XNAS:HSNI HSN Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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FORM 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended June 30, 2012

Or

 

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

For the transition period from              to             

Commission File No. 001-34061

 

 

HSN, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   26-2590893

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1 HSN Drive, St. Petersburg, Florida 33729

(Address of principal executive offices, including zip code)

(727) 872-1000

(Registrant’s telephone number, including area code)

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  x     No  ¨

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

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

As of July 30, 2012, the registrant had 55,654,132 shares of common stock, $0.01 par value per share, outstanding.

 

 

 


Table of Contents

HSN, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

 

          Page  

Part I—Financial Information

     3   

Item 1.

  

Financial Statements (Unaudited)

     3   
  

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2012 and 2011

     3   
  

Consolidated Balance Sheets as of June 30, 2012, December 31, 2011 and June 30, 2011

     4   
  

Consolidated Statements of Shareholders’ Equity for the Six Months Ended June 30, 2012 and Year Ended December 31, 2011

     5   
  

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011

     6   
  

Notes to Consolidated Financial Statements

     7   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     16   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     23   

Item 4.

  

Controls and Procedures

     23   

Part II—Other Information

     24   

Item 1.

  

Legal Proceedings

     24   

Item 1A.

  

Risk Factors

     24   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     24   

Item 3.

  

Defaults Upon Senior Securities

     24   

Item 4.

  

Mine Safety Disclosures

     24   

Item 5.

  

Other Information

     24   

Item 6.

  

Exhibits

     25   

Signatures

     26   

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

HSN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
   2012     2011     2012     2011  

Net sales

   $ 767,187      $ 721,064      $ 1,505,095      $ 1,420,278   

Cost of sales

     473,739        447,080        944,733        903,427   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     293,448        273,984        560,362        516,851   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Selling and marketing

     166,467        152,931        318,183        293,230   

General and administrative

     52,050        51,423        107,023        102,047   

Depreciation and amortization

     9,589        8,912        18,555        18,008   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     228,106        213,266        443,761        413,285   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     65,342        60,718        116,601        103,566   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

        

Interest income

     291        189        489        359   

Interest expense

     (8,140     (7,928     (15,673     (15,979
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (7,849     (7,739     (15,184     (15,620
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     57,493        52,979        101,417        87,946   

Income tax provision

     (21,882     (20,422     (38,518     (34,089
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     35,611        32,557        62,899        53,857   

Loss from discontinued operations, net of tax

     (1,690     (590     (2,808     (1,610

Loss on sale of discontinued operations, net of tax

     (3,174     —          (3,174     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 30,747      $ 31,967      $ 56,917      $ 52,247   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations per share

        

Basic

   $ 0.63      $ 0.56      $ 1.09      $ 0.92   

Diluted

   $ 0.61      $ 0.54      $ 1.06      $ 0.89   

Net income per share:

        

Basic

   $ 0.54      $ 0.55      $ 0.99      $ 0.89   

Diluted

   $ 0.53      $ 0.53      $ 0.96      $ 0.86   

Shares used in computing earnings per share:

        

Basic

     56,970        58,648        57,640        58,432   

Diluted

     58,450        60,779        59,251        60,560   

Dividends declared per common share

   $ 0.125      $ —        $ 0.25      $ —     

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 

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Table of Contents

HSN, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

 

     June 30,
2012
    December 31,
2011
    June 30,
2011
 
ASSETS       

Current assets:

      

Cash and cash equivalents

   $ 181,314      $ 381,808      $ 337,374   

Accounts receivable, net of allowance of $12,662, $13,127 and $14,171, respectively

     153,119        222,583        140,265   

Inventories

     340,806        296,460        322,372   

Deferred income taxes

     23,040        24,302        26,722   

Prepaid expenses and other current assets

     63,682        44,966        60,633   
  

 

 

   

 

 

   

 

 

 

Total current assets

     761,961        970,119        887,366   

Property and equipment, net

     158,610        158,434        155,900   

Intangible assets, net

     268,057        258,048        260,342   

Goodwill

     9,858        —          —     

Other non-current assets

     11,093        8,372        9,964   
  

 

 

   

 

 

   

 

 

 

TOTAL ASSETS

   $ 1,209,579      $ 1,394,973      $ 1,313,572   
  

 

 

   

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY       

Current liabilities:

      

Accounts payable, trade

   $ 209,314      $ 270,227      $ 190,075   

Current maturities of long-term debt

     —          —          17,460   

Accrued expenses and other current liabilities

     170,015        193,991        174,480   
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     379,329        464,218        382,015   

Long-term debt, net of current maturities

     239,208        239,111        291,395   

Deferred income taxes

     75,094        78,131        76,399   

Other long-term liabilities

     15,946        23,816        19,462   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     709,577        805,276        769,271   
  

 

 

   

 

 

   

 

 

 

Commitments and contingencies (Note 11)

      

Shareholders’ Equity:

      

Preferred stock, $0.01 par value; 25,000,000 authorized shares; no issued shares

     —          —          —     

Common stock, $0.01 par value; 300,000,000 authorized shares; 55,634,041, 58,414,019 and 58,762,204 issued shares at June 30, 2012, December 31, 2011 and June 30, 2011, respectively

     556        584        588   

Additional paid-in capital

     2,033,528        2,180,112        2,205,535   

Accumulated deficit

     (1,534,082     (1,590,999     (1,661,822
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     500,002        589,697        544,301   
  

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 1,209,579      $ 1,394,973      $ 1,313,572   
  

 

 

   

 

 

   

 

 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 

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Table of Contents

HSN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

     Preferred Stock      Common Stock     Additional
Paid-in
Capital
    Accumulated
Deficit
    Total  
     Shares      Amount      Shares     Amount        

Balance as of December 31, 2010

     —         $ —           57,967      $ 580      $ 2,189,952      $ (1,714,069   $ 476,463   

Comprehensive income

                 123,070        123,070   

Stock-based compensation expense for equity awards

     —           —           —          —          18,908        —          18,908   

Cash dividend declared on common stock

     —           —           —          —          (7,384     —          (7,384

Issuance of common stock from stock-based compensation awards, including related tax benefit of $9,330

     —           —           1,238        12        6,689        —          6,701   

Repurchase of common stock

     —           —           (791     (8     (28,053     —          (28,061
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2011

     —           —           58,414        584        2,180,112        (1,590,999     589,697   

Comprehensive income

     —           —           —          —          —          56,917        56,917   

Stock-based compensation expense for equity awards

     —           —           —          —          7,592        —          7,592   

Cash dividend declared on common stock

     —           —           —          —          (14,350     —          (14,350

Issuance of common stock from stock-based compensation awards, including related tax benefit of $14,172

     —           —           1,105        11        5,805        —          5,816   

Repurchase of common stock

     —           —           (3,885     (39     (145,631     —          (145,670
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2012

     —         $ —           55,634      $ 556      $ 2,033,528      $ (1,534,082   $ 500,002   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 

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Table of Contents

HSN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Six Months Ended
June 30,
 
   2012     2011  

Cash flows from operating activities attributable to continuing operations:

  

Net income

   $ 56,917      $ 52,247   

Loss from discontinued operations, net of tax

     (5,982     (1,610
  

 

 

   

 

 

 

Income from continuing operations

     62,899        53,857   

Adjustments to reconcile income from continuing operations to net cash used in operating activities attributable to continuing operations:

    

Depreciation and amortization

     18,555        18,008   

Stock-based compensation expense

     10,650        13,282   

Amortization of debt issuance costs

     1,422        1,285   

Deferred income taxes

     (1,775     (1,725

Bad debt expense

     10,477        9,743   

Excess tax benefits from stock-based awards

     (15,235     (5,425

Other

     116        956   

Changes in current assets and liabilities:

    

Accounts receivable

     58,763        46,231   

Inventories

     (45,987     (25,184

Prepaid expenses and other assets

     (15,499     (18,260

Accounts payable, accrued expenses and other liabilities

     (87,403     (94,599
  

 

 

   

 

 

 

Net cash used in operating activities attributable to continuing operations

     (3,017     (1,831
  

 

 

   

 

 

 

Cash flows from investing activities attributable to continuing operations:

  

Capital expenditures

     (19,012     (19,577

Aquisition of business, net of cash received

     (22,875     —     

Proceeds from sale of discontinued operations

     5,000        —     
  

 

 

   

 

 

 

Net cash used in investing activities attributable to continuing operations

     (36,887     (19,577
  

 

 

   

 

 

 

Cash flows from financing activities attributable to continuing operations:

  

Payments of debt issuance costs

     (4,607     —     

Repurchase of common stock

     (143,718     —     

Cash dividends paid

     (14,347     —     

Proceeds from issuance of common stock

     5,399        6,020   

Tax withholdings related to stock-based awards

     (13,965     (5,381

Excess tax benefits from stock-based awards

     15,235        5,425   
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities attributable to continuing operations

     (156,003     6,064   
  

 

 

   

 

 

 

Total cash used in continuing operations

     (195,907     (15,344
  

 

 

   

 

 

 

Cash flows from discontinued operations:

    

Net cash used in operating activities attributable to discontinued operations

     (4,425     (1,451

Net cash used in investing activities attributable to discontinued operations

     (162     (90
  

 

 

   

 

 

 

Total cash used in discontinued operations

     (4,587     (1,541
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (200,494     (16,885

Cash and cash equivalents at beginning of period

     381,808        354,259   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 181,314      $ 337,374   
  

 

 

   

 

 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 

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Table of Contents

HSN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1—ORGANIZATION

Company Overview

HSN, Inc. (“HSNi”) is an interactive multi-channel retailer that markets and sells a wide range of third party and private label merchandise directly to consumers through various platforms including (i) television home shopping programming broadcast on the HSN television networks; (ii) catalogs, which consist primarily of the Cornerstone portfolio of leading print catalogs which includes Ballard Designs, Chasing Fireflies, Frontgate, Garnet Hill, Grandin Road, Improvements, and TravelSmith; (iii) websites, which consist primarily of HSN.com and the eight branded websites operated by Cornerstone; (iv) retail and outlet stores; and (v) mobile devices. HSNi’s television home shopping business, related digital sales and outlet stores are referred to herein as “HSN” and all catalog operations, including related digital sales and stores, are collectively referred to herein as “Cornerstone.” Smith+Noble, a Cornerstone brand that specializes in window treatments, was sold in May 2012 and The Territory Ahead, a Cornerstone brand that specializes in casual apparel, was sold in July 2012.

HSN offerings primarily consist of jewelry, fashion (apparel & accessories), beauty & wellness, and home & other (including housewares, home design, electronics, culinary, fitness and other). Merchandise offered by Cornerstone primarily consists of home furnishings (including indoor/outdoor furniture, home décor, tabletop, textiles, window treatments and other home related goods) and apparel & accessories.

Basis of Presentation

HSNi was incorporated in Delaware in May 2008 in connection with the spin-off of several businesses previously owned by IAC/InterActiveCorp, or IAC. The spin-off from IAC occurred August 20, 2008 concurrent with the spin-offs from IAC of Interval Leisure Group, Inc., Ticketmaster Entertainment, Inc. (now a wholly-owned subsidiary of Live Nation, Inc.); and Tree.com, Inc. Throughout these financial statements, the separation transaction is referred to as the “Spin-off” and each of these companies as “Spincos.” In connection with the Spin-off, HSNi’s shares began trading on the NASDAQ Global Select Market under the symbol “HSNI.”

The operating results of Smith+Noble and The Territory Ahead are presented as discontinued operations in the consolidated statements of operations and the consolidated statements of cash flows for all periods presented. See Note 10 for further discussion of discontinued operations.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of HSNi’s management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of the results that may be expected for a full year. The accompanying unaudited consolidated financial statements should be read in conjunction with HSNi’s audited consolidated financial statements and notes thereto for the year ended December 31, 2011. The consolidated balance sheet as of December 31, 2011 and the consolidated statement of shareholders’ equity for the year ended December 31, 2011 were derived from the audited consolidated financial statements at that date but may not include all disclosures required by GAAP. Intercompany transactions and accounts have been eliminated in consolidation.

Reclassifications

In addition to the reclassifications made in the consolidated statements of operations and cash flows to present Smith+Noble and The Territory Ahead as discontinued operations, certain other reclassifications were made to prior period amounts in the consolidated statements of operations and the consolidated statements of cash flows to conform to the current year presentation. See Note 10 for further discussion of discontinued operations.

 

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Table of Contents

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES

Accounting Estimates

HSNi’s management is required to make certain estimates and assumptions during the preparation of its consolidated financial statements in accordance with GAAP. These estimates and assumptions impact the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates. In the opinion of HSNi’s management, the assumptions underlying these interim unaudited financial statements are reasonable.

Significant estimates underlying the accompanying consolidated financial statements include the determination of the lower of cost or market adjustment for inventory; sales returns and other revenue allowances; the allowance for doubtful accounts; the recoverability of long-lived and intangible assets; the determination of deferred income taxes, including related valuation allowances; the accrual for actual, pending or threatened litigation, claims and assessments; and assumptions related to the determination of stock-based compensation.

NOTE 3—PROPERTY AND EQUIPMENT

The balance of property and equipment, net, is as follows (in thousands):

 

     June 30,
2012
    December 31,
2011
    June 30,
2011
 

Capitalized software

   $ 200,028      $ 197,842      $ 214,757   

Computer and broadcast equipment

     95,884        93,364        92,826   

Buildings and leasehold improvements

     95,070        93,941        94,842   

Furniture and other equipment

     78,922        75,185        76,083   

Projects in progress

     8,905        8,881        8,016   

Land and land improvements

     10,988        10,962        10,921   
  

 

 

   

 

 

   

 

 

 
     489,797        480,175        497,445   

Less: accumulated depreciation and amortization

     (331,187     (321,741     (341,545
  

 

 

   

 

 

   

 

 

 

Total property and equipment, net

   $ 158,610      $ 158,434      $ 155,900   
  

 

 

   

 

 

   

 

 

 

NOTE 4—SEGMENT INFORMATION

HSNi presents its operating segments and related financial information in a manner consistent with how the chief operating decision maker and executive management view the businesses, how the businesses are organized as to segment management, and the focus of the businesses with regards to the types of products or services offered or the target market. HSNi has two operating segments, HSN and Cornerstone. The accounting policies of the segments are the same as those described in Note 2 – Summary of Significant Accounting Policies included in HSNi’s Annual Report on Form 10-K for the year ended December 31, 2011. Intercompany accounts and transactions have been eliminated in consolidation.

HSNi’s primary metric is Adjusted EBITDA, which is defined as operating income excluding, if applicable: (1) non-cash charges including: (a) stock-based compensation expense, (b) amortization of intangibles, (c) depreciation and gains and losses on asset dispositions, and (d) goodwill, long-lived asset and intangible asset impairments; (2) pro forma adjustments for significant acquisitions; and (3) one-time items. Adjusted EBITDA is not a measure determined in accordance with GAAP, and should not be considered in isolation or as a substitute for operating income, net income or any other measure determined in accordance with GAAP. Adjusted EBITDA is used as a measurement of operating efficiency and overall financial performance and HSNi believes it to be a helpful measure for those evaluating companies in the retail and media industries. Adjusted EBITDA measures the amount of income generated each period that could be used to service debt, pay taxes and fund capital expenditures. Adjusted EBITDA has certain limitations in that it does not take into account the impact to HSNi’s consolidated statements of operations of certain expenses, including stock-based compensation, amortization of intangibles, depreciation, gains and losses on asset dispositions, asset impairment charges, acquisition-related accounting expenses and one-time items.

 

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Table of Contents

The following tables reconcile Adjusted EBITDA to operating income for HSNi’s operating segments and to HSNi’s consolidated net income (in thousands):

 

                                                                                                                             
     Three Months Ended June 30, 2012     Three Months Ended June 30, 2011  
     HSN     Cornerstone     Total     HSN     Cornerstone     Total  

Adjusted EBITDA

   $ 52,709      $ 26,903      $   79,612      $ 51,624      $ 25,012      $   76,636   

Stock-based compensation expense

     (2,752     (1,898     (4,650     (3,781     (3,174     (6,955

Depreciation and amortization

     (6,609     (2,980     (9,589     (6,976     (1,936     (8,912

(Loss) gain on disposition of fixed assets

     (31     —          (31     (52     1        (51
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

   $   43,317      $ 22,025        65,342      $   40,815      $ 19,903        60,718   
  

 

 

   

 

 

     

 

 

   

 

 

   

Interest expense, net

         (7,849         (7,739
      

 

 

       

 

 

 

Income from continuing operations before income taxes

         57,493            52,979   

Income tax provision

         (21,882         (20,422
      

 

 

       

 

 

 

Income from continuing operations

         35,611            32,557   

Loss from discontinued operations, net of tax

         (1,690         (590

Loss on sale of discontinued operations, net of tax

         (3,174         —     
      

 

 

       

 

 

 

Net income

       $ 30,747          $ 31,967   
      

 

 

       

 

 

 

 

                                                                                                                             
     Six Months Ended June 30, 2012     Six Months Ended June 30, 2011  
     HSN     Cornerstone     Total     HSN     Cornerstone     Total  

Adjusted EBITDA

   $ 110,031      $ 35,849      $ 145,880      $ 103,822      $ 31,147      $ 134,969   

Stock-based compensation expense

     (6,039     (4,611     (10,650     (7,958     (5,324     (13,282

Depreciation and amortization

     (13,174     (5,381     (18,555     (14,174     (3,834     (18,008

Loss on disposition of fixed assets

     (45     (29     (74     (106     (7     (113
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

   $ 90,773      $ 25,828        116,601      $ 81,584      $ 21,982        103,566   
  

 

 

   

 

 

     

 

 

   

 

 

   

Interest expense, net

         (15,184         (15,620
      

 

 

       

 

 

 

Income from continuing operations before income taxes

         101,417            87,946   

Income tax provision

         (38,518         (34,089
      

 

 

       

 

 

 

Income from continuing operations

         62,899            53,857   

Loss from discontinued operations, net of tax

         (2,808         (1,610

Loss on sale of discontinued operations, net of tax

         (3,174         —     
      

 

 

       

 

 

 

Net income

       $ 56,917          $ 52,247   
      

 

 

       

 

 

 

The net sales for each of HSNi’s reportable segments are as follows (in thousands):

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
   2012      2011      2012      2011  

Net sales:

     

HSN

   $ 501,943       $ 481,994       $ 1,043,875       $ 1,008,168   

Cornerstone

     265,244         239,070         461,220         412,110   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 767,187       $ 721,064       $ 1,505,095       $ 1,420,278   
  

 

 

    

 

 

    

 

 

    

 

 

 

NOTE 5—STOCK-BASED AWARDS

The Second Amended and Restated 2008 Stock and Annual Incentive Plan, as amended (the “Plan”), authorizes the issuance of 8.0 million shares of HSNi common stock for new awards granted by HSNi. The purpose of the Plan is to assist HSNi in attracting, retaining and motivating officers, employees, directors and consultants, and to provide HSNi with the ability to provide incentives more directly linked to the profitability of HSNi’s business and increases in shareholder value. As of June 30, 2012, there were approximately 3.2 million shares of common stock available for grants under the Plan.

HSNi can grant restricted stock units (“RSUs”), stock options, stock appreciation rights (“SARs”), dividend equivalents and other stock-based awards under the Plan. Stock-based awards have a maximum term of 10 years. The exercise price of options and SARs granted under the Plan is required to be at or above the fair market value of HSNi’s stock on the

 

9


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date of grant. RSUs have rights to receive dividend equivalents that vest at the same time the underlying RSUs vest once the requisite service has been rendered. HSNi elects to issue shares of its common stock for RSU vestings and SAR exercises net of the employees’ minimum tax withholding obligation. The payments made by HSNi to the taxing authorities for these taxes were $14.0 million and $5.4 million for the six months ended June 30, 2012 and 2011, respectively.

During the six months ended June 30, 2012, HSNi granted approximately 300,000 RSUs and 357,000 SARs. The RSUs have a weighted average fair value of $35.97 and they primarily vest after three years. The SARs have a weighted average exercise price of $35.69, have a fair value of $12.96 and primarily vest ratably over three years. The following are the assumptions used in the Black-Scholes option pricing model to value SARs for the six months ended June 30, 2012: volatility factor of 46.51%, risk-free interest rate of 0.91%, expected term of 5 years and a dividend yield of 1.40%. Also during the six months ended June 30, 2012, HSNi granted approximately 25,000 options under the HSN, Inc. 2010 Employee Stock Purchase Plan (“ESPP”) which had a weighted average fair value of $11.53. The following are the assumptions used in the Black-Scholes option pricing model to value options granted under the ESPP for the six months ended June 30, 2012: volatility factor of 59.70%, risk-free interest rate of 0.06%, expected term of six months and a dividend yield of 1.36%.

During the first quarter of 2010, HSNi implemented a performance-based equity compensation program for certain key members of Cornerstone’s management. The amount payable is based on the extent to which certain pre-established performance goals for Cornerstone are achieved during the three-year period ending December 31, 2012. The amount earned pursuant to the award will be measured at the end of the requisite service period and is expected to be settled in shares of HSNi common stock. These equity awards are accounted for as liabilities which are remeasured each reporting period based on the probability of achievement of the performance conditions. As of June 30, 2012, a liability of approximately $15.3 million was recorded for these awards.

Stock-based compensation expense is included in the following line items in the accompanying consolidated statements of operations (in thousands):

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

Selling and marketing

   $ 630      $ 1,115      $ 1,812      $ 2,359   

General and administrative

     4,020        5,840        8,838        10,923   
  

 

 

   

 

 

   

 

 

   

 

 

 

Stock-based compensation expense before income taxes

     4,650        6,955        10,650        13,282   

Income tax benefit

     (1,488     (2,082     (3,614     (4,210
  

 

 

   

 

 

   

 

 

   

 

 

 

Stock-based compensation expense after income taxes

   $ 3,162      $ 4,873      $ 7,036      $ 9,072   
  

 

 

   

 

 

   

 

 

   

 

 

 

As of June 30, 2012, there was approximately $21.9 million of unrecognized compensation cost, net of estimated forfeitures, related to all equity-based awards, which is currently expected to be recognized over a weighted average period of approximately 2.0 years.

NOTE 6—INCOME TAXES

HSNi calculates its interim income tax provision in accordance with the accounting guidance for income taxes in interim periods. At the end of each interim period, HSNi makes its best estimate of the annual expected effective tax rate and applies that rate to its ordinary year-to-date income or loss. The tax or benefit related to significant, unusual, or extraordinary items that will be separately reported or reported net of their related tax effect are individually computed and recognized in the interim period in which those items occur.

In addition, the effect of changes in enacted tax laws or rates, tax status, or judgment on the realizability of a beginning-of-the-year deferred tax asset in future years is recognized in the interim period in which the change occurs.

The computation of the annual expected effective tax rate at each interim period requires certain estimates and assumptions including, but not limited to, the expected operating income for the year, permanent and temporary differences, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is acquired, additional information is obtained or the tax environment changes. To the extent that the estimated annual effective tax rate changes during a quarter, the effect of the change on prior quarters is included in tax expense for the current quarter.

For the three and six months ended June 30, 2012, HSNi recorded a tax provision of $21.9 million and $38.5 million, respectively, which represents effective tax rates of 38.1% and 38.0%, respectively. For the three and six months ended

 

10


Table of Contents

June 30, 2011, HSNi recorded a tax provision of $20.4 million and $34.1 million, respectively, which represents effective tax rates of 38.5% and 38.8%, respectively. The effective tax rates exceed the federal statutory rate of 35.0% due principally to the effect of state income taxes.

In connection with the Spin-off, HSNi entered into a Tax Sharing Agreement with IAC pursuant to which, among other things, each of the Spincos has indemnified IAC and the other Spincos for any taxes resulting from the Spin-off of such Spinco (and any related interest, penalties, legal and professional fees, and all costs and damages associated with related shareholder litigation or controversies) to the extent such amounts result from (i) any act or failure to act by such Spinco described in the covenants in the Tax Sharing Agreement, (ii) any acquisition of equity securities or assets of such Spinco or a member of its group, and (iii) any breach by such Spinco or any member of its group of any representation or covenant contained in the separation documents or in the documents relating to the Internal Revenue Service (“IRS”) private letter ruling and/or tax opinions. In the event an adjustment with respect to a pre-Spin-off period for which IAC is responsible results in a tax benefit to HSNi in a post-Spin-off period, HSNi will be required to pay such tax benefit to IAC. In general, IAC controls all audits and administrative matters and other tax proceedings relating to the consolidated federal income tax return of the IAC group and any other tax returns for which the IAC group is responsible. The provisions set forth in the Tax Sharing Agreement could subject HSNi to future tax contingencies.

The IRS has begun an examination of HSNi’s consolidated federal income tax return for the year ended December 31, 2010. In addition, the State of New York has notified HSNi that it intends to audit HSNi’s income tax returns for the periods ended December 31, 2008 through 2010. We do not anticipate any material adjustments to our tax liabilities resulting from either of these examinations.

The IRS has substantially completed its review of the IAC consolidated tax returns for the years ended December 31, 2001 through 2006, which includes the operations of HSNi. The settlement for these years has not yet been submitted to the Joint Committee on Taxation for approval. The IRS began its review of the IAC consolidated tax returns for the years ended December 31, 2007 through 2009 in July 2011. The statute of limitations for the years 2001 through 2008 has been extended to December 31, 2013. Various IAC consolidated tax returns filed with state, local and foreign jurisdictions are currently under examination, the most significant of which are California, New York and New York City, for various tax years beginning with 2005. By virtue of the Tax Sharing Agreement with IAC, HSNi is indemnified with respect to additional tax liabilities for consolidated or combined federal and state tax returns prepared and filed by IAC prior to the Spin-off, but is liable for any additional tax liabilities for HSNi separately filed state income tax returns.

NOTE 7—EARNINGS PER SHARE

HSNi computes basic earnings per share using the weighted average number of common shares outstanding for the period. HSNi computes diluted earnings per share using the treasury stock method which includes the weighted average number of common shares outstanding for the period plus the potential dilution that could occur if various equity awards to issue common stock were exercised or restricted equity awards were vested resulting in the issuance of common stock that could share in HSNi’s earnings.

 

11


Table of Contents

The following table presents HSNi’s basic and diluted earnings per share (in thousands, except per share data):

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

Net income (loss):

        

Continuing operations

   $ 35,611      $ 32,557      $ 62,899      $ 53,857   

Discontinued operations

     (4,864     (590     (5,982     (1,610
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 30,747      $ 31,967      $ 56,917      $ 52,247   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of shares outstanding:

        

Basic

     56,970        58,648        57,640        58,432   

Dilutive effect of non-cash compensation awards

     1,480        2,131        1,611        2,128   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     58,450        60,779        59,251        60,560   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share - basic:

        

Continuing operations

   $ 0.63      $ 0.56      $ 1.09      $ 0.92   

Discontinued operations

     (0.09     (0.01     (0.10     (0.03
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 0.54      $ 0.55      $ 0.99      $ 0.89   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share - diluted:

        

Continuing operations

   $ 0.61      $ 0.54      $ 1.06      $ 0.89   

Discontinued operations

     (0.08     (0.01     (0.10     (0.03
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 0.53      $ 0.53      $ 0.96      $ 0.86   
  

 

 

   

 

 

   

 

 

   

 

 

 

Unexercised employee stock options and stock appreciation rights and unvested restricted stock units excluded from the diluted EPS calculation because their effect would have been antidilutive

     751        1,209        845        1,305   
  

 

 

   

 

 

   

 

 

   

 

 

 

NOTE 8—LONG-TERM DEBT

The balance of long-term debt, including current maturities, is as follows (in thousands):

 

     June 30,
2012
    December 31,
2011
    June 30,
2011
 

Secured credit agreement terminated April 24, 2012:

      

Term loan

   $ —        $ —        $ 69,841   

Revolving credit facility

     —          —          —     

Secured credit agreement expiring April 24, 2017:

      

Term loan

     —          —          —     

Revolving credit facility

     —          —          —     

11.25% Senior Notes due August 1, 2016; interest payable each February 1st and August 1st

     240,000        240,000        240,000   

Unamortized original issue discount on Senior Notes

     (792     (889     (986
  

 

 

   

 

 

   

 

 

 

Total long-term debt

     239,208        239,111        308,855   

Less: current maturities

     —          —          (17,460
  

 

 

   

 

 

   

 

 

 

Long-term debt, net of current maturities

   $

XNAS:HSNI HSN Inc Quarterly Report 10-Q Filling

HSN Inc XNAS:HSNI Stock - Get Quarterly Report SEC Filing of HSN Inc XNAS:HSNI stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XNAS:HSNI HSN Inc Quarterly Report 10-Q Filing - 6/30/2012
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