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 business platform features our all-star family of brands, including: 1-800-Flowers.com®, 1-800-Baskets.com®, Cheryl's Cookies®, Harry & David®, PersonalizationMall.com®, Shari's Berries®, FruitBouquets.com®, Moose Munch®, The Popcorn Factory®, Wolferman's Bakery®, Stock Yards® and Simply Chocolate®. 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 relationships with customers. The Company also operates BloomNet®, an international floral and gift industry service provider offering a broad-range of products and services designed to help members grow their businesses profitably; Napco?, a resource for floral gifts and seasonal décor; andDesignPac Gifts, LLC , a manufacturer of gift baskets and towers. Business Segments The Company operates in the following three business segments: Consumer Floral & Gifts,Gourmet Foods & Gift Baskets , andBloomNet . The Consumer Floral & Gifts segment includes the operations of the Company's flagship brand,1-800-Flowers.com , PersonalizationMall, FruitBouquets.com, Flowerama, and Goodsey, while theGourmet Foods & Gift Baskets segment includes the operations of Harry & David,Wolferman's Bakery ,Moose Munch , Stock Yards, Cheryl's,Mrs. Beasley's ,The Popcorn Factory , DesignPac, 1-800-Baskets.com, 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 2021 Results Fiscal 2021 was a transformative year for the Company. Over the past several years, we have grown from a collection of specialty brands into a unique ecommerce platform that inspires and enables our customers to express, connect and celebrate. The success that the Company experienced in fiscal 2021 began with the foundation laid during fiscal 2018 when the Company implemented a three-year plan focused on three primary objectives: (i) "E-commerce Growth Initiatives" (ii) "Focused Loyalty and "Coordinated Promotional Activity", and (iii) "BloomNet Growth." These objectives formulated the backbone of the long-term customer acquisition efforts implemented by our flagship1-800-Flowers.com and Harry & David brands, and the roll-out of our successful Passport loyalty program. The revenue and earnings growth achieved in fiscal 2021 was made possible by the momentum that we have been building over the last several years, backed by the investments made in our products, technology, marketing capabilities, production and fulfillment infrastructure and our people. This momentum is evidenced in our revenue growth trend of 8.4% in Fiscal 2019, approximately 9.0% in fiscal 2020, prior to the onset of the COVID-19 pandemic, before finishing the year at 19.3%, and ultimately reaching 42.5% in fiscal 2021. As a result of our assortment of products and services designed to help our customers deliver smiles, including the timely, accretive acquisition of PersonalizationMall, combined with our agile fulfillment infrastructure, which can quickly flex with changing sales, we were well positioned to take advantage of the shift in consumer behavior brought on by the pandemic, which dramatically accelerated the shift to e-commerce shopping. Over the span of two years, the Company grew from$1.2 billion in fiscal 2019 to$2.1 billion in fiscal 2021, and delivered adjusted EBITDA of$213.1 million in fiscal 2021, compared to$129.5 million in fiscal 2020 and$82.1 million in fiscal 2019. Net income increased from$34.8 million in fiscal 2019 to$59.0 million in fiscal 2020 and$118.6 in fiscal 2021. 23
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We believe it is helpful to review our earnings performance based on EBITDA, excluding the impact of certain items. In consolidation, on a pro forma basis, adjusting fiscal 2021 for: (i) the negative impact on EBITDA of costs associated with the acquisition of PersonalizationMall ($5.4 million ), and (ii) gains on non-qualified deferred compensation ('NQDC") plan assets ($5.7 million ), partially offset by (iii) favorable settlements of Harry & David store lease closure costs ($0.5 million ), and adjusting fiscal 2020 to exclude: (i) costs associated with the acquisition of PersonalizationMall ($2.7 million ), (ii) Harry & David store closure costs ($5.2 million ), and gains on NQDC assets ($0.3 million ), fiscal 2021 Adjusted EBITDA was$213.1 million , compared to$129.5 million in fiscal 2020.
Acquisition of PersonalizationMall
OnAugust 3, 2020 , the Company completed its acquisition ofPersonalizationMall.com LLC ("PersonalizationMall"), a leading ecommerce provider of personalized products. The extensive offerings of PersonalizationMall include a wide variety of personalization processes such as sublimation, embroidery, digital printing, engraving and sandblasting, while providing an industry-leading customer experience based on a fully integrated business platform that includes a highly automated personalization process and rapid order fulfillment. The Company used a combination of cash on its balance sheet and its existing credit facility to fund the$245.0 million purchase (subject to certain working capital and other adjustments), which included its newly renovated, leased 360,000 square foot state-of-the-art production and distribution facility, as well as customer database, tradenames and website. PersonalizationMall's revenues were approximately$171.2 million during its fiscal year endedFebruary 29, 2020 . Amended Credit Agreement Subsequent to, but in contemplation of the acquisition of PersonalizationMall, onAugust 20, 2020 , the Company entered into a First Amendment to its 2019 Credit Agreement to: (i) increase the aggregate principal amount of the existing revolving credit facility ("Revolver") commitments from$200.0 million to$250.0 million , (ii) establish a new tranche of term A-1 loans in an aggregate principal amount of$100.0 million (the "New Term Loan"), (iii) increase the working capital sublimit with respect to the Revolver from$175.0 million to$200.0 million , and (iv) increase the seasonally-reduced Revolver commitments from$100.0 million to$125.0 million for the period fromJanuary 1 through August 1 for each fiscal year of the Company. The New Term Loan will mature onMay 31, 2024 . The New Term Loan is payable in 15 quarterly installments of principal and interest beginning onSeptember 27, 2020 , with escalating principal payments, at the rate of 5.0% per annum for the first four payments, and 10.0% per annum for the remaining 11 payments, with the remaining balance of$67.5 million due upon maturity. The$100.0 million proceeds of the New Term Loan were used to repay the$95.0 million borrowing, which had been drawn on its existing Revolver to finance the acquisition, as well as financing fees of approximately$2.0 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 included 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 is expected to 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 continue to see strong e-commerce demand for gourmet foods and gift baskets and our floral and personalized products. With that said, there are headwinds (and resulting increased costs) that have impacted our fiscal 2021 results, and will continue to impact our operations for 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
obligations, employee costs and other store closure costs. Annual revenues
attributable to the closed locations was approximately
within our
during our first, second and third quarters, as many of our large wholesale
customers were taking a cautious approach due to the uncertainty surrounding
the future impact of COVID-19 on their brick and mortar retail stores. ? Increased operating costs - we are seeing 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, including: required social distancing, enhanced facility cleaning
and sanitizing schedules, and staggered production shifts, as well as overall
wage rate increases, and labor supply shortages. ? Supply chain constraints - the nationwide increase in e-commerce volume has
also resulted in third-party carrier capacity constraints, and higher delivery
costs. Ocean transport costs and capacity shortages, caused by the ongoing
global recovery from the pandemic, have created supply chain shortages and
increased costs.
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The scale and overall economic impact of the COVID-19 crisis is still very difficult to assess as the Company begins to annualize the impact that COVID-19 has had on consumer behavior. However, 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 and continue to grow revenues through fiscal 2022.
Looking ahead, we believe we are well positioned to deepen the relationships we have with our customers by engaging with them across a broad range of communication channels as we work to build a true community and offer our customers the most robust online gifting assortment.
Fiscal 2022 Guidance
For the fiscal 2022 full year, the Company is providing the following guidance:
? Total revenue growth of 10.0 percent-to-12.0 percent compared with the prior
year;
? Adjusted EBITDA growth of 5.0 percent-to-8.0 percent;
? EPS in line with fiscal 2021, as improved EBITDA is offset by higher
depreciation and a higher effective tax rate; and
? Free Cash Flow in excess of $100.0 million .
The Company's guidance for the year is based on several factors including:
? The significant increase in consumers shopping online where the Company's
broad product offering and brand portfolio makes it a leading destination for
customers looking for solutions to help them connect, express themselves and
celebrate - sentiments that have become more important than ever;
? Significant expansion of the Company's product offering, both organically and
through strategic acquisitions like
? Continued strong growth and positive behaviors in the Company's customer file,
including strong new-to-file customer growth as well as increased demand from
existing customers; and
? Continued strong growth in the Company's Celebrations Passport® loyalty
program, which is helping drive increased frequency, retention, and
cross-category/cross-brand purchases.
The Company is also aware of several headwinds affecting its business, including:
? A challenging labor market with both limited availability and rising wage
rates; and
? Significant increases in both inbound and outbound shipping rates as well as
higher commodity costs.
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. 25
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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.
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.
Free Cash Flow
We define Free Cash Flow as net cash provided by operating activities, less
capital expenditures. The Company considers Free Cash Flow to be a liquidity
measure that provides useful information to management and investors about the
amount of cash generated by the business after the purchases of fixed assets,
which can then be used to, among other things, invest in the Company's business,
make strategic acquisitions, strengthen the balance sheet and repurchase stock
or retire debt. Free Cash Flow is a liquidity measure that is frequently used by
the investment community in the evaluation of similarly situated companies.
Since Free Cash Flow is not a measure of performance calculated in accordance
with GAAP, it should not be considered in isolation or as a substitute for
analysis of the Company's results as reported under GAAP. A limitation of the
utility of free cash flow as a measure of financial performance is that it does
not represent the total increase or decrease in the company's cash balance for
the period.
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Table of Contents 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 27, 2021 andJune 28, 2020 . For segment information for the fiscal year endedJune 30, 2019 , please refer to our Annual Report on Form 10-K for the fiscal year endedJune 30, 2019 . Years Ended Personalization Harry & David As Adjusted Personalization Harry &
David As Adjusted
June 27, Mall Litigation & Store Closure (non-GAAP) June 28, Mall Litigation & Store Closure (non-GAAP) %
2021 Transaction Costs Costs June 27, 2021 2020 Transaction Costs Costs Jun 28, 2020 Change
Net revenues:
Consumer Floral
& Gifts $ 1,025,015 $ - $ - $ 1,025,015 $ 593,197 $ - $ - $ 593,197 72.8 %
BloomNet 142,919 142,919 111,766 111,766 27.9 %
Gourmet Foods &
Gift Baskets 955,607 955,607 785,547 785,547 21.6 %
Corporate 341 341 591 591 -42.3 %
Intercompany
eliminations (1,637 ) (1,637 ) (1,464 ) (1,464 ) -11.8 %
Total net
revenues $ 2,122,245 $ - $ - $ 2,122,245 $ 1,489,637 $ - $ - $ 1,489,637 42.5 %
Gross profit:
Consumer Floral
& Gifts $ 420,860 $ - $ - $ 420,860 $ 233,941 $ - $ - $ 233,941 79.9 %
41.1 % 41.1 % 39.4 % 39.4 %
BloomNet 64,978 64,978 54,193 54,193 19.9 %
45.5 % 45.5 % 48.5 % 48.5 %
Gourmet Foods &
Gift Baskets 410,208 410,208 333,620 333,620 23.0 %
42.9 % 42.9 % 42.5 % 42.5 %
Corporate 383 383 442 442 -13.3 %
112.3 % 112.3 % 74.8 % 74.8 %
Total gross
profit $ 896,429 $ - $ -$ 896,429 $ 622,196 $ - $ -$ 622,196 44.1 % 42.2 % - - 42.2 % 41.8 % - - 41.8 % EBITDA (non-GAAP): Segment Contribution Margin (non-GAAP) (a): Consumer Floral & Gifts$ 128,625 $ - $ -$ 128,625 $ 73,806 $ - $ -$ 73,806 74.3 % BloomNet 45,875 45,875 35,111 35,111 30.7 % Gourmet Foods & Gift Baskets 149,377 (483 ) 148,894 110,627 5,177 115,804 28.6 %
Segment
Contribution
Margin Subtotal 323,877 - (483 ) 323,394 219,544 - 5,177 224,721 43.9 % Corporate (b) (132,280 ) 5,403 (126,877 ) (106,667 ) 2,706 (103,961 ) -22.0 %
EBITDA
(non-GAAP) 191,597 5,403 (483 ) 196,517 112,877 2,706 5,177 120,760 62.7 %
Add:
Stock-based
compensation 10,835 10,835 8,434 8,434 28.5 % Add: Compensation charge related to NQDC Investment Appreciation 5,713 5,713 347 347 1546.4 % Adjusted EBITDA (non-GAAP)$ 208,145 $ 5,403 $ (483 )$ 213,065 $ 121,658 $ 2,706 $ 5,177$ 129,541 64.5 % 27
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Reconciliation of net income to adjusted net income
(non-GAAP): Years Ended
June 27, June 28,
2021 2020
Net income $ 118,652 $ 58,998 Adjustments to reconcile net income to adjusted net income (non-GAAP) Add: PersonalizationMall litigation and transaction costs
5,403 2,706
Add: Harry & David store closure cost (483 )
5,177
Deduct: Income tax benefit on adjustments (1,005 ) (1,908 ) Adjusted net income (non-GAAP)$ 122,567 $
64,973
Basic and diluted net income per common share Basic$ 1.83 $ 0.92 Diluted$ 1.78 $ 0.89 Basic and diluted adjusted net income per common share (non-GAAP) Basic$ 1.89 $ 1.01 Diluted$ 1.84 $ 0.98 Weighted average shares used in the calculation of net income and adjusted net income per common share Basic 64,739 64,463 Diluted 66,546 66,408 28
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Reconciliation of net income to adjusted EBITDA
(non-GAAP): Years Ended
June 27, June 28,
2021 2020
Net income $ 118,652 $ 58,998
Add: Interest expense/other (income), net (28 ) 2,522
Add: Depreciation and amortization 42,510 32,513 Add: Income tax expense 30,463 18,844 EBITDA 191,597 112,877 Add: Stock-based compensation 10,835 8,434
Add: Compensation charge related to NQDC investment appreciation
5,713 347
Add: PersonalizationMall litigation and transaction costs
5,403 2,706
Add: Harry & David store closure cost (483 ) 5,177 Adjusted EBITDA$ 213,065 $ 129,541
(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 27, 2021 % Change June 28, 2020 % Change June 30, 2019
(dollars in thousands)
Net revenues:
E-Commerce $ 1,879,550 52.8 % $ 1,230,385 23.2 % $ 998,359
Other 242,695 -6.4 % 259,252 3.6 % 250,264
$ 2,122,245 42.5 % $ 1,489,637 19.3 % $ 1,248,623 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 27, 2021 , net revenues increased 42.5% in comparison to the prior year, reflecting strong growth across the Company's three business segments. Excluding revenues ofPersonalizationMall.com , which was acquired onAugust 3, 2020 , total net revenues grew 26.6% in comparison to the prior year, as the favorable growth trends we had been seeing in everyday gifting occasions, beginning with the fourth quarter of fiscal 2020, continued through the third quarter of fiscal 2021, before normalizing with the annualization of the pandemic during the fourth quarter of fiscal 2021. The annual growth rate reflects "post-COVID-19" growth of 52.6% (35.5%, excluding PersonalizationMall) through the first three quarters of fiscal 2021, and "post-COVID-19 annualization" growth of 16.5% (3.8%, excluding PersonalizationMall) during the fourth quarter of fiscal 2021. The marketing and merchandising investments that the Company has made across its brands, including product offerings and messaging that have resonated with our customers, coupled with the strategic acquisitions of Shari's Berries® in August of 2019 and PersonalizationMall.com® in August of 2020, have enabled the Company to capitalize on the consumer behavioral shift to e-commerce shopping accelerated by the pandemic. 29
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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 , consolidated net revenues grew 16.3% in fiscal 2020 compared to the prior year.
Disaggregated revenue by channel follows:
Years Ended
June 27, 2021 June 28, 2020 June 30, 2019
Gourmet Gourmet Gourmet
Foods & Consumer Foods & Consumer Foods &
Consumer Gift Floral & Gift Floral & Gift
Floral & Gifts BloomNet Baskets Consolidated Gifts BloomNet Baskets Consolidated Gifts BloomNet Baskets Consolidated
(in thousands)
Net revenues
E-commerce $ 1,015,716 $ - $ 863,834 $ 1,879,550 $ 585,585 $ - $ 644,800 $ 1,230,385 $ 489,463 $ - $ 508,897 $ 998,360
Retail 5,543 - 9,134 14,677 4,318 - 37,076 41,394 4,706 - 45,862 50,568
Wholesale - 45,299 82,639 127,938 - 33,675 103,671 137,346 - 29,744 93,659 123,403
BloomNet - 97,620 - 97,620 - 78,091 - 78,091 - 73,132 - 73,132
Other 3,756 - - 3,756 3,294 - - 3,294 3,596 - - 3,596
Corporate - - - 341 - - - 591 - - - 1,105
Eliminations - - - (1,637 ) - - - (1,464 ) - - - (1,541 )
Total net
revenues $ 1,025,015 $ 142,919 $ 955,607 $ 2,122,245 $ 593,197 $ 111,766 $ 785,547 $ 1,489,637 $ 497,765 $ 102,876 $ 648,418 $ 1,248,623
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Table of Contents Revenue by sales channel:
? E-commerce revenues (combined online and telephonic) increased 52.8% during
fiscal 2021, comprised of 73.5% growth within the Consumer Floral & Gifts
segment and 34.0% growth in the
fiscal 2021, the Company fulfilled approximately 26.0 million e-commerce
orders (an increase of 54.9% compared to fiscal 2020) at an average order
value of
E-commerce revenues increased 23.2% during fiscal 2020, comprised of 19.6%
growth within the Consumer Floral segment and 26.7% growth in the Gourmet
Foods & Gift Baskets segment. During fiscal 2020, 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
to fiscal 2019).
? Other revenues are comprised of the Company's
wholesale and retail channels of its 1-800-Flowers.com Consumer Floral and
fiscal 2021, primarily as a result of the disposition of Harry & David stores
in
offset by 27.9% growth within the BloomNet segment.
Other revenues increased 3.6% during fiscal 2020, primarily as a result of
8.6% growth within the
Foods & Gift Baskets segment.
Revenue by segment:
Consumer Floral & Gifts - this segment, which historically has consisted
primarily of the operations of the 1-800-Flowers.com brand, but now includes
revenues attributable to PersonalizationMall, subsequent to its August 3, 2020
acquisition date, derives revenue from the sale of consumer floral products and
gifts, primarily through its e-commerce sales channel (telephonic and online
sales), as well as retail stores, and royalties from its franchise operations.
Net revenues increased 72.8%, during fiscal 2021, reflecting: (i) the marketing
and merchandising investments made in our flagship brand, which have driven our
growth and market share gains that began in the second half of fiscal 2018,
continued through fiscal 2020, and accelerated with the start of the pandemic,
and (ii) the incremental revenues of PersonalizationMall. Excluding the revenues
derived from PersonalizationMall, segment pro-forma revenue growth was 33.0%
during fiscal 2021, despite the shift of the Valentine's Day date placement from
Friday in fiscal 2020 to Sunday in fiscal 2021, which normally results in a 20%
reduction in demand. The revenue increase was supported by the Company's
customer acquisition strategy, and a strategic combination of organic and
investment spend, resulting in growth across our "everyday" gifting occasions,
which focused on "Birthday", "Anniversary", "Sympathy" and "Just Because"
occasions, as well as holiday specific occasions, including the Christmas,
Valentine's Day and Mother's Day holidays. The acquisition of
PersonalizationMall and its complementary product line contributed to the
accelerated growth rate as it filled the personalization gift niche that our
consumer and BGS customers requested.
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 Mother's Day holidays, with post holiday
"everyday" volume continuing to show strong year over year improvement.
Net revenues increased 27.9% during fiscal 2021, primarily due to increased: (i) settlement processing revenues, due to higher florist-to-florist order volume, (ii) transaction, reciprocity and membership fees, driven primarily by increased order volume referred through the network, and (iii) favorable wholesale demand. This growth was supported by the strategic decision made inApril 2020 , to temporarily waive fees and establish health and safety protocols to help member florists, until they could safely re-establish operations during the pandemic. 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 increased1-800-Flowers.com , florist-to-florist, andShari's Berries order volume referred 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 inApril 2020 to support our florist network during the worst of the pandemic. 31
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Gourmet Foods & Gift Baskets - this segment includes the operations of Harry & David,Wolferman's Bakery , Stock Yards, Cheryl's Cookies,The Popcorn Factory , 1-800-Baskets/DesignPac, andShari's Berries (acquired onAugust 14, 2019 ). 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 21.6%, during the fiscal year 2021, due to favorable e-commerce revenues across the segment, partially offset by reduced wholesale and retail volumes. E-commerce revenue growth of 34.0% during fiscal 2021 was the result of increased penetration of "everyday" volume, and increased holiday volume in the second quarter of fiscal 2021, both of which benefitted from the impact of the COVID-19 pandemic as product offerings, convenience, and brand sentiment resonated with customers. Wholesale/retail channel revenues declined 34.8% during the fiscal year 2021, as big-box retail store customers reduced order volumes due to the pandemic, and as a result of the closure of the Harry & David retail store operations in the fourth quarter of fiscal 2020. Net revenues increased 21.1% during fiscal 2020, as a result of favorable sales across all brands within the segment, and incremental revenue fromShari's Berries , acquired inAugust 2019 . The favorability was attributable to 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. 32
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Gross Profit
Years Ended
June 27, June 28, June 30,
2021 % Change 2020 % Change 2019
(dollars in thousands)
Gross profit $ 896,429 44.1 % $ 622,196 18.3 % $ 526,121
Gross margin % 42.2 % 41.8 % 42.1 %
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, as well as payments made
to referring florists related to order volume sent through the Company's
BloomNet network.
Gross profit increased 44.1% during fiscal 2021 primarily due to the increase in
revenues noted above. Gross profit percentage increased 40 basis points during
the fiscal year 2021, as higher margins within the Consumer Floral & Gifts (due
to the acquisition of PersonalizationMall) and Gourmet Foods & Gift Baskets
segments were offset, in part, by lower margins within the BloomNet segment. On
a pro-forma basis, excluding the impact of PersonalizationMall, gross margin
percentage was 41.1%.
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.
Consumer Floral & Gifts segment - Gross profit increased 79.9% during fiscal
2021, due to the aforementioned revenue growth and an increase in gross profit
percentage of 170 basis points to 41.1%. The higher gross profit percentage was
primarily attributable to the acquisition of PersonalizationMall, which carries
higher margins, as well as pricing initiatives and reductions in promotional
activity after the onset of COVID-19, partially offset by higher florist
fulfillment, credits, product and delivery costs which increased as a result of
the pandemic. On a pro-forma basis, excluding the impact of PersonalizationMall,
acquired on August 3, 2020 , gross margin percentage was 37.9% during the fiscal
year 2021.
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 "Celebrations Passport" to increase purchase frequency.
BloomNet segment - Gross profit increased 19.9% during fiscal 2021, due to the
increase in revenues noted above, partially offset by a decrease in gross profit
percentage of 300 basis points to 45.5%. The decrease in gross margin % was due
to higher rebates (higher florist to florist volume), combined with unfavorable
wholesale product margins due to product mix, and higher
shipping/merchandising costs.
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.
Gourmet Foods & Gift Baskets segment - Gross profit increased by 23.0% during
fiscal 2021, due to the increase in revenues noted above, as well as an increase
in gross profit percentage of 40 basis points, to 42.9%. The increase in gross
profit percentage was primarily attributable to lower promotions, merchandise
assortment, channel mix, and fixed cost efficiency, partially offset by higher
transportation costs due to surcharges and expedited ship methods, as well as
increased labor costs.
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.
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Marketing and Sales Expense
Years Ended
June 27, June 28, June 30,
2021 % Change 2020 % Change 2019
(dollars in thousands)
Marketing and sales $ 533,268 46.8 % $ 363,227 13.6 % $ 319,636
Percentage of sales 25.1 % 24.4 % 25.6 %
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 46.8% during fiscal 2021, as a result of
marketing initiatives designed to accelerate revenue growth and capture market
share within both the Gourmet Foods & Gift Baskets segment, and the Consumer
Floral & Gifts segment, which includes the incremental marketing costs of
PersonalizationMall, which was acquired on August 3, 2020 . On a pro-forma basis,
excluding the impact of PersonalizationMall, and Harry & David store closure
costs, marketing and sales as a percentage of net revenues, was 24.6% during
fiscal 2021, compared with 24.0% in fiscal 2020, primarily reflecting the
year-over-year increase in marketing costs during the fourth quarter of fiscal
2021, due to the low cost of marketing during the early stages of the pandemic
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.
During fiscal 2021, the Company added approximately 6.6 million new e-commerce
customers (5.2 million on a proforma basis excluding PersonalizationMall), an
increase of 61.7% (27.0% on a proforma basis excluding PersonalizationMall) over
the prior year. During fiscal 2020, the Company added approximately 4.1 million
new e-commerce customers, an increase of 40.5% over the prior year.
Approximately 51.9% of customers who placed e-commerce orders during fiscal 2021
were repeat customers compared to approximately 53.3% in fiscal 2019.
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Technology and Development Expense
Years Ended
June 27, June 28, June 30,
2021 % Change 2020 % Change 2019
(dollars in thousands)
Technology and development $ 54,428 11.8 % $ 48,698 11.3 % $ 43,758
Percentage of sales 2.6 % 3.3 % 3.5 %
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 11.8% during fiscal 2021,
primarily due to increased consulting and labor costs, increased hosting and
maintenance costs incurred to support the Company's technology platform, in
addition to the incremental technology costs associated with
PersonalizationMall, which was acquired on
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. During the fiscal years 2021, 2020 and 2019, the Company expended$79.7 million ,$69.5 million and$65.4 million , respectively, on technology and development, of which$25.3 million ,$20.8 million and$21.6 million , respectively, has been capitalized.
General and Administrative Expense
Years Ended
June 27, June 28, June 30,
2021 % Change 2020 % Change 2019
(dollars in thousands)
General and administrative $ 117,136 20.3 % $ 97,394 11.1 % $ 87,654
Percentage of sales 5.5 % 6.5 % 7.0 %
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 20.3% during fiscal 2021, due to
incremental costs related to: (i) PersonalizationMall (including transaction and
litigation related costs), (ii) higher labor costs due to annual merit increases
and performance related bonuses, as well as investment earnings on the Company's
NQDC Plan assets (offset within Other (income) expenses noted below), (iii)
incremental health and safety-related COVID-19 related expenses, partially
offset by (iv) lower travel expenses, and (v) lower bad debt expense compared to
the impact of COVID-19 on certain business and wholesale accounts in fiscal
2020.
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.
Depreciation and Amortization
Years Ended
June 27, June 28, June 30,
2021 % Change 2020 % Change 2019
(dollars in thousands)
Depreciation and amortization $ 42,510 30.7 % $ 32,513 8.5 % $ 29,965
Percentage of sales 2.0 % 2.2 % 2.4 %
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Depreciation and amortization expense increased 30.7% during fiscal 2021, primarily due to the incremental depreciation and customer list amortization associated with PersonalizationMall, recent short-lived IT related ecommerce/platform enhancements and accelerated depreciation on certain legacy systems, which are being replaced with modern platforms.
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.
Interest Expense, net
Years Ended
June 27, June 28, June 30,
2021 % Change 2020 % Change 2019
(dollars in thousands)
Interest expense, net $ 5,860 140.4 % $ 2,438 -12.0 % $ 2,769 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 increased 140.4% during fiscal 2021, due to the incremental interest expense associated with a new tranche of Term A-1 Loan in the aggregate principal of$100.0 million (the "New Term Loan") which was used to partially finance the acquisition of PersonalizationMall, and lower interest income on the Company's outstanding cash balances due to lower interest rates.
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.
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Other income (expense), net
Years Ended
June 27, June 28, June 30,
2021 % Change 2020 % Change 2019
(dollars in thousands)
Other income (expense), net $ 5,888 7,109.5 % $ (84 ) -113.0 % $ 644 Other income, net for the fiscal years 2021, 2020 and 2019, respectively, consist primarily of investment earnings (losses) on the Company's NQDC Plan assets.
Income Taxes During the fiscal years 2021, 2020 and 2019, the Company recorded income tax expense from continuing operations of$30.5 million ,$18.8 million and$8.2 million , respectively, resulting in an effective tax rate of 20.4%, 24.2% and 19.1%, respectively. The Company's effective tax rate for fiscal 2021 differed from theU.S. federal statutory rate of 21% primarily due to various permanent differences and tax credits, including excess tax benefits from stock-based compensation, partially offset by state income taxes and nondeductible expenses for executive compensation. 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. AtJune 27, 2021 , the Company's total federal and state capital loss carryforwards were$25.2 million , which if not utilized, will expire in fiscal 2022. The Company's foreign net operating loss carryforwards were$4.5 million , which if not utilized, will begin to expire in fiscal 2034. 37
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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 2020 Credit Agreement (see Note 9. in Part IV, Item 15 for details). At June 27, 2021, the Company had working capital of$134.1 million , including cash and cash equivalents of$173.6 million , compared to working capital of$198.3 million , including cash and cash equivalents of$240.5 million atJune 28, 2020 .
As of
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 pandemic of the novel strain of coronavirus ("COVID-19"), our customers have increasingly turned to our brands and our expanded product offerings to help them connect and express themselves, 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 the aforementioned increase in the Company's "everyday" business has and is expected to continue to lessen the seasonality of our business. The Company utilized cash on hand to fund its operations throughAugust 2020 . InSeptember 2020 , the Company borrowed under its Revolver to fund short-term working capital needs, with borrowings peaking at$70.0 million inNovember 2020 . Cash generated from operations during the Christmas holiday shopping season enabled the Company to repay the Revolver inDecember 2020 . Based on current projected cash flows, the Company believes that available cash balances are expected to be sufficient to provide for the Company's operating needs until the second quarter of fiscal year 2022, when the Company expects to borrow against its Revolver to fund pre-holiday manufacturing and inventory purchases. The Company expects to be able to repay all working capital borrowings prior to the end of the same quarter. While we believe that our sources of funding will be sufficient to meet our anticipated operating cash needs for at least the next twelve months, any projections of future cash needs and cash flows are subject to substantial uncertainty. We continually evaluate, and 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. To date, we have not identified any material liquidity deficiencies as a result of the COVID-19 pandemic. Based on the information currently available to us, we do not expect the impact of COVID-19 to have a negative impact on our liquidity. 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$173.3 million for the fiscal 2021 was primarily attributable to the Company's net income, adjusted for non-cash charges for depreciation and amortization, stock-based compensation, deferred income taxes, and bad debt expense, as well as increases in accounts payable and accrued expenses due to increased volume and the timing of our seasonal inventory build, partially offset by volume related increases in prepaid expenses, trade receivables and inventory.
Net cash used in investing activities of
Net cash provided by financing activities of$67.7 million related to proceeds from bank borrowings of$265.0 million (including the Company's New Term Loan in the amount of$100.0 million , which was used to repay borrowings then outstanding under the Company's Revolver in the amount of$97.5 million ), repayment of notes payable and bank borrowings of$175.0 million (including the$97.5 million repayment of the Revolver upon closing of the$100.0 million New Term Loan), and the acquisition of$22.4 million of treasury stock Stock Repurchase Program See Item 5 in Part II for details. 38
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At
? Long-term debt obligations - payments due under the Company's 2020 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 Total
Purchase commitments $ 189,137 $ 8,327 $ 6,172 $ 3,750 $ 2,000 - $ - $ 209,386
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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 quantitative test ( "Step 1"). 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 Step 1 quantitative test is necessary. Step 1 of the quantitative test requires comparison of the fair value of each of the reporting units to the respective carrying value. If the carrying value of the reporting unit is less than the fair value, no impairment exists. Otherwise, the Company would 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. 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.
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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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