwill by segment and the related change in the net carrying amount:
|
|
1-800-Flowers.com Consumer Floral
|
|
|
BloomNet Wire Service
|
|
|
Gourmet Food & Gift Baskets (1)
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Balance at
July 3, 2016
|
|
$
|
17,441
|
|
|
$
|
-
|
|
|
$
|
60,226
|
|
|
$
|
77,667
|
|
Goodwill reclassified to assets held for sale (see
Note 4
)
|
|
|
-
|
|
|
|
-
|
|
|
|
14,900
|
|
|
|
14,900
|
|
Balance at
April 2, 2017
|
|
$
|
17,441
|
|
|
$
|
-
|
|
|
$
|
45,326
|
|
|
$
|
62,767
|
|
|
(1)
|
The total carrying amount of goodwill for all periods in the table above is reflected net of $71.1 million of accumulated impairment charges, which were
recorded in the Gourmet Food & Gift Baskets segment during fiscal 2009.
|
The Company
’s other intangible assets consist of the following:
|
|
|
|
|
|
|
April 2
, 201
7
|
|
|
July 3, 2016
|
|
|
|
Amortization Period
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
|
|
(in years)
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets with determinable lives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in licenses
|
|
14
|
-
|
16
|
|
|
$
|
7,420
|
|
|
$
|
5,911
|
|
|
$
|
1,509
|
|
|
$
|
7,420
|
|
|
$
|
5,832
|
|
|
$
|
1,588
|
|
Customer lists
|
|
3
|
-
|
10
|
|
|
|
12,184
|
|
|
|
7,920
|
|
|
|
4,264
|
|
|
|
21,144
|
|
|
|
15,960
|
|
|
|
5,184
|
|
Other
|
|
5
|
-
|
14
|
|
|
|
2,946
|
|
|
|
2,017
|
|
|
|
929
|
|
|
|
3,665
|
|
|
|
2,698
|
|
|
|
967
|
|
Total intangible assets with determinable lives
|
|
|
|
|
|
|
|
22,550
|
|
|
|
15,848
|
|
|
|
6,702
|
|
|
|
32,229
|
|
|
|
24,490
|
|
|
|
7,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks with indefinite lives
|
|
|
|
54,739
|
|
|
|
-
|
|
|
|
54,739
|
|
|
|
71,261
|
|
|
|
-
|
|
|
|
71,261
|
|
Total identifiable intangible assets
|
|
|
$
|
77,289
|
|
|
$
|
15,848
|
|
|
$
|
61,441
|
|
|
$
|
103,490
|
|
|
$
|
24,490
|
|
|
$
|
79,000
|
|
Trademarks and customer lists to be disposed of as a result of the Fannie May disposition were included in "Assets held for sale" on the condensed consolidated balance sheet as of April 2, 2017, and accordingly, are not included in this table (see
Note 4
).
Intangible assets are reviewed for impairmen
t whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Future estimated amortization expense is as follows: remainder of fiscal 2017 - $0.4 million, fiscal 2018 - $1.3 million, fiscal 2019 - $0.7 million, fiscal 2020 - $0.6 million, fiscal 2021 - $0.6million and thereafter - $3.1million.
Note 7
– Investments
The Company has certain investments in non-marketable equity instruments of private companies. The Company accounts for
these investments using the equity method if they provide the Company the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if the Company has an ownership interest in the voting stock of the investee between 20% and 50%, although other factors, such as representation on the investee’s Board of Directors, are considered in determining whether the equity method is appropriate. The Company records equity method investments initially at cost, and adjusts the carrying amount to reflect the Company’s share of the earnings or losses of the investee.
The Company
’s equity method investment is comprised of a 29.0% interest in Flores Online, a Sao Paulo, Brazil based internet floral and gift retailer, that the Company made on May 31, 2012. The book value of this investment was $1.1 million as of April 2, 2017 and July 3, 2016, and is included in the “Other assets” line item within the Company’s consolidated balance sheets. The Company’s equity in the net loss of Flores Online for the three and nine months ended April 2, 2017 and March 27, 2016 was less than $0.1 million. During the quarter ended September 27, 2015, the Company determined that the fair value of its investment in Flores Online ($1.2 million) was below its carrying value ($2.9 million) and that this decline was other-than-temporary. As a result, the Company recorded an impairment charge of $1.7 million, which is included within the “Other (income) expense, net” line items in the Company’s consolidated statements of operations for the nine-months ended March 27, 2016.
Investments in non-marketable equity instruments of private companies, where the Company does not possess the ability to exercise significa
nt influence, are accounted for under the cost method. Cost method investments are originally recorded at cost, and are included within the “Other assets” line item within the Company’s consolidated balance sheets. The aggregate carrying amount of the Company’s cost method investments was $1.7 million (including a $1.5 million investment in Euroflorist – see
Note 4
) as of April 2, 2017 and July 3, 2016.
The Company also holds certain trading securities associated with its Non-Qualified Deferred C
ompensation Plan (“NQDC Plan”). These investments are measured using quoted market prices at the reporting date and are included within the “Other assets” line item in the condensed consolidated balance sheets (see
Note 10
).
Each reporting period,
the Company uses available qualitative and quantitative information to evaluate its investments for impairment. When a decline in fair value, if any, is determined to be other-than-temporary, an impairment charge is recorded in the consolidated statement of operations.
Note 8
–Debt
The Company
’s current and long-term debt consists of the following:
|
|
April 2, 2017
|
|
|
July 3, 2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Revolver (1)
|
|
$
|
-
|
|
|
$
|
-
|
|
Term Loan (1)
|
|
|
113,563
|
|
|
|
117,563
|
|
Deferred financing costs
|
|
|
(3,794
|
)
|
|
|
(3,573
|
)
|
Total debt
|
|
|
109,769
|
|
|
|
113,990
|
|
Less: current debt
|
|
|
6,469
|
|
|
|
19,594
|
|
Long-term debt
|
|
$
|
103,300
|
|
|
$
|
94,396
|
|
(1)
On December 23, 2016
, the Company
entered into an Amended and Restated Credit Agreement (the “2016 Amended Credit Agreement”)
with JPMorgan Chase Bank as administrative agent, and a group of lenders.
The 2016 Amended Credit Agreement amended and restated the Company
’s credit agreement dated as of September 30, 2014 (the “2014 Agreement”)
to, among other things, extend the maturity date of the $115.0 million outstanding term loan ("Term Loan") and the revolving credit facility (the "Revolver") by approximately two years to December 23, 2021. The Term Loan is payable in 19 quarterly installments of principal and interest beginning on April 2, 2017, with escalating principal payments, at the rate of 5% in year one, 7.5% in year two, 10% in year three, 12.5% in year four, and 15% in year five, with the remaining balance of $61.8 million due upon maturity. The Revolver, in the aggregate amount of $200 million, subject to seasonal reduction to an aggregate amount of $100 million for the period from January 1 through August 1, may be used for working capital and general corporate purposes, subject to certain restrictions.
For each borrowing under the 2016 Amended Credit Agreement, the Company may elect that such borrowing bear interest at an annual rate equal to either (1) a base rate plus an applicable margin varying from
0.75% to 1.5%, based on the Company’s consolidated leverage ratio, where the base rate is the highest of (a) the prime rate, (b) the highest of the federal funds rate and the overnight bank funding rate as published by the New York Fed, plus 0.5% and (c) an adjusted LIBO rate, plus 1% or (2) an adjusted LIBO rate plus an applicable margin varying from 1.75% to 2.5%, based on the Company’s consolidated leverage ratio.
The 2016 Amended Credit Agreement requires that while any borrowings are outstanding the Company comply with certain financial covenants and affirmative covenants as well as certain negative covenants, that subject to certain exceptions, limit the Company's ability to, among other things, incur additional indebtedness, make certain investments and make certain restricted payments.
The Company was in compliance with these covenants as of April 2, 2017.
The 2016 Amended Credit Agreement is secured by substantially all of the assets of the Company and the Subsidiary Guarantors.
Future principal payments under the term loan are as fo
llows: $1.5 million – remainder of fiscal 2017, $7.2 million – fiscal 2018, $10.1 million – fiscal 2019, $12.9 million – fiscal 2020, $15.8 million - fiscal 2021, and $66.1 million thereafter.
Note 9 - Property, Plant and Equipment
The Company
’s property, plant and equipment consists of the following:
|
|
April 2, 2017
|
|
|
July
3, 2016
|
|
|
|
(in thousands)
|
|
Land
|
|
$
|
30,789
|
|
|
$
|
30,789
|
|
Orchards in production and land improvements
|
|
|
9,564
|
|
|
|
9,483
|
|
Building and building improvements
|
|
|
56,407
|
|
|
|
54,950
|
|
Leasehold improvements
|
|
|
11,378
|
|
|
|
21,584
|
|
Production equipment and
furniture and fixtures
|
|
|
44,887
|
|
|
|
72,912
|
|
Computer and telecommunication equipment
|
|
|
53,609
|
|
|
|
52,737
|
|
Software
|
|
|
123,800
|
|
|
|
136,333
|
|
Capital projects in progress - orchards
|
|
|
8,615
|
|
|
|
8,513
|
|
Property, plant and equipment, gross
|
|
|
339,049
|
|
|
|
387,301
|
|
Accumulated depreciation and amortization
|
|
|
(184,381
|
)
|
|
|
(215,939
|
)
|
Property, plant and equipment, net
|
|
$
|
154,668
|
|
|
$
|
171,362
|
|
Property, plant and equipment to be disposed of as a result of the Fannie May disposition were included in "Assets held for sale" on the condensed consolidated balance sheet as of April 2, 2017, and accordingly, are not included in this table (see
Note 4
).
Note 10 - Fair Value Measurements
Cash and cash equivalents, trade and other receivables, accounts payable and accrued expenses are reflected in the consolidated balance sheets at carrying value, which approximates fair value due to the short-term nature of these instruments. Although no
trading market exists, the Company believes that the carrying amount of its debt approximates fair value due to its variable nature. The Company’s investments in non-marketable equity instruments of private companies are carried at cost and are periodically assessed for other-than-temporary impairment, when an event or circumstances indicate that an other-than-temporary decline in value may have occurred. The Company’s remaining financial assets and liabilities are measured and recorded at fair value (see table below). The Company’s non-financial assets, such as definite lived intangible assets and property, plant and equipment, are recorded at cost and are assessed for impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred. Goodwill and indefinite lived intangibles are tested for impairment annually, or more frequently if events occur or circumstances change such that it is more likely than not that an impairment may exist, as required under the accounting standards.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants
at the measurement date. The authoritative guidance for fair value measurements establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under the guidance are described below:
Level
1
|
|
Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
|
|
|
Level 2
|
|
Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not
active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
|
|
|
Level 3
|
|
Valuations based on inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities.
|
The following table presents by level, within the fair value hierarchy, financial assets and liabilities measured at fair value on a recurring basis:
|
|
|
|
|
|
Fair Value
Measurements - Assets (Liabilities)
|
|
|
|
Carrying Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
(in thousands)
|
|
Assets (liabilities) as of
April 2, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities held in a “
rabbi trust” (1)
|
|
$
|
6,538
|
|
|
$
|
6,538
|
|
|
$
|
|
|
|
$
|
|
|
|
|
$
|
6,538
|
|
|
$
|
6,538
|
|
|
$
|
|
|
|
$
|
|
|
Assets (liabilities) as of
July 3, 2016:
|
|
Trading securities held in a “
rabbi trust” (1)
|
|
$
|
4,852
|
|
|
$
|
4,852
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
$
|
4,852
|
|
|
$
|
4,852
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
(1)
|
The Company has established a Non-qualified Deferred Compensation Plan for certain members of senior management. Deferred compensation plan assets are invested in mutual funds held in a “
rabbi trust” which is restricted for payment to participants of the NQDC Plan. Trading securities held in a rabbi trust are measured using quoted market prices at the reporting date and are included in the “Other assets” line item, with the corresponding liability included in the “Other liabilities” line item in the consolidated balance sheets.
|
Note 11
– Income Taxes
At the end of each interim reporting period, the Company estimates its effective income tax rate expected to be applicable for the full year. This estimate is used in providing for income taxes on a year-to-date basis and may change in subsequent interim
periods. The Company's effective tax rate from operations for the three months and nine months ended April 2, 2017 was 34.7% and 31.9% respectively, compared to 37.6% and 31.7% in the same respective periods of the prior year. The effective rates for fiscal 2017 differed from the U.S. federal statutory rate of 35%
due to various permanent differences and tax credits
, including excess tax benefits on stock based compensation as a result of the Company's early adoption of ASU 2016-09 (see
Note 1
)
, domestic production deductions and research and development credits,
partially offset by state income taxes.
The effective rate for fiscal 2016 differed from the U.S. federal statutory rate of 35% primarily due to the domestic production deduction and various tax credits such as employment credits and research and development credits that were renewed by U.S. Congress in December 2015, as well as the impact of the Company's reduced effective foreign tax rate in the UK resulting from the sale of iFlorist in October 2015, partially offset by state income taxes.
The Company files income tax returns in the U
.S. federal jurisdiction, various state jurisdictions, and various foreign countries. The Company concluded its U.S. federal examination for fiscal 2014, however, fiscal years 2015 and 2016 remain subject to U.S. federal examination. Due to ongoing state examinations and non-conformity with the U.S. federal statute of limitations for assessment, certain states remain open from fiscal 2012. The Company commenced operations in foreign jurisdictions in 2012. The Company's foreign income tax filings are open for examination by its respective foreign tax authorities, mainly Canada and the United Kingdom.
The Company'
s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. At April 2, 2017 the Company has remaining unrecognized tax positions of approximately $0.4 million, including accrued interest and penalties of $0.1 million. The Company believes that none of its unrecognized tax positions will be resolved over the next twelve months.
Note 12
– Business Segments
The Company
’s management reviews the results of the Company’s operations by the following three business segments:
•
1-800-Flowers.com Consumer Floral,
•
BloomNet Wire Service, and
•
Gourmet Food and Gift Baskets
Segment performance is measured based on contribution margin, which includes only the direct controllable revenue and operating expe
nses of the segments. As such, management’s measure of profitability for these segments does not include the effect of corporate overhead (see (a) below), nor does it include depreciation and amortization, other (income) expense, net and income taxes, or stock-based compensation and certain acquisition/integration costs, both of which are included within corporate overhead. Assets and liabilities are reviewed at the consolidated level by management and not accounted for by segment.
Net revenues:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
April 2, 2017
|
|
|
March 27, 2016
|
|
|
April 2, 2017
|
|
|
March 27, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Net Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-800-Flowers.com Consumer Floral
|
|
$
|
124,684
|
|
|
$
|
113,182
|
|
|
$
|
297,707
|
|
|
$
|
280,956
|
|
BloomNet Wire Service
|
|
|
24,091
|
|
|
|
22,517
|
|
|
|
65,557
|
|
|
|
63,740
|
|
Gourmet Food & Gift Baskets
|
|
|
85,611
|
|
|
|
99,096
|
|
|
|
592,295
|
|
|
|
595,006
|
|
Corporate
|
|
|
260
|
|
|
|
262
|
|
|
|
839
|
|
|
|
817
|
|
Intercompany eliminations
|
|
|
(931
|
)
|
|
|
(850
|
)
|
|
|
(2,301
|
)
|
|
|
(1,890
|
)
|
Total net revenues
|
|
$
|
233,715
|
|
|
$
|
234,207
|
|
|
$
|
954,097
|
|
|
$
|
938,629
|
|
Operating Income:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
April 2, 2017
|
|
|
March 27, 2016
|
|
|
April 2, 2017
|
|
|
March 27, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Contribution Margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-800-Flowers.com Consumer Floral
|
|
$
|
15,863
|
|
|
$
|
13,748
|
|
|
$
|
37,172
|
|
|
$
|
33,031
|
|
BloomNet Wire Service
|
|
|
8,245
|
|
|
|
7,747
|
|
|
|
23,713
|
|
|
|
22,017
|
|
Gourmet Food & Gift Baskets
|
|
|
(10,776
|
)
|
|
|
(6,753
|
)
|
|
|
84,544
|
|
|
|
88,626
|
|
Segment Contribution Margin Subtotal
|
|
|
13,332
|
|
|
|
14,742
|
|
|
|
145,429
|
|
|
|
143,674
|
|
Corporate (a)
|
|
|
(21,125
|
)
|
|
|
(20,432
|
)
|
|
|
(62,616
|
)
|
|
|
(60,519
|
)
|
Depreciation and amortization
|
|
|
8,492
|
|
|
|
7,546
|
|
|
|
25,656
|
|
|
|
24,279
|
|
Operating income (loss)
|
|
$
|
(16,285
|
)
|
|
$
|
(13,236
|
)
|
|
$
|
57,157
|
|
|
$
|
58,876
|
|
(a)
Corporate expenses consist of the Company’s enterprise shared service cost centers, and include, among other items, Information Technology, Human Resources, Accounting and Finance, Legal, Executive and Customer Service Center functions, as well as Stock-Based Compensation. In order to leverage the Company’s infrastructure, these functions are operated under a centralized management platform, providing support services throughout the organization. The costs of these functions, other than those of the Customer Service Center, which are allocated directly to the above categories based upon usage, are included within corporate expenses as they are not directly allocable to a specific segment.
|
Note 13
– Commitments and Contingencies
Litigation
There are various claims, lawsuits, and pending actions against the Company and its subsidiaries incident to the operations of its businesses. It is the opinion of management, after consultation with counsel, that the ultimate resolution of such claims, lawsuits and pending actions will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity.
Note 14. Fire at the
Fannie May Warehouse and Distribution Facility
On November 27, 2014, a fire occurred at the Company's Maple Heights, Ohio warehouse and distribution facility. While the fire did not cause any injuries, the building was severely damaged, rendering it inoperable for the holiday season,
and all Fannie May and Harry London confections in the facility were destroyed. As a result, the Company had limited supplies of its Fannie May Fine Chocolates and Harry London Chocolates products available in its retail stores as well as for its ecommerce and wholesale channels during its fiscal 2015 holiday season. While the Company implemented contingency plans to increase production for Fannie May Fine Chocolates and Harry London Chocolates products at its production facility in Canton, Ohio and to shift warehousing and distribution operations to alternate Company facilities, product availability was severely limited, impacting revenue and earnings during fiscal 2015, and lingering into fiscal 2016.
The following table reflects the costs related to the
fire and the insurance recovery and associated gain as of September 27, 2015:
|
|
Fire-related Insurance Recovery
|
|
|
|
(in thousands)
|
|
Loss on inventory
|
|
$
|
29,587
|
|
Other fire related costs
|
|
|
5,802
|
|
Total fire related costs
|
|
|
35,389
|
|
Less: fire related insurance recoveries
|
|
|
(55,000
|
)
|
Fire related gain
|
|
$
|
(19,611
|
)
|
During the three months ended September 27, 2015, the Company and its insurance carrier reached final agreement, and during the three months ended December 27, 2015, the Company received all remaining proceeds
from its Fannie May fire claim. The agreement, in the amount of $55.0 million, provided for: (i) recovery of raw materials and work-in-process at replacement cost, and finished goods at selling price, less costs to complete the sale and normal discounts and other charges, as well as (ii) other incremental fire-related costs. The cost of inventory lost in the fire was approximately $29.6 million, while other fire-related costs amounted to approximately $5.8 million, including incremental contracted lease and cold storage fees which was incurred until the Company moved back into its leased facility. The resulting gain of $19.6 million is included in “Other (income) expense, net” in the condensed consolidated statements of operations for nine months ended March 27, 2016.