. Acquisitions and Dispositions
Disposition of Fannie
May
Confections Brands, Inc.
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 total consideration of
$115.0
million in cash, subject to seasonal working capital adjustment. At that time, the Company determined that the Fannie
May
business met the held for sale criteria, as prescribed by FASB ASC
360
-
10
-
45
-
9,
but did
not
meet the criteria to qualify as a discontinued operation.
On
May 30, 2017,
the Company completed the disposition of Fannie
May,
and in
August 2017,
the working capital adjustment was finalized, resulting in an
$11.4
million reduction to the purchase price. The resulting gain on sale, in the amount of
$14.6
million, is included within “Other (income) expense, net” in the Company
’s consolidated statements of income for the fiscal year
2017.
In connection with the working capital adjustment of
$11.4
million, the Company has an
$8.5
million payable to Ferrero, included in the“Accrued expenses” line item in the Company’s consolidated balance sheet as of
July 2, 2017.
Per FASB ASC
350
-
20
-
40,
when a portion of reporting unit that constitutes a business is to be disposed of, goodwill associated with that business shall be included in the carrying amount of the business in determining the gain or loss on disposal. The amount of goodwill to be included in that carrying amount shall be based on the relative fair values of the business to be disposed of and the portion of the reporting unit that will be retained. Fannie
May
represented a business, as defined by FASB, and was included in the Company's Gourmet Food & Gift Baskets reporting unit. As a result, we allocated
$15.1
million of goodwill to the Fannie
May
business based on the relative fair value of Fannie
May
to the Gourmet Food & Gift Baskets reporting unit. The Company estimated the fair value of the Gourmet Food & Gift Baskets reporting unit in a manner consistent with its significant accounting policy for goodwill, described in Note
1
above.
The Company and Ferrero also entered into a transition services agreement whereby the Company will provide certain post-closing services to Ferrero and Fannie
May
for a period of approximately
18
months, related to the business of Fannie
May,
and a commercial agreement with respect to the distribution of certain Ferrero and Fannie
May
products.
Operating results of Fannie
May
are reflected in the Company
’s consolidated financial statements through
May 30, 2017,
the date of its disposition, within its Gourmet Food & Gift Baskets segment.
During fiscal
2017,
Fannie
May
contributed net revenues of
$85.6
million. Operating and pre-tax income during such period were
not
material.
Acquisition of Harry & David
On
September 30, 2014,
the Company completed its acquisition of Harry & David, a leading multi-channel specialty retailer and producer of branded premium gift-quality fruit, gourmet food products and other gifts marketed under the Harry & David brands. The transaction, for a purchase price of
$142.5
million, includes the Harry & David
’s brands and websites as well as its headquarters, manufacturing and distribution facilities and orchards in Medford, Oregon, a warehouse and distribution facility in Hebron, Ohio and
48
Harry & David retail stores located throughout the country.
During the quarter ended
June 28, 2015,
the Company finalized the allocation of the purchase price to the identifiable assets acquired and liabilities assumed based on its estimates of their fair values on the acquisition date. The determination of the fair values of the acquired assets and assumed liabilities (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. The estimates and assumptions include the projected timing and amount of future cash flows and discount rates reflecting risk inherent in the future cash flows. Of the acquired intangible assets,
$5.2
million was assigned to customer lists, which are being amortized over the estimated remaining lives of between
4
to
11
years,
$35.5
million was assigned to trademarks,
$1.1
million was assigned to leasehold positions and
$16.0
million was assigned to goodwill, which is
not
expected to be deductible for tax purposes. The goodwill recognized in conjunction with our acquisition of Harry & David 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. It also includes certain other intangible assets that do
not
qualify for separate recognition, such as an assembled workforce.
The following table summarizes the final allocation of the purchase price to the estimated fair values of assets acquired and liabilities assumed at the date of the acquisition:
| | | Harry & David Final Purchase Price Allocation | |
| | | | |
| Current assets | | $ | 126,268 | |
| Intangible assets | | | 41,827 | |
| Goodwill | | | 16,042 | |
| Property, plant and equipment | | | 105,079 | |
| Other assets | | | (131 | ) |
| Total assets acquired | | | 289,085 | |
| | | | | |
| Current liabilities, including short-term debt | | | 104,513 | |
| Deferred tax liabilities | | | 42,048 | |
| Other liabilities assumed | | | 24 | |
| Total liabilities assumed | | | 146,585 | |
| Net assets acquired | | $ | 142,500 | |
The estimated fair value of the acquired work in process and finished goods inventory was determined utilizing the income approach. The income approach estimates the fair value of the inventory based on the net retail value of the inventory less operating expenses and a reasonable profit allowance. 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 deferred revenue was determined based on the costs to perform the remaining services and/or satisfy the Company
’s remaining obligations, plus a reasonable profit for those activities. These remaining costs exclude sales and marketing expenses since the Deferred Revenue has already been “sold,” and
no
additional sales and marketing expenses will be incurred. The reasonable profit to be earned on the deferred revenue was estimated based on the profit mark-up that the Company earns on similar services.
The estimated fair value of property, plant and equipment was determined utilizing a combination of the cost, sales comparison, market, and excess earnings method approaches, as follows:
Under the cost approach a replacement cost of the asset is
first
determined based on replacing the real property with assets of equal utility and functionality, developed based on both the indirect and the direct cost methods. The indirect cost method includes multiplying the assets
’ historical costs by industry specific inflationary trend factors to yield an estimated replacement cost. In applying this method, all direct and indirect costs including tax, freight, installation, engineering and other associated soft costs were considered. The direct cost method includes obtaining a current replacement cost estimate from the Company and equipment dealers, which includes all applicable direct and indirect costs. An appropriate depreciation allowance is then applied to the replacement cost based on the effective age of the assets relative to the expected normal useful lives of the assets, condition of the assets, and the planned future utilization of the assets. The determination of fair value also includes considerations of functional obsolescence and economic obsolescence, where applicable.
The sales comparison approach was considered for certain real estate property. Under the sales comparison approach, an estimate of fair value is determined by comparing the property being valued to similar properties that have been sold within a reasonable period from the valuation date, applying appropriate units of comparison.
The market approach was considered for certain assets with active secondary markets including agricultural equipment, automobiles, computer equipment, and general equipment, mobile equipment, packaging machinery and semi-tractors. Under the market approach market, comparables for the assets are obtained from equipment dealers, resellers, industry databases, and published price guides. The market comparables are then adjusted to the subject assets based on age, condition or type of transaction. All applicable direct and indirect costs are also considered and reflected in the final fair value determination.
The fair value of orchards in production was determined based on the excess earnings method under the income approach. This valuation approach assumed that the orchards
’ production could be sold independently through a wholesale market rather than Harry & David’s retail channel. The excess earnings method required calculating future crop revenue as determined by multiplying the future crop volume in tons to be produced by the projected price per ton based on the USDA “Agricultural Prices” report released
January 31, 2015
by the National Agricultural Statistics Services. Appropriate expenses were deducted from the sales attributable to the orchards and economic rents were charged for the return on contributory assets. The after-tax cash flows attributable to the asset were discounted back to their net present value at an appropriate rate of return and summed to calculate the value of the orchards.
The estimated fair value of the acquired trademarks 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 association 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 Harry & David are reflected in the Company
’s consolidated financial statements from the date of acquisition, within its Gourmet Food & Gift Baskets segment.
Harry & David contributed net revenues of
$359.7
million and operating income of approximately
$24.6
million from
September 30, 2014
through
June 28, 2015.
These amounts are
not
necessarily indicative of the results of operations that Harry & David would have realized had it continued to operate as a stand-alone company during the period presented due to integration activities since the acquisition date, and due to costs that are now reflected in the Company’s unallocated corporate costs which are
not
allocated to Harry & David.
Disposition of Colonial Gifts Limited ("iFlorist")
During
October 2015,
the Company completed the sale of substantially all of the assets of iFlorist to Euroflorist AB (“Euroflorist”), a pan-European floral and gifting company headquartered in Malmo, Sweden. As consideration for the assets sold, the Company received an investment in Euroflorist with a fair value on the date of sale of approximately
$1.5
million. (The Company will account for this investment using the cost method as it does
not
possess the ability to exercise significant influence over Euroflorist.). The Company recorded a loss on the sale in the amount of
$2.1
million which is included within “Other (income) expense, net” in the condensed consolidated statements of operations.
. Significant Accounting Policies
The consolidated financial statements include the accounts of
1
-
800
-FLOWERS.COM, Inc. and its subsidiaries (collectively, the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation. During fiscal
2017,
2016
and
2015
approximately
1%,
1%
and
2%
respectively, of consolidated net revenue came from international sources.
The Company
’s fiscal year is a
52
- or
53
-week period ending on the Sunday nearest to
June 30.
Fiscal years
2017
and
2015,
which ended on
July 2, 2017
and
June 28, 2015,
respectively consisted of
52
weeks. Fiscal year
2016,
which ended on
July 3, 2016,
consisted of
53
weeks
.
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.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits with banks, highly liquid money market funds, United States government securities, overnight repurchase agreements and commercial paper with maturities of
three
months or less when purchased.
Inventories are valued at the lower of cost or market using the
first
-in,
first
-out method of accounting.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation expense is computed using the straight-line method over the assets
’ estimated useful lives. Amortization of leasehold improvements and capital leases is computed using the straight-line method over the shorter of the estimated useful lives and the initial lease terms. The Company capitalizes certain internal and external costs incurred to acquire or develop internal-use software. Capitalized software costs are amortized on a straight-line basis over the estimated useful life of the software. Orchards in production, consisting of direct labor and materials, supervision and other items, are capitalized as part of capital projects in progress – orchards until the orchards produce fruit in commercial quantities. Upon attaining commercial levels of production the capital investments in these orchards are recorded as land improvements. Estimated useful lives are periodically reviewed, and where appropriate, changes are made prospectively. The Company’s property plant and equipment is depreciated using the following estimated lives:
| Building and building improvements (years) | 10-40 |
| Leasehold improvements (years) | 3-10 |
| Furniture, fixtures and production equipment (years) | 3-10 |
| Software (years) | 3-7 |
| Orchards in production and land improvements | 15-35 |
Property, plant and equipment are reviewed for impairment whenever changes in circumstances or events
may
indicate that the carrying amounts are
not
recoverable.
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in each business combination, with the carrying value of the Company
’s goodwill allocated to its reporting units, in accordance with the acquisition method of accounting. Goodwill is
not
amortized, but it is subject to an annual assessment for impairment, which the Company performs during the
fourth
quarter, or more frequently if events occur or circumstances change such that it is more likely than
not
that an impairment
may
exist. The Company tests goodwill for impairment at the reporting unit level. The Company identifies its reporting units by assessing whether the components of its operating segments constitute businesses for which discrete financial information is available and management of each reporting unit regularly reviews the operating results of those components.
In applying the goodwill impairment test, the Company has the option to perform a qualitative test (also known as “Step
0”
) or a
two
-step quantitative test (consisting of “Step
1”
and “Step
2”
). Under the Step
0
test, the Company
first
assesses qualitative factors to determine whether it is more likely than
not
that the fair value of the reporting units is less than its carrying value. Qualitative factors
may
include, but are
not
limited to economic conditions, industry and market considerations, cost factors, overall financial performance of the reporting unit and other entity and reporting unit specific events. If after assessing these qualitative factors, the Company determines it is “more-likely-than-
not”
that the fair value of the reporting unit is less than the carrying value, then performing the
two
-step quantitative test is necessary.
The
first
step (“Step
1”
) of the
two
-step quantitative test requires comparison of the fair value of each of the reporting units to the respective carrying value. If the carrying value of the reporting unit is less than the fair value,
no
impairment exists and the
second
step (“Step
2”
) is
not
performed. If the carrying value of the reporting unit is higher than the fair value, Step
2
must be performed to compute the amount of the goodwill impairment, if any. In Step
2,
the impairment is computed by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized for the excess.
The Company generally estimates the fair value of a reporting unit using an equal weighting of the income and market approaches. The Company uses industry accepted valuation models and set criteria that are reviewed and approved by various levels of management and, in certain instances, the Company engages
third
-party valuation specialists. Under the income approach, the Company uses a discounted cash flow methodology which requires management to make significant estimates and assumptions related to forecasted revenues, gross profit margins, operating income margins, working capital cash flow, perpetual growth rates, and long-term discount rates, among others. For the market approach, the Company uses the guideline public company method. Under this method the Company utilizes information from comparable publicly traded companies with similar operating and investment characteristics as the reporting units, to create valuation multiples that are applied to the operating performance of the reporting unit being tested, in order to obtain their respective fair values. The Company also reconciles the aggregate fair values of its reporting units determined in the
first
step (as described above) to its current market capitalization, allowing for a reasonable control premium
.
During fiscal
2017
and fiscal
2016
the Company performed a Step
0
analysis and determined that it was
not
“more likely than
not”
that the fair values of the reporting units were less than their carrying amounts.
During fiscal
2015,
the Company performed the
two
-step quantitative impairment test and determined that the estimated fair value of the Company
’s reporting units significantly exceeded their respective carrying values (including goodwill allocated to each respective reporting unit).
Future changes in the estimates and assumptions above could materially affect the results of our reviews for impairment of goodwill.
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.
Definite-lived intangibles are reviewed for impairment whenever changes in circumstances or events
may
indicate that the carrying amounts are
not
recoverable. When such events or changes in circumstances occur, a recoverability test is performed comparing projected undiscounted cash flows from the use and eventual disposition of an asset or asset group to its carrying value. If the projected undiscounted cash flows are less than the carrying value, then an impairment charge would be recorded for the excess of the carrying value over the fair value, which is determined by discounting future cash flows.
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.
During fiscal
2017
and fiscal
2016
the Company performed a Step
0
analysis and determined that it is
not
“more likely than
not”
that the fair values of the indefinite-lived intangibles were less than their carrying amounts.
During fiscal
2015,
the Company performed the quantitative impairment test and determined that
the estimated fair value of the Company's intangibles exceeded their respective carrying value. Future changes in the estimates and assumptions above could materially affect the results of our reviews for impairment of intangibles.
The Company accounts for business combinations in accordance with ASC Topic
805
which requires, among other things, the acquiring entity in a business combination to recognize the fair value of all the assets acquired and liabilities assumed; the recognition of acquisition-related costs in the consolidated results of operations; the recognition of restructuring costs in the consolidated results of operations for which the acquirer becomes obligated after the acquisition date; and contingent purchase consideration to be recognized at their fair values on the acquisition date with subsequent adjustments recognized in the consolidated results of operations. The fair values assigned to identifiable intangible assets acquired are determined primarily by using an income approach which is based on assumptions and estimates made by management. Significant assumptions utilized in the income approach are based on company specific information and projections which are
not
observable in the market and are therefore considered Level
3
measurements. The excess of the purchase price over the fair value of the identified assets and liabilities is recorded as goodwill. Operating results of the acquired entity are reflected in the Company
’s consolidated financial statements from date of acquisition.
The Company capitalizes the costs of producing and distributing its catalogs. These costs are amortized in direct proportion to actual sales from the corresponding catalogs over a period
not
to exceed
12
months. Included within prepaid and other current assets was
$2.7
million and
$3.0million
at
July 2, 2017
and
July 3, 2016
respectively, relating to prepaid catalog expenses.
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 investments consist of a
30.0%
interest in Flores Online, a Sao Paulo, Brazil based internet floral and gift retailer, that the Company made on
May 31, 2012.
The book value of this investment was
$1.0
million as of
July 2, 2017
and
$1.1
million as of
July 3, 2016,
and is included in the “Other assets” line item within the Company’s consolidated balance sheets. The Company’s equity in the net loss of Flores Online for both the years ended
July 2, 2017
and
July 3, 2016
was
$
million. During the quarter ended
September 27, 2015,
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
$1.7
million, which is included within the “Other (income) expense, net” line item in the Company’s consolidated statement of income in fiscal
2016.
Investments in non-marketable equity instruments of private companies, where the Company does
not
possess the ability to exercise significant influence, are accounted for under the cost method. Cost method investments are originally recorded at cost, and are included within the “Other assets” line item within the Company
’s consolidated balance sheets. The aggregate carrying amount of the Company’s cost method investments was
$1.7
million as of
July 2, 2017 (
including a
$1.5
million investment in Euroflorist – see
for details) and
$1.7
million as of
July 3, 2016.
During the year ended
July 3, 2016,
the Company determined that the fair value of
one
of its cost method investments was below its carrying value and that the decline was other-than-temporary. As a result the Company recorded an impairment charge of
$0.5
million, which is included within the “Other (income) expense, net” line items in the Company’s consolidated statements of income in fiscal
2016.
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 in Other assets in the condensed consolidated balance sheets (see
for details).
Each reporting period, the Company uses available qualitative and quantitative information to evaluate its investments for impairment. When a decline in fair value, if any, is determined to be other-than-temporary, an impairment charge is recorded in the consolidated statement of operations.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company maintains cash and cash equivalents with high quality financial institutions. Concentration of credit risk with respect to accounts receivable is limited due to the Company's large number of customers and their dispersion throughout the United States, and the fact that a substantial portion of receivables are related to balances owed by major credit card companies. Allowances relating to consumer, corporate and franchise accounts receivable (
$1.8
million at
July 2, 2017
and
$2.1
million at
July 3, 2016)
have been recorded based upon previous experience and management
’s evaluation.
Net revenues are generated by e-commerce operations from the Company
’s online and telephonic sales channels as well as other operations (retail/wholesale) and primarily consist of the selling price of merchandise, service or outbound shipping charges, net of discounts, returns and credits. Net revenues are recognized primarily upon product delivery and do
not
include sales tax. Net revenues generated by the Company’s BloomNet Wire Service operations include
membership fees as well as other products and service offerings to florists.
Membership fees are recognized monthly in the period earned, and products sales are recognized upon product shipment with shipping terms primarily FOB shipping point.
Cost of revenues consists 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 manufacturing and production operations.
Marketing and sales expense consists primarily of advertising expenses, catalog costs, online portal and search expenses, 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.
The Company expenses all advertising costs, with the exception of catalog costs (see
Deferred Catalog Costs
above), at the time the advertisement is
first
shown. Advertising expense was
$137.5
million,
$133.1
million and
$130.6
million for the years ended
July 2, 2017,
July 3, 2016
and
June 28, 2015,
respectively.
Technology and Development
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, content development and maintenance and support costs related to the Company’s order entry, customer service, fulfillment and database systems. Costs associated with the acquisition or development of software for internal use are capitalized if the software is expected to have a useful life beyond
one
year and amortized over the software’s useful life, typically
three
to
seven
years. Costs associated with repair maintenance or the development of website content are expensed as incurred, as the useful lives of such software modifications are less than
one
year.
The Company records compensation expense associated with restricted stock awards and other forms of equity compensation based upon t
he fair value of stock-based awards as measured at the grant
date. The cost associated with share-based awards that are subject solely to time-based vesting requirements is recognized over the awards’ service period for the entire award on a straight-line basis. The cost associated with performance-based equity awards is recognized for each tranche over the service period, based on an assessment of the likelihood that the applicable performance goals will be achieved.
The Company does
not
enter into derivative transactions for trading purposes, but rather, on occasion to manage its exposure to interest rate fluctuations. When entering into these transactions, the Company has managed its floating rate debt using interest rate swaps in order to reduce its exposure to the impact of changing interest rates on its consolidated results of operations and future cash outflows for interest. The Company did
not
have any open derivative positions at
July 2, 2017
and
July 3, 2016.
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.
Basic net income per common share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common and dilutive common equivalent shares (consisting primarily of employee stock options and unvested restricted stock awards) outstanding during the period
Recent Accounting Pronouncements
In
May 2014,
the FASB issued ASU
No.
2014
-
09,
“Revenue from Contracts with Customers.” This amended guidance will enhance the comparability of revenue recognition practices and will be applied to all contracts with customers. Expanded disclosures related to the nature, amount, timing, and uncertainty of revenue that is recognized are requirements under the amended guidance. As we continue to evaluate the impact of this ASU, we have determined that the new standard will impact the following areas: the costs of producing and distributing the Company
’s catalogs will be expensed upon shipment, instead of being capitalized and amortized in direct proportion to the actual sales; gift card breakage will be estimated based on the historical pattern of gift card redemption, rather than when redemption is considered remote; the Company will defer revenue at the time the Celebrations Reward loyalty points are earned using a relative fair value approach, rather than accruing a liability equal to the incremental cost of fulfilling its obligations. We have further identified the timing of revenue recognition for e-commerce orders (shipping point versus destination) as a potential issue in our analysis, which is
not
expected to change the total amount of revenue recognized, but could accelerate the timing of when revenue is recognized. We plan to adopt this guidance beginning with the
first
quarter in the fiscal year ending
June 30, 2019
on a retrospective basis with a cumulative adjustment to retained earnings. We are continuing to evaluate the impact that this ASU, and related amendments and interpretive guidance, will have on our consolidated financial statements, including the related disclosures.
In
April 2015,
the FASB issued ASU
No.
2015
-
03,
“Simplifying the Presentation of Debt Issuance Costs,” which amends ASC
835
-
30,
“Interest
– Imputation of Interest.” In order to simplify the presentation of debt issuance costs, ASU
No.
2015
-
03
requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, and
not
recorded as a separate asset. The Company adopted this standard effective
July 4, 2016
and applied it retrospectively to all periods presented. The impact of the adoption of the new guidance was to reclassify
$3.6
million of deferred financing costs previously included within “Other Assets” to “Long-term debt” in the consolidated balance sheets as of
July 3, 2016.
In
July 2015,
the FASB issued ASU
No.
2015
-
11,
“Inventory (Topic
330
).” The pronouncement was issued to simplify the measurement of inventory and changes the measurement from lower of cost or market to lower of cost and net realizable value. ASU
2015
-
11
is effective for the Company
’s fiscal year ending
July 1, 2018.
The adoption of ASU
2015
-
11
is
not
expected to have a significant impact on the Company’s consolidated financial position or results of operations.
In
January 2016,
the FASB issued ASU
No.
2016
-
01,
"Financial Instruments
– Overall: Recognition and Measurement of Financial Assets and Financial Liabilities." The pronouncement requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. This guidance will become effective for the Company's fiscal year ending
June 30, 2019.
The adoption is
not
expected to have a significant impact on the Company’s consolidated financial statements.
In
February 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 impact and expect the ASU will have a material impact on our consolidated financial statements, primarily to the consolidated balance sheets and related disclosures
.
In
March 2016,
the FASB issued ASU
No.
2016
-
09,
“Improvements to Employee Share-Based Payment Accounting.” ASU
No.
2016
-
09
affects all entities that issue share-based payment awards to their employees. ASU
No.
2016
-
09
simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company elected to early adopt the amendments in ASU
2016
-
09,
in fiscal
2017.
As a result, stock-based compensation excess tax benefits are reflected in the Consolidated Statements of Income as a component of the provision for income taxes, whereas they were previously recognized in equity. This change resulted in the recognition of excess tax benefits against income tax expenses, rather than additional paid-in capital, of
$1.0
million for the year ended
July 2, 2017.
There was
no
impact on earnings per share since approximately
700,000
tax benefit shares for the year ended
July 2, 2017,
previously associated with the APIC pool calculation, are
no
longer considered in the diluted share computation. Additionally, our Consolidated Statements of Cash Flows now present excess tax benefits as an operating activity. This change has been applied prospectively in accordance with the ASU and prior periods have
not
been adjusted. Further, the Company has elected to account for forfeitures as they occur, rather than estimate expected forfeitures. The cumulative effect of this change, which was recorded as compensation expense in fiscal
2017,
was
not
material to the financial statements. In addition, this ASU allows entities to withhold an amount up to an employees
’ maximum individual statutory tax rate in the relevant jurisdiction, up from the minimum statutory requirement, without resulting in liability classification of the award. We adopted this change on a modified retrospective basis, with
no
impact to our consolidated financial statements. Finally, this ASU clarified that the cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity. This change does
not
have an impact on the Company’s consolidated financials as it conforms with its current practice.
In
June 2016,
the FASB issued ASU
No.
2016
-
13,
“Financial Instruments-Credit Losses (Topic
326
): Measurement of Credit Losses on Financial Instruments.” ASU
2016
-
13
introduces a new forward-looking “expected loss” approach, to estimate credit losses on most financial assets and certain other instruments, including trade receivables. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. This ASU also expands the disclosure requirements to enable users of financial statements to understand the entity
’s assumptions, models and methods for estimating expected credit losses. ASU
2016
-
13
is effective for the Company’s fiscal year ending
July 4, 2021,
and the guidance is to be applied using the modified-retrospective approach. The Company is currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
In
January 2017,
the FASB issued ASU
No.
2017
-
01,
"Business Combinations (Topic
805
): Clarifying the Definition of a Business (ASU
2017
-
01
)," which revises the definition of a business and provides new guidance in evaluating when a set of transferred assets and activities is a business. ASU
2017
-
01
is effective for the Company's fiscal year ending
June 30, 2019,
with early adoption permitted, and should be applied prospectively. We do
not
expect the standard to have a material impact on our consolidated financial statements.
In
January 2017,
the FASB issued ASU
No.
2017
-
04,
"Intangibles - Goodwill and Other (Topic
350
): Simplifying the Test for Goodwill Impairment," 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.
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. This guidance will be effective for the Company’s fiscal year ending
June 30, 2019
and
may
be applied retrospectively. The Company is currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
In
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.
ASU
2017
-
09
is effective for the Company's fiscal year ending
June 30, 2019,
with early adoption permitted, and should be applied prospectively to an award modified on or after the adoption date. The Company is currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
Certain balances in the prior fiscal years have been reclassified to conform to the presentation in the current fiscal year. See
“Recent Accounting Pronouncements”
above regarding the impact of our adoption of ASU
No.
2015
-
13.