1 800 FLOWERS COM INC - Quarter Report: 2019 March (Form 10-Q)

 

 

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

X   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

 

or

 

__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

 

Commission File No. 0-26841

 

1-800-FLOWERS.COM, Inc.

(Exact name of registrant as specified in its charter)

 

​DELAWARE	11-3117311
(State of incorporation)	(I.R.S. Employer Identification No.)

 

One Old Country Road, Carle Place, New York, 11514	(516) 237-6000
(Address of principal executive offices) (Zip code)	(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑  No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit such files). Yes ☑   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

   

☐ Large accelerated filer		☑ Accelerated filer
☐ Non-accelerated filer		☐ Smaller reporting company
		☐ Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☑

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Class A common stock	FLWS	The Nasdaq Stock Market

 

The number of shares outstanding of each of the Registrant’s classes of common stock as of May 3, 2019:

 

Class A common stock:	35,775,034
Class B common stock:	28,542,823

 

 

 

 

 

TABLE OF CONTENTS

 

			Page
Part I.	Financial Information
Item 1.	Condensed Consolidated Financial Statements			1
	Condensed Consolidated Balance Sheets – March 31, 2019 (Unaudited) and July 1, 2018			1
	Condensed Consolidated Statements of Income (Unaudited) – Three and Nine Months Ended March 31, 2019 and April 1, 2018			2
	Condensed Consolidated Statements of Comprehensive Income (Unaudited) – Three and Nine Months Ended March 31, 2019 and April 1, 2018			3
	Condensed Consolidated Statements of Stockholder’s Equity (Unaudited) – Three and Nine Months Ended March 31, 2019 and April 1, 2018			4
	Condensed Consolidated Statements of Cash Flows (Unaudited) – Nine Months Ended March 31, 2019 and April 1, 2018			5
	Notes to Condensed Consolidated Financial Statements (Unaudited)			6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk			22
Item 4.	Controls and Procedures			22
Part II.	Other Information
Item 1.	Legal Proceedings			22
Item 1A.	Risk Factors			22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			23
Item 3.	Defaults upon Senior Securities			23
Item 4.	Mine Safety Disclosures			23
Item 5.	Other Information			23
Item 6.	Exhibits			23
Signatures				24

 

 

 

 

 

 

		March 31, 2019				July 1, 2018
		(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	206,377			$	147,240
Trade receivables, net			19,166				12,935
Inventories			74,377				88,825
Prepaid and other			20,592				24,021
Total current assets			320,512				273,021
Property, plant and equipment, net			158,190				163,340
Goodwill			62,590				62,590
Other intangibles, net			59,762				59,823
Other assets			13,894				12,115
Total assets		$	614,948			$	570,889
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable		$	25,381			$	41,437
Accrued expenses			103,012				73,299
Current maturities of long-term debt			12,219				10,063
Total current liabilities			140,612				124,799
Long-term debt			83,595				92,267
Deferred tax liabilities			27,011				26,200
Other liabilities			14,788				12,719
Total liabilities			266,006				255,985
Commitments and contingencies (See Note 13)
Stockholders’ equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized, none issued			-				-
Class A common stock, $0.01 par value, 200,000,000 shares authorized, 52,931,127 and 52,071,293 shares issued at March 31, 2019 and July 1, 2018, respectively			528				520
Class B common stock, $0.01 par value, 200,000,000 shares authorized, 33,822,823 shares issued at March 31, 2019 and July 1, 2018			338				338
Additional paid-in-capital			347,235				341,783
Retained earnings			116,830				73,429
Accumulated other comprehensive loss			(258	)			(200	)
Treasury stock, at cost, 17,209,093 and 15,978,790 Class A shares at March 31, 2019 and July 1, 2018, respectively, and 5,280,000 Class B shares at March 31, 2019 and July 1, 2018			(115,731	)			(100,966	)
Total stockholders’ equity			348,942				314,904
Total liabilities and stockholders’ equity		$	614,948			$	570,889

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		Three Months Ended								Nine Months Ended
		March 31, 2019				April 1, 2018				March 31, 2019				April 1, 2018
Net revenues		$	248,413			$	238,545			$	989,225			$	921,987
Cost of revenues			150,893				145,090				568,338				525,995
Gross profit			97,520				93,455				420,887				395,992
Operating expenses:
Marketing and sales			71,163				68,215				243,781				231,708
Technology and development			11,511				10,241				32,696				29,086
General and administrative			22,447				19,553				64,480				58,128
Depreciation and amortization			7,028				7,885				22,840				24,646
Total operating expenses			112,149				105,894				363,797				343,568
Operating income (loss)			(14,629	)			(12,439	)			57,090				52,424
Interest (income) expense, net			(30	)			662				2,390				2,919
Other (income) expense, net			(1,285	)			31				(293	)			(315	)
Income (loss) before income taxes			(13,314	)			(13,132	)			54,993				49,820
Income tax expense (benefit)			(5,073	)			(4,669	)			11,922				806
Net income (loss)		$	(8,241	)		$	(8,463	)		$	43,071			$	49,014
Basic net income (loss) per common share		$	(0.13	)		$	(0.13	)		$	0.67			$	0.76
Diluted net income (loss) per common share		$	(0.13	)		$	(0.13	)		$	0.65			$	0.73
Weighted average shares used in the calculation of net income (loss) per common share:
Basic			64,194				64,527				64,383				64,694
Diluted			64,194				64,527				66,456				66,949

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		Three Months Ended								Nine Months Ended
		March 31, 2019				April 1, 2018				March 31, 2019				April 1, 2018
Net income (loss)		$	(8,241	)		$	(8,463	)		$	43,071			$	49,014
Other comprehensive income (loss) (currency translation & other miscellaneous items)			3				(38	)			(58	)			(11	)
Comprehensive income (loss)		$	(8,238	)		$	(8,501	)		$	43,013			$	49,003

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		Three Months Ended March 31, 2019 and April 1, 2018
		Common Stock																Additional				Retained				Accumulated												Total
		Class A								Class B								Paid-in				Earnings				Other				Treasury Stock								Stockholders’
		Shares				Amount				Shares				Amount				Capital				(Deficit)				Comprehensive Loss				Shares				Amount				Equity
Balance at December 30, 2018			52,749,203			$	527				33,822,823			$	338			$	344,769			$	125,071			$	(261	)			22,383,738			$	(114,371	)		$	356,073
Net income			-				-				-				-				-				(8,241	)			-				-				-				(8,241	)
Translation adjustment			-				-				-				-				-				-				3				-				-				3
Stock-based compensation			1,924				-				-				-				1,903				-				-				-				-				1,903
Exercise of stock options			180,000				1				-				-				563				-				-				-				-				564
Acquisition of Class A treasury stock			-				-				-				-				-				-				-				105,355				(1,360	)			(1,360	)
Balance at March 31, 2019			52,931,127			$	528				33,822,823			$	338			$	347,235			$	116,830			$	(258	)			22,489,093			$	(115,731	)		$	348,942
Balance at December 31, 2017			51,879,967			$	519				33,847,063			$	338			$	339,805			$	90,115			$	(160	)			21,157,054			$	(99,875	)		$	330,742
Net income			-				-				-				-				-				(8,463	)			-				-				-				(8,463	)
Translation adjustment			-				-				-				-				-								(38	)			-				-				(38	)
Stock-based compensation			2,754				-				-				-				932				-				-				-				-				932
Exercise of stock options			30,000				-				-				-				164				-				-				-				-				164
Acquisition of Class A treasury stock			-				-				-				-				-				-				-				93,192				(990	)			(990	)
Balance at April 1, 2018			51,912,721			$	519				33,847,063			$	338			$	340,901			$	81,652			$	(198	)			21,250,246			$	(100,865	)		$	322,347

		Nine Months Ended March 31, 2019 and April 1, 2018
		Common Stock																Additional				Retained				Accumulated												Total
		Class A								Class B								Paid-in				Earnings				Other				Treasury Stock								Stockholders’
		Shares				Amount				Shares				Amount				Capital				(Deficit)				Comprehensive Loss				Shares				Amount				Equity
Balance at July 1, 2018			52,071,293			$	520				33,822,823			$	338			$	341,783			$	73,429			$	(200	)			21,258,790			$	(100,966	)		$	314,904
Net income			-				-				-				-				-				43,071				-				-				-				43,071
Translation adjustment			-				-				-				-				-								(58	)			-				-				(58	)
Stock-based compensation			411,600				4				-				-				4,527				-				-				-				-				4,531
Exercise of stock options			448,234				4				-				-				925				-				-				-				-				929
Other			-				-				-				-				-				330				-				-				-				330
Acquisition of Class A treasury stock			-				-				-				-				-				-				-				1,230,303				(14,765	)			(14,765	)
Balance at March 31, 2019			52,931,127			$	528				33,822,823			$	338			$	347,235			$	116,830			$	(258	)			22,489,093			$	(115,731	)		$	348,942
Balance at July 2, 2017			51,227,779			$	513				33,901,603			$	339			$	337,726			$	32,638			$	(187	)			19,989,731			$	(88,790	)		$	282,239
Net income			-				-				-				-				-				49,014				-				-				-				49,014
Translation adjustment			-				-				-				-				-								(11	)			-				-				(11	)
Conversion of Class B stock into Class A stock			54,540				1				(54,540	)			(1	)			-				-				-				-				-				-
Stock-based compensation			596,402				5				-				-				2,996				-				-				-				-				3,001
Exercise of stock options			34,000				-				-				-				179				-				-				-				-				179
Acquisition of Class A treasury stock			-				-				-				-				-				-				-				1,260,515				(12,075	)			(12,075	)
Balance at April 1, 2018			51,912,721			$	519				33,847,063			$	338			$	340,901			$	81,652			$	(198	)			21,250,246			$	(100,865	)		$	322,347

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		Nine Months Ended
		March 31, 2019				April 1, 2018
Operating activities:
Net income		$	43,071			$	49,014
Reconciliation of net income to net cash provided by operating activities:
Depreciation and amortization			22,840				24,646
Amortization of deferred financing costs			671				721
Deferred income taxes			811				(13,004	)
Bad debt expense			1,018				906
Stock-based compensation			4,531				3,002
Other non-cash items			(301	)			249
Changes in operating items:
Trade receivables			(7,249	)			(9,347	)
Inventories			14,448				6,956
Prepaid and other			2,675				(45	)
Accounts payable and accrued expenses			14,741				1,453
Other assets			(349	)			(88	)
Other liabilities			98				110
Net cash provided by operating activities			97,005				64,573
Investing activities:
Working capital adjustment related to sale of business			-				(8,500	)
Capital expenditures, net of non-cash expenditures			(16,845	)			(15,809	)
Net cash used in investing activities			(16,845	)			(24,309	)
Financing activities:
Acquisition of treasury stock			(14,765	)			(12,075	)
Proceeds from exercise of employee stock options			929				179
Proceeds from bank borrowings			30,000				30,000
Repayment of bank borrowings			(37,187	)			(35,031	)
Net cash used in financing activities			(21,023	)			(16,927	)
Net change in cash and cash equivalents			59,137				23,337
Cash and cash equivalents:
Beginning of period			147,240				149,732
End of period		$	206,377			$	173,069

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Note 1 – Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared by 1-800-FLOWERS.COM, Inc. and Subsidiaries (the “Company”) in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended March 31, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2019. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 1, 2018.

 

The Company’s quarterly results may experience seasonal fluctuations. Due to the seasonal nature of the Company’s business, and its continued expansion into non-floral products, the Thanksgiving through Christmas holiday season, which falls within the Company’s second fiscal quarter, generates nearly 50% of the Company’s annual revenues, and all of its earnings. Additionally, due to the number of major floral gifting occasions, including Mother's Day, Valentine’s Day, Easter and Administrative Professionals Week, revenues also rise during the Company’s fiscal third and fourth quarters compared to its fiscal first quarter. In fiscal 2018, Easter was on April 1st, which resulted in the shift of Easter-related revenue and EBITDA into the Company’s third quarter of fiscal 2018. The Easter holiday was on April 21st in 2019, which resulted in the shift of most Easter-related e-commerce and retail revenue and associated EBITDA, from the Company’s third quarter, to its fourth quarter.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

Revenue Recognition

 

Net revenue is measured based on the amount of consideration that we expect to receive, reduced by discounts and estimates for credits and returns (calculated based upon previous experience and management’s evaluation). Service and outbound shipping charged to customers are recognized at the time the related merchandise revenues are recognized and are included in net revenues. Inbound and outbound shipping and delivery costs are included in cost of revenues. Net revenues exclude sales and other similar taxes collected from customers.

 

A description of our principal revenue generating activities is as follows:

 

●

E-commerce revenues - consumer products sold through our online and telephonic channels. Revenue is recognized when control of the merchandise is transferred to the customer, which generally occurs upon shipment. Payment is typically due prior to the date of shipment.

●

Retail revenues - consumer products sold through our retail stores. Revenue is recognized when control of the goods is transferred to the customer, at the point of sale, at which time payment is received.

●

Wholesale revenues - products sold to our wholesale customers for subsequent resale. Revenue is recognized when control of the goods is transferred to the customer, in accordance with the terms of the applicable agreement. Payment terms are typically 30 days from the date control over the product is transferred to the customer.

●

BloomNet Services - membership fees as well as other service offerings to florists. Membership and other subscription-based fees are recognized monthly as earned. Services revenues related to orders sent through the floral network are variable, based on either the number of orders or the value of orders, and are recognized in the period in which the orders are delivered. The contracts within BloomNet Services are typically month-to-month and as a result no consideration allocation is necessary across multiple reporting periods. Payment is typically due less than 30 days from the date the services were performed.

  

Deferred revenues

 

Deferred revenues are recorded when the Company has received consideration (i.e. advance payment) before satisfying its performance obligations. As such, customer orders are recorded as deferred revenue prior to shipment or rendering of product or services. Deferred revenues primarily relate to e-commerce orders placed, but not shipped, prior to the end of the fiscal period, as well as for monthly subscription programs, including our Fruit of the Month Club and Celebrations Passport program.

 

Our total deferred revenue as of July 1, 2018 was $13.5 million (included in “Accrued expenses” on our consolidated balance sheets), of which, $0.9 million and $13.2 million was recognized as revenue during the three and nine months ended March 31, 2019, respectively. The deferred revenue balance as of March 31, 2019 was $23.9 million.

 

Recently Issued Accounting Pronouncements - Adopted

 

Revenue from Contracts with Customers. In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” amending revenue recognition guidance (“ASC 606”) and requiring more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company determined that the new standard impacted the following areas related to our e-commerce and retail/franchise revenue streams: the costs of producing and distributing the Company’s catalogs will be expensed upon mailing, instead of being capitalized and amortized in direct proportion to the actual sales; gift card breakage will be recognized over the expected customer redemption period, rather than when redemption is considered remote; e-commerce revenue will be recognized upon shipment, when control of the merchandise transfers to the customer, instead of upon receipt by the customer; initial and other franchise fees will be recognized over the franchise term (or remaining franchise term), rather than upon store opening (or renewal/transfer). The Company adopted this ASU effective July 2, 2018 for all revenue contracts with our customers using the modified retrospective approach and increased retained earnings by $0.3 million. The adjustment primarily related to the unredeemed portion of our gift cards (breakage income), which increased retained earnings and reduced accrued expenses by $1.9 million; partially offset by the change in accounting for the Company’s catalogs, which decreased retained earnings and decreased prepaid expense by $0.8 million; as well as a deferral of initial franchise fees, which decreased retained earnings and increased accrued expenses by $0.8 million.

 

The comparative information presented in this Form 10-Q has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company does not expect the adoption of the new revenue standard to have a material impact to our net income on an ongoing, annual basis. However, the adoption of the new revenue standard is expected to result in quarterly fluctuations, primarily as a result of the change in accounting for catalog costs, as noted above. During the three months ended March 31, 2019, assuming we had not adopted the new revenue standard, “Marketing and sales” expense, within our statement of operations, would have been approximately $1.6 million higher, thereby increasing our Net loss for the period by approximately $1.0 million (tax effected). During the nine months ended March 31, 2019, assuming we had not adopted the new revenue standard, “Marketing and sales” expense, within our statement of operations, would have been approximately $0.4 million lower, thereby increasing our Net income for the period by approximately $0.3 million (tax effected). The Company’s contract liabilities related to gift cards ($1.7 million as of March 31, 2019) are not considered material for purposes of this disclosure. Refer to Note 12 – Business Segments for disclosure of disaggregated revenues.

 

 

 

Financial Instruments – Recognition and Measurement. In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities," as amended by ASU No. 2018-03, “Financial Instruments-Overall: Technical Corrections and Improvements,” issued in February 2018. The new guidance requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income (subject to an exemption for investments that have no readily determinable fair values), requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. Upon adoption of the new guidance, we have elected to measure the investments we hold in certain non-marketable equity securities in which we do not have a controlling interest or significant influence that have no readily determinable fair values at cost, less impairment, adjusted for observable price changes from orderly transactions for identical or similar investments of the same issuer. The Company adopted the guidance prospectively effective July 2, 2018. The adoption did not have a significant impact on the Company’s consolidated financial position or results of operations.

 

Statement of Cash Flows. In June 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230), a consensus of the FASB’s Emerging Issues Task Force.” ASU 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The Company adopted the guidance restrospectively, effective July 2, 2018. The adoption did not have a significant impact on the Company’s consolidated financial position or results of operations.

 

Business Combinations – Definition of a Business. In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01)," which revises the definition of a business and provides new guidance in evaluating when a set of transferred assets and activities is a business. The Company adopted the guidance prospectively, effective July 2, 2018. The adoption did not have a significant impact on the Company’s consolidated financial position or results of operations.

 

Nonfinancial Assets – Derecognition. In February 2017, the FASB issued ASU No. 2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets.” This update clarifies the scope of accounting for the derecognition or partial sale of nonfinancial assets to exclude all businesses and nonprofit activities. ASU 2017-05 also provides a definition for in-substance nonfinancial assets and additional guidance on partial sales of nonfinancial assets. The Company adopted the guidance retrospectively, effective July 2, 2018. The adoption did not have a significant impact on the Company’s consolidated financial position or results of operations.

 

Stock Compensation – Modification Accounting. In May 2017, the FASB issued ASU No. 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.” This ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. An entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The Company adopted the guidance prospectively, to awards modified on or after the adoption date, effective July 2, 2018. The adoption did not have a significant impact on the Company’s consolidated financial position or results of operations.

 

Cloud Computing Arrangements – Implementation Costs. In August 2018, the FASB issued ASU No. 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by this ASU. The amendments in this Update also require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, require the entity to present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element and also require the entity to present the capitalized implementation costs in the statement of financial position in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented. The Company adopted the guidance prospectively, to all implementation costs incurred after the date of adoption, effective July 2, 2018. The adoption did not have a significant impact on the Company’s consolidated financial position or results of operations.

 

Recently Issued Accounting Pronouncements – Not Yet Adopted

 

Leases. In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Under this guidance, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. This guidance offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for the Company’s fiscal year ending June 28, 2020. We are currently evaluating the ASU, but expect that it will have a material impact on our consolidated financial statements, primarily the consolidated balance sheets and related disclosures.

 

Financial Instruments – Measurement of Credit Losses. In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 introduces a new forward-looking “expected loss” approach, to estimate credit losses on most financial assets and certain other instruments, including trade receivables. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. This ASU also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses. ASU 2016-13 is effective for the Company’s fiscal year ending July 4, 2021, and the guidance is to be applied using the modified-retrospective approach. The Company is currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

 

Goodwill – Impairment Test. In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which eliminates step two from the goodwill impairment test. Under ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value up to the amount of goodwill allocated to that reporting unit. This guidance is effective for the Company’s fiscal year ending July 4, 2021, with early adoption permitted, and should be applied prospectively. We do not expect the standard to have a material impact on our consolidated financial statements.

 

U.S. Tax Reform

 

On December 22, 2017, the U.S. government enacted significant changes to the U.S. tax law following the passage and signing of the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act revises the future ongoing U.S. corporate income tax by, among other things, lowering U. S. corporate income tax rates from 35% to 21%. Since the Company’s fiscal year ends in June, the lower corporate income tax rate was phased in, resulting in a U.S. statutory federal rate of approximately 28% for fiscal year 2018, and 21% for subsequent fiscal years. The Tax Act also eliminated the domestic production activities deduction and introduced limitations on certain business expenses and executive compensation deductions.

 

Shortly after the Tax Act was enacted, the SEC staff issued Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (“SAB 118”), which provided guidance on accounting for the Tax Act’s impact. SAB 118 provided a measurement period, which in no case should extend beyond one year from the Tax Act enactment date, during which a company acting in good faith may complete the accounting for the impacts of the Tax Act under ASC Topic 740. In accordance with the expiration of the SAB 118 measurement period, we completed the assessment of the income tax effects of the Tax Act in the second quarter of fiscal 2019, with no adjustments recorded to the provisional amounts.

 

 

 

 

 

Note 2 – Net Income Per Common Share

 

The following table sets forth the computation of basic and diluted net income (loss) per common share:

 

 

 

Note 3 – Stock-Based Compensation

 

The Company has a Long Term Incentive and Share Award Plan, which is more fully described in Note 12 and Note 13 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 1, 2018, that provides for the grant to eligible employees, consultants and directors of stock options, restricted shares, and other stock-based awards.

 

The amounts of stock-based compensation expense recognized in the periods presented are as follows:

 

 

 Stock-based compensation is recorded within the following line items of operating expenses:

 

 

Stock based compensation expense has not been allocated between business segments, but is reflected as part of Corporate overhead. (see Note 12 - Business Segments.)

 

Stock Options

 

The following table summarizes stock option activity during the nine months ended March 31, 2019:

 

 

As of March 31, 2019, the total future compensation cost related to non-vested options, not yet recognized in the statement of income, was $0.2 million and the weighted average period over which these awards are expected to be recognized was 0.6 years.

 

 

 

Restricted Stock

 

The Company grants shares of Common Stock to its employees that are subject to restrictions on transfer and risk of forfeiture until fulfillment of applicable service and performance conditions and, in certain cases, holding periods (Restricted Stock). The following table summarizes the activity of non-vested restricted stock awards during the nine months ended March 31, 2019:

 

 

The fair value of non-vested shares is determined based on the closing stock price on the grant date. As of March 31, 2019, there was $11.6 million of total unrecognized compensation cost related to non-vested restricted stock-based compensation to be recognized over the weighted-average remaining period of 2.2 years.

 

 

Note 4 – Disposition

 

On March 15, 2017, the Company and Ferrero International S.A., a Luxembourg corporation (“Ferrero”), entered into a Stock Purchase Agreement (the “Purchase Agreement”) pursuant to which Ferrero agreed to purchase from the Company all of the outstanding equity of Fannie May Confections Brands, Inc., including its subsidiaries, Fannie May Confections, Inc. and Harry London Candies, Inc. (“Fannie May”) for a total consideration of $115.0 million in cash, subject to adjustment for seasonal working capital. On May 30, 2017, the Company closed on the transaction, and the working capital adjustment was finalized in August 2017, resulting in an $8.5 million payment to Ferrero during the first quarter of fiscal 2018. The associated gain of $14.6 million was included within “Other (income) expense, net” in the fourth quarter of fiscal 2017.

 

The Company and Ferrero also entered into a transition services agreement, as amended, whereby the Company will provide certain post-closing services to Ferrero and Fannie May for a period of approximately 20 months, related to the business of Fannie May, and a commercial agreement with respect to the distribution of certain Ferrero and Fannie May products.  

  

 

Note 5 – Inventory

 

The Company’s inventory, stated at cost, which is not in excess of market, includes purchased and manufactured finished goods for sale, packaging supplies, crops, raw material ingredients for manufactured products and associated manufacturing labor and is classified as follows:

 

 

 

 

Note 6 – Goodwill and Intangible Assets

 

The following table presents goodwill by segment and the related change in the net carrying amount:

 

  

The Company’s other intangible assets consist of the following:

 

 

Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Future estimated amortization expense is as follows: remainder of fiscal 2019 - $0.2 million, fiscal 2020 - $0.6 million, fiscal 2021 - $0.6 million, fiscal 2022 - $0.5 million, fiscal 2023 - $0.5 million and thereafter - $2.1 million.

 

 

 

 

Note 7 – Investments

 

Equity investments accounted for under the equity method 

 

The Company has certain investments in non-marketable equity instruments of private companies. The Company accounts for these investments using the equity method if they provide the Company the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if the Company has an ownership interest in the voting stock of the investee between 20% and 50%, although other factors, such as representation on the investee’s Board of Directors, are considered in determining whether the equity method is appropriate. The Company records equity method investments initially at cost and adjusts the carrying amount to reflect the Company’s share of the earnings or losses of the investee.

 

The Company’s equity method investment is comprised of an interest in Flores Online S.A. ("Flores Online"), a Sao Paulo, Brazil-based internet floral and gift retailer, that the Company originally acquired on May 31, 2012. The Company currently holds 24.9% of the outstanding shares of Flores Online. The book value of this investment was $0.5 million as of March 31, 2019 and $0.6 million as of July 1, 2018, and is included in the “Other assets” line item within the Company’s consolidated balance sheets. The Company’s equity in the net loss of Flores Online for the three and nine months ended March 31, 2019 and April 1, 2018, respectively, was less than $0.1 million. During the quarter ended December 31, 2017, Flores Online entered into a share exchange agreement with Isabela Flores Intermediações Ltda. ("Isabela Flores"), whereby among other changes, the Company exchanged 5% of its interest in Flores Online for a 5% interest in Isabela Flores. This new investment of approximately $0.1 million is currently being accounted for as an equity investment without a readily determinable fair value (see below). In conjunction with this share exchange, the Company determined that the fair value of its investment in Flores Online was below its carrying value and that this decline was other-than-temporary. As a result, the Company recorded an impairment charge of $0.2 million, which is included within “Other (income) expense, net” in the Company’s consolidated statement of income during the quarter ended December 31, 2017.

 

Equity investments without a readily determinable fair value

 

Investments in non-marketable equity instruments of private companies, where the Company does not possess the ability to exercise significant influence, are accounted for at cost, less impairment (assessed qualitatively at each reporting period), adjusted for observable price changes from orderly transactions for identical or similar investments of the same issuer. These investments are included within “Other assets” in the Company’s consolidated balance sheets. The aggregate carrying amount of the Company’s cost method investments was $1.7 million as of March 31, 2019 and July 1, 2018. 

 

Equity investments with a readily determinable fair value

 

The Company also holds certain trading securities associated with its Non-Qualified Deferred Compensation Plan (“NQDC Plan”). These investments are measured using quoted market prices at the reporting date and are included within the “Other assets” line item in the consolidated balance sheets (see Note 10 - Fair Value Measurements).

 

 

Note 8 –Debt

 

The Company’s current and long-term debt consists of the following:

 

 

(1) On December 23, 2016, the Company entered into an Amended and Restated Credit Agreement (the “2016 Amended Credit Agreement”) with JPMorgan Chase Bank, N.A. as administrative agent, and a group of lenders. The 2016 Amended Credit Agreement amended and restated the Company’s credit agreement dated September 30, 2014 to, among other things, extend the maturity date of the $115.0 million outstanding term loan ("Term Loan") and the revolving credit facility (the "Revolver") by approximately two years to December 23, 2021. The Term Loan is payable in 19 quarterly installments of principal and interest beginning on April 2, 2017, with escalating principal payments, at the rate of 5% in year one, 7.5% in year two, 10% in year three, 12.5% in year four, and 15% in year five, with the remaining balance of $61.8 million due upon maturity. The Revolver, in the aggregate amount of $200 million, subject to seasonal reduction to an aggregate amount of $100 million for the period from January 1 through August 1, may be used for working capital and general corporate purposes, subject to certain restrictions.

 

For each borrowing under the 2016 Amended Credit Agreement, the Company may elect that such borrowing bear interest at an annual rate equal to either: (1) a base rate plus an applicable margin varying from 0.75% to 1.5%, based on the Company’s consolidated leverage ratio, where the base rate is the highest of (a) the prime rate, (b) the highest of the federal funds rate and the overnight bank funding rate as published by the New York Fed, plus 0.5%, and (c) an adjusted LIBO rate, plus 1%, or (2) an adjusted LIBO rate plus an applicable margin varying from 1.75% to 2.5%, based on the Company’s consolidated leverage ratio. The 2016 Amended Credit Agreement requires that, while any borrowings are outstanding, the Company comply with certain financial covenants and affirmative covenants as well as certain negative covenants that, subject to certain exceptions, limit the Company's ability to, among other things, incur additional indebtedness, make certain investments and make certain restricted payments. The Company was in compliance with these covenants as of March 31, 2019. The 2016 Amended Credit Agreement is secured by substantially all of the assets of the Company and the subsidiary guarantors, named therein.

 

Future principal payments under the Term Loan are as follows: $2.9 million – fiscal 2019, $12.9 million – fiscal 2020, $15.8 million - fiscal 2021, and $66.1 million – fiscal 2022.

  

 

 

 

 

Note 9 - Property, Plant and Equipment

 

The Company’s property, plant and equipment consists of the following:

 

 

 

Note 10 - Fair Value Measurements

 

Cash and cash equivalents, trade and other receivables, prepaids, accounts payable and accrued expenses are reflected in the consolidated balance sheets at carrying value, which approximates fair value due to the short-term nature of these instruments. Although no trading market exists, the Company believes that the carrying amount of its debt approximates fair value due to its variable nature. The Company’s investments in non-marketable equity instruments of private companies are carried at cost and are periodically assessed for other-than-temporary impairment, when an event or circumstances indicate that an other-than-temporary decline in value may have occurred. The Company’s remaining financial assets and liabilities are measured and recorded at fair value (see table below). The Company’s non-financial assets, such as definite lived intangible assets and property, plant and equipment, are recorded at cost and are assessed for impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred. Goodwill and indefinite lived intangibles are tested for impairment annually, or more frequently, if events occur or circumstances change such that it is more likely than not that an impairment may exist, as required under the accounting standards.

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date. The authoritative guidance for fair value measurements establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under the guidance are described below:

 

Level 1		Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
Level 2		Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
Level 3		Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The following table presents by level, within the fair value hierarchy, financial assets and liabilities measured at fair value on a recurring basis:

 

 

(1)

The Company has established an NQDC Plan for certain members of senior management. Deferred compensation plan assets are invested in mutual funds held in a “rabbi trust,” which is restricted for payment to participants of the NQDC Plan. Trading securities held in a rabbi trust are measured using quoted market prices at the reporting date and are included in the “Other assets” line item, with the corresponding liability included in the “Other liabilities” line item in the consolidated balance sheets.

 

 

Note 11 – Income Taxes

 

At the end of each interim reporting period, the Company estimates its effective income tax rate expected to be applicable for the full year. This estimate is used in providing for income taxes on a year-to-date basis and may change in subsequent interim periods. The Company’s effective tax rate for the three and nine months ended March 31, 2019 was 38.1% and 21.7% respectively, compared to 35.6% and 1.6% in the same periods of the prior year. The effective rates for fiscal 2019 differed from the U.S. federal statutory rate of 21% due to state income taxes and nondeductible expenses for executive compensation, which were partially offset by various permanent differences and tax credits, including increased excess tax benefits from stock-based compensation. The effective rates for fiscal 2018 differed from the transitional U.S. federal tax rate of 28.0% due to a tax benefit of $12.2 million, or $0.18 per diluted share, recognized during the second quarter of fiscal 2018, reflecting a revaluation of deferred tax liabilities at the lower U.S. federal statutory rate of 21% as a result of the Tax Act (see Note 1 – Accounting Policies above), and various permanent differences, tax credits, and return to provision adjustments related to the filing of the Company’s fiscal 2017 tax return, partially offset by state income taxes.

 

 

 

 

The Company files income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and various foreign countries. The Company is currently undergoing its U.S. federal examination for fiscal 2016, however, fiscal years 2015, 2017, and 2018 remain subject to U.S. federal examination. Due to ongoing state examinations and nonconformity with the U.S. federal statute of limitations for assessment, certain states remain open from fiscal 2015. The Company's foreign income tax filings from fiscal 2014 are open for examination by its respective foreign tax authorities, mainly Canada, Brazil, and the United Kingdom.

 

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. At March 31, 2019, the Company has an unrecognized tax benefit, including an immaterial amount of accrued interest and penalties, of approximately $0.6 million. The Company believes that $0.1 million of unrecognized tax positions will be resolved over the next twelve months.

 

 

Note 12 – Business Segments

 

The Company’s management reviews the results of its operations by the following three business segments:

 

•     1-800-Flowers.com Consumer Floral,

•     BloomNet Wire Service, and

•     Gourmet Food & Gift Baskets

 

Segment performance is measured based on contribution margin, which includes only the direct controllable revenue and operating expenses of the segments. As such, management’s measure of profitability for these segments does not include the effect of corporate overhead (see (a) below), nor does it include depreciation and amortization, other (income) expense, net and income taxes, or stock-based compensation, both of which are included within corporate overhead. Assets and liabilities are reviewed at the consolidated level by management and not accounted for by segment.

 

 

 

 

(a) Corporate expenses consist of the Company’s enterprise shared service cost centers, and include, among other items, Information Technology, Human Resources, Accounting and Finance, Legal, Executive and Customer Service Center functions, as well as Stock-Based Compensation. In order to leverage the Company’s infrastructure, these functions are operated under a centralized management platform, providing support services throughout the organization. The costs of these functions, other than those of the Customer Service Center, which are allocated directly to the above categories based upon usage, are included within corporate expenses as they are not directly allocable to a specific segment.

 

 

 

 

The following tables represent a disaggregation of revenue from contracts with customers, by channel:

 

 

 

 

Note 13 – Commitments and Contingencies

 

Litigation

 

There are various claims, lawsuits, and pending actions against the Company and its subsidiaries incident to the operations of its businesses. It is the opinion of management, after consultation with counsel, that the ultimate resolution of such claims, lawsuits and pending actions will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity

 

 

 

 

 

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