Significant Accounting Policies (Policies)

3 Months Ended

Aug. 26, 2018

Basis of Accounting, Policy [Policy Text Block]

Basis of Presentation

The accompanying unaudited consolidated financial statements of Landec have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form

-Q and Article

of Regulation S-

In the opinion of management, all adjustments (consisting of normal recurring accruals) have been made which are necessary to present fairly the financial position of the Company at

August 26, 2018

and the results of operations and cash flows for all periods presented. Although Landec believes that the disclosures in these financial statements are adequate to make the information presented

not

misleading, certain information normally included in financial statements and related footnotes prepared in accordance with GAAP have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission. The accompanying financial data should be reviewed in conjunction with the audited financial statements and accompanying notes included in Landec's Annual Report on Form

-K for the fiscal year ended

May 27, 2018.

May 2018,

the Company discontinued the Food Export business segment. As a result, the Food Export business segment has been reclassified as a discontinued operation under the provisions of Accounting Standards Codification ("ASC")

205

20,

Presentation of Financial Statements - Discontinued Operations

("ASC

205

20"

) and ASC

360,

Property, Plant and Equipment

("ASC

360”

) for the

three

months ended

August 27, 2017.

The results of operations for the

three

months ended

August 26, 2018

are

not

necessarily indicative of the results that

may

be expected for an entire fiscal year because there is some seasonality in Apio’s food business and the order patterns of Lifecore’s customers which

may

lead to significant fluctuations in Landec’s quarterly results of operations.

As disclosed in the Company’s fiscal

2018

Annual Report on Form

-K, the Company determined that it had improperly included accrued capital expenditures in cash used in investing activities from the purchase of property and equipment in its Statements of Cash Flows for the previous annual financial statements and the quarterly financial statements for fiscal years

2018

and

2017.

While the Company concluded that the impact of these errors was

not

material to prior annual periods, the Company concluded that the errors were material to its fiscal years’

2018

and

2017

quarterly Statements of Cash Flows. As a result, cash used in operating and investing activities were both understated. Accordingly, the Company restated its fiscal years

2018

and

2017

quarterly Statements of Cash Flows in Note

– Quarterly Consolidated Financial Information (unaudited), in the Company’s fiscal year

2018

Annual Report on Form

-K. The Statement of Cash Flows for the

three

months ended

August 27, 2017

has been restated to reflect this error correction.

Consolidation, Policy [Policy Text Block]

Basis of Consolidation

The consolidated financial statements are presented on the accrual basis of accounting in accordance with GAAP and include the accounts of Landec Corporation and its subsidiaries, Apio and Lifecore. All intercompany transactions and balances have been eliminated.

Arrangements that are

not

controlled through voting or similar rights are reviewed under the guidance for variable interest entities (“VIEs”). A company is required to consolidate the assets, liabilities, and operations of a VIE if it is determined to be the primary beneficiary of the VIE.

An entity is a VIE and subject to consolidation, if by design: a) the total equity investment at risk is

not

sufficient to permit the entity to finance its activities without additional subordinated financial support provided by any party, including equity holders, or b) as a group the holders of the equity investment at risk lack any

one

of the following

three

characteristics: (i) the power, through voting rights or similar rights to direct the activities of an entity that most significantly impact the entity’s economic performance, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity. The Company reviewed the consolidation guidance and concluded that its equity investment in the non-public company is

not

a VIE.

Use of Estimates, Policy [Policy Text Block]

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make certain estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. The accounting estimates that require management’s most significant and subjective judgments include revenue recognition; loss contingencies; sales returns and allowances; inventories; self-insurance liabilities; recognition and measurement of current and deferred income tax assets and liabilities; the assessment of recoverability of long-lived assets including intangible assets; the valuation of investments; the valuation and recognition of stock-based compensation; the valuation of financial assets and liabilities; and the valuation of contingent consideration liabilities.

These estimates involve the consideration of complex factors and require management to make judgments. The analysis of historical and future trends can require extended periods of time to resolve and are subject to change from period to period. The actual results

may

differ from management’s estimates.

Cash and Cash Equivalents, Policy [Policy Text Block]

Cash and Cash Equivalents

The Company records all highly liquid securities with

three

months or less from date of purchase to maturity as cash equivalents. Cash equivalents consist mainly of money market funds. The market value of cash equivalents approximates their historical cost given their short-term nature.

Reconciliation of Cash and Cash Equivalents and

Restricted

Cash as presented on the Statements of Cash Flows

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows (in thousands):

	August 26, 2018		May 27, 2018			August 27, 2017			May 28, 2017
Cash and cash equivalents	$	1,359	$	2,899		$	8,264		$	5,998
Restricted cash		325		325			325			325
Cash, discontinued operations		—		(8	)		(73	)		(589	)
Cash, cash equivalents and restricted cash	$	1,684	$	3,216		$	8,516		$	5,734

Cash and Cash Equivalents, Restricted Cash and Cash Equivalents, Policy [Policy Text Block]

Restricted Cash

The Company was required to maintain

$325,000

of restricted cash as of both

August 26, 2018

and

May 27, 2018,

related to certain collateral requirements for obligations under its workers’ compensation programs. The restricted cash is included in Other assets in the Company’s accompanying Consolidated Balance Sheets.

Inventory, Policy [Policy Text Block]

Inventories

Inventories are stated at the lower of cost (

first

-in,

first

-out method) or net realizable value and consist of the following (in thousands):

	August 26, 2018		May 27, 2018
Raw materials	$	13,891	$	15,286
Work in progress		3,146		3,672
Finished goods		12,949		12,861
Total	$	29,986	$	31,819

If the cost of the inventories exceeds their net realizable value, provisions are recorded currently to reduce them to net realizable value. The Company also records a provision for slow moving and obsolete inventories based on the estimate of demand for its products.

Related Party Transactions

The Company sells products to and earns license fees from Windset Holdings

2010

Ltd. (“Windset”). During the

three

months ended

August 26, 2018

and

August 27, 2017,

the Company recognized revenues of

$134,000

and

$104,000,

respectively. These amounts have been included in product sales in the accompanying Consolidated Statements of Comprehensive Income. The related receivable balances of

$114,000

and

$334,000

are included in accounts receivable in the accompanying Consolidated Balance Sheets as of

August 26, 2018

and

May 27, 2018,

respectively.

Additionally, unrelated to the revenue transactions above, the Company purchases produce from Windset for sale to

third

parties. During the

three

months ended

August 26, 2018

and

August 27, 2017,

the Company recognized cost of product sales of

$6,000

and

$0,

respectively, in the accompanying Consolidated Statements of Comprehensive Income, from the sale of products purchased from Windset.

All related party transactions are monitored quarterly by the Company and approved by the Audit Committee of the Board of Directors.

Debt, Policy [Policy Text Block]

Debt Issuance Costs

The Company records its line of credit debt issuance costs as an asset, and as such,

$120,000

and

$248,000

were recorded as prepaid expenses and other current assets, and other assets, respectively, as of

August 26, 2018,

and

$120,000

and

$278,000,

respectively, as of

May 27, 2018.

The Company records its term debt issuance costs as a contra-liability, and as such,

$60,000

and

$125,000

was recorded as current portion of long-term debt, and long-term debt, net, respectively, as of

August 26, 2018

and

$60,000

and

$140,000,

respectively, as of

May 27, 2018.

See Note

– Debt, of the Notes to Consolidated Financial Statements for further information.

Fair Value of Financial Instruments, Policy [Policy Text Block]

Financial Instruments

The Company’s financial instruments are primarily composed of commercial-term trade payables, grower advances, notes receivable, and debt instruments. For short-term instruments, the historical carrying amount approximates the fair value of the instrument. The fair value of long-term debt approximates its carrying value.

Cash Flow Hedges

The Company has entered into interest rate swap contracts to manage interest rate risk. These derivative instruments

may

offset a portion of the changes in interest expense. The Company designates these derivative instruments as cash flow hedges. The Company accounts for its derivative instruments as either an asset or a liability and carries them at fair value in Other assets or Other non-current liabilities in the accompanying Consolidated Balance Sheets. The accounting for changes in the fair value of derivative instruments depends on the intended use of the derivative instrument and the resulting designation.

For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of Accumulated Other Comprehensive Income (“AOCI”) in Stockholders’ Equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument, if any, is recognized in earnings in the current period. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions.

Accumulated

Other Comprehensive Income (AOCI)

Comprehensive income consists of

two

components, net income and Other Comprehensive Income (“OCI”). OCI refers to revenue, expenses, and gains and losses that under GAAP are recorded as a component of stockholders’ equity but are excluded from the determination of net income. The Company’s AOCI consists of net deferred gains and losses on its interest rate swap contracts accounted for as cash flow hedges. The components of AOCI, net of tax, are as follows (in thousands):

	AOCI
Accumulated OCI, net, as of May 27, 2018	$	1,148
Unrealized losses on interest rate swap contracts, net of tax effect		(89	)
Amounts reclassified from OCI		—
Accumulated OCI, net, as of August 26, 2018	$	1,059

The Company does

not

expect any transactions or other events to occur that would result in the reclassification of any significant gains or losses into earnings in the next

months.

Investment In Non Public Companies [Policy Text Block]

Investment in Non-Public Company

February 15, 2011,

the Company made its initial investment in Windset which is reported as an Investment in non-public company, fair value, in the accompanying Consolidated Balance Sheets as of

August 26, 2018

and

May 27, 2018.

The Company has elected to account for its investment in Windset under the fair value option. See Note

– Investment in Non-public Company, for further information.

Goodwill and Intangible Assets, Policy [Policy Text Block]

Intangible Assets

The Company’s intangible assets are comprised of customer relationships with a finite estimated useful life of

eleven

thirteen

years, and trademarks, tradenames and goodwill with indefinite useful lives.

Finite-lived intangible assets are reviewed for possible impairment whenever events or changes in circumstances occur that indicate that the carrying amount of an asset (or asset group)

may

not

be recoverable. Indefinite lived intangible assets are reviewed for impairment at least annually. For goodwill and other indefinite-lived intangible assets, the Company performs a qualitative impairment analysis in accordance with ASC

350

35.

Self Insurance Reserve [Policy Text Block]

Partial Self-Insurance on Employee Health and Workers Compensation Plans

The Company provides health insurance benefits to eligible employees under self-insured plans whereby the Company pays actual medical claims subject to certain stop loss limits and self-insures its workers compensation claims. The Company records self-insurance liabilities based on actual claims filed and an estimate of those claims incurred but

not

reported. Any projection of losses concerning the Company's liability is subject to a high degree of variability. Among the causes of this variability are unpredictable external factors such as inflation rates, changes in severity, benefit level changes, medical costs, and claims settlement patterns. This self-insurance liability is included in Other accrued liabilities in the accompanying Consolidated Balance Sheets and represents management's best estimate of the amounts that have

not

been paid as of

August 26, 2018

and

May 27, 2018.

It is reasonably possible that the expense the Company ultimately incurs could differ and adjustments to future reserves

may

be necessary.

Fair Value Measurement, Policy [Policy Text Block]

Fair Value Measurements

The Company uses fair value measurement accounting for financial assets and liabilities and for financial instruments and certain other items measured at fair value. The Company has elected the fair value option for its investment in a non-public company. See Note

– Investment in Non-public Company for further information. The Company also measures its contingent consideration liability at fair value. See Note

– Acquisition of

for further information. The Company has

not

elected the fair value option for any of its other eligible financial assets or liabilities.

The accounting guidance established a

three

-tier hierarchy for fair value measurements, which prioritizes the inputs used in measuring fair value as follows:

Level

– observable inputs such as quoted prices for identical instruments in active markets.

Level

– inputs other than quoted prices in active markets that are observable either directly or indirectly through corroboration with observable market data.

Level

– unobservable inputs in which there is little or

market data, which would require the Company to develop its own assumptions.

As of

August 26, 2018

and

May 27, 2018,

the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis, including its interest rate swap contracts, its minority interest investment in Windset and its contingent consideration liability from the acquisition of

The fair value of the Company’s interest rate swap contracts is determined based on model inputs that can be observed in a liquid market, including yield curves, and is categorized as a Level

fair value measurement and is included in Other assets or Other non-current liabilities in the accompanying Consolidated Balance Sheets.

The fair value of the Company’s contingent consideration liability from the acquisition of

utilizes significant unobservable inputs, including projected earnings before interest, taxes, depreciation and amortization (“EBITDA”) and discount rates. As a result, the Company’s contingent consideration liability associated with the

acquisition is considered a Level

measurement liability and is included in Other non-current liabilities in the accompanying Consolidated Balance Sheets.

The Company has elected the fair value option of accounting for its investment in Windset. The calculation of fair value utilizes significant unobservable inputs, including projected cash flows, growth rates, and discount rates. As a result, the Company’s investment in Windset is considered to be a Level

measurement investment. The change in the fair value of the Company’s investment in Windset for the

three

months ended

August 26, 2018

was due to the Company’s

26.9%

minority interest in the change in the fair market value of Windset during the period. In determining the fair value of the investment in Windset, the Company utilizes the following significant unobservable inputs in the discounted cash flow models:

	At August 26, 2018			At May 27, 2018
Revenue growth rates		6	%		6	%
Expense growth rates		6	%		6	%
Income tax rates		15	%		15	%
Discount rates		12	%		12	%

The revenue growth, expense growth, and income tax rate assumptions are considered the Company's best estimate of the trends in those items over the discount period. The discount rate assumption takes into account the risk-free rate of return, the market equity risk premium, and the company’s specific risk premium and then applies an additional discount for lack of liquidity of the underlying securities. The discounted cash flow valuation model used by the Company has the following sensitivity to changes in inputs and assumptions (in thousands):

	Impact on value of investment in Windset as of August 26, 2018
10% increase in revenue growth rates	$	10,100
10% increase in expense growth rates	$	(9,400	)
10% increase in income tax rates	$	(500	)
10% increase in discount rates	$	(4,300	)

Imprecision in estimating unobservable market inputs can affect the amount of gain or loss recorded for a particular position. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

The following table summarizes the fair value of the Company’s assets and liabilities that are measured at fair value on a recurring basis (in thousands):

	Fair Value at August 26, 2018						Fair Value at May 27, 2018
Assets:	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Interest rate swap contract	$	—	$	1,466	$	—	$	—	$	1,529	$	—
Investment in non-public company		—		—		67,500		—		—		66,500
Total assets	$	—	$	1,466	$	67,500	$	—	$	1,529	$	66,500

Liabilities:
Interest rate swap contract	$	—	$	54	$	—	$	—	$	—	$	—
Contingent consideration liability		—		—		4,000		—		—		4,000
Total liabilities	$	—	$	54	$	4,000	$	—	$	—	$	4,000

Revenue Recognition, Policy [Policy Text Block]

Revenue Recognition

See Note

– Business Segment Reporting, for a discussion about the Company’s

three

business segments; namely, Natural Foods, Biomaterials, and Other.

The Company follows the

five

step, principles-based model to recognize revenue upon the transfer of promised goods or services to customers and in an amount that reflects the consideration for which the Company expects to be entitled in exchange for those goods or services. Revenue, net of estimated allowances and returns, is recognized when the Company has completed its performance obligations under a contract and control of the product is transferred to the customer. Substantially all revenue is recognized at the time shipment is made or upon delivery as control of the product is transferred to the customer.

The revenue streams within the Company are consistent with those disclosed within Note

– Business Segment Reporting. For descriptions of the Company’s product offerings and segments refer to Note

– Business Segment Reporting in our annual report on Form

-K for the year ended

May 27, 2018.

The Company’s standard terms of sale are included in its contracts, purchase orders, and invoices. As such, all revenue is considered revenue recognized from contracts with customers. Shipping and other transportation costs charged to customers are recorded in both revenue and cost of goods sold. The Company has elected to account for shipping and handling as fulfillment activities, and

not

a separate performance obligation. The Company’s standard payment terms with its customers range from

days to

days. Certain customers

may

receive cash-based incentives (including: volume rebates, discounts, and slotting fees), which are accounted for as variable consideration to the Company’s variable consideration. The Company estimates these sales incentives based on the expected amount to be provided to its customers and reduces revenues recognized towards its performance obligations. The Company does

not

anticipate significant changes in its estimates for variable consideration.

Occasionally, the Company enters into bill-and-hold arrangements, where it invoices the customer for products even though it retains possession of the products until a point-in-time in the future when the products will be shipped to the customer. In these contracts, the primary performance obligation is satisfied, and revenue is generally recognized, at a point-in-time when the product is segregated from the Company’s general inventory, it's ready for shipment to the customer, and the Company does

not

have the ability to use the product or re-deploy it to another customer.

The Company disaggregates its revenue by segment product lines based on how it markets its products and reviews results of operations. The following tables disaggregate segment revenue by major product lines (in thousands):

	Three Months Ended
Natural Foods :	August 26, 2018		August 27, 2017
Salads	$	49,080	$	42,048
Core vegetables		61,750		58,075
Other		1,221		3,494
Total	$	112,051	$	103,617

	Three Months Ended
Biomaterials :	August 26, 2018		August 27, 2017
Aseptic	$	5,766	$	7,026
Fermentation		3,070		2,791
Development services		3,781		2,347
Total	$	12,617	$	12,164

Shipping and Handling Cost, Policy [Policy Text Block]

Shipping and Handling

Shipping and handling costs are incurred to move the Company’s products from production and storage facilities to the customer. Handling costs are incurred from the point the product is segregated from the Company’s general inventory until it is provided to the shipper and generally include costs to store, move and prepare the products for shipment. The cost of shipping and handling services is recognized in Cost of product sales in the accompanying Consolidated Statements of Comprehensive Income.

Commitments and Contingencies, Policy [Policy Text Block]

Legal Contingencies

In the ordinary course of business, the Company is involved in various legal proceedings and claims.

The Company makes a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least each fiscal quarter and adjusted to reflect the impacts of negotiations, estimate settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. Legal fees are expensed in the period in which they are incurred.

Apio has been the target of a union organizing campaign which has included

three

unsuccessful attempts to unionize Apio's Guadalupe, California processing plant. The campaign has involved a union and over

100

former and current employees of Pacific Harvest, Inc. and Rancho Harvest, Inc. (collectively "Pacific Harvest"), Apio's labor contractors at its Guadalupe, California processing facility, bringing legal actions before various state and federal agencies, the California Superior Court, and initiating over

100

individual arbitrations against Apio and Pacific Harvest.

The legal actions consisted of

three

main types of claims: (

) Unfair Labor Practice claims ("ULPs") before the National Labor Relations Board (“NLRB”), (

) discrimination/wrongful termination claims before state and federal agencies and in individual arbitrations, and (

) wage and hour claims as part of

two

Private Attorney General Act (“PAGA”) cases in state court and in over

100

individual arbitrations.

The ULP claims were settled in fiscal year

2017

for

$310,000.

Apio was responsible for half of this settlement, or

$155,000.

May 5, 2017,

the parties to the remaining actions executed a Settlement Agreement concerning the discrimination/wrongful termination claims and the wage and hour claims which covers all non-exempt employees of Pacific Harvest working at Apio's Guadalupe, California processing facility from

September 2011

through the settlement date. Under the Settlement Agreement, the plaintiffs were paid

$6.0

million in

three

installments:

$2.4

million of which was paid in

July 2017,

$1.8

million of which was paid in

November 2017

and

$1.8

million of which was paid in

July 2018,

representing the final payment due under the settlement agreement. The Company and Pacific Harvest have each agreed to pay

one

half of the settlement payments. The Company paid the entire

first

two

installments of

$4.2

million and will be reimbursed by Pacific Harvest for its

$2.1

million portion, of which

$800,000

and

$1.3

million is included in Prepaid and other current assets and Other assets, respectively, in the accompanying Consolidated Balance Sheets. This receivable will be repaid through monthly payments until fully paid, which the Company expects to occur by

December 2020.

The Company’s recourse against non-payment by Pacific Harvest is its security interest in assets owned by Pacific Harvest.

As of

August 26, 2018

and

May 27, 2018,

the Company had accrued

and

$1.0

million, respectively, related to these actions, which is included in Other accrued liabilities in the accompanying Consolidated Balance Sheets.

New Accounting Pronouncements, Policy [Policy Text Block]

Recent Accounting Guidance

Recently Adopted Pronouncements

Restricted Cash

November 2016,

the Financial Accounting Standards Board (“FASB”) issued ASU

2016

18,

Statement of Cash Flows (Topic

230

Restricted Cash

(“ASU

2016

18”

). ASU

2016

requires that entities include restricted cash and restricted cash equivalents with cash and cash equivalents in the beginning-of-period and end-of-period total amounts shown on the Statement of Cash Flows. The amendments in ASU

2016

are effective for fiscal years beginning after

December 15, 2017,

including interim reporting periods within those fiscal years. The Company adopted ASU

2016

May 28, 2018.

As a result of this retrospective adoption, the beginning-of-period and end-of-period total cash and cash equivalents in the Statement of Cash Flows have been adjusted to include restricted cash of

$325,000

for all periods presented.

Statement of Cash Flows

August 2016,

the FASB issued ASU

2016

15,

Statement of Cash Flows (Topic

230

Classification of Certain Cash Receipts and Cash Payments

(a consensus of the Emerging Issues Task Force). ASU

2016

clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows to reduce diversity in practice. Among other things, debt prepayment or debt extinguishment costs will be presented as cash outflows for financing activities on the statement of cash flow. Effective

May 28, 2018,

the Company adopted the ASU, without any impact to the presentation of its financial statements and disclosures.

Revenue Recognition

May

2014,

the Financial Accounting Standards Board (“FASB”) issued ASU

2014

09,

which creates FASB ASC Topic

606

, Revenue from Contracts with Customers

(“Topic

606”

) and supersedes ASC Topic

605,

Revenue Recognition

. The guidance replaces industry-specific guidance and establishes a single

five

-step model to identify and recognize revenue. The core principle of the guidance is that an entity should recognize revenue upon transfer of control of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Additionally, the guidance requires the entity to disclose further quantitative and qualitative information regarding the nature and amount of revenues arising from contracts with customers, as well as other information about the significant judgments and estimates used in recognizing revenues from contracts with customers.

The Company adopted Topic

606

May 28, 2018

using the modified retrospective method. The adoption of this Topic

606

did

not

have a material impact upon the timing and measurement of revenue recognition. Additionally, the Company concluded that its historical methodology for estimation and recognition of variable consideration, i.e., rebates and other cash-based customer incentives remains consistent with the requirements of Topic

606.

Revenues from the Company’s Natural Foods segment are mostly generated from the sales of finished goods. Revenues from the Company’s Biomaterials segment are mostly generated from its supply and contract manufacturing arrangements. Such sales predominantly contain a single performance obligation and revenue is recognized at a point-in-time, when control of the product transfers from the Company to the customer.

The timing of revenue recognition for these types of sales remains virtually unchanged under Topic

606.

In the notes to the consolidated financial statements, the Company has expanded its revenue recognition disclosures. The Company has elected the practical expedient that allows an election to account for the cost of shipping and handling that is performed after control of a good has been transferred to the customer as a fulfillment cost. Additionally, it has implemented changes to accounting policies and procedures, business processes, and controls in order to comply with the revenue recognition and disclosure requirements of Topic

606.

Recently Issued Pronouncements to be Adopted

Cloud Computing Arrangements

August 2018,

the FASB issued ASU

2018

15,

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract

(ASU

2018

), which requires that requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification

350

to determine which implementation costs to defer and recognize as an asset. The Accounting Standards Update generally aligns the guidance on recognizing implementation costs incurred in a cloud computing arrangement that is a service contract with that for implementation costs incurred to develop or obtain internal-use software, including hosting arrangements that include an internal-use software license. ASU

2018

is effective for fiscal years, and interim periods within those fiscal years, beginning after

December 15, 2019.

Early application is permitted. The Company is currently assessing the future impact of this update on its consolidated financial statements and related disclosures.

Income Taxes

February 2018,

the FASB issued ASU

2018

02,

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

that permits a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act enacted in

December 2017.

The standard is effective for fiscal years beginning after

December 15, 2018.

Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.

Hedging

August 2017,

the FASB issued ASU

2017

12,

Targeted Improvements to Accounting for Hedging Activities

(ASU

2017

), which amends the presentation and disclosure requirements and changes how companies assess effectiveness. The amendments are intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. ASU

2017

is effective for annual periods beginning after

December 15, 2018,

including interim periods within those periods. Early application is permitted. The Company is currently assessing the future impact of this update on its consolidated financial statements and related disclosures.

Financial Instruments – Credit Losses

June 2016,

the FASB issued ASU

2016

13,

Financial Instruments — Credit Losses (Topic

326

): Measurement of Credit Losses on Financial Instruments

(ASU

2016

), which requires the measurement of all expected credit losses for financial assets including trade receivables held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU

2016

is effective for fiscal years, and interim periods within those fiscal years, beginning after

December 15, 2019.

The adoption of ASU

2016

not

expected to have a material impact on its consolidated financial statements and related disclosures.

Leases

February 2016,

the FASB issued ASU

2016

02,

Leases (Topic

842

)

(“ASU

2016

02”

), which requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use-assets. ASU

2016

also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. In

July 2018,

the FASB issued ASU

2018

11—

Leases (Topic

842

) – Targeted Improvements

. This ASU provides transition relief on comparative reporting to the previously-issued ASU

2016

and related guidance. The Company will adopt ASU

2016

beginning in the

first

quarter of fiscal year

2020

on a modified retrospective basis.

The Company is currently in the process of evaluating the impact that ASU

2016

will have upon its consolidated financial statements and related disclosures. The Company’s assessment efforts to date have included:

	●	Reviewing the provisions of ASU 2016 - 02;
	●	Gathering information to evaluate its lease population and portfolio;
	●	Evaluating the nature of its real and personal property and other arrangements that may meet the definition of a lease; and
	●	Systems’ readiness evaluations.

As a result of these efforts, the Company currently anticipates that the adoption of ASU

2016

will have a significant impact on its long-term assets and liabilities, as, at a minimum, virtually all of its leases designated as operating leases are expected to be reported on the consolidated balance sheets. The pattern of recognition for operating leases within the consolidated statements of comprehensive income is

not

anticipated to significantly change. The adoption is

not

expected to an impact on the Company’s ability to meet its loan covenants as the impact from the adoption of ASU

2016

was taken into consideration when determining its loan covenants.