1-800-FLOWERS.COM, INC. This "Management's Discussion and Analysis of Financial Condition and Results of Operations" (MD&A) is intended to provide an understanding of our financial condition, change in financial condition, cash flow, liquidity and results of operations. The following MD&A discussion should be read in conjunction with the consolidated financial statements and notes to those statements that appear elsewhere in this Form 10-K. The following discussion contains forward-looking statements that reflect the Company's plans, estimates and beliefs. The Company's actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to any differences include, but are not limited to, those discussed under the caption "Forward-Looking Information" and under Item 1A - "Risk Factors." Business overview1-800-FLOWERS.COM, Inc. and its subsidiaries (collectively, the "Company") is a leading provider of gifts designed to help customers express, connect and celebrate. For more than 40 years, 1-800-Flowers.com® has been delivering smiles to customers with gifts for every occasion, including fresh flowers and the best selection of plants, gift baskets, gourmet foods, confections, jewelry, candles, balloons and plush stuffed animals. As always, our 100% Smile Guarantee® backs every gift. The Company's Celebrations Ecosystem includes the following brands: 1-800-Flowers.com®, 1-800-Baskets.com®, Cheryl's Cookies®, FruitBouquets.com®, Harry & David®, Moose Munch®, The Popcorn Factory®, Wolferman's®, Personalization Universe®, Simply Chocolate®, Goodsey®, DesignPac®, Stock Yards®, and Shari's Berries®. InAugust 2020 , the Company added to its family of brands with the acquisition of PersonalizationMall®. Through the Celebrations Passport® loyalty program, which provides members with free standard shipping and no service charge across our portfolio of brands,1-800-FLOWERS.COM, Inc. strives to deepen its relationships with its customers. The Company also operates BloomNet®, an international floral service provider providing a broad-range of products and services designed to help professional florists grow their businesses profitably; as well as NapcoSM, a resource for floral gifts and seasonal décor. Business Segments The Company operates in the following three business segments: Consumer Floral,Gourmet Foods & Gift Baskets , andBloomNet . The Consumer Floral segment includes the operations of the Company's flagship brand,1-800-Flowers.com , FruitBouquets.com, Flowerama, Personalization Universe and Goodsey, while theGourmet Foods & Gift Baskets segment includes the operations of Harry & David (which includes Wolferman's,Moose Munch and Stock Yards), Cheryl's (which includesMrs. Beasley's ),The Popcorn Factory , DesignPac and 1-800-Baskets (which includes Simply Chocolate) andShari's Berries . TheBloomNet segment includes the operations ofBloomNet and Napco.
See Item 1 in Part I for a detailed description of the Company's business.
Fiscal 2020 Results
The Company entered fiscal 2020 with strong revenue growth momentum, coming off of fiscal 2019, which saw consolidated revenue increase 8.4% in comparison to fiscal 2018, driven by the successful implementation of several strategic growth initiatives designed to support the Company's flagship 1-800-Flowers and Harry & David brands. The Company built upon this momentum, generating revenue growth of 8.3% during the first nine months of fiscal 2020, accompanied by growth in its customer files, reflecting the strength of its family of brands, its focus on technological innovation and product development, and most importantly, providing an exemplary customer experience. The Company was able to leverage its business platform as this growth rate accelerated with the onset of the COVID-19 pandemic, during which time we saw customers increasingly turn to our brands and product offerings to help them remain connected and express themselves during this difficult time. As a result, consolidated annual revenue grew 19.3%, to approximately$1.5 billion during fiscal 2020, while net income increased 69.7%, to$59.0 million . Adjusted EBITDA, which excludes the impact of stock-based compensation,Non-Qualified Plan Investment appreciation/depreciation, the costs of closing our Harry & David retail stores, and PersonalizationMall litigation and transaction costs, increased 57.8%, to$129.5 million . COVID-19 Impact In response to the global pandemic, the Company has taken actions to ensure employee safety and business continuity, informed by the guidelines set forth by local, state and federal government and health officials. These initiatives include developing a "Pandemic Preparedness and Response Plan," establishing an internal "nerve center" to allow for communication and coordination throughout the business, designing workstream teams to promote workforce protection and supply chain management, and dedicating resources to support customers, vendors, franchisees, and ourBloomNet member florists. The COVID-19 pandemic has affected, and will continue to affect, our operations and financial results for the foreseeable future. While there is significant uncertainty in the overall consumer environment due to the COVID-19 crisis, we are seeing strong e-commerce demand for gourmet foods and gift baskets and our floral products for holidays and every-day gifting occasions, as well as for self-consumption. Entering the Company's fiscal fourth quarter, immediately following the onset of the pandemic, we saw significantly increased demand during the Easter Holiday period, throughMother's Day , and then continuing with "Everyday" volume through the end of the fiscal year. As we look past the end of fiscal 2020, demand trends remain strong through the first quarter of fiscal 2021. With that said, there are headwinds (and resulting increased costs) that have been, and will continue to impact our operations during the foreseeable future, including the following:
? Retail store closures - on
and for the safety of its employees, the Company temporarily closed its
Cheryl's and Harry & David retail stores. Affected employees were provided with
Company paid special COVID leave pay through
Company worked to understand the extent and potential length of the crisis. On
Harry & David retail stores. As a result, the Company incurred a charge of
approximately
employee costs and other store closure costs. Annual revenues attributable to
the closed locations was approximately
business as a result of COVID-19, which impacted our fourth quarter results
within our
customers were forced to close during the pandemic, resulting in loss of
revenues, as well as increased reserves on certain customer receivables. We
anticipate that this reduction in wholesale volume will continue through the
fiscal second quarter of fiscal 2021, as many of our large wholesale customers
are taking a cautious approach due to the uncertainty surrounding the future
impact of COVID-19 on the overall consumer economy, and store based retail
sales in particular.
?
in
changes we have made, and continue to make, to our manufacturing, warehouse and
distribution facilities to provide for the safety and wellbeing of our
associates, including, among others: required social distancing, enhanced
facility cleaning and sanitizing schedules, and staggered production shifts.
? PersonalizationMall litigation - On
an Equity Purchase Agreement to acquire PersonalizationMall for
from Bed Bath & Beyond Inc. The Company originally expected the Acquisition to
close on
created by the COVID-19 pandemic, the Company requested a reasonable delay in
the closing date as it believed that conditions to closing the transaction had
not been met, including the shut-down of PersonalizationMall's facilities. The
Seller responded to this request by filing a lawsuit in the
in theState of Delaware onApril 1, 2020 , seeking a judgment forcing the Company to close. OnJuly 20, 2020 , the Company entered into a settlement agreement with respect to the litigation and an amendment to the Equity Purchase Agreement, which reflects, among other things, an amended
purchase price of
Company incurred approximately$2 .7mm of related litigation and transaction costs during fiscal 2020. 19
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The scale and overall economic impact of the COVID-19 crisis is still very difficult to assess. However, the strong e-commerce demand that we are seeing across our brands, is expected to offset both the reductions in wholesale revenue, and the increases in costs noted above. The Company believes that the operating platform it has built over the years, combined with its diversified product line, and ability to engage with its customers will allow it to successfully navigate this challenging environment. We remain focused on three key elements of our business strategy:
? Taking care of the health and safety of our associates, our
our vendors and our customers, ? Maintaining our financial strength and flexibility, and ? Continuing to invest in areas of our business that can help drive future
growth. Fiscal 2021 Guidance Due to the significant uncertainty in the overall economy related to the ongoing COVID-19 pandemic, the Company is not providing guidance for its full fiscal 2021 year. Regarding the fiscal first quarter: Based on the strong growth momentum that the Company has carried into the first two months of fiscal 2021, combined with anticipated contributions from its recent acquisition of PersonalizationMall, the Company expects to achieve total consolidated revenue growth for the first quarter in the range of 40-to-45 percent (30-to-35 percent organic growth), compared with the prior year period.
? The anticipated strong revenue growth in the quarter reflects expected
e-commerce revenue growth of more than 70 percent, somewhat offset by lower
wholesale orders and reduced retail revenues (reflecting the closing of the
Harry & David retail stores in fiscal 2020). ? The Company expects the anticipated strong revenue growth, combined with
continued operating leverage and contributions from PersonalizationMall, will
enable it to drive Adjusted EBITDA for the quarter to break-even or slightly
positive, compared with a loss of$11.3 million in the prior year period. Regarding the fiscal second quarter: While there remains considerable uncertainty in the overall economy, the Company expects the current strong e-commerce demand to continue into the key holiday season in its second fiscal quarter. In addition, the Company anticipates solid contributions to revenues and profits from its recently acquired PersonalizationMall business. The Company anticipates that these factors, combined with the continued strong growth in its customer files, will offset certain headwinds, including higher operating costs due to the COVID-19 pandemic, lower wholesale orders from mass market retailers, capacity constraints at third-party shipping vendors and the potential distraction of the pending national election.
Definitions of non-GAAP financial measures:
We sometimes use financial measures derived from consolidated financial information, but not presented in our financial statements prepared in accordance withU.S. generally accepted accounting principles ("GAAP"). Certain of these are considered "non-GAAP financial measures" under theSEC rules. See below for definitions and the reasons why we use these non-GAAP financial measures. Where applicable, see the Segment Information and Results of Operations sections below for reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures. These non-GAAP financial measures are referred to as "adjusted" or "on a comparable basis" below, as these terms are used interchangeably. EBITDA and adjusted EBITDA We define EBITDA as net income (loss) before interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA adjusted for the impact of stock-based compensation,Non-Qualified Plan Investment appreciation/depreciation, and certain items affecting period to period comparability. See Segment Information for details on how EBITDA and adjusted EBITDA were calculated for each period presented. The Company presents EBITDA and adjusted EBITDA because it considers such information meaningful supplemental measures of its performance and believes such information is frequently used by the investment community in the evaluation of similarly situated companies. The Company uses EBITDA and adjusted EBITDA as factors used to determine the total amount of incentive compensation available to be awarded to executive officers and other employees. The Company's credit agreement uses EBITDA and adjusted EBITDA to measure compliance with covenants such as interest coverage and debt incurrence. EBITDA and adjusted EBITDA are also used by the Company to evaluate and price potential acquisition candidates. EBITDA and adjusted EBITDA have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP. Some of the limitations are: (a) EBITDA and adjusted EBITDA do not reflect changes in, or cash requirements for, the Company's working capital needs; (b) EBITDA and adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on the Company's debts; and (c) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future and EBITDA does not reflect any cash requirements for such capital expenditures. EBITDA should only be used on a supplemental basis combined with GAAP results when evaluating the Company's performance. 20
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Segment contribution margin and adjusted segment contribution margin
We define segment contribution margin as earnings before interest, taxes, depreciation and amortization, before the allocation of corporate overhead expenses. Adjusted segment contribution margin is defined as contribution margin adjusted for certain items affecting period-to-period comparability. See
Segment Information for details on how segment contribution margin was calculated for each period presented.
When viewed together with our GAAP results, we believe segment contribution margin and adjusted segment contribution margin provide management and users of the financial statements meaningful information about the performance of our business segments. Segment contribution margin and adjusted segment contribution margin are used in addition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures. The material limitation associated with the use of the segment contribution margin and adjusted segment contribution margin is that they are an incomplete measure of profitability as they do not include all operating expenses or non-operating income and expenses. Management compensates for these limitations when using this measure by looking at other GAAP measures, such as operating income and net income.
Adjusted net income and adjusted net income per common share
We define adjusted net income and adjusted net income per common share as net income and net income per common share adjusted for certain items affecting period to period comparability. See Segment Information below for details on how adjusted net income and adjusted net income per common share were calculated for each period presented. We believe that adjusted net income and adjusted net income per common share are meaningful measures because they increase the comparability of period to period results. Since these are not measures of performance calculated in accordance with GAAP, they should not be considered in isolation of, or as a substitute for, GAAP net income and net income per common share, as indicators of operating performance and they may not be comparable to similarly titled measures employed by other companies. Segment Information The following table presents the net revenues, gross profit and segment contribution margin from each of the Company's business segments, as well as consolidated EBITDA, adjusted EBITDA and adjusted net income, for fiscal years endedJune 28, 2020 andJune 30, 2019 . For segment information for the fiscal year endedJuly 1, 2018 , please refer to our Annual Report on Form 10-K for the fiscal year endedJuly 1, 2018 , filed onSeptember 14, 2018 . Years Ended Harry & David PersonalizationMall Litigation Store As Adjusted and Transaction Closure (non-GAAP) June 28, 2020 Costs Costs June 28, 2020 June 30, 2019 % Change (dollars in thousands) Net revenues: 1-800-Flowers.com Consumer Floral$ 593,197 $ - $ -$ 593,197 $ 497,765 19.2 % BloomNet 111,766 - - 111,766 102,876 8.6 % Gourmet Foods & Gift Baskets 785,547 - - 785,547 648,418 21.1 % Corporate 591 - - 591 1,105 -46.5 % Intercompany eliminations (1,464 ) - - (1,464 ) (1,541 ) 5.0 % Total net revenues$ 1,489,637 $ - $ -$ 1,489,637 $ 1,248,623 19.3 % Gross profit: 1-800-Flowers.com Consumer Floral$ 233,941 $ - $ -$ 233,941 $ 195,100 19.9 % 39.4 % 39.4 % 39.2 % BloomNet 54,193 - - 54,193 51,970 4.3 % 48.5 % 48.5 % 50.5 % Gourmet Foods & Gift Baskets 333,620 - - 333,620 278,113 20.0 % 42.5 % 42.5 % 42.9 % Corporate 442 - - 442 938 -52.9 % 74.8 % 74.8 % 84.9 % Total gross profit$ 622,196 $ - $ -$ 622,196 $ 526,121 18.3 % 41.8 % - - 41.8 % 42.1 % EBITDA (non-GAAP): Segment Contribution Margin (non-GAAP) (a): 1-800-Flowers.com Consumer Floral$ 73,806 $ - $ -$ 73,806 $ 49,653 48.6 % BloomNet 35,111 - - 35,111 34,705 1.2 % Gourmet Foods & Gift Baskets 110,627 - 5,177 115,804 82,319 40.7 % Segment Contribution Margin Subtotal 219,544 - 5,177 224,721 166,677 34.8 % Corporate (b) (106,667 ) 2,706 - (103,961 ) (91,604 ) -13.5 % EBITDA (non-GAAP) 112,877 2,706 5,177 120,760 75,073 60.9 % Add: Stock-based compensation 8,434 - - 8,434 6,310 33.7 % Add: Compensation charge related toNQ Plan Investment Appreciation 347 - - 347 729 -52.3 % Adjusted EBITDA (non-GAAP)$ 121,658 $ 2,706$ 5,177 $ 129,541 $ 82,112 57.8 % 21
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Reconciliation of net income to adjusted net income (non-GAAP):
Years Ended
June 28, 2020 June 30, 2019
(in thousands, except per share data)
Net income $ 58,998 $ 34,766
Adjustments to reconcile net income to adjusted net
income (non-GAAP)
Add: PersonalizationMall litigation and transaction
costs 2,706 -
Add: Harry & David store closure costs 5,177 -
Deduct: Income tax (benefit) on adjustments (1,908 ) -
Adjusted net income (non-GAAP) $ 64,973 Basic and diluted net income per common share Basic$ 0.92 $ 0.54 Diluted$ 0.89 $ 0.52 Basic and diluted adjusted net income per common share (non-GAAP) Basic$ 1.01 $ 0.54 Diluted$ 0.98 $ 0.52 Weighted average shares used in the calculation of net income and adjusted net income per common share Basic 64,463 64,342 Diluted 66,408 66,457 22
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Reconciliation of net income to adjusted EBITDA (non-GAAP):
Years Ended
June 28, 2020 June 30, 2019
(in thousands)
Net income $ 58,998 $ 34,766
Add:
Interest expense, net 2,522 2,125
Depreciation and amortization 32,513 29,965
Income tax expense 18,844 8,217
EBITDA 112,877 75,073Add: PersonalizationMall litigation and transaction costs
2,706 -
Add: Harry & David store closure costs 5,177 -
Add: Stock-based compensation 8,434 6,310
Add: Compensation charge related to NQ plan investment
appreciation/(depreciation) 347 729
Adjusted EBITDA $ 129,541 $ 82,112 (a) Segment performance is measured based on segment contribution margin or
segment Adjusted EBITDA, reflecting only the direct controllable revenue and
operating expenses of the segments, both of which are non-GAAP measurements.
As such, management's measure of profitability for these segments does not
include the effect of corporate overhead, described above, depreciation and
amortization, other income (net), and other items that we do not consider
indicative of our core operating performance.
(b) 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.
Results of Operations
The Company's fiscal year is a 52- or 53-week period ending on the Sunday
nearest to
Net Revenues
Years Ended
June 28, 2020 % Change June 30, 2019 % Change July 1, 2018
(dollars in thousands)
Net revenues:
E-Commerce $ 1,230,385 23.2 % $ 998,359 8.3 % $ 921,848
Other 259,252 3.6 % 250,264 8.8 % 230,073
$ 1,489,637 19.3 % $ 1,248,623 8.4 % $ 1,151,921 Net revenues consist primarily of the selling price of the merchandise, service or outbound shipping charges, less discounts, returns and credits.
During the year endedJune 28, 2020 , net revenues increased 19.3% in comparison to the prior year, reflecting strong execution of the Company's strategy to engage with its customers and build deeper relationships and thereby drive sustainable, long-term growth. The annual growth rate reflects "pre-COVID-19" growth of approximately 8.3% through the first three quarters of fiscal 2020, and "post-COVID-19" growth of 61.0% during the fourth quarter of fiscal 2020. The Company experienced growth across its three business segments, reflecting the strategic marketing and merchandising investments across the Company's brands, the continuing positive trends in everyday gifting occasions, increased self-consumption within theGourmet Foods & Gift Baskets segment, as well as incremental revenues fromShari's Berries , which was acquired onAugust 14, 2019 . Excluding the incremental revenue contributed byShari's Berries , which was acquired onAugust 14, 2019 , consolidated net revenues grew 16.3% in fiscal 2020 compared to the prior year. During fiscal 2019, net revenues increased 8.4% in comparison to the prior year, due to strong customer demand for both holiday and everyday gifting occasions in ourGourmet Foods & Gift Baskets and Consumer Floral segments, as well as membership, transaction and services growth in theBloomNet segment.
Disaggregated revenue by channel follows:
Years Ended
June 28, 2020 June 30, 2019 July 1, 2018
Gourmet Gourmet Gourmet
Foods & Foods & Foods &
Consumer Gift Consumer Gift Consumer Gift
Floral BloomNet Baskets Consolidated Floral BloomNet Baskets Consolidated Floral BloomNet Baskets Consolidated
(in thousands)
Net revenues
E-commerce $ 585,585 $ - $ 644,800 $ 1,230,385 $ 489,463 $ - $ 508,897 $ 998,360 $ 448,943 $ - $ 472,905 $ 921,848
Retail 4,318 - 37,076 41,394 4,706 - 45,862 50,568 4,743 - 46,860 51,603
Wholesale - 33,675 103,671 137,346 - 29,744 93,659 123,403 - 28,747 85,758 114,505
BloomNet Services - 78,091 - 78,091 - 73,132 - 73,132 - 60,822 - 60,822
Other 3,294 - - 3,294 3,596 - - 3,596 3,774 - - 3,774
Corporate - - - 591 - - - 1,105 - - - 1,114
Eliminations - - - (1,464 ) - - - (1,541 ) - - - (1,745 )
Total net revenues
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Table of Contents Revenue by sales channel:
? E-commerce revenues (combined online and telephonic) increased 23.2% during
fiscal 2020, comprised of 19.6% growth within the Consumer Floral segment and
26.7% growth in the
the Company fulfilled approximately 16.4 million e-commerce orders (an
increase of 24.1% compared to fiscal 2019) at an average order value of
(a decrease of 0.7% compared to fiscal 2019).
E-commerce revenues increased 8.3% during fiscal 2019, comprised of 9.0%
growth within the Consumer Floral segment and 7.6% growth in the
& Gift Baskets segment. During fiscal 2019, the Company fulfilled
approximately 13.2 million e-commerce orders, at an average order value of
fiscal 2018.
? Other revenues are comprised of the Company's
wholesale and retail channels of its 1-800-Flowers.com Consumer Floral and
fiscal 2020, primarily as a result of 8.6% growth within the
and 0.9% growth within the Gourmet Foods & Gift Baskets segment.
Other revenues increased 8.8% during fiscal 2019, primarily as a result of
14.9% growth within the
Foods & Gift Baskets segment, driven primarily by increased wholesale volume,
partially offset by a decline in Harry & David retail store volume due to a
reduction in store count and a decline in customer traffic.
Revenue by segment:
? 1-800-Flowers.com Consumer Floral - this segment includes the operations of
the 1-800-Flowers.com brand, which derives revenue from the sale of consumer
floral products through its e-commerce sales channels (telephonic and online
sales), retail stores, and royalties from its franchise operations.
Net revenues increased 19.2% during fiscal 2020 reflecting the continued
benefit of the strategic marketing and merchandising investments made in the
Company's flagship brands over the past two years, combined with the
significant growth achieved during the 4th quarter, triggered by the pandemic.
The Company experienced record Easter and
holiday "everyday" volume continuing to show strong year over year
improvement.
Net revenues increased 8.8% during fiscal 2019 due to stable growth throughout
the year, driven by a combination of organic growth and increased investment
in strategic marketing and merchandising programs designed to accelerate
growth and increase market share across its "everyday" gifting occasions,
which focuses on "Birthday", "Anniversary", "Sympathy" and "Just Because"
occasions. New product introductions at both the entry level and luxury price
points, such as the expanded Unicorn and succulents collections, attract new
customers to grow the brand's "everyday" business, while supporting continued
growth during the key Christmas, Valentine's and Mother's Day holidays.
?
other product and service offerings to florists.
Net revenues increased 8.6% during fiscal 2020, primarily due to increased
demand for directory, settlement processing revenues (due to the higher
florist-to-florist order volume), and transaction fees (driven primarily by
increased
volume sent through the network), and favorable wholesale demand throughout
the year due to new customer acquisitions. Offsetting the above increases were
lower membership and reciprocity fees due to fee waivers in April 2020 to
support our florist network during the worst of the pandemic.
Net revenues increased 14.9% during fiscal 2019, primarily due to higher
services revenues, including membership, settlement processing, directory and
transaction fees, monetizing the increased 1-
florist-to-florist orders being sent through the network, building on the
efforts begun during the second half of fiscal 2018 to capture a greater share
of orders from local flower shops and third-party, online floral companies.
?
David, Wolferman's, Stock Yards, Cheryl's Cookies,
1-800-Baskets/DesignPac, and
Revenue is derived from the sale of gourmet fruits, cookies, baked gifts,
premium chocolates and confections, gourmet popcorn, gift baskets, dipped
berries, and prime steaks and chops through the Company's e-commerce sales
channels (telephonic and online sales) and company-owned and operated retail
stores under the Harry & David and Cheryl's brand names, as well as wholesale
operations.
Net revenues increased 21.1% during fiscal 2020, as a result of favorable
sales across all brands within the segment, and incremental revenue from
increased demand throughout the year, with growth of 9.7% during the first
nine months of the year, then fueled by accelerated e-commerce demand
coinciding with the onset of COVID-19, as product offerings, convenience, and
brand sentiment resonated with customers. Wholesale/retail volume, which had
been trending significantly favorable to prior year before the onset of
COVID-19, ended relatively flat for the year due to the closure of many of the
brand's retail customer's stores, and the closure of the Harry & David retail
store operations in the 4th quarter.
Net revenues increased 7.1% during fiscal 2019, attributable to growth from
nearly all brands, but primarily due to: (i) strong growth from Harry & David,
driven by improved merchandising assortments, increased investments in digital
marketing programs, and its "Share More" messaging, which resonated with
customers, contributing to new customer acquisition and increases in its
"everyday" business, and (ii) as 1-800-Baskets/DesignPac, which generated
year-over-year growth from new and existing wholesale customers, as well
through its e-commerce business attributable to its Simply Chocolate product
line.
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Gross Profit
Years Ended
June 28, June 30, July 1,
2020 % Change 2019 % Change 2018
(dollars in thousands)
Gross profit $ 622,196 18.3 % $ 526,121 7.6 % $ 489,025
Gross margin % 41.8 % 42.1 % 42.5 %
Gross profit consists of net revenues less cost of revenues, which is comprised
primarily of florist fulfillment costs (fees paid directly to florists), the
cost of floral and non-floral merchandise sold from inventory or through third
parties, and associated costs including inbound and outbound shipping charges.
Additionally, cost of revenues includes labor and facility costs related to
direct-to-consumer and wholesale production operations.
Gross profit increased 18.3% during fiscal 2020 due to the increase in revenues
noted above, partially offset by a lower gross profit percentage. Gross profit
percentage decreased 30 basis points during fiscal 2020, due to lower margins
within the Gourmet Foods & Gift Baskets and BloomNet segments, partially offset
by improved margins in the Consumer Floral segment. The lower margins were
attributable to the acquisition of Shari's Berries , which carries a lower gross
margin, and macro-economic headwinds including: (i) rising labor and
transportation costs, (ii) tariffs, and (iii) increased costs associated with
the changes we have made, and continue to make, to our manufacturing, warehouse
and distribution facilities to provide for the safety and wellbeing of our
associates in light of COVID-19, including: required social distancing, enhanced
facility cleaning and sanitizing schedules, and staggered production shifts.
These headwinds have been partially offset by the Company's strategic pricing
initiatives and operational productivity improvements.
Gross profit increased 7.6% during fiscal 2019 due to the increase in revenues
noted above, partially offset by a lower gross profit percentage. Gross profit
decreased 40 basis points during fiscal 2019, reflecting BloomNet's lower gross
margin percentage, as well as hourly labor, particularly seasonal labor, and the
growth of our Celebrations Passport free-shipping program, partially offset by
Gourmet Foods & Gift Baskets logistics initiatives, which reduced per order
transportation costs, as well as manufacturing initiatives, including automation
and shifting some production to earlier in the season to better utilize our core
workforce.
Consumer Floral segment - Gross profit increased 19.9% during fiscal 2020, due
to the aforementioned revenue growth and an increase in gross profit percentage
of 20 basis points to 39.4%. The higher gross profit percentage reflects lower
promotional activity throughout the year due to the elimination of the loyalty
points program, instead emphasizing "Passport" to increase purchase frequency.
Gross profit increased 7.4% during fiscal 2019, due to the aforementioned
revenue growth, partially offset by a decrease in gross profit percentage of 50
basis points to 39.2%. The lower gross profit percentage reflects higher product
costs, an increased Celebrations Passport program participation, which has been
driving improved customer loyalty and purchase frequency, and increased
transportation costs.
BloomNet segment - Gross profit increased 4.3% during fiscal 2020, due to the
increase in revenues noted above, partially offset by a decrease in gross profit
percentage of 200 basis points to 48.5%. The lower gross profit percentage was
due to unfavorable wholesale product margins due to the impact of tariffs,
promotional offerings and higher shipping and merchandise costs, as well as
higher rebates (higher florist-to-florist volume) and the aforementioned fee
waivers in April 2020 to assist the florist network during the onset of the
pandemic. Gross profit increased 6.9% during fiscal 2019, due to the increase in
revenues noted above, partially offset by a decrease in gross profit percentage
of 380 basis points to 50.5%. The lower gross profit percentage is due to the
increase in the volume of lower margin florist-to-florist orders, on membership
and transaction fee margins, as a result of an increase in rebates to support
the brand's efforts to gain market share.
Gourmet Foods & Gift Baskets segment - Gross profit increased by 20.0% during
fiscal 2020, due to the increase in revenues noted above, partially offset by a
decrease in gross profit percentage of 40 basis points to 42.5%, mainly due to
the acquisition of Shari's Berries , which carries a lower gross margin than the
rest of the segment, as well as the aforementioned macro-economic headwinds and
incremental COVID-19 costs. Gross profit increased by 7.9% during fiscal 2019,
due to the increase in revenues noted above, as well as increased margins. Gross
profit percentage increased 30 basis points to 42.9% during fiscal 2019, due to
logistics initiatives, which reduced shipping and transportation costs, combined
with strategic pricing initiatives, and improved operational performance at
Cheryl's, partially offset by rising labor costs, and penetration of the
Celebrations Passport program.
Marketing and Sales Expense
Years Ended
June 28, June 30, July 1,
2020 % Change 2019 % Change 2018
(dollars in thousands)
Marketing and sales $ 363,227 13.6 % $ 319,636 7.0 % $ 298,810
Percentage of sales 24.4 % 25.6 % 25.9 %
Marketing and sales expense consists primarily of advertising and promotional
expenditures, catalog costs, online portal and search costs, retail store and
fulfillment operations (other than costs included in cost of revenues) and
customer service center expenses, as well as the operating expenses of the
Company's departments engaged in marketing, selling and merchandising
activities.
Marketing and sales expense increased 13.6% during fiscal 2020, primarily due to
increased advertising spend within the Gourmet Foods & Gift Baskets and
1-800-Flowers.com Consumer Floral segments, due to the Company's incremental
marketing efforts designed to accelerate revenue growth and capture market
share, partially offset by operational efficiencies and platform leverage
attributable to the revenue growth. The investment spend was successful in
driving significant enterprise growth, while improving overall operating expense
leverage and reducing enterprise reliance on promotional pricing, thereby
further reinforcing the premium positioning of the Company's portfolio of
brands. As a result, marketing and sales as a percentage of net revenues, during
fiscal 2020 decreased to 24.4% compared with 25.6% in fiscal 2019.
Marketing and sales expense increased 7.0% during fiscal 2019, primarily due to
increased advertising spend within the Consumer Floral and Gourmet Foods & Gift
Baskets segments, associated with the Company's incremental marketing efforts
designed to accelerate revenue growth and capture market share, coupled with an
increase in performance-based bonuses. Increased efficiency around our digital
marketing programs generated strong revenue growth, which in turn, enabled us to
leverage our platform, while automation initiatives in our service centers drove
lower customer service costs. As a result, marketing and sales as a percentage
of net revenues, during fiscal 2019 decreased to 25.6% compared with 25.9% in
fiscal 2018.
During fiscal 2020, the Company added approximately 4.2 million new e-commerce
customers, an increase of 40.5% over the prior year. During fiscal 2019, the
Company added approximately 3.0 million new e-commerce customers, an increase of
10.7% over the prior year. Approximately 51.7% of customers who placed
e-commerce orders during fiscal 2020 were repeat customers compared to
approximately 57.7% in fiscal 2019.
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Technology and Development Expense
Years Ended
June 28, June 30, July 1,
2020 % Change 2019 % Change 2018
(dollars in thousands)
Technology and development $ 48,698 11.3 % $ 43,758 11.5 % $ 39,258
Percentage of sales 3.3 % 3.5 % 3.4 %
Technology and development expense consists primarily of payroll and operating
expenses of the Company's information technology group, costs associated with
its websites, including hosting, design, content development and maintenance and
support costs related to the Company's order entry, customer service,
fulfillment and database systems.
Technology and development expenses increased by 11.3% during fiscal 2020, as a
result of increased consulting and labor costs, due to higher performance based
bonuses compared to the prior year, increased hosting costs due to higher usage
of cloud storage applications, and higher maintenance and license costs,
including security and platform enhancements.
Technology and development expenses increased by 11.5% during fiscal 2019, as a result of increased license and maintenance costs required to support the Company's technology platform, and higher labor and consulting costs due to annual merit increases and an increase in performance-based bonuses.
During the fiscal years endedJune 28, 2020 ,June 30, 2019 andJuly 1, 2018 , the Company expended$69.5 million ,$65.4 million and$61.2 million , respectively, on technology and development, of which$20.8 million ,$21.6 million and$21.9 million , respectively, has been capitalized.
General and Administrative Expense
Years Ended
June 28, June 30, July 1,
2020 % Change 2018 % Change 2018
(dollars in thousands)
General and administrative $ 97,394 11.1 % $ 87,654 13.2 % $ 77,440
Percentage of sales 6.5 % 7.0 % 6.7 %
General and administrative expense consists of payroll and other expenses in
support of the Company's executive, finance and accounting, legal, human
resources and other administrative functions, as well as professional fees and
other general corporate expenses.
General and administrative expense increased 11.1% during fiscal 2020, primarily
due to an increase in labor costs primarily related to performance-based
bonuses, higher transaction and legal costs associated with the acquisition of
PersonalizationMall.com , and higher bad debt expense, primarily related to the
impact of COVID-19 on certain corporate, wholesale, and florist accounts,
partially offset by lower health insurance and travel costs.
General and administrative expense increased 13.2% during fiscal 2019, primarily
due to an increase in labor costs related to performance-based bonuses and merit
increases, as well as increased health insurance costs, and the reinstatement of
the Company's 401k match (See Note 14. in Part IV, Item 15 for details
regarding Employee Retirement Plans).
Depreciation and Amortization
Years Ended
June 28, June 30, July 1,
2020 % Change 2019 % Change 2018
(dollars in thousands)
Depreciation and amortization $ 32,513 8.5 % $ 29,965 -7.7 % $ 32,469
Percentage of sales 2.2 % 2.4 % 2.8 %
Depreciation and amortization expense increased 8.5% during fiscal 2020, primarily as a result of recent short-lived capital expenditures to support the Company's IT infrastructure.
Depreciation and amortization expense decreased 7.7% during fiscal 2019, as certain short-lived assets were fully depreciated/amortized early in fiscal 2019, while the timing of certain longer-term capital projects had been extended into fiscal 2020.
Interest Expense, net
Years Ended
June 28, June 30, July 1,
2020 % Change 2019 % Change 2018
(dollars in thousands)
Interest expense, net $ 2,438 -12.0 % $ 2,769 -23.7 % $ 3,631 Interest expense, net consists primarily of interest expense and amortization of deferred financing costs attributable to the Company's credit facility (See
Note 9. in Part IV, Item 15 for details), net of income earned on the Company's available cash balances.
Interest expense, net decreased 12.0% during fiscal 2020, due to a decline in the outstanding Term Loan balance, and decreasing interest rates on the Company's credit facility, partially offset by lower interest income on available cash balances due to decreasing interest rates.
Interest expense, net decreased 23.7% during fiscal 2019, due to an increase in
interest income, resulting from higher invested cash balances and associated
rates earned on these balances, combined with a declining outstanding Term Loan
balance, partially offset by increasing interest rates on the Company's credit
facility.
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Other income (expense), net
Years Ended
June 28, June 30, July 1,
2020 % Change 2019 % Change 2018
(dollars in thousands)
Other income (expense), net $ (84 ) -113.0 % $ 644 6.4 % $ 605 Other income, net for the years ended
Income Taxes During the fiscal years endedJune 28, 2020 ,June 30, 2019 , andJuly 1, 2018 , the Company recorded income tax expense (benefit) from continuing operations of$18.8 million ,$8.2 million , and($2.8) million , respectively, resulting in an effective tax rate of 24.2%, 19.1%, and -7.3%, respectively. The Company's effective tax rate for fiscal 2020 differed from theU.S. federal statutory rate of 21% primarily due to state income taxes and nondeductible expenses for executive compensation, partially offset by various permanent differences and tax credits, including excess tax benefits from stock-based compensation. The Company's effective tax rate for fiscal 2019 differed from theU.S. federal statutory rate of 21% primarily due to the impact of excess tax benefit from stock-based compensation and various tax credits, partially offset by state income taxes and non-deductible executive compensation as a result of recent tax reform from The Tax Cuts and Jobs Act ("Tax Act"), which removed the performance-based exclusion for determining the deductible limit. The Company's effective tax rate for fiscal 2018 was impacted by the enactment of the Tax Act on December 22, 2017 (see Note 11 in Part IV, Item 15 for details). Although the Tax Act was enacted onDecember 22, 2017 , since the Company had aJuly 1 fiscal year-end, the lower corporate income tax rate was phased in, resulting in aU.S. statutory federal rate of approximately 28% for our fiscal 2018, and 21% for fiscal 2019. In addition to the impact of the lower transitional rate, during fiscal 2018, the Company recognized a tax benefit of$12.2 million , or$0.18 per diluted share, reflecting a revaluation of deferred tax liabilities at the lowerU.S. federal statutory rate of 21%. Adjusted for the benefit of$12.2 million , the Company's effective tax rate would have been 24.8%, reflecting various tax credits and return to provision adjustments related to the filing of the Company's fiscal 2017 tax return. AtJune 28, 2020 , the Company's total federal and state capital loss carryforwards were$26.9 million , which if not utilized, will expire in fiscal 2022. The Company's foreign net operating loss carryforwards were$3.9 million , which if not utilized, will begin to expire in fiscal 2034.
Quarterly Results of Operations
The following table provides unaudited quarterly consolidated results of
operations for each quarter of fiscal years 2020 and 2019. The Company believes
this unaudited information has been prepared substantially on the same basis as
the annual audited consolidated financial statements and all necessary
adjustments, consisting of only normal recurring adjustments, have been included
in the amounts stated below to present fairly the Company's results of
operations. The operating results for any quarter are not necessarily indicative
of the operating results for any future period.
Jun. 28, Mar. 29, Dec 29, Sep. 29, Jun. 30, Mar. 31, Dec 30, Sep. 30,
2020 2020 2019 2019 2019 2019 2018 2018
(in thousands, except per share data)
Net revenues:
E-commerce
(telephonic/online) $ 382,400 $ 231,851 487,084 $ 129,050
35,556 46,925 118,558 58,213 41,921 44,052 112,495 51,796 Total net revenues 417,956 278,776 605,642 187,263
259,398 248,413 571,316 169,496
Cost of revenues 248,530 171,324 336,470 111,117 154,164 150,893 316,489 100,956
Gross profit 169,426 107,452 269,172 76,146 105,234 97,520 254,827 68,540 Operating expenses: Marketing and sales 100,378 78,606 127,404 56,839
75,855 71,163 119,664 52,954
Technology and
development 14,262 11,900 11,733 10,803 11,062 11,511 10,906 10,279
General and
administrative 33,207 20,031 22,634 21,522 23,174 22,447 21,603 20,430 Depreciation and amortization
9,245 7,803 7,830 7,635 7,125 7,028 7,969 7,843 Total operating expenses
157,092 118,340 169,601 96,799 117,216 112,149 160,142 91,506 Operating income (loss)
12,334 (10,888 ) 99,571 (20,653 ) (11,982 ) (14,629 ) 94,685 (22,966 )
Interest (income)
expense, net 711 147 985 595 379 (30 ) 1,430 990
Other income
(expense), net 1,630 (2,605 ) 975 (84 )351 1,285 (1,266 ) 274 Income (loss) before income taxes 13,253 (13,640 ) 99,561 (21,332 )
(12,010 ) (13,314 ) 91,989 (23,682 ) Income tax expense (benefit)
3,479 (3,983 ) 25,409 (6,061 )
(3,705 ) (5,073 ) 23,411 (6,416 )
Net income (loss)
Basic net income (loss) per common share$ 0.15 $ (0.15 ) $ 1.15 $ (0.24 )
Diluted net income (loss) per common share$ 0.15 $ (0.15 ) $ 1.12 $ (0.24 ) $ (0.13 ) $ (0.13 ) $ 1.04 $ (0.27 ) Weighted average shares used in the calculation of net income (loss) per common share: Basic 64,283 64,348 64,687 64,503 64,343 64,194 64,209 64,620 Diluted 66,385 64,348 66,401 64,503 64,343 64,194 66,136 64,620
The Company's quarterly results may experience seasonal fluctuations - see the
Seasonality section in Item 1 for details. Refer above to the Results of Operations section in Item 7 for a discussion of significant events and transactions.
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Liquidity and Capital Resources
Liquidity and borrowings The Company's principal sources of liquidity are cash on hand, cash flows generated from operations and borrowings available under the 2019 Credit Agreement (see Note 18. in Part IV, Item 15 for details). At June 28, 2020, the Company had working capital of$198.3 million , including cash and cash equivalents of$240.5 million , compared to working capital of$175.4 million , including cash and cash equivalents of$172.9 million atJune 30, 2019 . As ofJune 28, 2020 , there were no borrowings outstanding under the Company's Revolver. Due to the seasonal nature of the Company's business, and its continued expansion into non-floral products, theThanksgiving through Christmas holiday season, which falls within the Company's second fiscal quarter, historically generated nearly 50% of the Company's annual revenues, and all of its earnings. However, with the onset of the COVID-19 pandemic, the Company experienced a significant increase in its revenues and earnings during its fourth quarter of fiscal 2020. These trends have continued through the first two months of its fiscal 2021 first quarter. Our customers have increasingly turned to our brands and our expanded product offerings to help them connect and express themselves during the recent COVID-19 pandemic and our "everyday" gifting product line has seen increased volume. While the continuing impacts of COVID-19 are difficult to predict, the Company expects that its fiscal second quarter will continue to be its largest in terms of revenues and earnings, although increases in the Company's "everyday" business have and are expected to continue to lessen the seasonality of our business. As a result, the Company expects to generate significant cash from operations during its second quarter, and then utilize that cash for operating needs during its fiscal third and fourth quarters, after which time, the Company expects to borrow against its Revolver to fund pre-holiday manufacturing and inventory purchases. Borrowings under the Revolver typically peak in November, at which time cash generated from operations during the Christmas holiday shopping season are expected to enable the Company to repay working capital borrowings prior to the end of December. We believe that our sources of funding will be sufficient to meet our anticipated operating cash needs for at least the next 12 months. However, any projections of future cash needs and cash flows are subject to substantial uncertainty. We continually evaluate opportunities to repurchase common stock and we will, from time to time, consider the acquisition of, or investment in, complementary businesses, products, services, capital infrastructure, and technologies, which might affect our liquidity requirements or cause us to require additional financing. We have not identified any material liquidity deficiencies as a result of the COVID-19 pandemic. We will continue to monitor and assess the impact COVID-19 may have on our business and financial results. See Part I. Item 1A. "Risk Factors" and Part II. Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further information. Cash Flows Net cash provided by operating activities of$139.4 million for the fiscal year endedJune 28, 2020 was primarily attributable to the Company's net income, adjusted for non-cash charges for depreciation and amortization, stock-based compensation, and bad debt expense, as well as increases in accounts payable and accrued expenses as a result of the timing of our seasonal inventory build and performance-based bonus payments, partially offset by increases in trade receivables and inventory related to increased sales volumes.
Net cash used in investing activities of
Net cash used in financing activities of$15.5 million for the fiscal year endedJune 28, 2020 was primarily due to the acquisition of$10.7 million of treasury stock and net bank repayments of$5.0 million . Stock Repurchase Program The Company has a stock repurchase plan through which purchases can be made from time to time in the open market and through privately negotiated transactions, subject to general market conditions. The repurchase program is financed utilizing available cash. InAugust 2017 , the board of directors increased the authorization to$30.0 million , and onJune 27, 2019 , increased it once more to$30.0 million . The Company repurchased a total of$10.7 million (754,458 shares),$14.8 million (1,230,303 shares) and$12.2 million (1,269,059 shares) during the fiscal years endedJune 28, 2020 ,June 30, 2019 andJuly 1, 2018 , respectively, under this program. As ofJune 28, 2020 ,$19.3 million remains authorized under the plan. Contractual Obligations
At
? Long-term debt obligations - payments due under the Company's 2019 Credit
Agreement (See Note 9 - Long-Term Debt in Item 15 for details).
? Operating lease obligations - payments due under the Company's long-term
operating leases (See Note 16 - Leases in Item 15 for details).
? Purchase commitments - consisting primarily of inventory and IT related
equipment purchase orders and license agreements made in the ordinary course of
business - see below for the contractual payments due by period.
Payments due by period
(in thousands)
Fiscal Fiscal Fiscal Fiscal Fiscal
2021 2022 2023 2024 2025 Thereafter TotalPurchase commitments$ 98,860 $ 12,600 $ 4,784 $ 1,171 $ - $ -$ 117,415 28
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Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial position and results of operations are based upon the consolidated financial statements of1-800-FLOWERS.COM, Inc. , which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management evaluates its estimates on an ongoing basis, and bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We consider accounting estimates to be critical if both: (i) the nature of the estimate or assumption is material due to the levels of subjectivity and judgment involved, and (ii) the impact within a reasonable range of outcomes of the estimate and assumption is material to the Company's financial condition. Our critical accounting policies relate to goodwill, other intangible assets and income taxes. Management of the Company has discussed the selection of critical accounting policies and the effect of estimates with the audit committee of the Company's board of directors.Goodwill Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in each business combination, with the carrying value of the Company's goodwill allocated to its reporting units, in accordance with the acquisition method of accounting.Goodwill is not amortized, but it is subject to an annual assessment for impairment, which the Company performs during the fourth quarter, or more frequently, if events occur or circumstances change such that it is more likely than not that an impairment may exist. The Company tests goodwill for impairment at the reporting unit level. The Company identifies its reporting units by assessing whether the components of its operating segments constitute businesses for which discrete financial information is available and management of each reporting unit regularly reviews the operating results of those components. In applying the goodwill impairment test, the Company has the option to perform a qualitative test (also known as "Step 0") or a two-step quantitative test (consisting of "Step 1" and "Step 2"). Under the Step 0 test, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting units is less than its carrying value. Qualitative factors may include, but are not limited to, economic conditions, industry and market considerations, cost factors, overall financial performance of the reporting unit and other entity and reporting unit specific events. If after assessing these qualitative factors, the Company determines it is "more-likely-than-not" that the fair value of the reporting unit is less than the carrying value, then performing the two-step quantitative test is necessary. The first step ("Step 1") of the two-step quantitative test requires comparison of the fair value of each of the reporting units to their respective carrying value. If the carrying value of the reporting unit is less than the fair value, no impairment exists and the second step ("Step 2") is not performed. If the carrying value of the reporting unit is higher than the fair value, Step 2 must be performed to compute the amount of the goodwill impairment, if any. In Step 2, the impairment is computed by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized for the excess. The Company generally estimates the fair value of a reporting unit using an equal weighting of the income and market approaches. The Company uses industry accepted valuation models and set criteria that are reviewed and approved by various levels of management and, in certain instances, the Company engages third-party valuation specialists. Under the income approach, the Company uses a discounted cash flow methodology which requires management to make significant estimates and assumptions related to forecasted revenues, gross profit margins, operating income margins, working capital cash flow, perpetual growth rates, and long-term discount rates, among others. For the market approach, the Company uses the guideline public company method. Under this method the Company utilizes information from comparable publicly traded companies with similar operating and investment characteristics as the reporting units, to create valuation multiples that are applied to the operating performance of the reporting unit being tested, in order to obtain their respective fair values. The Company also reconciles the aggregate fair values of its reporting units determined in the first step (as described above) to its current market capitalization, allowing for a reasonable control premium.
For further discussion of the methods used and factors considered in our
estimates as part of the impairment testing for
Note 6 in Part IV, Item 15.
Other Intangibles, net Other intangibles consist of definite-lived intangible assets (such as investment in licenses, customer lists, and others) and indefinite-lived intangible assets (such as acquired trade names and trademarks). The cost of definite-lived intangible assets is amortized to reflect the pattern of economic benefits consumed, over the estimated periods benefited, ranging from 3 to 16 years, while indefinite-lived intangible assets are not amortized, but are reviewed for impairment whenever changes in circumstances or events may indicate that the carrying amounts are not recoverable. The Company tests indefinite-lived intangible assets for impairment at least annually, during the fourth quarter, or whenever changes in circumstances or events may indicate that the carrying amounts are not recoverable. In applying the impairment test, the Company has the option to perform a qualitative test (also known as "Step 0") or a quantitative test. Under the Step 0 test, the Company assesses qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. Qualitative factors may include, but are not limited to economic conditions, industry and market considerations, cost factors, financial performance, legal and other entity and asset specific events. If, after assessing these qualitative factors, the Company determines it is "more-likely-than-not" that the indefinite-lived intangible asset is impaired, then performing the quantitative test is necessary. The quantitative impairment test for indefinite-lived intangible assets encompasses calculating a fair value of an indefinite-lived intangible asset and comparing the fair value to its carrying value. If the carrying value exceeds the fair value, impairment is recognized for the difference. To determine fair value of other indefinite-lived intangible assets, the Company uses an income approach, the relief-from-royalty method. This method assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to obtain the rights to use the comparable asset. Other indefinite-lived intangible assets' fair values require significant judgments in determining both the assets' estimated cash flows as well as the appropriate discount and royalty rates applied to those cash flows to determine fair value.
For further discussion of the methods used and factors considered in our estimates as part of the impairment testing for other intangibles, see Note 2 and Note 6 in Part IV, Item 15.
Income Taxes
The Company uses the asset and liability method to account for income taxes. The
Company has established deferred tax assets and liabilities for temporary
differences between the financial reporting bases and the income tax bases of
its assets and liabilities at enacted tax rates expected to be in effect when
such assets or liabilities are realized or settled. The Company recognizes as a
deferred tax asset, the tax benefits associated with losses related to
operations. Realization of these deferred tax assets assumes that we will be
able to generate sufficient future taxable income so that these assets will be
realized. The factors that the Company considers in assessing the likelihood of
realization include the forecast of future taxable income and available tax
planning strategies that could be implemented to realize the deferred tax
assets.
The Company recognizes the tax benefit from an uncertain tax position only if it
is more likely than not that the tax position will be sustained on examination
by the taxing authorities based on the technical merits of the position. The tax
benefits recognized in the financial statements on a particular tax position are
measured based on the largest benefit that has a greater than a 50% likelihood
of being realized upon settlement. The amount of unrecognized tax benefits
("UTBs") is adjusted as appropriate for changes in facts and circumstances, such
as significant amendments to existing tax law, new regulations or
interpretations by the taxing authorities, new information obtained during a tax
examination, or resolution of an examination. We recognize both accrued interest
and penalties, where appropriate, related to UTBs in income tax expense.
Assumptions, judgment and the use of estimates are required in determining if
the "more likely than not" standard has been met when developing the provision
for income taxes. For further discussion see Note 11 , in Part IV, Item 15.
Recently Issued Accounting Pronouncements
See Note 2. in Part IV, Item 15 for details regarding the impact of accounting standards that were recently issued, on our consolidated financial statements.
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