1 800 FLOWERS COM INC - Quarter Report: 2020 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 29, 2020

 

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)

 

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

 

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 ☑

 

The number of shares outstanding of each of the Registrant’s classes of common stock as of May 1, 2020:

 

Class A common stock:	35,739,913
Class B common stock:	28,542,823

 

 

Table of Contents

 

 

 

1-800-FLOWERS.COM, Inc.

FORM 10-Q

For the quarterly period ended March 29, 2020

TABLE OF CONTENTS

 

 

			Page
Part I.	Financial Information
Item 1.	Condensed Consolidated Financial Statements			1
	Condensed Consolidated Balance Sheets – March 29, 2020 (Unaudited) and June 30, 2019			1
	Condensed Consolidated Statements of Income (Loss) (Unaudited) – Three and Nine Months Ended March 29, 2020 and March 31, 2019			2
	Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) – Three and Nine Months Ended March 29, 2020 and March 31, 2019			3
	Condensed Consolidated Statements of Stockholder’s Equity (Unaudited) – Three and Nine Months Ended March 29, 2020 and March 31, 2019			4
	Condensed Consolidated Statements of Cash Flows (Unaudited) – Nine Months Ended March 29, 2020 and March 31, 2019			5
	Notes to Condensed Consolidated Financial Statements (Unaudited)			6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk			24
Item 4.	Controls and Procedures			25
Part II.	Other Information
Item 1.	Legal Proceedings			25
Item 1A.	Risk Factors			25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			26
Item 3.	Defaults upon Senior Securities			26
Item 4.	Mine Safety Disclosures			26
Item 5.	Other Information			26
Item 6.	Exhibits			27
Signatures				28

 

 

Table of Contents

 

 

 

		March 29, 2020				June 30, 2019
		(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	232,115			$	172,923
Trade receivables, net			26,217				12,374
Inventories			74,037				92,361
Prepaid and other			21,312				25,580
Total current assets			353,681				303,238
Property, plant and equipment, net			166,399				166,681
Operating lease right-of-use assets			70,284				-
Goodwill			74,711				62,590
Other intangibles, net			66,500				59,615
Other assets			17,054				14,316
Total assets		$	748,629			$	606,440
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable		$	37,314			$	25,704
Accrued expenses			116,815				96,793
Current maturities of long-term debt			5,000				5,000
Current portion of long-term operating lease liabilities			9,524				-
Total current liabilities			168,653				127,497
Long-term debt			88,648				91,973
Long-term operating lease liabilities			64,251				-
Deferred tax liabilities			27,300				28,898
Other liabilities			11,766				15,361
Total liabilities			360,618				263,729
Commitments and contingencies (See Note 13 and Note 14)
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, 53,702,810 and 53,084,127 shares issued at March 29, 2020 and June 30, 2019, respectively			537				530
Class B common stock, $0.01 par value, 200,000,000 shares authorized, 33,822,823 shares issued at March 29, 2020 and June 30, 2019			338				338
Additional paid-in-capital			356,038				349,319
Retained earnings			157,749				108,525
Accumulated other comprehensive loss			(252	)			(269	)
Treasury stock, at cost, 17,962,897 and 17,209,093 Class A shares at March 29, 2020 and June 30, 2019, respectively, and 5,280,000 Class B shares at March 29, 2020 and June 30, 2019			(126,399	)			(115,732	)
Total stockholders’ equity			388,011				342,711
Total liabilities and stockholders’ equity		$	748,629			$	606,440

 

		Three Months Ended								Nine Months Ended
		March 29, 2020				March 31, 2019				March 29, 2020				March 31, 2019
Net revenues		$	278,776			$	248,413			$	1,071,681			$	989,225
Cost of revenues			171,324				150,893				618,911				568,338
Gross profit			107,452				97,520				452,770				420,887
Operating expenses:
Marketing and sales			78,606				71,163				262,849				243,781
Technology and development			11,900				11,511				34,436				32,696
General and administrative			20,031				22,447				64,187				64,480
Depreciation and amortization			7,803				7,028				23,268				22,840
Total operating expenses			118,340				112,149				384,740				363,797
Operating income (loss)			(10,888	)			(14,629	)			68,030				57,090
Interest (income) expense, net			147				(30	)			1,727				2,390
Other (income) expense, net			2,605				(1,285	)			1,714				(293	)
Income (loss) before income taxes			(13,640	)			(13,314	)			64,589				54,993
Income tax expense (benefit)			(3,983	)			(5,073	)			15,365				11,922
Net income (loss)		$	(9,657	)		$	(8,241	)		$	49,224			$	43,071
Basic net income (loss) per common share		$	(0.15	)		$	(0.13	)		$	0.76			$	0.67
Diluted net income (loss) per common share		$	(0.15	)		$	(0.13	)		$	0.74			$	0.65
Weighted average shares used in the calculation of net income (loss) per common share:
Basic			64,348				64,194				64,517				64,383
Diluted			64,348				64,194				66,378				66,456

 

		Three Months Ended								Nine Months Ended
		March 29, 2020				March 31, 2019				March 29, 2020				March 31, 2019
Net income (loss)		$	(9,657	)		$	(8,241	)		$	49,224			$	43,071
Other comprehensive income (loss) (currency translation & other miscellaneous items)			1				3				17				(58	)
Comprehensive income (loss)		$	(9,656	)		$	(8,238	)		$	49,241			$	43,013

 

 

		Nine months ended
		March 29, 2020				March 31, 2019
Operating activities:
Net income		$	49,224			$	43,071
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			23,268				22,840
Amortization of deferred financing costs			486				671
Deferred income taxes			(1,597	)			811
Bad debt expense			1,201				1,018
Stock-based compensation			6,441				4,531
Other non-cash items			(23	)			(301	)
Changes in operating items:
Trade receivables			(15,044	)			(7,249	)
Inventories			19,353				14,448
Prepaid and other			3,148				2,675
Accounts payable and accrued expenses			31,442				14,741
Other assets and liabilities			(557	)			(251	)
Net cash provided by operating activities			117,342				97,005
Investing activities:
Acquisitions, net of cash acquired			(20,500	)			-
Capital expenditures, net of non-cash expenditures			(22,282	)			(16,845	)
Purchase of equity investments			(1,176	)			-
Net cash used in investing activities			(43,958	)			(16,845	)
Financing activities:
Acquisition of treasury stock			(10,667	)			(14,765	)
Proceeds from exercise of employee stock options			285				929
Proceeds from bank borrowings			20,000				30,000
Repayment of notes payable and bank borrowings			(23,750	)			(37,187	)
Debt issuance cost			(60	)			-
Net cash used in financing activities			(14,192	)			(21,023	)
Net change in cash and cash equivalents			59,192				59,137
Cash and cash equivalents:
Beginning of period			172,923				147,240
End of period		$	232,115			$	206,377

 

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 (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended March 29, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending June 28, 2020. These financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended June 30, 2019, which provides a more complete understanding of our accounting policies, financial position, operating results and other matters.

 

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. As a result of 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.

 

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.

 

COVID-19

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. The CARES Act provides a substantial stimulus and assistance package intended to address the impact of the COVID-19 pandemic, including tax relief and government loans, grants and investments. The CARES Act did not have a material impact on the Company’s consolidated financial statements during the three months and nine months ended March 29, 2020.

 

The Company is closely monitoring the impact of the pandemic of the novel strain of coronavirus ("COVID-19") on its business, including how it will affect its customers, workforce, suppliers, vendors, franchisees, florists, and production and distribution channels, as well as its financial statements. The extent to which COVID-19 impacts the Company’s business and financial results will depend on numerous evolving factors including, but not limited to: the magnitude and duration of COVID-19, the extent to which it will impact macroeconomic conditions including interest rates, employment rates and consumer confidence, the speed of the anticipated recovery, and governmental, business and individual consumer reactions to the pandemic. The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts of COVID-19 as of March 29, 2020 and through the date of this report. The accounting matters assessed included, but were not limited to, the Company’s allowance for doubtful accounts and credit losses, inventory and related reserves and the carrying value of goodwill and other long-lived assets. While there was not a material impact to the Company’s consolidated financial statements as of and for the quarter ended March 29, 2020, the Company’s future assessment of these factors and the evolving factors described above, could result in material impacts to the Company’s consolidated financial statements in future reporting periods.

 

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 June 30, 2019 was $17.3 million (included in “Accrued expenses” on our consolidated balance sheets), of which, $0.5 million and $16.4 million was recognized as revenue during the three and nine months ended March 29, 2020. The deferred revenue balance as of March 29, 2020 was $28.6 million.

 

6

Table of Contents

 

Recently Issued Accounting Pronouncements - Adopted

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASC 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. We adopted the new standard effective July 1, 2019 and elected the optional transition method and therefore, we will not apply the standard to the comparative periods presented in our financial statements. The new standard provides a number of optional practical expedients in transition. We elected the ‘package of practical expedients’, that did not require us to reassess, under the new standard, our prior conclusions about lease identification, lease classification and initial direct costs. Further, we elected a short-term lease exception policy, permitting us to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less) and an accounting policy to account for lease and non-lease components as a single component for certain classes of assets. The adoption of the new standard had a material impact to the Company’s Consolidated Balance Sheets, but no impact to the Consolidated Statements of Income (Operations) or Consolidated Statements of Cash Flows. As such, we recorded operating lease liabilities of $80.7 million, based on the present value of the remaining minimum rental payments using discount rates as of the effective date, and a corresponding right-of-use assets of $78.7 million based on the operating lease liabilities adjusted for deferred rent and lease incentives received. See Note 13 - Leases for further information about our transition to ASC 842 and the newly required disclosures.

 

Recently Issued Accounting Pronouncements – Not Yet Adopted

 

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 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 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.

  

 

Note 2 – Net Income (Loss) 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 June 30, 2019, 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:

 

 

7

Table of Contents

 

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 29, 2020:

 

 

As of March 29, 2020, the total future compensation cost related to non-vested options, not yet recognized in the statement of income, was $0.0 million and the weighted average period over which these awards are expected to be recognized was 0.0 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 29, 2020:

 

 

The fair value of non-vested shares is determined based on the closing stock price on the grant date. As of March 29, 2020, there was $12.2 million of total unrecognized compensation cost related to non-vested restricted stock-based compensation to be recognized over the weighted-average remaining period of 1.9 years.  

   

8

Table of Contents

 

 

Note 4 – Acquisition

 

Acquisition of Shari’s Berries

 

On August 14, 2019, the Company completed its acquisition of the Shari’s Berries business ("Shari's Berries"), a leading provider of dipped berries and other specialty treats, through a bankruptcy proceeding of certain assets of the gourmet food business of the FTD Companies, Inc. The transaction, for a purchase price of $20.5 million, included the Shari’s Berries domain names, copyrights, trademarks, customer data, phone numbers and other intellectual property, as well as certain raw material inventory and the assumption of specified liabilities.

 

The total purchase price was allocated to the identifiable assets acquired and liabilities assumed based on our preliminary estimates of their fair values on the acquisition date. The Company is in the process of finalizing its allocation and this may result in potential adjustments to the carrying value of the respective recorded assets and liabilities, establishment of certain additional intangible assets, revisions of useful lives of intangible assets, and the determination of any residual amount that will be allocated to goodwill. Of the acquired intangible assets, $0.6 million was assigned to customer lists, which is being amortized over the estimated remaining life of 2 years, $6.9 million was assigned to tradenames, and $12.1 million was assigned to goodwill, which is expected to be deductible for tax purposes. The goodwill recognized in conjunction with our acquisition of Shari’s Berries is primarily related to synergistic value created in terms of both operating costs and revenue growth opportunities, enhanced financial and operational scale, and other strategic benefits.

 

The following table summarizes the preliminary allocation of the purchase price to the estimated fair values of assets acquired and liabilities assumed at the date of the acquisition:

 

 

Raw materials inventory was valued at book value, as there have not been any significant price fluctuations or other events that would materially change the cost to replace the raw materials.

 

The estimated fair value of the acquired tradenames was determined using the relief from royalty method, which is a risk-adjusted discounted cash flow approach. The relief from royalty method values an intangible asset by estimating the royalties saved through ownership of the asset. The relief from royalty method requires identifying the future revenue that would be generated by the trademark, multiplying it by a royalty rate deemed to be avoided through ownership of the asset and discounting the projected royalty savings amounts back to the acquisition date. The royalty rate used in the valuation was based on a consideration of market rates for similar categories of assets. The discount rate used in the valuation was based on the Company’s weighted average cost of capital, the riskiness of the earnings stream associated with the trademarks and the overall composition of the acquired assets.

 

The estimated fair value of the acquired customer lists was determined using the excess earnings method under the income approach. This method requires identifying the future revenue that would be generated by existing customers at the time of the acquisition, considering an appropriate attrition rate based on the historical experience of the Company. Appropriate expenses are then deducted from the revenues and economic rents are charged for the return on contributory assets. The after-tax cash flows attributable to the asset are discounted back to their net present value at an appropriate intangible asset rate of return and summed to calculate the value of the customer lists.

  

Operating results of the Shari’s Berries brand are reflected in the Company’s consolidated financial statements from the date of acquisition, within the Gourmet Foods & Gift Baskets segment. Pro forma results of operations have not been presented, as the impact on the Company’s consolidated financial results would not have been material.

 

 

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:

 

 

9

Table of Contents

 

 

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 2020 - $0.3 million, fiscal 2021 - $0.9 million, fiscal 2022 - $0.6 million, fiscal 2023 - $0.5 million, fiscal 2024 - $0.5 million and thereafter - $1.5 million.

 

 

Note 7 – Investments

 

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 $2.8 million as of March 29, 2020 and $1.6 million as of June 30, 2019. 

 

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 May 31, 2019, the Company entered into a Second Amended and Restated Credit Agreement (the “2019 Credit Agreement”) with JPMorgan Chase Bank, N.A. as administrative agent, and a group of lenders. The 2019 Credit Agreement amended and restated the Company’s existing amended and restated credit agreement dated as of December 23, 2016 (the “2016 Credit Agreement”) to, among other modifications: (i) increase the amount of the outstanding term loan (“Term Loan”) from approximately $97 million to $100 million, (ii) extend the maturity date of the outstanding Term Loan and the revolving credit facility (“Revolver”) by approximately 29 months to May 31, 2024, and (iii) decrease the applicable interest rate margins for LIBOR and base rate loans by 25 basis points. The Term Loan is payable in 19 quarterly installments of principal and interest beginning on September 29, 2019, with escalating principal payments, at the rate of 5.0% per annum for the first eight payments, and 10.0% per annum for the remaining 11 payments, with the remaining balance of $62.5 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 2019 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 based on the Company’s consolidated leverage ratio, where the base rate is the highest of (a) the prime rate, (b) the New York fed bank rate plus 0.5% and (c) a LIBOR rate plus 1% or (2) an adjusted LIBOR rate plus an applicable margin varying based on the Company’s consolidated leverage ratio. The 2019 Credit Agreement requires that while any borrowings or commitments 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 29, 2020. The 2019 Credit Agreement is secured by substantially all of the assets of the Company.

 

Future principal payments under the Term Loan are as follows: $1.25 million – remainder of fiscal 2020, $5.0 million – fiscal 2021, $10.0 million - fiscal 2022, $10.0 million – fiscal 2023 and $70.0 million – fiscal 2024. 

10

Table of Contents

 

 

 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 from operations for the three and nine months ended March 29, 2020 was 29.2% and 23.8% respectively, compared to 38.1% and 21.7% in the same periods of the prior year. The effective tax rates for fiscal 2020 and fiscal 2019 differed from the U.S. federal statutory rate of 21% 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 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 2017, however, fiscal year 2018 remains 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 29, 2020, the Company has an unrecognized tax benefit, including accrued interest and penalties, of approximately $0.9 million. The Company believes that $0.2 million of unrecognized tax positions will be resolved over the next twelve months. 

 

11

Table of Contents

  

 

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 Foods & 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. 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: 

 

 

 

12

Table of Contents