General
Our fiscal year ends on the Saturday in December closest to
The discussion of our financial condition and results of operations for the years endedDecember 26, 2020 andApril 30, 2019 , included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") can be found in Exhibit 99.1 of Form 8-K filed onJune 25, 2021 , to reflect certain retrospective revisions for discontinued operations and changes in reportable segments in the consolidated financial statements of the Company in its Annual Report on Form 10-K for the year endedDecember 26, 2020 that was previously filed with theSecurities and Exchange Commission ("SEC") onMarch 10, 2021 (the "Form 10-K").
Overview
We are an owner and operator of franchised and franchisable businesses that continually looks to grow our portfolio of brands while utilizing our operating and capital allocation philosophy to generate strong cash flows. We currently operate six reportable segments: Vitamin Shoppe,Pet Supplies Plus , Badcock, American Freight, Buddy's, and Sylvan. 29
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Our Vitamin Shoppe segment is an omnichannel specialty retailer of vitamins, minerals, herbs, specialty supplements, sports nutrition and other health and wellness products. OurPet Supplies Plus segment is a leading franchisor and retailer of pet supplies and services. Our Badcock segment carries a complete line of furniture, appliances, bedding, electronics, home office equipment, accessories and seasonal items in a showroom format. Our American Freight segment is a retail chain offering in-store and online access to furniture, mattresses, new and out-of-box appliances and home accessories at discount prices. OnOctober 23, 2019 , we completed the acquisition of theSears Outlet business ("Sears Outlet ") fromSears Hometown and Outlet Stores, Inc. (the "Sears Outlet Acquisition").Sears Outlet has been rebranded asAmerican Freight Outlet and is included in our American Freight segment. Our Buddy's segment is a specialty retailer of high quality, name brand consumer electronic, residential furniture, appliances and household accessories through rent-to-own agreements. Our Sylvan segment is an established and growing franchisor of supplemental education for Pre-K-12 students and families inthe United States andCanada .
Our revenue is derived primarily from merchandise sales, rental revenue, and service revenue comprised of royalties and other fees required from our franchisees, licensees, and financing programs.
When evaluating our performance, management focuses on several metrics that we believe are critical to our success:
•Net change in retail and franchise outlets. The change in retail and franchise locations from year to year is a function of new locations opening, offset by locations that we or our franchisees close. Please see section 2. Properties of this annual report for the number of locations at
•Same-store or comparable store sales. The difference in revenue generated by the segment's existing store locations over a certain period (often a fiscal week, month, or quarter), compared to an identical period in the past, usually in the previous year. A segment's store becomes a comparable store at the beginning of the fiscal period following the one year anniversary of the store open date (or the beginning of the 13th fiscal period after the store opens). If a store relocates outside of the current trade area or defined territory, it is removed from the comparable store base and is treated as a new store. On-line revenue is included in the overall segment comparable store sales calculation. •Adjusted EBITDA. Management focuses on adjusted EBITDA as a measure of the cash flow from recurring operations from the businesses. Adjusted EBITDA represents net income (loss), before income taxes, interest expense, depreciation and amortization, and certain other items.
Acquisitions
OnDecember 27, 2020 , we completed our acquisition ofFurniture Factory Outlet ("FFO Home"). For a complete description of the FFO Home Acquisition, refer to "Note 2 - Acquisitions" in the Notes to the Consolidated Financial Statements. OnMarch 10, 2021 , we completed our acquisition ofPSP Midco, LLC ("Pet Supplies Plus"). For a complete description of the Pet Supplies Plus Acquisition, refer to "Note 2 - Acquisitions" in the Notes to the Consolidated Financial Statements. OnSeptember 27, 2021 , we completed our acquisition of Sylvan. For a complete description of the Sylvan Acquisition, refer to "Note 2 - Acquisitions" in the Notes to the Consolidated Financial Statements. OnNovember 22, 2021 , we completed our acquisition of Badcock. For a complete description of the Badcock Acquisition, refer to "Note 2 - Acquisitions" in the Notes to the Consolidated Financial Statements.
Discontinued operations
As disclosed above, onFebruary 21, 2021 , we entered into the Purchase Agreement withNextPoint to sell ourLiberty Tax business. In connection with the Purchase Agreement, the parties entered into a transition services agreement pursuant to which both parties agreed to provide certain transition services to each other for a period not to exceed twelve months. OnJuly 2, 2021 , we completed the transaction and received total consideration of$255.3 million , consisting of$181.2 million in cash and$74.1 million in proportionate voting shares ofNextPoint recorded as an investment in equity securities in "Other non-current assets" on the Consolidated Balance Sheet. The transaction resulted in a gain on the sale of$188.1 million recorded in "Income (loss) from discontinued operations, net of tax" on the Consolidated Statement of Operations. As part of the divestiture, we incurred transaction costs of$7.1 million which were paid using shares ofNextPoint . As a result of the transaction, the financial position and results of operations of the Liberty Tax business are presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented. 30
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Table of Contents Results of Operations
For the year ended
As described above, ourLiberty Tax business is reported as a discontinued operation and its results of operations are excluded from our results of operations. For the fiscal year endedApril 30, 2019 ,Liberty Tax was our only business, therefore, no continuing operations existed for that fiscal year and comparative information is not provided. The following table sets forth the results of our operations for the years endedDecember 25, 2021 , andDecember 26, 2020 : Fiscal Years Ended Change (In thousands) 12/25/2021 12/26/2020 $ % Total revenues$ 3,255,204 $ 2,029,727 $ 1,225,477 60 % Total operating expenses 3,028,853 1,977,216 1,051,637 53 % Income (loss) from operations 226,351 52,511 173,840 331 % Net income (loss) from continuing operations 191,966 20,645 171,321 830 % Net income (loss) from discontinued operations, net of tax 171,822 4,419 167,403 3,788 % Net income (loss) attributable to Franchise Group, Inc.$ 363,788 $ 25,064 $ 338,724 1351 %
Revenues. The table below presents the components and the evolution of our revenues for the financial years ended
Fiscal Years Ended Change (In thousands) 12/25/2021 12/26/2020 $ % Product$ 3,012,471 $ 1,899,662 $ 1,112,809 59 % Service and other 209,103 65,798 143,305 218 % Rental 33,630 64,267 (30,637) (48) % Total revenue$ 3,255,204 $ 2,029,727 $ 1,225,477 60 % Our total revenue increased by$1.2 billion , or 60%, in the year endedDecember 25, 2021 compared to the year endedDecember 26, 2020 . This increase was primarily due to the Pet Supplies Plus Acquisition onMarch 10, 2021 , which increased revenue by$917.4 million , the Badcock Acquisition onNovember 22, 2021 , which increased revenue by$102.1 million , and the Sylvan Acquisition onSeptember 27, 2021 , which increased revenue by$9.7 million . The$30.6 million decrease in rental revenue was due to the refranchising of 47 Buddy's' Company-owned stores onNovember 10, 2020 and an additional 8 stores onAugust 25, 2021 . Operating expenses. The following table details the amounts and changes in our operating expenses for the years endedDecember 25, 2021 andDecember 26, 2020 : Fiscal Years Ended Change (In thousands) 12/25/2021 12/26/2020 $ % Cost of revenue: Product$ 1,892,741 $ 1,136,054 $ 756,687 67 % Service and other 16,506 2,149 14,357 668 % Rental 11,552 21,905 (10,353) (47) % Total cost of revenue 1,920,799 1,160,108 760,691 66 % Selling, general and administrative expenses 1,108,054 817,108 290,946 36 % Total operating expenses$ 3,028,853 $ 1,977,216 $ 1,051,637 53 % Total operating expenses increased$1.1 billion , or 53%, in the year endedDecember 25, 2021 compared to the year endedDecember 26, 2020 . This increase was primarily due to the Pet Supplies Plus Acquisition onMarch 10, 2021 , which increased operating expenses by$875.8 million , the Badcock Acquisition onNovember 22, 2021 , which increased operating expenses by$79.4 million and the Sylvan Acquisition onSeptember 27, 2021 , which increased operating expenses by$10.4 31
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million. the
Non-operating income (expenses). The following table presents certain information regarding our non-operating income (expenses) for the years ended
Fiscal Years Ended Change (Fiscal 2021 vs. Fiscal 2020) (In thousands) 12/25/2021 12/26/2020 4/30/2019 $ % Bargain purchase gain$ 132,559 $ - -$ 132,559 100 % Other (67,368) (5,294) - (62,074) 1,173 % Interest expense, net (133,114) (96,774) - (36,340) 38 % Non-operating income (expense)$ (67,923) $ (102,068) $ -$ 34,145 (33) %
Non-operating income (expenses) increased
• Increased bargain purchase gain
•Other expenses increased$62.1 million for the year endedDecember 25, 2021 due to a prepayment penalty of$36.7 million from the repayment of the Franchise Group New Holdco Term Loan and ABL Term Loan and a$31.8 million loss related to our investment inNextPoint ; and •Interest expense, net increased by$36.3 million due to the write-off of$29.3 million ,$6.1 million and$4.7 million of deferred financing costs from the termination of the Franchise Group New Holdco Term Loan and ABL Term Loan, the$182.1 million principal payment on the First Lien Term Loan and the$219.0 million principal payment on the First Lien Badcock Term Loan. These increases were partially offset by the reduction in amortization of deferred financing costs.
Income taxes. The following table sets forth certain information regarding our income taxes for the years ended
Fiscal Years Ended
Change
(In thousands) 12/25/2021 12/26/2020 $ % Gain (loss) before income taxes$ 158,428 $ (49,557) $ 207,985 (420) % Income tax benefit (33,538) (60,501) 26,963 (45) % Effective tax rate (21.2) % 122.1 % The decrease in the effective tax rate from 122.1% to (21.2)% for the year endedDecember 25, 2021 compared to the year endedDecember 26, 2020 is primarily due to a$45.2 million release of a valuation allowance in the current year, on the basis of management's reassessment of the amount of its deferred tax assets that are more likely than not to be realized. In addition, the bargain purchase gain recorded in the Badcock Acquisition in the current year is disregarded for tax purposes, resulting in a permanent benefit. In the prior year, the Company recorded an income tax benefit of$52.3 million on a pre-tax loss of$50.0 million related to the Coronavirus Aid, Relief, and Economic Security (the "CARES Act"), which was enacted onMarch 27, 2020 . The CARES Act retroactively changed the eligibility of certain assets for expense treatment in the year placed in service, back to 2018, and permitted any net operating loss for the tax years 2018, 2019, and 2020 to be carried back for five years.
Net revenue. In the year ended
in the year ended
Segment information
Our operations are conducted in six reporting business segments: Vitamin Shoppe,Pet Supplies Plus , Badcock, American Freight, Buddy's, and Sylvan. We define our segments as those operations whose results our chief operating decision maker ("CODM") regularly reviews to analyze performance and allocate resources. Because the Pet Supplies Plus Acquisition, Sylvan Acquisition, and Badcock Acquisition occurred in the year endedDecember 25, 2021 , comparable information is not available; therefore,Pet Supplies Plus , Sylvan, and Badcock segment information is not provided. 32
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Table of Contents Vitamin Shoppe
The following table summarizes the results of operations of our Vitamin Shoppe segment for the years ended
Fiscal Years Ended Change (In thousands) 12/25/2021 12/26/2020 $ % Total revenues$ 1,172,725 $ 1,035,964 $ 136,761 13 % Operating expenses 1,068,721 1,030,593 38,128 4 % Operating income (loss)$ 104,004 $ 5,371 $ 98,633 1,836 % Total revenue for our Vitamin Shoppe segment increased$136.8 million , or 13%, for the year endedDecember 25, 2021 as compared to the year endedDecember 26, 2020 . The increase in revenue was the result of a 14.4% increase in comparable store sales, which was the driven by strong customer traffic, several new product introductions throughout the year and the continuation in demand for health and wellness products. Operating expenses for the Vitamin Shoppe segment increased$38.1 million , or 4%, for the year endedDecember 25, 2021 as compared to the year endedDecember 26, 2020 . The increase in operating expenses was primarily driven by: •a$55.2 million increase in cost of revenue correlated to the revenue growth noted above, as a percentage of revenue. Gross margin, excluding the inventory step-up amortization in 2020 due to purchase price accounting, decreased approximately ten basis points to 45.2% compared to 45.3% in the prior year due to higher sales for supplement products which have a lower margin.
Increases in operating expenses were partially offset by:
• $20.6 million amortization of inventory increase during the prior year period;
•a$9.8 million decrease in occupancy costs due to 32 fewer stores compared to the prior year; a$2.9 million right-of-use asset impairment in the prior year period; and
•a
American freight
The following table summarizes the operating results of our American Freight segment for the years endedDecember 25, 2021 andDecember 26, 2020 . Because the American Freight Acquisition occurred in the year endedDecember 26, 2020 , comparable information for the year endedApril 30, 2019 is not available: Fiscal Years Ended Change (In thousands) 12/25/2021 12/26/2020 $ % Total revenues$ 988,892 $ 896,431 $ 92,461 10 % Operating expenses 922,351 856,083 66,268 8 % Operating income (loss)$ 66,541 $ 40,348 $ 26,193 65 % Total revenue for our American Freight segment increased$92.5 million , or 10%, for the year endedDecember 25, 2021 as compared to the year endedDecember 26, 2020 . The increase in revenue was primarily driven by the following:
•the inclusion of full first quarter results in the current year (American Freight was acquired on
•increase in turnover linked to the opening of new stores; and
•the FFO Home acquisition.
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Operating expenses for the American Freight segment increased$66.3 million , or 8%, for the year endedDecember 25, 2021 as compared to the year endedDecember 26, 2020 . The increase in operating expenses was primarily driven by the following:
•the inclusion of the first full quarter in the current year (American Freight was acquired on
•higher occupancy costs due to new store openings and store acquisitions; and
•an increase in advertising expenses due to a reduction in advertising in the prior year due to the COVID-19 pandemic.
boyfriend
The following table summarizes the operating results of our Buddy's segment for the years endedDecember 25, 2021 andDecember 26, 2020 . Because the Buddy's Acquisition occurred in the Transition Period, comparable information for the year endedApril 30, 2019 is not available: Fiscal Years Ended Change (In thousands) 12/25/2021 12/26/2020 $ % Total revenues$ 64,409 $ 97,332 $ (32,923) (34) % Operating expenses 47,724 76,968 (29,244) (38) % Operating income (loss)$ 16,685 $ 20,364 $ (3,679) (18) % Total revenue for our Buddy's segment decreased$32.9 million , or (34)%, for the year endedDecember 25, 2021 as compared to the year endedDecember 26, 2020 . The decrease in revenue was primarily driven by the following: •a$30.6 million decrease in rental revenue due to the refranchising of 47 Company-owned stores onNovember 10, 2020 and an additional 8 stores onAugust 25, 2021 . Rental revenue for comparable stores for the year increased to$30.4 million from$29.7 million in the prior year.
•The decline in rental income was partially offset by an increase in
Operating expenses for the Buddy's segment decreased$29.2 million , or (38)%, for the year endedDecember 25, 2021 as compared to the year endedDecember 26, 2020 . The decrease in operating expenses was primarily driven by the following: •a$10.4 million decrease in rental cost of sales, an$8.2 million decrease in employee compensation, and a$7.3 million decrease in other expenses due to the refranchising of 47 Company-owned stores onNovember 10, 2020 and an additional 8 stores onAugust 25, 2021 . Adjusted EBITDA. To provide additional information regarding our financial results, we have disclosed Adjusted EBITDA in the table below and within this Annual Report. Adjusted EBITDA represents net income (loss), before income taxes, interest expense, depreciation and amortization, and certain other items specified below. We have provided a reconciliation below of Adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure. We have included Adjusted EBITDA in this Annual Report because we believe the presentation of these measures is useful to investors as supplemental measures in evaluating the aggregate performance of our operating businesses and in comparing our results from period to period because they exclude items that we do not believe are reflective of our core or ongoing operating results. These measures are used by our management to evaluate performance and make resource allocation decisions each period. Adjusted EBITDA is also the primary operating metric used in the determination of executive management's compensation. In addition, a measure similar to Adjusted EBITDA is used in our credit facilities. Adjusted EBITDA is not a recognized financial measure under GAAP and may not be comparable to similarly-titled measures used by other companies in our industry. Adjusted EBITDA should not be considered in isolation from or as an alternative to net income (loss), operating income (loss), or any other performance measures derived in accordance with GAAP. 34
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The following table presents a reconciliation of Adjusted EBITDA for the fiscal years endedDecember 25, 2021 andDecember 26, 2020 . Amounts for the year endedApril 30, 2019 are not provided as they are all attributable to discontinued operations. Fiscal Years Ended (In thousands) 12/25/2021 12/26/2020 Net income (loss) from continuing operations$ 191,966 $ 10,944 Add back: Interest expense 133,114 96,774 Income tax benefit (33,538) (60,501) Depreciation and amortization charges 69,086 52,152 Total Adjustments 168,662 88,425 EBITDA 360,628 99,369 Adjustments to EBITDA Executive severance and related costs 302
5,643
Stock based compensation 14,956
8,923
Litigation costs and settlements (1,130) (1,070) Corporate compliance costs 2,172 543 Store closures 2,429 592 Securitized receivables, net (19,919) - Prepayment penalty on early debt repayment 36,726 44,996 Right-of-use asset impairment 2,948 2,895 Integration costs 16,655 2,703 Divestiture costs 515 - Acquisition costs 22,878 26,309 Loss on investment in equity securities 31,773 - Acquisition bargain purchase gain (132,559) - Total Adjustments to EBITDA (22,254) 91,534 Adjusted EBITDA$ 338,374 $ 190,903 Funding Requirements We believe that we have sufficient liquidity to support our ongoing operations and maintain a sufficient liquidity position to meet our obligations and commitments. Our liquidity plans are established as part of our financial and strategic planning processes and consider the liquidity necessary to fund our operating, capital expenditure and debt service needs. We primarily fund our operations and acquisitions through operating cash flows and, as needed, a combination of borrowings under various credit agreements, availability under our revolving credit facilities and the issuance of equity securities. Cash generation can be subject to variability based on many factors, including seasonality, receipt of prepaid payments from area developers, timing of repayment of loans to franchisees and the effects of changes in end markets.
After
Sources and uses of cash
Operational activities
Net cash provided by operating activities decreased$135.5 million in 2021 compared to 2020 due to a$219.1 million increase in cash used for inventory and a$36.1 million decrease in accounts payable and accrued expenses due to the timing of payments. These were partially offset by a$127.5 million increase in cash net income and an$18.5 million increase in other assets due to our investment inNextPoint . Cash net income represents net income adjusted for non-cash or non-operating 35
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activities such as bargain purchase gains, gain on disposal of our Liberty tax business, debt prepayment penalties, change in fair value of investments and amortization of deferred financing costs . Investing activities
Net cash used in investing activities increased$572.9 million in 2021 compared to 2020. This increase was primarily driven by an increase of$710.4 million in cash used for acquisitions and a$23.5 million decrease of proceeds from the sale of company-owned stores partially offset by$179.5 million in cash received from divestitures. Financing activities Net cash provided by financing activities increased$743.6 million in 2021 compared to 2020. The increase was driven by a$1,689.0 million increase in proceeds from the issuance of debt, a$150.7 million decrease in repayments of revolving credit facilities and a$50.1 million increase in proceeds from the issuance of preferred stock. The increases in cash provided by financing activities were partially offset by a$671.1 million increase in repayments of long-term obligations, a$198.0 million reduction in proceeds from the issuance of common stock, a$157.9 million reduction in borrowing under our revolving credit facilities, a$49.1 million increase in payments for debt issuance costs, a$37.9 million increase in dividends paid and a$36.7 million increase in cash paid for penalties for early debt repayment.
Contractual obligations
The following tables summarize our contractual obligations as ofDecember 25, 2021 : Contractual Obligations (in thousands) Total 2022 2023 2024 2025 2026 Thereafter
Finance leases Liabilities related to finance leases
375 $ - Operating lease liabilities 730,172 66,834 199,063 155,360 112,046 80,557 116,312 Long-Term Obligations Secured Borrowing 407,502 302,246 105,256 - - - - Term Loans 1,482,016 4,319 362,252 - - 1,115,445 - ABL Revolver 20,000 - - - - 20,000 - Total Obligations$ 1,909,518 $ 306,565 $ 467,508 $ - $ -$ 1,135,445 $ - Commitments Expiring in Expiring in Expiring in Expiring in (in thousands) Total 2022 2023 2024 2025 Expiring in 2026 Thereafter Guarantees$ 23,925 $ 4,228 $ 3,860 $ 4,506 $ 3,039 $ 2,597$ 5,695 Purchase obligations 145,890 84,249 58,462 2,969 210 - - Total commitments$ 169,815 $ 88,477 $ 62,322 $ 7,475 $ 3,249 $ 2,597$ 5,695
For more information on long-term obligations, refer to “Note 9 – Long-term obligations”, to the consolidated financial statements in section 8.
Leasing
Operating lease obligations. Refer to "Note 8 - Leases", to the Consolidated Financial Statements in Item 8 for information on our operating leases. The obligation above includes amounts for leases that were signed prior toDecember 25, 2021 for stores that were not yet open onDecember 25, 2021 .
Other factors affecting our liquidity
Tax Receivable Agreement. We may be required to make payments under the Tax
Receivable Agreement ("TRA Payments") to the owners of Buddy's (the "Buddy's
Members"). As of December 25, 2021 , we had TRA Payments due to the Buddy's
Members of $17.3 million . Refer to "Note 12 - Income Taxes", to the Consolidated
Financial Statements in Item 8 for more information on the Tax Receivable
Agreement.
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Off-balance sheet arrangements
The Company remains secondarily liable under various real estate leases that were assigned to franchisees who acquired stores from the Company. In the event of the failure of an acquirer to pay lease payments, the Company could be obligated to pay the remaining lease payments which extend through 2033 and aggregated$22.9 million as ofDecember 25, 2021 . If the Company is required to make payments under these guarantees, the Company could seek to recover those amounts from the franchisees or in some cases their affiliates. The Company believes that payment under these guarantees is remote as ofDecember 25, 2021 .
Interest rate risk
We are exposed to various types of market risk in the normal course of our business, including the impact of interest rate changes. We may enter into interest rate swaps to manage exposure to interest rate changes. We do not enter into derivative instruments for any purpose other than cash flow hedging and we do not hold derivative instruments for trading purposes.
Long-term debt. We use short-term and long-term financing to manage our overall interest expense related to our existing floating rate debt, as well as to cover variability in cash flows due to changes in benchmark interest rates related to issuances expected debt. See “Note 9 – Long-term obligations” to the consolidated financial statements in section 8 for more details on the components of our long-term debt as at
Changes in fair value
10 Basis Point
Increase in Underlying 10 Basis Point Decrease
Fair Value Rate in Underlying Rate
Long-term debt$ 1,909,518 $ 190,952 $ (190,952)
Critical accounting policies
The preparation of financial statements requires the use of estimates. Certain of our estimates require a high level of judgment and have the potential to have a material effect on the financial statements if actual results vary significantly from those estimates. Following is a discussion of the estimates that we consider critical. Long-Lived and Right-of-Use Assets. We review our long-lived assets, such as property, plant and equipment, purchased intangibles subject to amortization, and operating lease right-of-use assets, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset group may not be recoverable. We measure recoverability by comparison of the carrying value of an asset to its estimated undiscounted future cash flows expected to be generated by the asset. We recognize and measure potential impairment at the lowest level where cash flows are individually identifiable. If the carrying amount of an asset exceeds its estimated future cash flows, we recognize an impairment charge equal to the amount by which the carrying value of the asset exceeds the fair value of the asset. We determine fair value through various valuation techniques, including discounted cash flow models, quoted market values, and third-party independent appraisals. Business Combinations-Purchase Price Allocation. For acquisitions which meet the definition of a business combination in accordance with ASC 805, we allocate the purchase price to the various tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values, some of which are preliminary as ofDecember 25, 2021 . The excess of the purchase price over the fair values of the assets acquired and liabilities assumed represents goodwill derived from the acquisition. The amount by which the net fair value of assets acquired and liabilities assumed exceeds the fair value of consideration transferred as the purchase price is recorded as a bargain purchase gain. Determining the fair value of certain assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions, which are inherently uncertain. Many of the estimates and assumptions used to determine fair values, such as those used for intangible assets are made based on forecasted information and discount rates. In addition, the judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations. Refer to "Note 2 - Acquisitions" to the Consolidated Financial Statements in Item 8 for additional information.Goodwill and Non-amortizing Intangible Assets.Goodwill and non-amortizing intangible assets are initially recorded at their fair values. These assets are not amortized but are evaluated as of the end of July of each fiscal year, and a more frequent evaluation is performed if an event occurs or circumstances change that would more likely than not reduce the assets fair values below their carrying values. Such events or circumstances could include, but are not limited to, significant negative industry or 37
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economic trends, unanticipated changes in the competitive environment and a significant and sustained decline in our share price.
For goodwill, the Company performs a qualitative and/or quantitative assessment
to determine whether it is more likely than not that each reporting unit's fair
value is less than its carrying value, including goodwill. If the Company
determines that it is more likely than not that the fair value of the reporting
unit is less than its carrying value, the Company then estimates the fair value.
The Company uses either a market multiple method or a discounted cash flow
method to estimate the fair value of its reporting units and recognizes goodwill
impairment for any excess of the carrying amount of a reporting unit's goodwill
over its estimated fair value.
For non-amortizing intangible assets, the Company evaluates its tradenames for
impairment by comparing the fair value, based on an income approach using the
relief-from-royalty method, to its carrying value. If the carrying value of the
asset exceeds its estimated fair value, an impairment loss is recognized in an
amount equal to that excess. The Company's reporting units are determined in
accordance with the provisions of Accounting Standards Codification ("ASC") 350,
"Intangibles - Goodwill and Other (Topic 350)."
Refer to “Note 6 –
Recently issued accounting standards
See “Note 1 – Organization and significant accounting policies” in our consolidated financial statements.
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